-----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, O9SLL9QAgd8HkZp11XfhbkMV7kZLN9N1ahoAWRL9f4TTwZipJf3rJ6CddlghVBW1 s46Z/zj5WRfmOEvwqisZHA== 0000891618-98-001460.txt : 19980401 0000891618-98-001460.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891618-98-001460 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISOCOR CENTRAL INDEX KEY: 0000879283 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954310259 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27900 FILM NUMBER: 98582252 BUSINESS ADDRESS: STREET 1: 3420 OCEAN PARK BLVD CITY: SANTA MONICA STATE: CA ZIP: 90405 MAIL ADDRESS: STREET 2: 3420 OCEAN PARK BLVD SUITE 2010 CITY: SANTA MONICA STATE: CA ZIP: 904053306 10-K405 1 FORM 10-K405 FOR THE YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM --------------- TO --------------- . COMMISSION FILE NUMBER: 000-27900 ------------------------ ISOCOR (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4310259 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3420 OCEAN PARK BOULEVARD 90405 SANTA MONICA, CA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 581-8100 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant based upon the closing sale price of the Registrant's Common Stock on the Nasdaq National Market on February 17, 1998 was approximately $17,100,596. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 9,581,192 shares of Registrant's Common Stock issued and outstanding as of February 17, 1998. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders scheduled to be held on May 13, 1998 (the "1998 Proxy Statement"). ================================================================================ 2 INTRODUCTORY STATEMENTS AND REFERENCES References made in this Annual Report on Form 10-K to "ISOCOR," the "Company" or the "Registrant" refer to ISOCOR and its subsidiaries. The ISOCOR name, N-PLEX and Plexlink are registered trademarks of the Company. ISOGATE, ISOMAIL, ISOPLEX, ISOPRO, ISOTRADE and PLEXLINK Secure are trademarks of the Company. This Annual Report on Form 10-K contains forward-looking statements that are subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include, but are not limited to, the introduction and market acceptance of new products offered by the Company and its competitors, general changes in the markets in which the Company competes, the volume and timing of large transactions with customers, the level of product and price competition, the Company's success in expanding its direct sales force and indirect distribution channels, the risks related to international operations, and other risks detailed below and included from time to time in the Company's other SEC reports and press releases, copies of which are available from the Company upon request. The Company assumes no obligation to update any forward-looking statements contained herein. RISK FACTORS Significant Fluctuations in Quarterly Results; Limited Operating History The Company's quarterly operating results have in the past varied significantly and are likely in the future to vary significantly based upon a number of factors, including the introduction and market acceptance of new products offered by the Company and its competitors, general changes in the markets in which the Company competes, the volume and timing of large transactions with customers, the level of product and price competition, the Company's success in expanding its direct sales force and indirect distribution channels and the risks related to international operations, as well as other factors. Products are generally shipped as orders are received, and product revenues are generally recognized as products are shipped. Consequently, quarterly revenues and operating results depend primarily on the volume and timing of orders during the quarter, which are difficult to forecast due to the length of the sales cycle. Further, the Company typically generates a large percentage of its quarterly revenues during the last few weeks of the quarter. A significant portion of the Company's operating expenses are relatively fixed in the short term, and planned expenditures are based on sales forecasts. If revenue levels are below expectations, operating results are likely to be materially adversely affected. In particular, net income, if any, may be disproportionately affected because only a small portion of the Company's expenses varies with revenue in the short term. There can be no assurance that the Company will achieve revenue growth in the future or be profitable on an operating basis in any future period. Due to the foregoing factors, the Company believes that period-to-period comparisons of its results are not necessarily meaningful and should not be relied upon as indications of future performance. Further, it is likely that in some future quarter the Company's revenues or operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock could be materially adversely affected. The Company was incorporated in February 1991 and recorded its first sales in the second quarter of 1992. The Company incurred losses through 1994, during the first two quarters of 1995, during the second quarter of 1996 and for all of 1997. As a result, the Company had an accumulated deficit of $13.6 million as of December 31, 1997. There can be no assurance that the Company will be profitable in the future. Substantial Competition The markets for the Company's products are intensely competitive and characterized by rapid changes in technology and evolving standards. The Company encounters competition from a number of sources, including privately held companies which specialize in messaging products, computer hardware vendors, customized solution vendors or systems integrators, and software companies such as Control Data Systems, Inc., the Lotus Development Corporation subsidiary of International Business Machines Corporation ("Lotus"), Microsoft 2 3 Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape") and Worldtalk Corporation. A variety of potential actions by any of the Company's competitors, including a reduction of product prices, increased promotion, announcement or accelerated introduction of new or enhanced products, product giveaways, product bundling or feature integration could have a material adverse effect on the Company's business, financial condition and results of operations. Large companies that compete with the Company or that may compete with it in the future have substantial technical and financial resources that allow them to develop, enhance or acquire competitive products, and substantial marketing resources and presence to promote these products aggressively. Moreover, the Company's current and potential competitors may respond more quickly than the Company to new or emerging technologies or changes in customer requirements or distribution methods. Accordingly, it is possible that current or potential competitors could rapidly gain significant market share. See "Item 1: Business -- Competition." Dependence on Commercial Use of the Internet Particularly in light of the Company's strategic shift of focus away from X.400-based products to products related to the Internet, the success of the Company's products will depend in large part on increased commercial use and acceptance of the Internet. Because commercial use of the Internet is relatively recent and is evolving rapidly, it is difficult to predict with any assurance whether the Internet will prove to be a viable marketplace. There can be no assurance that the infrastructure or complementary products necessary to make the Internet viable for broad electronic business communications and transactions will be developed. The flat rate, time-of-day and volume-independent pricing structure offered by Internet service providers to organizations is currently favorable. Less favorable pricing structures may have a material adverse impact on the commercial adoption of the Internet and therefore on the success of the Company's products and the Company's business prospects. Dependence on New Products The Company has invested significant resources into the development of new products and expects to continue to make these investments in the future. Additionally, the Company expects sales of its new products related to the Internet to comprise an increasing fraction of overall sales. ISOCOR also plans to continue to enhance its products with new releases that provide additional features and to make its products available on additional hardware and operating system platforms. Any quality, reliability or interoperability problems with new or enhanced products, or any other actual or perceived problems in new or enhanced products, could have a material adverse effect on market acceptance of such products. There can be no assurance that such problems or perceived problems will not arise or, that even in the absence of such problems, the new or enhanced products will receive market acceptance. A failure of new or enhanced products to receive market acceptance for any reason would have a material adverse effect on the Company's business prospects. See "Item 1: Business -- Products" and "-- Product Development." Dependence on Expansion of North American Sales and Marketing Efforts The Company intends to expand further its North American sales and marketing efforts, which is a critical component of its strategy to expand Internet-related revenues. In particular, the Company is currently pursuing plans to increase its North American direct and indirect sales force. There can be no assurance that the Company will be successful in attracting or retaining qualified direct and indirect sales personnel, that the expansion of the Company's sales and marketing efforts will result in increased sales of the Company's products, that the cost of such expansion will not exceed the revenues generated thereby, or that the Company's sales and marketing organization will compete successfully against the larger and better-funded sales and marketing organizations of the Company's competitors. A failure in any of these areas could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1: Business -- Marketing, Sales and Distribution." 3 4 Dependence on International Third-Party Distribution Internationally, the Company relies significantly on resellers for certain elements of the marketing and for the distribution of its software products. The agreements in place with these organizations are generally non-exclusive. These resellers are not within the control of the Company, may distribute products other than the Company's products and are not obligated to purchase products from the Company. There can be no assurance that these resellers will place a high priority on the marketing of the Company's products, and they may give a higher priority to other products which may include products of the Company's competitors. This may result in a lower sales effort applied to the Company's products and a consequent reduction in the Company's operating results. In addition, because the Company's international sales are made to a large extent through resellers, the Company often does not enter into product sales contracts with the international end users of its products. There can be no assurance that the Company will retain any of its resellers, and there can be no assurance that the Company will succeed in recruiting replacement or new organizations to represent the Company's products. Any changes in the Company's distribution channels may adversely affect sales and consequently may adversely affect the Company's business, financial condition and results of operations. See "Item 1: Business -- Marketing, Sales and Distribution." Ability to Respond to Rapid Technological Change The Company's future success will depend significantly on its ability to enhance continually its current software products and develop or acquire and market new products which keep pace with technological developments and evolving industry standards as well as respond to changes in customer needs. The market for electronic directory and messaging infrastructure, Internet and ISO compliant software products is characterized by rapidly changing technology, evolving industry standards and customer demands and frequent new product introductions and enhancements. There can be no assurance that the Company will be successful in developing or acquiring product enhancements or new products to address changing technologies and customer requirements adequately, that it will introduce such products on a timely basis or that any such products or enhancements will be successful in the marketplace. The Company's delay or failure in the development or acquisition of technological improvements or the adaptation of its software products to technological change could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1: Business -- Products" and "-- Product Development." The Company's software products are very complex as a result of market requirements for a high level of functionality, support of diverse operating environments and the need for interoperability and support for multiple technological standards. These products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Such loss or delay could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1: Business -- Products" and "-- Product Development." Risk Associated with Software and Hardware and the Year 2000 Much of the computer hardware and software currently deployed experiences problems handling dates beyond the year 1999. This computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing both the readiness of its internal computer systems and software, and the compliance of its software licensed to customers, for handling the year 2000. Based on preliminary information, the Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues and does not currently believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk and the possibility that third parties might assert claims against the Company with respect to such issues. Accordingly, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such changes, which could have an adverse effect on future results of operations. 4 5 Dependence on International Operations International revenues accounted for approximately 67% of the Company's revenues in 1997, while the European revenues accounted for approximately 86% of the Company's international revenues in 1997. The Company expects that international sales will continue to account for a significant portion of its total revenues in future periods. International sales are subject to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, longer payment cycles, increased difficulties in collecting accounts receivable and potentially adverse tax consequences. Fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to end users in a particular country, leading to a reduction in sales in that country. In addition, sales in Europe are adversely affected in the third quarter of each year as many customers and end users reduce their business activities during the summer months. These seasonal factors and currency fluctuation risks may have an effect on the Company's quarterly results of operations. Further, because the Company has operations in different countries, the Company's management must address differences in regulatory environments and cultures. Failure to address these differences successfully could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1: Business -- Marketing, Sales and Distribution" and " -- Product Development." Dependence on Third-party Products Certain of the Company's products incorporate technology obtained from third parties, including elements of the Company's directory products. Although the Company believes that its reliance on third-party products does not pose a significant business risk, due to the time involved in developing an internal alternative or licensing such technology from another third party, the Company is dependent in the short term upon the ability of such third parties to enhance their current products, to develop new products on a timely and cost-effective basis to meet changing customer needs, to successfully implement any programming changes necessary for handling the year 2000 issue and to respond to evolving industry standards and other technological changes. Although the Company believes there are alternative sources for such third-party software, there can be no assurance that the Company would be able to replace the functionality provided by such third-party software in the event that such software becomes inaccessible to the Company, obsolete or incompatible with future enhancements of the Company's software products or that, if the Company could replace such functionality, that such replacement could be obtained at a reasonable cost. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1: Business -- Products." Currency Fluctuations While the Company's consolidated financial statements are prepared in United States dollars, a substantial portion of the Company's worldwide operations have a functional currency other than the United States dollar. In particular, the Company maintains substantial development operations in Ireland where the functional currency is the Irish Pound, and in Germany where the functional currency is the German Mark. A significant portion of the Company's revenues are also denominated in currencies other than the United States dollar. Fluctuations in exchange rates may have a material adverse effect on the Company's results of operations and could also result in exchange losses. The impact of future exchange rate fluctuations cannot be predicted adequately. To date, the Company has not sought to hedge the risks associated with fluctuations in exchange rates, but may undertake such transactions in the future. The Company does not have a policy relating to hedging. There can be no assurance that any hedging techniques implemented by the Company would be successful or that the Company's results of operations will not be materially adversely affected by exchange rate fluctuations. See "Dependence on International Operations" and "Item 1: Business -- Marketing, Sales and Distribution." Risks Associated with Intellectual Property The Company regards its software products as proprietary and relies primarily on a combination of statutory and common law copyright, trademark and trade secret laws, customer licensing agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights. The 5 6 Company generally enters into confidentiality and invention assignment agreements with its employees and consultants. Additionally, the Company enters into confidentiality agreements with certain of its customers and potential customers and limits access to, and distribution of, its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technologies without authorization, or to develop similar technologies independently. Furthermore, the laws of certain countries in which the Company does business do not protect the Company's software and intellectual property rights to the same extent as do the laws of the United States. In its N-PLEX and NetCS Connectivity product lines, ISOCOR has implemented a license key mechanism which disables use of the various modules of the product unless proper number keys are provided by the customer during the installation process. Otherwise, the Company does not include in its software any mechanisms to prevent or inhibit unauthorized use, but generally either requires the execution of an agreement that restricts copying and use of the Company's products or provides for the same in a break-the-seal license agreement. If unauthorized copying or misuse of the Company's products were to occur to any substantial degree, the Company's business, financial condition and results of operations could be materially adversely affected. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. While the Company has not received claims alleging infringement of the proprietary rights of third parties that the Company believes would have a material adverse effect on the Company's business, financial condition or results of operations, there can be no assurance that third parties will not claim that the Company's current or future products infringe the proprietary rights of others. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. See "Item 1: Business -- Proprietary Rights." Risk of Increased Taxation; Loss or Refund of Grant Aid The Company has significant operations and generates a substantial portion of its taxable income in Ireland. Under an incentive tax program due to terminate in 2010, the Company is taxed in Ireland on its "manufacturing income" at a 10% rate, which is substantially lower than United States rates. For Irish tax purposes, most of the Company's operating income earned in Ireland is considered "manufacturing income." To qualify for this 10% tax rate, the Company must carry out "software development services" or "technical or consultancy services" (as defined in the Irish Finance Act 1980) in Ireland and qualify for an employment grant from the Industrial Authority of Ireland. If the Company ceases to comply with these qualifications, all or a part of its taxable profits may be subject to a 36% tax rate on its post disqualification date taxable profits. Should this occur, or should Irish tax laws be rescinded or changed, the Company's net income could be materially adversely affected. If the Company could no longer qualify for this 10% tax rate, or if the Irish tax laws were rescinded or changed, the Company's net income would be materially adversely impacted. In addition, if United States or other international tax authorities were to challenge successfully the manner in which profits are recognized among the Company and its subsidiaries or if the Company were to transfer funds relating to income generated in lower tax jurisdictions to the United States, the Company's effective tax rate could increase, and its business, financial condition and results of operations could be materially adversely affected. During 1996, the Company secured Irish Industrial Development Authority (the "IDA") grant aid in Ireland in the amount of $793,000 under an incentive program designed to induce organizations to locate and conduct business in Ireland. To qualify for this grant aid, the Company must satisfy various conditions, including that the Company must maintain its current ownership interest in its Irish subsidiary; the subsidiary must not establish or carry on similar ventures outside Ireland; and the subsidiary must remain solvent. The grants include remedy provisions which the IDA employs to pursue partial revocation of amounts granted in the event the recipient of the grant substantially vacates its presence in Ireland. While the Company's level of employment within Ireland in 1997 declined, the Company's plans include a commitment to a significant continuing presence in Ireland. There can be no assurance, however, that the IDA will not seek partial revocation of prior grants, the Company will continue to qualify for this grant aid or be eligible for future 6 7 grants or that the Company's results of operations will not be materially adversely affected by the loss of grant aid. During 1996, the Company also received grant aid from the Technological Finance Authority -- Berlin, under an incentive program to promote research and development in small and medium sized German-owned companies located in Berlin. The Company is no longer eligible to receive these grants. Dependence on Key Personnel The Company's success depends to a significant degree upon the continued contributions of its key management and engineering personnel. The success of the Company depends to a large extent upon its ability to retain and continue to attract highly skilled personnel. Competition for employees in the software industry is intense, and there can be no assurance that the Company will be able to attract and retain enough qualified employees. If the business of the Company increases, it may become increasingly difficult to hire, train and assimilate the new employees needed. The Company's inability to retain and attract key employees could have a material adverse impact on the Company's business, financial condition and results of operations. Fluctuations in Market Price of Common Stock Announcements of new products by the Company or its competitors and quarterly variations in financial results could cause the market price of the Company's Common Stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations from time to time that have affected market prices of many technology based companies that are not necessarily related to the operating performance of such companies. These broad market fluctuations may adversely affect the price of the Company's Common Stock. Blank Check Preferred Stock; Anti-Takeover Provisions The Company's Board of Directors has the authority to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change of control of the Company without further action by the shareholders and may adversely affect the voting and other rights of the holders of Common Stock. The Company has no present plans to issue shares of Preferred Stock. The Company's Articles of Incorporation and Bylaws provide, among other things, for the elimination of cumulative voting with respect to the election of directors (effective at the first annual meeting following the annual meeting at which the Company has 800 or more shareholders of record), the prohibition of actions taken by the Company's shareholders by written consent and certain other procedures, including advance notice procedures with regard to the nomination of candidates for election as directors, other than by or at the direction of the Board of Directors which could have the effect of making it more difficult for a third party to effect a change in the control of the Board of Directors. In addition, these provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding voting stock of the Company, and may make more difficult or discourage a takeover of the Company. 7 8 PART I ITEM 1. BUSINESS General ISOCOR was founded and incorporated in California in February 1991. ISOCOR develops, markets and supports off-the-shelf electronic messaging and directory infrastructure software products and services that enable businesses to engage in electronic communications over corporate networks, public telephone networks, value added networks ("VANs") and the Internet. ISOCOR's products are available either as a complete, integrated package or as individual components, and they support the prevailing, market-driven standards for electronic information exchange -- Internet and International Organization for Standards ("ISO")-based standards. ISOCOR's products and services are designed to support electronic information exchange globally in an accurate, cost-effective and secure way, while operating seamlessly across multiple protocols and architectures. ISOCOR's business strategy is to provide a focused range of products offering features and performance to meet the wide range of customers' needs; to support open architectures and legacy systems by providing solutions that are hardware and software platform-independent and are based on open standards; to leverage Internet-based technologies by adding enhanced Internet capabilities to its message server product line allowing the exchange, switching and management of traffic formatted in prevailing native Internet-based standards without any conversions unless that traffic is directed to heterogeneous environments; and to expand distribution channels primarily to increase its North American direct sales force to focus on sales to large corporate customers and service providers. Products Initially, the Company licensed software technology to enable it to offer products to its customers quickly. Thereafter, the Company has developed its own software technology in order to decrease the amount of time required to respond to market demand, differentiate its products from those of its competitors in terms of features and quality, and decrease its dependence on third-party suppliers. At present, the majority of the Company's products are based upon internally developed technology. ISOCOR has designed its software to conform to international standards, allowing the Company's products to interoperate with many existing products and services. Conformance with international standards has been achieved through application of the experience of ISOCOR employees in standards development to the design and testing of the Company's products. The ISOCOR solution is implemented through two major product groups: message servers and directories. Message servers handle the interchange of any size or type of electronic document or information across and outside of a customer's computer network and include products that allow leading proprietary E-mail systems to interoperate. Directory products support enterprise-wide directory listing, access and navigation, as well as connections to external networks like the World Wide Web. Message Server Products The Company's server software has been designed to provide high performance while reducing hardware requirements. This has been achieved through a design methodology that eliminates the overhead of protocol layering, reduces the number of computer instructions required to perform common operations and reduces dependence on the mechanical performance of computer peripheral devices such as disk drives. The design also reduces the risk that messages will be lost or will not be duplicated in the event of external system breakdowns, such as loss of power or hardware failures. This promotes high reliability of the electronic information exchange backbone and allows public carriers to rely upon the software. N-PLEX, ISOCOR's Internet server product, provide robust message management, administrative control and secure message transfer server products to the SMTP, POP3 and IMAP4 standards. Performance of Internet mail systems has been enhanced by use of the ISOCOR-developed caching algorithms which 8 9 reduces the use of time-consuming DNS directory accesses over the Internet and makes full use of Microsoft Windows NT operating system threading facilities for efficient utilization of multiprocessor computer systems. In addition, N-PLEX Global has been ported to the Sun Solaris UNIX operating system and is optimized for high levels of performance. Security holes are eliminated in the proprietary ISOCOR design, and authentication login facilities have been added using encryption technology to prevent unauthorized access to the mail systems. The N-PLEX Management Center is designed to extend normal server management capabilities to support mixed protocol backbones with Internet service, X.400 and gateways to other mail systems. It manages ISOCOR's message servers and gateways in an integrated fashion, providing the high level of service necessary for implementing mission-critical electronic information exchange applications. The N-PLEX Management Center runs on the Windows NT platform, performing remote management of components over TCP/IP, thereby allowing the administrator to manage multiple sites simultaneously from a central management station. The management facilities provided by the Management Center include remote configuration, routing configuration, fault notification, performance monitoring, system management and message tracking. The proliferation of multiple proprietary electronic messaging systems within organizations has created isolated islands of communication where users on one system cannot communicate with users on other systems. To solve this incompatibility problem, N-PLEX Hub enables users to exchange electronic information, including attached files such as spreadsheets and word processing documents, without complex rules or administration. This cross-communication capability allows the rapid exchange of information across departments or organizations. N-PLEX Hub also connects proprietary electronic messaging systems to the ISOCOR message server and directory server products, so that the proprietary directories reflect the availability of additional external users via the electronic messaging backbone. N-PLEX Hub supports the exchange of data between the most popular local mail systems including those provided by Lotus (cc:Mail and Notes) and Microsoft. ISOGATE products also enable users to connect to public-based systems with its X.400 and SMTP/MIME (Internet) gateways. ISOCOR offers application programming interfaces ("APIs") for its N-PLEX Hub products that can be used to integrate an organization's business applications. One such application-specific gateway is the ISOTRADE EDI Server ("ISOTRADE"). ISOTRADE links the ISOCOR electronic information exchange backbone with electronic data interchange ("EDI") translation products, such as those made by TSI International, Ltd., Harbinger Corporation, and St. Paul Software, Inc., and also allows the customer to create software that can directly access the ISOTRADE APIs for electronic commerce applications. ISOPLEX message servers store and relay messages via the X.400 standard, allowing them to be implemented over prevailing network protocols including TCP/IP and X.25. In addition, the Company's ISOPLEX servers run on a variety of hardware platforms and operating systems. The management system can be used on a remote basis over a networked set of servers, reducing the personnel required to manage the ISOPLEX servers. ISOCOR also offers ISOPLEX ADMD, which provides advanced features in the areas of mail account tracking, message management and administration and system control. With ISOPLEX ADMD, large organizations and public carriers can offer high-end, value-added services unavailable in simpler message management servers. Directory Products As systems increase in size and complexity, organizations increasingly need to implement a central repository for the information required to communicate across systems. The Global Directory Server ("GDS"), ISOCOR's directory product, is designed to store and disseminate such information on both a wide area and local area basis. This information may include e-mail addresses and cryptographic material for digital signatures and message confidentiality that are used invisibly by client software, as well as information that users may access directly, such as telephone numbers, fax numbers, physical mail addresses and pictures. The directory allows efficient and rapid updating of this information for use at diverse locations, reducing errors and 9 10 saving the time and personnel resources required to maintain and distribute this data. This distributed application architecture allows system managers to optimize the location of information so that information required locally is on the local server, while users continue to have transparent access to information on any other server in the network. GDS is standards-based and can synchronize stored information, such as e-mail addresses, among proprietary systems communicating across different electronic information exchange systems. A number of client applications are compatible with GDS, including World Wide Web browsers, and Internet clients through the use of LDAP (Lightweight Directory Access Protocol) which can access GDS over the wide variety of network connections including dial-up, Internet TCP/IP and X.25. GDS can serve as an easy-to-access information source, storing data from other sources such as corporate databases, World Wide Web servers and other content sources. As with other ISOCOR applications, GDS is supplemented by an integrated set of directory tools, called the Global Directory Navigator, that allows an administrator to exchange information with other databases, collect accounting information and administer the system either remotely or locally. In March 1996, the Company entered into an agreement with International Computers Limited ("ICL") to license a portion of ICL's i500 directory server product for incorporation with ISOCOR's own communication software technology to create ISOCOR's Global Directory Server product. This bi-lateral crosslicensing agreement provides for the payment of royalties by the Company based on sales of products incorporating the licensed i500 directory server product. In September 1997, the Company entered into an agreement with Zoomit Corporation to resell its VIA meta-directory products and tools. This agreement provides for the payment of royalties by the Company based on the sales of these specific products and tools. Marketing, Sales and Distribution The Company sells its products both directly to end users and indirectly through resellers, systems integrators and original equipment manufacturers ("OEMs"). In North America, ISOCOR sells its products primarily through a direct sales organization focused on Fortune 1000 companies and service providers. Internationally, ISOCOR sells its products primarily through a worldwide network of resellers. The Company's international resellers consist primarily of systems integrators and value added resellers ("VARs"). These resellers typically range in size from several hundred staff down to half a dozen specialists in some smaller countries. The Company selects resellers based on general experience in electronic messaging, data communications and systems integration, and then trains them on the Company's software products and technologies at ISOCOR's training centers in the U.S. and Ireland. In addition, ISOCOR sells to major accounts worldwide, primarily to large telecommunications carriers which prefer to deal directly with the Company for support. A number of the Company's international public carrier backbone customers have also begun licensing ISOCOR's products to end users as customer premises equipment. See "Introductory Statements and References: Risk Factors -- Dependence on International Third-party Distribution." The Company's reseller agreements generally grant resellers non-exclusive rights to distribute the Company's products in each reseller's defined geographic market. Each reseller is generally responsible for supporting its end-user customers, while ISOCOR provides technical support to the reseller. The Company provides price protection to its resellers such that, if the Company reduces the price of its products, resellers are entitled to a credit for the difference between the reduced price and the price they previously paid for products that are held in the reseller's inventory at the time of the price reduction and that were purchased within the preceding 30 days. ISOCOR's resellers typically stock little inventory, but instead obtain products from the Company on an as-needed basis. To support its sales efforts, the Company conducts marketing programs which include direct mail, public relations, advertising (including a World Wide Web home page on the global Internet (www.isocor.com)), worldwide trade shows and selected joint marketing programs. The Company also sponsors an annual meeting for its resellers to provide them additional information and skills to market the Company's products 10 11 effectively. The sales, support and service functions for the Company's products are provided principally through the Company's Santa Monica headquarters with the exception of the European, Middle East and African markets which are serviced through ISOCOR sales and support offices in Berlin, Bern, Dublin, London and Paris. During 1997, international revenues accounted for 67% of the Company's total revenues. Of these international revenues, 86% resulted from sales to resellers or customers located primarily in Europe, with the remainder resulting from sales to resellers or customers located in the rest of the world. International sales may be subject to government controls and other risks, including export licenses, federal restrictions on the export of critical technology, changes in demand resulting from currency exchange fluctuations, political instability, trade restrictions and changes in tariffs. To date, the Company has experienced no material difficulties due to these factors. See "Introductory Statements and References: Risk Factors -- Dependence on International Operations" and " -- Currency Fluctuations." Customers ISOCOR's products are used in a variety of industries. The Company markets its products primarily to large and medium-sized corporate customers, as well as service providers. During 1997, no single customer accounted for more than 10% of the Company's revenues. During 1997, the following categories of revenue accounted for more than 10% of total revenues: server products accounted for 33% of total revenues, gateway products accounted for 12% of total revenues, directory products accounted for 11% of total revenues and services accounted for 29% of total revenues. Customer and Reseller Support and Services The Company offers its resellers and end-user customers standard support and upgrade services. The agreements that provide for these services vary among end users, resellers and OEMs, but generally provide that for an annual fee the Company will provide customer support services by electronic communication, fax or telephone. These agreements also typically provide for software upgrades to the licensed products as they are generally released by the Company. ISOCOR also offers training, custom engineering and pre- and post-sale services to end users and carriers. Professional services include network design consulting, product installation, administrator training, custom application integration and turnkey systems implementation. The Company has major customer support centers in Santa Monica and Dublin. Additionally, local technical support is available at the Company's regional offices in London, Paris and Bern. In 1997, provision by ISOCOR of all customer and reseller support and services accounted for 29% of ISOCOR revenues. Product Development The Company has invested significant resources into the development of new products and expects to continue to make these investments in the future. ISOCOR also plans to continue to enhance its products with new releases that provide additional features and to make its products available on additional hardware and operating system platforms. See "Introductory Statements and References: Risk Factors -- Dependence on New Products" and " -- Ability to Respond to Rapid Technological Change." Much of the computer hardware and software currently deployed experiences problems handling dates beyond the year 1999. This computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing both the readiness of its internal computer systems and software, and the compliance of its software licensed to customers, for handling the year 2000. Based on preliminary information, the Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues and does not currently believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk and the possibility that third parties might assert claims against the Company with respect to such issues. Accordingly, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such changes which could have an 11 12 adverse effect on future results of operations. See "Introductory Statements and References: Risk Factors -- Risk Associated with Software and Hardware and the Year 2000". The Company has development centers located in Berlin, Copenhagen, Dublin and Santa Monica. The largest such facility is located in Dublin in order to take advantage of lower costs in Ireland, IDA tax incentives and grants and the strong Irish educational structure. The presence of development facilities in the U.S. and Europe enhances access to both American and European markets and technology. ISOCOR invests substantial management time and resources in quality assurance testing for all of its products. Quality assurance testing takes place at the Company's Berlin, Dublin and Santa Monica facilities. As of December 31, 1997, the Company employed 70 persons in the product development function. The product development organization consists of separate product units, each with expertise in specific areas. Engineering expenses were $7.9 million in 1997. Competition The market for the Company's products is intensely competitive and subject to rapid technological change and evolving standards. The Company believes its long-term success will depend in part on its ability to be a leader in developing and offering products that meet emerging industry or market standards, to offer a broad range of high-performance, multi-platform, messaging and directory infrastructure products requiring little customization for the general marketplace, to maintain strong customer support and sufficient distribution channels and to offer competitively priced products. The Company believes that its products currently compete favorably with respect to these factors. The messaging and directory infrastructure market is fragmented and a number of companies are participating in this market with a variety of product offerings featuring varying profiles and business models. The Company's competition includes privately held companies which specialize in messaging products such as Data Communications Ltd., Innosoft International, Inc., and Software.com. ISOCOR's competitors also include customized solution vendors or systems integrators such as Control Data Systems, Inc. and publicly held software companies such as Lotus, Microsoft, Netscape, and Worldtalk Corporation. Major software providers such as Microsoft, Lotus and Novell, Inc. ("Novell"), have incorporated functionality into their product offerings similar to that provided by the Company's products. The Company's Global Directory Server contains elements that compete directly and indirectly with components and complete products offered by Novell and other developers of X.500 and directory server-based software products. The Company's gateway products contain elements that compete directly with components or complete products offered by Control Data Systems Inc., Innosoft International, Inc., Worldtalk Corporation and other developers of products for connectivity between dissimilar electronic information exchange software systems. To the extent such companies provide such functionality or products, the Company's business, financial condition and results of operations could be materially adversely affected. Many of the Company's current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than can the Company. Increased competition could result in price reductions, reduced operating margins and loss of market share. See "Introductory Statements and References: Risk Factors -- Dependence on New Products," "-- Substantial Competition" and "-- Ability to Respond to Rapid Technological Change." Proprietary Rights The Company regards its software products as proprietary and relies primarily on a combination of statutory and common law copyright, trademark and trade secret laws, customer licensing agreements, employee and third party nondisclosure agreements and other methods to protect its proprietary rights. The Company generally enters into confidentiality and invention assignment agreements with its employees and consultants. Additionally, the Company enters into confidentiality agreements with its customers and potential 12 13 customers and limits access to, and distribution of, its proprietary information. In its N-PLEX and NetCS Connectivity product lines, ISOCOR has implemented a key license mechanism which disables use of the various modules of the product unless proper number keys are provided by the customer during the installation process. Otherwise, the Company does not include in its software any mechanisms to prevent or inhibit unauthorized use, but generally either requires the execution of an agreement that restricts copying and use of the Company's products or provides for the same in a shrinkwrap license agreement. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. See "Introductory Statements and References: Risk Factors -- Risks Associated with Intellectual Property." While the Company has not received claims alleging infringement of the proprietary rights of third parties which the Company believes would have a material adverse effect on the Company's business, financial condition and results of operations, there can be no assurance that third parties will not claim that the Company's current or future products infringe the proprietary rights of others. Any such claim, with or without merit, could result in costly litigation or might require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, or at all. Manufacturing The Company contracts with third parties to manufacture the media containing its software, which consists of diskette and tape duplication and printing of manuals and boxes. Assembly is performed by the Company at its Dublin and Berlin facilities. The raw materials and services associated with manufacturing the media are generally available through a number of sources. Finished products are generally shipped from Ireland to customers in Europe, the Far East, Australia, the Middle East and Africa, and to the Company's United States facility. The Company's United States facility generally distributes products to customers in North and South America. The NetCS Connectivity products are generally shipped directly from Berlin to customers in Germany, and otherwise to the Company's Irish and United States facilities for further distribution. Employees As of December 31, 1997, the Company employed 215 persons, including 70 in product development and engineering (including 10 in Berlin, three in Copenhagen, 43 in Dublin and 14 in Santa Monica), 44 in pre-and post-sales customer support, 15 in North American sales, 23 in international sales, 21 in marketing, seven in assembly and 35 in administration. The Company also retains consultants from time to time, primarily in the area of engineering, to assist with particular areas of software development for limited periods of time. None of the Company's employees is currently represented by a labor union, and the Company considers its relations with its employees to be good. ITEM 2. PROPERTIES ISOCOR's corporate offices are located in Santa Monica, California, where the Company currently leases approximately 19,000 square feet under a sublease expiring in 1998. The Company has entered into a new sublease agreement with respect to the same 19,000 square feet expiring in early 2001. The Company's Santa Monica facility houses its corporate offices and engineering, sales and marketing departments. Additionally, the Company leases approximately 2,000 square feet in Vienna, Virginia for a sales office under a sub-lease expiring in early 1999, and another approximately 7,500 square feet of total space in Berlin for engineering and sales offices, including an approximately 2,000 square foot primary space with a lease expiring in 1999, and an approximately 500 foot satellite space leased month to month. The Company also leases office space for its major engineering facility in Dublin, consisting of approximately 24,000 square feet under a sublease expiring in 1998. The Company has exercised its option to extend the lease to mid-1999. In addition, the Company leases approximately 1,000 square feet each of office facilities in London, Paris, Copenhagen, Bern and Zurich. The Bern and Zurich facilities are sales offices, while the offices in London and Paris perform pre-sales marketing and support. The London, Paris and Zurich leases expire in 2002, 2003 and 2002, 13 14 respectively. The leases for the facilities in Copenhagen and Bern are month to month leases. The Company believes that these facilities are adequate for the Company's current needs and that suitable additional space, if needed, should be available on commercially reasonable terms to accommodate expansion of the Company's operations. See "Item 8: Financial Statements and Supplementary Data -- Note 7." ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in various legal proceedings in the normal course of business. The Company is not currently involved in any litigation which, in management's opinion, would have a material adverse effect on its business, operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER INFORMATION (a) Market Information. The Company completed an initial public offering of its Common Stock on March 13, 1996, and the Company's Common Stock is traded on the NASDAQ Stock Market under the symbol ICOR. As of February 17, 1998, the Company had approximately 147 shareholders of record. The following table shows the high and low closing prices of the Company's Common Stock for each fiscal quarter during the fiscal years ended December 31, 1996 and 1997, as reported by Nasdaq:
1996 ------------------ HIGH BID LOW BID -------- ------- First Quarter (ended 3/31/96).............................. $ 9.750 $7.500 Second Quarter (ended 6/30/96)............................. 20.000 8.750 Third Quarter (ended 9/30/96).............................. 15.000 6.625 Fourth Quarter (ended 12/31/96)............................ 7.375 5.250
1997 ------------------ First Quarter (ended 3/31/97).............................. $ 6.750 $3.750 Second Quarter (ended 6/30/97)............................. 3.500 2.000 Third Quarter (ended 9/30/97).............................. 3.625 2.188 Fourth Quarter (ended 12/31/97)............................ 3.625 1.750
Future stock prices may be subject to volatility, particularly on a quarterly basis. Any shortfall in revenues or net income from amounts expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's stock. Dividend Policy. In 1993 and 1994, cash dividends were declared and subsequently paid by NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in a transaction accounted for as a "pooling of interests." The Company has not paid dividends on its Common Stock and has no present plans to do so. (b) Report of Offering Securities and Use of Proceeds Therefrom. In connection with its initial public offering in 1996, the Company filed a Registration Statement on Form S-1, SEC File No. 333-606 (the "Registration Statement"), which was declared effective by the Commission on March 13, 1996. The Company registered 2,300,000 shares of its Common Stock, $0.001 par value per share. The offering commenced on March 14, 1996 and did not terminate until all of the registered shares had been sold. The aggregate offering price of the registered shares was $20,700,000. The managing underwriters of the offering were Hambrecht & Quist and Furman Selz LLP. The Company incurred the following expenses in connection with the offering: Underwriting discounts and commissions................... $1,449,000 Other expenses........................................... 981,000 ---------- Total Expenses................................. $2,430,000
All of such expenses were direct or indirect payments to others. 15 16 The net offering proceeds to the Company after deducting the total expenses above were approximately $18,300,000. From March 14, 1996 to December 31, 1997, the Company used such net offering proceeds, in direct or indirect payments to others, as follows: Purchase and installment of machinery and equipment..... $ 2,414,000 Working capital......................................... 7,655,000 Investment in short-term, interest-bearing obligations........................................... 6,048,000 Repayment of short-term liabilities..................... 1,368,000 Application to short-term assets........................ 815,000 ----------- Total......................................... $18,300,000
Each of such amounts is a reasonable estimate of the application of the net offering proceeds. This use of proceeds does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. 16 17 ITEM 6. SELECTED FINANCIAL DATA SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenues................................... $ 5,460 $13,541 $20,774 $26,394 $22,018 Gross profit..................................... 3,723 10,720 16,180 21,326 16,351 Income (loss) from operations.................... (2,531) (120) 586 (33) (9,068) Net income (loss)................................ $(2,791) $ (10) $ 319 $ 483 (7,904) ======= ======= ======= ======= ======= Net income (loss) per share...................... $ (1.88) $ (0.01) $ 0.19 $ 0.06 $ (0.83) ======= ======= ======= ======= ======= Weighted average shares outstanding.............. 1,486 1,567 1,652 7,733 9,485 ======= ======= ======= ======= ======= Net income (loss) per share, assuming dilution... $ (1.88) $ (0.01) $ 0.04 $ 0.05 $ (0.83) ======= ======= ======= ======= ======= Weighted average shares outstanding and dilutive shares............................. 1,486 1,567 7,783 9,808 9,485 ======= ======= ======= ======= ======= CONSOLIDATED BALANCE SHEETS DATA: Total assets..................................... $11,482 $12,484 $19,494 $41,298 $34,223 Long-term liabilities............................ 156 110 606 187 133 Total shareholders' equity....................... $ 9,107 $ 8,697 $12,487 $33,204 $25,684 Cash dividends declared per common share (1)..... $ 0.02 $ 0.09 -- -- --
- --------------- (1) In 1993 and 1994, cash dividends were declared and subsequently paid by NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in a transaction accounted for as a "pooling of interests." Therefore, although the Company has not paid dividends on its Common Stock and has no plans to pay cash dividends to its shareholders in the near future, due to the disclosure rules for poolings of interest which require presentation as though the combination had been consummated for all periods presented, some cash dividends are shown above. 17 18 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The consolidated financial statements of the Company contained in this report have been retroactively restated for all periods presented to include the financial position, results of operations and cash flows of NetCS Informationstechnik GmbH ("NetCS") in accordance with the pooling-of-interests method of accounting. In 1997, NetCS Informationstechnik GmbH's legal name was changed to ISOCOR GmbH. Revenues. Total revenues were $20.8 million, $26.4 million and $22.0 million in 1995, 1996 and 1997, respectively, representing an increase of 27% in 1996 and a decrease of 17% in 1997. The decline in product revenues in 1997 was primarily related to the decline in demand for X.400 software solutions and NetCS connectivity products, partially offset by an increase in demand for software solutions related to the increased business usage of the Internet. ISOCOR believes that the major driver for the decline in demand for X.400 software solutions was the rapid emergence and explosion of business use of the Internet. In 1996, revenues driven by the demand for X.400 solutions were 58% of product revenues. In 1997, these revenues fell to 31% of product revenues. While the Company continues to see projects related to X.400 in certain parts of the world, or in certain specific application areas, the Company believes that this marketplace will continue to decline slowly throughout 1998. Product revenues were $17.6 million, $21.3 million and $15.6 million in 1995, 1996 and 1997, respectively, representing an increase of 21% in 1996 and a decrease of 27% in 1997. The increase from 1995 to 1996 resulted primarily from increases in the volume of products sold, partially offset by an increase in the provision for estimated future returns. The decrease from 1996 to 1997 was mainly due to decreased volumes of, and declining prices for, the Company's X.400 products and NetCS connectivity products, partially offset by increased volumes in the Company's products driven by the increased demand for software solutions as a result of the increased business usage of the Internet, as discussed above. On a geographic basis, revenues from North American sources accounted for 18%, 22% and 33% of total revenues, while revenues in the Company's European marketplace accounted for 66%, 71% and 58% of total revenues in 1995, 1996 and 1997, respectively. Revenues from North American sources increased as a percentage of revenues during these years largely due to the Company's increased focus on this market and the growth in demand for the Company's software solutions driven by the Internet. In 1997, this growth was partially offset by decreased volumes of, and declining prices for, the Company's X.400 products. Revenues from European sources decreased as a percentage of revenues in 1997 largely due to a continuing shift away from the Company's product lines driven by a decline in the market for X.400 software solutions and NetCS connectivity products, partially offset by increased volumes in the Company's products driven by the increased demand for software solutions as a result of the increased business usage of the Internet, as discussed above. International revenues from non-European sources were positively impacted in 1995 by a single sale in Asia in excess of $1.3 million. Service revenues were $3.2 million, $5.1 million and $6.4 million in 1995, 1996 and 1997 respectively, representing increases of 60% and 25% in 1996 and 1997, respectively. Service revenues include software support and update fees, training, custom engineering and installation. The increases during 1996 and 1997 were primarily due to increased volumes of software support and update service fees. Cost of Revenues. Cost of revenues includes both cost of product revenues and cost of service revenues. Cost of product revenues consists primarily of costs of hardware purchased from third-party vendors, product media duplication, manuals, packaging materials, and third-party royalties relating to licensed technology. Cost of service revenues consists primarily of personnel-related costs of providing software support and update, training, custom engineering and installation services. Cost of revenues increased year over year from 1996 to 1997 primarily as a result of increased third-party royalties on one of the Company's product lines associated with the growth in demand driven by the Internet, increased costs of supporting a higher level of service revenues, and a $310,000 write-down of third-party prepaid royalties relating to a specific product technology which the Company believes is non-strategic, which was partially offset by a reduction in costs relating to hardware purchased from third-party vendors as a result of decreased sales of these components. Cost of 18 19 revenues increased year over year from 1995 to 1996 primarily as a result of supporting a higher level of service revenues and increased production costs associated with higher volumes of products sold, offset by a reduction in third-party royalties relating to licensed technology. Gross Profit. Gross profit was $16.2 million, $21.3 million and $16.4 million, representing 78%, 81% and 74% of revenues in 1995, 1996 and 1997, respectively. Gross profit from product sales was $14.6 million, $18.6 million and $12.8 million in 1995, 1996 and 1997, respectively, representing 83%, 87% and 82% of product revenues in 1995, 1996 and 1997, respectively. The absolute decrease in gross profit from 1996 to 1997 was primarily a result of decreased product revenues as discussed above, coupled with increased third-party royalties on one of the Company's product lines associated with the growth in demand driven by the Internet and a $310,000 write-down of third-party prepaid royalties relating to a specific product technology which the Company believes is non-strategic. The absolute increase in gross profit from 1995 to 1996 was primarily a result of increased sales of the Company's products, coupled with a shift in the Company's sales primarily toward higher margin products which results primarily from the Company's decreasing reliance upon technology owned by third parties and thus, lower royalties paid to third parties. Gross profit from services was $1.5 million, $2.7 million and $3.6 million in 1995, 1996 and 1997, respectively, representing 48%, 53% and 56% of services revenues in 1995, 1996 and 1997, respectively. The increase in gross profit from services during these years is primarily due to increased services revenues without a corresponding increase in personnel costs associated with providing these services. Engineering. Engineering expenses were $7.5 million, $9.0 million and $7.9 million in 1995, 1996 and 1997, respectively, representing 36%, 34% and 36% of revenues in 1995, 1996 and 1997, respectively. Engineering expenditures consist primarily of personnel costs, equipment costs and related costs required to conduct the Company's development efforts, which include costs related to engineering, product management, technical writing and quality assurance. The dollar decrease in engineering expenses in 1997 resulted principally from decreased levels of personnel involved in these activities, and relate primarily to the reduction in and stabilization of development of the Company's X.400 products. The dollar increases in engineering expenses in 1996 resulted principally from increased levels of personnel primarily involved in these activities, and relate primarily to the continued development and enhancement of the N-PLEX server product family and the development of the Global Directory Server product. During 1995, 1996 and 1997, there were approximately 105, 136 and 106 people on average, respectively, involved in engineering activities. To date, all software development costs have been expensed as incurred, as the impact of software development costs that qualify for capitalization under Financial Accounting Standard No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," have been immaterial to the financial statements. The Company believes that significant investments in research and development are required for the Company to remain competitive. While the Company intends to continue to place emphasis on its research and development efforts in the future to remain competitive, the Company anticipates it will continue to moderate these expenses, relative to prior periods, during 1998 and that these expenses may not vary directly with the level of revenues for that same period. Sales and Marketing. Sales and marketing expenses were $6.8 million, $10.1 million and $14.0 million in 1995, 1996 and 1997, respectively, representing 33%, 38% and 63% of revenues in 1995, 1996 and 1997, respectively. Sales and marketing expenses include personnel and associated costs relating to selling, sales support and marketing activities, including marketing programs such as trade shows and other promotional costs. In 1995, 1996 and 1997, the increases in sales expenses resulted primarily from expansion of the Company's sales and support organizations both in the United States and internationally. During 1995, 1996 and 1997, there were approximately 53, 74 and 80 people on average, respectively, primarily involved in sales activities. In 1997, the Company's marketing expenditures increased over 1996 primarily due to increased level of personnel involved with marketing activities on a worldwide basis, as well as an increase in marketing program costs. In 1996, the Company's marketing expenditures increased from 1995 primarily due to an increased level of personnel and marketing programs primarily in North America. The Company intends to maintain a similar absolute level of spending on sales and marketing in 1998. 19 20 Administration. Administration expenses were $2.1 million, $2.7 million and $3.0 million in 1995, 1996 and 1997, respectively, representing 10% to 13% of revenues in each of those years. The dollar increases were primarily due to higher levels of staffing. During 1995, 1996 and 1997, there were approximately 20, 29 and 38 people on average, respectively, primarily involved in administrative activities. The Company expects to increase the dollar amount of its administration expenditures in the future to support potential growth and to continue to meet the reporting requirements imposed on a public company. Agency Grants. In 1992, 1994 and 1996 the Company secured grant aid in the amounts of $750,000, $850,000 and $793,000, respectively, from the Industrial Development Authority of Ireland under an incentive program designed to induce organizations to locate and conduct business in Ireland. These grants are for six years each and are primarily dependent upon the creation and fulfillment of new jobs within the Company in Ireland. The Company reflected as reductions of operating expenses $712,000, $413,000 and $69,000 relating to these grants in 1995, 1996 and 1997, respectively. The Company has decreased its level of employment in Ireland in 1997, however, the Company is committed to retaining a significant and continuing presence in Ireland. The Company also received grant aid from the Technological Finance Authority -- Berlin under an incentive program to promote research and development in small and medium-sized German-owned companies located in Berlin. The Company reflected as reductions in operating expenses $124,000, $87,000 and $0 relating to these grants in 1995, 1996 and 1997, respectively. As of August 31, 1996, the Company is no longer eligible to receive grants from the Technological Finance Authority -- Berlin. The Company expects the level of grant aid it receives from differing sources to vary from year to year, primarily dependent upon its employment level in Ireland. Severance Costs. Severance costs of $681,000 in 1997 represent the costs accrued with respect to 35 terminated employees due to the restructuring activities completed in 1997. The total severance costs incurred were $364,000 for engineering, $190,000 for sales and marketing, and $127,000 for administration. Acquisition Costs. Acquisition costs of $227,000 in 1996 represent the direct costs, primarily legal and accounting, of the business combination of NetCS Informationstechnik GmbH and ISOCOR. Provision for Loss on Investment. Provision for loss on investment of $100,000 in 1995 represents the Company's estimate of a one-time loss related to the sale of a 15% interest in a UK company, which interest the Company had held since 1992 and subsequently liquidated in January 1996. This investment was made to provide access to technology that is no longer strategic to the Company as a result of the Company's internal technology development efforts. Income (Loss) from Currency Fluctuations. Income (loss) from currency fluctuations was $72,000, $(82,000) and $39,000 in 1995, 1996 and 1997, respectively. The differences resulted primarily from changes in foreign currency rates. Interest Income. Interest income was $104,000, $1 million and $1.2 million in 1995, 1996 and 1997, respectively. The increase in 1996 was primarily a result of increased interest income on the Company's increased cash equivalents and marketable securities related to the Company's initial public offering in March 1996. The increase in 1997 resulted primarily from interest earned for the full twelve months of 1997 on those cash equivalents and marketable securities, partially offset by declining cash equivalents and marketable securities balances in 1997. Provision for Income Taxes. During 1995 and 1997, the Company did not generate taxable income in the United States. In 1996, the Company utilized $390,000 of tax loss carryforwards to offset income otherwise taxable in the United States, which resulted in a significant reduction in income tax expense for that year. Included in provision for income taxes in 1995 is $278,000 relating to income taxes withheld by a foreign government relating to a substantial sale in that country made from the United States. The Company also utilized foreign operating loss carryforwards to offset $941,000 of income otherwise subject to foreign taxation in 1995. The Company has significant operations and generates a substantial portion of its taxable income in Ireland. Under a tax holiday due to terminate in 2010, the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. For Irish tax purposes, most of the Company's operating income earned in Ireland is considered "manufacturing income." To qualify for this 10% rate, the Company must carry out "software 20 21 development services" or "technical or consultancy services" (as defined in the Irish Finance Act 1980) in Ireland and qualify for an employment grant from the Industrial Development Authority of Ireland. If the Company ceases to comply with these qualifications, all or a part of its taxable profits may be subject to a 36% tax rate on its post disqualification date taxable profits. Should this occur, or should Irish tax laws be rescinded or changed, the Company's net income could be materially adversely affected. Because the Company utilized tax loss carryforwards to offset income otherwise taxable in Ireland in 1995, this reduced tax rate has not resulted in significant reductions in income tax expense for those years. Liquidity and Capital Resources Prior to the Company's initial public offering in March 1996, the Company financed its operations primarily through private sales of equity securities. The Company received net proceeds of approximately $3.2 million and $1.8 million in 1995 and 1996, respectively, from the private sale of equity securities. In March 1996, the Company completed a public offering and sale of 2,300,000 shares of its Common Stock, resulting in net proceeds to the Company of approximately $18.4 million. Funds from the Company's equity financings continue to be used to fund the expansion of the Company's infrastructure and internal operations, including purchases of capital equipment and the hiring of additional personnel. The Company generated (used) cash from operating activities of $(565,000), $446,000 and $(4,718,000) in 1995, 1996 and 1997, respectively. Operating cash flows in 1997 relative to 1996 were affected by a significantly increased operating loss (net of adjustments due to depreciation and amortization and the provision for doubtful accounts, returns and price protection), partially offset by a decrease in accounts receivable as a result of the Company's increased collections of accounts receivable and decreased level of revenues. Operating cash flows in 1996 relative to 1995 were affected by increases in deferred revenues, offset by a substantial increase in accounts receivable as a result of the Company's increased level of revenues and a decrease in product development obligation. Cash flow from operations can vary significantly from quarter to quarter depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. In addition, the Company typically generates a large percentage of its quarterly revenues during the last few weeks of the quarter, which when coupled with payment terms in excess of 90 days on some of the larger sales tends to give rise to increases in accounts receivable. These factors have been offset in 1997 by the Company's decreased revenues versus 1996, yielding a decreased level of accounts receivable at December 31, 1997. However, these same factors when coupled with the Company's increased revenues in 1996 versus 1995, gave rise to an increase in the accounts receivable balances at December 31, 1996. The Company expects that certain of the Company's larger sales will continue to have longer payment terms, thus slowing the cash flow cycle. The Company does not believe these longer payment terms are likely to have a material adverse effect on the collectibility of the related receivables. The Company currently anticipates that the Company's available cash, cash equivalents and marketable securities resources ($20.5 million as of December 31, 1997), will be sufficient to meet its working capital and capital expenditure requirements through at least the end of 1999. Recent Accounting Pronouncements On June 30, 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. This accounting standard is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. The statement will require additional disclosures for all periods presented, but will not impact reported amounts of net income (loss) of the Company. On June 30, 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires 21 22 restatement of earlier periods presented. The Company is currently evaluating the requirements of SFAS No. 131. On October 27, 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company is currently evaluating the requirements of SOP 97-2. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets................................. 23 Consolidated Statements of Operations....................... 24 Consolidated Statements of Shareholders' Equity............. 25 Consolidated Statements of Cash Flows....................... 26 Notes to Consolidated Financial Statements.................. 27
22 23 ISOCOR CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT NUMBERS OF SHARES) ASSETS
DECEMBER 31, ------------------ 1996 1997 ------- ------- Current assets: Cash and cash equivalents................................. $13,374 $10,784 Marketable securities..................................... 11,739 9,677 Trade accounts receivable Customer, net.......................................... 11,160 9,054 Related party.......................................... 74 46 Other current assets...................................... 1,618 1,993 ------- ------- Total current assets.............................. 37,965 31,554 Property and equipment, net................................. 2,990 2,405 Other assets................................................ 343 264 Total assets...................................... $41,298 $34,223 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 819 $ 839 Accrued expenses.......................................... 3,677 3,667 Deferred revenues......................................... 2,730 3,678 Product development obligation............................ 380 -- Other current liabilities................................. 301 222 ------- ------- Total current liabilities......................... 7,907 8,406 Other long-term liabilities............................... 187 133 ------- ------- Total liabilities................................. 8,094 8,539 Commitments and contingencies Shareholders' equity: Preferred Stock, undesignated, authorized 2,000,000 shares, none issued or outstanding..................... -- -- Common stock, authorized 50,000,000 shares, issued and outstanding 9,315,241 and 9,551,931 shares at December 31, 1996 and 1997, respectively........................ 39,047 39,359 Notes receivable from shareholders........................ (26) (56) Accumulated deficit....................................... (5,680) (13,584) Deferred compensation..................................... (205) (130) Cumulative foreign currency translation adjustment........ 68 95 ------- ------- Total shareholders' equity........................ 33,204 25,684 ------- ------- Total liabilities and shareholders' equity........ $41,298 $34,223 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 23 24 ISOCOR CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- ------- ------- Revenues: Products: Customer............................................... $17,200 $20,785 $15,525 Related parties........................................ 381 503 95 Services: Customer............................................... 3,122 5,045 6,340 Related parties........................................ 71 61 58 ------- ------- ------- Total revenues.................................... 20,774 26,394 22,018 Cost of revenues: Products.................................................. 2,938 2,663 2,863 Services.................................................. 1,656 2,405 2,804 ------- ------- ------- Total cost of revenues............................ 4,594 5,068 5,667 ------- ------- ------- Gross profit................................................ 16,180 21,326 16,351 ------- ------- ------- Operating expenses: Engineering............................................... 7,522 9,041 7,867 Sales and marketing....................................... 6,843 10,142 13,973 Administration............................................ 2,065 2,676 2,967 Agency grants............................................. (836) (500) (69) Severance costs........................................... -- -- 681 ------- ------- ------- Total operating expenses.......................... 15,594 21,359 25,419 ------- ------- ------- Income (loss) from operations............................... 586 (33) (9,068) Acquisition costs......................................... -- (227) -- Provision for loss on investment.......................... (100) -- -- Income (loss) from currency fluctuations.................. 72 (82) 39 Interest income........................................... 104 1,010 1,170 ------- ------- ------- Income (loss) before income taxes......................... 662 668 (7,859) Provision for income taxes................................ 343 185 45 ------- ------- ------- Net income (loss)........................................... $ 319 $ 483 $(7,904) ======= ======= ======= Net income (loss) per share, assuming no dilution........... $ 0.19 $ 0.06 $ (0.83) ======= ======= ======= Weighted average shares outstanding......................... 1,652 7,733 9,485 ======= ======= ======= Net income (loss) per share, assuming dilution.............. $ 0.04 $ 0.05 $ (0.83) ======= ======= ======= Weighted average shares outstanding and dilutive shares..... 7,783 9,808 9,485 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 24 25 ISOCOR CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS, EXCEPT NUMBERS OF SHARES)
SERIES A SERIES B SERIES C SERIES D PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK -------------------- -------------------- ------------------ ----------------- NUMBER OF NUMBER OF NUMBER OF NUMBER OF SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------- ---------- ------- -------- ------- -------- ------ Balances, December 31, 1994............ 1,875,000 $ 4,846 2,036,997 $ 8,156 457,142 $ 1,951 Issuance of preferred stock, net of offering costs: Series B preferred stock.............. 29,658 185 Series C preferred stock.............. 400,000 2,499 150,000 Series D preferred stock.............. 653 Issuance of common stock............... Repurchase of common stock............. Deferred compensation.................. Payment of notes receivable............ Net income............................. Currency translation................... ---------- ------- ---------- ------- -------- ------- -------- ----- Balances, December 31, 1995............ 1,875,000 4,846 2,066,655 8,341 857,142 4,450 150,000 653 Initial public offering (IPO), net of offering costs of $2,430.............. Conversion of preferred stock to common stock at IPO.......................... (1,875,000) (4,846) (2,066,655) (8,341) (857,142) (4,450) (150,000) (653) Issuance of common stock............... Deferred compensation.................. Payment of notes receivable............ Net income............................. Currency translation................... ---------- ------- ---------- ------- -------- ------- -------- ----- Balances, December 31, 1996............ -- -- -- -- -- -- -- -- Issuance of common stock............... Deferred compensation.................. Payment of notes receivable............ Net loss............................... Currency translation................... ---------- ------- ---------- ------- -------- ------- -------- ----- Balances, December 31, 1997............ -- $ - -- $ - -- $ - -- $ - ========== ======= ========== ======= ======== ======= ======== ===== COMMON STOCK FOREIGN ------------------- CURRENCY NUMBER OF NOTES DEFERRED ACCUMULATED TRANSLATION SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT ADJUSTMENT TOTAL --------- ------- ---------- ------------ ----------- ----------- ------- Balances, December 31, 1994............ 1,625,947 $ 238 $(54) $ (6,482) $ 42 $ 8,697 Issuance of preferred stock, net of offering costs: Series B preferred stock.............. 185 Series C preferred stock.............. 2,499 Series D preferred stock.............. 653 Issuance of common stock............... 90,520 58 (26) 32 Repurchase of common stock............. (54,500) (20) 20 0 Deferred compensation.................. 325 (280) 45 Payment of notes receivable............ 15 15 Net income............................. 319 319 Currency translation................... 42 42 --------- ------- ---- ----- -------- ---- ------- Balances, December 31, 1995............ 1,661,967 601 (45) (280) (6,163) 84 12,487 Initial public offering (IPO), net of offering costs of $2,430.............. 2,300,000 18,270 18,270 Conversion of preferred stock to common stock at IPO.......................... 5,007,130 18,290 0 Issuance of common stock............... 346,144 1,886 1,886 Deferred compensation.................. 75 75 Payment of notes receivable............ 19 19 Net income............................. 483 483 Currency translation................... (16) (16) --------- ------- ---- ----- -------- ---- ------- Balances, December 31, 1996............ 9,315,241 39,047 (26) (205) (5,680) 68 33,204 Issuance of common stock............... 236,690 312 312 Deferred compensation.................. (30) (30) Payment of notes receivable............ 75 75 Net loss............................... (7,904) (7,904) Currency translation................... 27 27 --------- ------- ---- ----- -------- ---- ------- Balances, December 31, 1997............ 9,551,931 $39,359 $(56) $(130) $(13,584) $ 95 $25,684 ========= ======= ==== ===== ======== ==== =======
The accompanying notes are an integral part of these consolidated financial statements. 25 26 ISOCOR CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1995 1996 1997 ------- -------- ------- Cash flows from operating activities: Net income (loss)......................................... $ 319 $ 483 $(7,904) Adjustments to reconcile income (loss) to net cash (used) provided by operating activities: Provision for doubtful accounts, returns and price protection........................................... 279 1,026 (4) Depreciation and amortization............................. 938 1,304 1,373 Amortization of deferred compensation..................... 45 75 75 Provision for loss on investment.......................... 100 -- -- Deferred rent............................................. 47 (21) (26) (Increase)/decrease in: Accounts receivable.................................... (4,375) (3,577) 1,185 Other current assets................................... (643) 104 (538) Other assets........................................... 71 (81) (5) Increase/(decrease) in: Accounts payable....................................... 270 (220) 105 Other accrued expenses................................. 606 615 467 Deferred revenues...................................... 705 1,220 1,176 Product development obligation......................... 825 (445) (224) Other current liabilities.............................. 199 34 (380) Long-term liabilities.................................. 49 (71) (18) ------- -------- ------- Net cash (used) provided by operating activities...................................... (565) 446 (4,718) ------- -------- ------- Cash flows from investing activities: Purchase of property and equipment........................ (1,612) (1,782) (952) Purchase of marketable securities......................... -- (11,739) (13,669) Sale of Marketable Securities............................. -- -- 1,000 Marketable Securities at Maturity......................... -- -- 14,731 Investments, at cost...................................... (240) -- -- Sale of minority interest in non-consolidated subsidiary............................................. -- 547 -- ------- -------- ------- Net cash (used) provided by investing activities...................................... (1,852) (12,974) 1,110 Cash flows from financing activities: Proceeds from the sale of stock, net...................... 3,199 22,595 285 ------- -------- ------- Costs related to initial public offering.................. -- (2,430) -- ------- -------- ------- Net cash provided by financing activities......... 3,199 20,165 285 ------- -------- ------- Effect of exchange rate changes on cash..................... (183) (143) 733 ------- -------- ------- Net increase (decrease) in cash................... 599 7,494 (2,590) Cash and cash equivalents, beginning of year................ 5,281 5,880 13,374 ------- -------- ------- Cash and cash equivalents, end of year...................... $ 5,880 $ 13,374 $10,784 ======= ======== ======= Supplemental disclosure of cash flow information: Income taxes paid......................................... $ 32 279 $ 100 Supplemental schedule of non-cash financing activities: Series B Preferred Stock issued for acquisition........... $ 185 -- -- Deferred compensation..................................... $ 325 -- -- Common stock issued to shareholders in exchange for notes receivable, net........................................ $ 6 -- --
The accompanying notes are an integral part of these consolidated financial statements. 26 27 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ISOCOR (the "Company") develops, markets and supports off-the-shelf electronic messaging and directory infrastructure software products and services that enable businesses to engage in electronic communications over corporate networks, public telephone networks, value added networks and the Internet. Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany accounts and transactions. Investments in excess of 50% of the outstanding common stock of the investee are consolidated. The Company has no investments of less than 50% of investee common stock. Use of Estimates Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying value of these instruments approximates market value because of their short maturity. Marketable securities The Company invests excess cash in a diversified portfolio consisting of a variety of securities including commercial paper, corporate notes and U.S. Government obligations all with maturities of one year or less. All of the Company's marketable securities have been classified as "available-for-sale" securities and are reported at fair value based on quoted market prices as required by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Concentration of credit risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company's accounts receivable are derived from sales directly to customers and indirectly through resellers, systems integrators and OEMs. The Company performs ongoing credit evaluations of its customers before granting uncollateralized credit and to date has not experienced any unusual credit related losses. At December 31, 1996 and 1997, United States, Ireland and Other Europe represented 29%, 56% and 15% and 53%, 34% and 13%, respectively, of the Company's net accounts receivable. At December 31, 1996 and 1997, the Company had balances held in U.S. banks of approximately $2,754,000 and $1,486,000 respectively, which exceeded federally insured limits. Cash equivalents are managed by major investment firms in accordance with the Company's investment policy. Property and equipment Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over estimated useful lives of three to five years. Maintenance and repairs are expensed as incurred, while renewals and betterments are capitalized. Upon the sale or retirement of property 27 28 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and equipment, the accounts are relieved of the cost and the related accumulated depreciation, and any resulting gain or loss is included in operations. Foreign currency translation Results of operations for foreign entities are translated using the average exchange rates during the period. Foreign entities' assets and liabilities are translated to U.S. dollars using the exchange rates in effect at the balance sheet date, and resulting translation adjustments are recorded in a separate component of shareholders' equity. Actual gains or losses incurred on currency transactions in other than the entities' functional currencies are included in income in the current period. Revenue recognition The Company derives revenue from two principal and related sources: software licenses and services. Software license revenues, designated in the Company's financial statements as product revenues, are generated from licensing to end users, distributors and resellers. The Company generates service revenues primarily from software maintenance, training, support and custom engineering. The Company generally recognizes product revenues upon shipment, net of allowances for estimated future returns and price protection, provided that no significant obligations of the Company remain and that collection of the resulting receivable is deemed probable. Upon shipment, the Company accrues the cost of any insignificant performance obligations. The Company recognizes service revenues from customer support and maintenance fees ratably over the term of the service period, which is typically 12 months. Payments for maintenance fees are generally made in advance. The Company generally recognizes service revenues from custom engineering which is separately contracted for and priced from the software license fees, as specific milestones are met in the respective agreements. Where customer engineering is essential to the functionality of the software, the Company does not recognize revenue on the underlying software until the requirements of the specific development arrangement are satisfied. Deferred revenues represent the difference between amounts invoiced and amounts recognized as revenues under software development and maintenance agreements. The Company recognizes service revenues from training activities as the services are provided. Amounts received in connection with a product development arrangement (See Note 12) under which the Company is committed to specific efforts are recognized as reductions in associated product development costs as those costs are incurred. Agency grants Agency grants are recognized as reductions in operating expenses as earned under the respective terms of the agreements. Software development costs Costs related to the conceptual formulation and design of software products are expensed as engineering expense. Based on the Company's development process, technological feasibility is established upon completion of a working model. To date, costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been immaterial. Excess of cost over assets acquired The excess of cost over net assets acquired is amortized over the estimated useful life of one to five years using the straight line method. The Company periodically reviews and evaluates whether there has been a permanent impairment in the value of intangibles. Factors considered in the evaluation include current operating results, trends and anticipated undiscounted cash flows. 28 29 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents the tax payable in connection with the current period operations plus or minus the change during the period in deferred tax assets and liabilities. (See Note 11). Computation of net income (loss) per common share The Company has adopted SFAS No. 128, "Earnings Per Share" for the year ended December 31, 1997, and has restated earnings per common share for all periods presented in accordance with the new standard. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued. Potential common shares related to stock options and preferred stock are excluded from the computation when their effect is antidilutive. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations for the years ended December 31, 1995, 1996 and 1997 (in thousands).
1995 1996 1997 ------ ------ ------- NUMERATOR: Net Income (loss)numerator for basic and diluted EPS................................................ $ 319 $ 483 $(7,904) DENOMINATOR: Denominator for basic EPS-weighted average shares..... 1,652 7,733 9,485 Effect of dilutive securities: Stock options.................................... 957 989 -- Preferred Stock.................................. 5,174 1,086 -- ------ ------ ------- Denominator for diluted EPS-adjusted weighted average shares and assumed conversions........................ 7,783 9,808 9,485
Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive were -0-, -0- and 2,050,265 shares in 1995, 1996 and 1997, respectively. All per share information has been given retroactive effect for the 1 for 2.5 reverse stock split which occurred on January 26, 1996 for all outstanding shares of common and preferred stock. All of the 475,000 common shares of the Company issued to effect the business combination with NetCS have been fully weighted for all periods presented for the computation of the weighted average number of shares outstanding as required for "pooling of interests" accounting treatment. Reclassifications Certain reclassifications have been made to the 1995 financial statements to conform with the 1996 and 1997 presentation. 29 30 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Recent Accounting Pronouncements On June 30, 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. This accounting standard is effective for fiscal years beginning after December 15, 1997 and requires additional disclosures for all periods presented, but will not impact reported amounts of net income (loss) of the Company. On June 30, 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. The Company is currently evaluating the requirements of SFAS No. 131. On October 27, 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company is currently evaluating the requirements of SOP 97-2. 2. INITIAL PUBLIC OFFERING In March 1996, the Company completed the public offering and sale of 2,300,000 shares of its common stock at $9 per share resulting in net proceeds to the Company of approximately $18,270,000 after offering costs, underwriting discounts and commissions. The Company's shares are traded on the Nasdaq Stock Market under the symbol "ICOR." 3. MARKETABLE SECURITIES The Company held the following positions as of December 31, 1996 and 1997 (dollars in thousands):
1996 1997 MATURITIES ------- ------ ------------- Corporate notes.......................... $ 8,098 $8,182 1 - 10 months U.S. Government obligations.............. 3,641 1,495 1 - 6 months ------- ------ $11,739 $9,677 ======= ======
Realized gains and losses are based on the book value of the specific securities sold and were immaterial during the years ended December 31, 1996 and 1997. At December 31, 1996 and 1997, the difference between cost and market value of the Company's marketable securities was not material. In 1995, the Company had no marketable securities. 30 31 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACCOUNTS RECEIVABLE Customer trade accounts receivable, net of allowances as of December 31, 1996 and 1997 were (dollars in thousands):
1996 1997 ------- ------- Accounts receivable...................................... $12,807 $10,563 Less: Allowance for doubtful accounts, returns and price protection............................................. (1,647) (1,509) ------- ------- $11,160 $ 9,054 ======= =======
As of December 31, 1996 and 1997, approximately 72% and 56% of the Company's trade accounts receivable were from customers located in Europe, respectively. 5. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1996 and 1997 consisted of the following (dollars in thousands):
1996 1997 ------ ------ Computer equipment......................................... $4,785 $5,180 Office equipment and furniture............................. 2,010 1,876 ------ ------ 6,795 7,056 Less accumulated depreciation.............................. (3,805) (4,651) ------ ------ $2,990 $2,405 ====== ======
For the years ended December 31, 1995, 1996 and 1997, depreciation expense was $925,000, $1,276,000 and $1,362,000, respectively. 6. ACQUISITIONS In October 1995, the Company acquired a 60 percent interest in a sales and distribution company located in Europe for 29,658 shares of Series B Preferred stock and $279,000 in cash. The transaction was recorded as a purchase and, accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon fair market value. The $355,000 paid in excess of the net assets acquired is being amortized using the straight line method over an estimated useful life of five years and is included in Other Assets in the accompanying Consolidated Balance Sheets as of December 31, 1996 and 1997, net of accumulated amortization of $72,000 and $122,000, respectively. At December 31, 1996 and 1997, the related 40 percent minority interest was $79,000. The Company is required to purchase the remaining 40 percent of this sales and distribution company within four years from the date of purchase, at a price approximating net revenues for the year preceding the purchase of the Company's initial 60 percent interest, subject to various adjustments and maximums. The results of operations for this investment have been included in the Consolidated Statements of Operations for the periods subsequent to the acquisition and were insignificant prior to the acquisition. Pursuant to a Stock Purchase Agreement dated August 29, 1996 by and among ISOCOR B.V., a wholly owned subsidiary of the Company, NetCS Informationstechnik GmbH, a corporation organized under the laws of the Federal Republic of Germany ("NetCS") and the stockholders of NetCS (the "Purchase Agreement"), the Company acquired (the "Acquisition") all of the outstanding quota interests (shares) in NetCS in exchange for an aggregate of 475,000 shares of the Company's common stock. The Acquisition has been accounted for under "pooling of interests" accounting treatment, and therefore, as required by 31 32 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accounting Principles Board Statement No. 16, all financial statements herein have been restated as though the Acquisition had been effected for all periods presented. A reconciliation of the Company's previously reported revenue and earnings to the earnings shown in these financial statements follows (dollars in thousands):
REVENUES NET INCOME (LOSS) -------- ----------------- Year Ended December 31, 1995 ISOCOR only...................................... $16,501 $314 NetCS only....................................... 4,273 5 ------- ---- Consolidated ISOCOR........................... $20,774 $319 ======= ==== Six Months Ended June 30, 1996 ISOCOR only...................................... $10,354 $(49) NetCS only....................................... 2,621 34 ------- ---- Consolidated ISOCOR........................... $12,975 $(15) ======= ====
7. COMMITMENTS AND CONTINGENCIES The Company leases its offices and operating facilities under various operating leases which expire at various dates through 2002. Certain leases contain free rent periods and renewal options and provisions to increase monthly rentals at specified intervals. The consolidated statements of operations reflect rent expense on a straight-line basis over the term of the respective leases. Total rental expense for the years ended December 31, 1995, 1996 and 1997 was $1,042,000, $1,128,000 and $1,418,000, respectively. Future minimum rental commitments under operating leases are as follows (dollars in thousands): For the year ending 1998................................................ $1,455 1999................................................ 1,125 2000................................................ 686 2001................................................ 291 2002................................................ 83 ------ $3,640 ======
As more fully described in Note 6, the Company is committed to purchase the remaining 40 percent interest not already owned by the Company of a sales and distribution company located in Switzerland. From time to time, the Company is involved in various legal proceedings in the normal course of business. The Company is not currently involved in any litigation which, in management's opinion, would have a material adverse effect on its business, operating results, financial condition or cash flows. The Company is assessing both the readiness of its internal computer systems and software, and the compliance of its software licensed to customers for handling the year 2000. Based on preliminary information, the Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues and does not currently believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition in future periods. However, if the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk and the possibility that third parties might assert claims against the Company with respect to such issues. Accordingly, there can be no assurance that there will not be a delay in, or increased 32 33 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) costs associated with, the implementation of such changes, which could have an adverse effect on future results of operations. 8. ACCRUED EXPENSES Accrued expenses at December 31, 1996 and 1997 were (dollars in thousands):
1996 1997 ------ ------ Salaries and related expenses.............................. $1,196 $1,197 Royalties.................................................. 556 499 Commissions................................................ 440 464 Corporate and sales taxes.................................. 347 184 Other...................................................... 1,138 1,323 ------ ------ $3,677 $3,667 ====== ======
9. LONG-TERM LIABILITIES Long term liabilities at December 31, 1996 and 1997 were (dollars in thousands):
1996 1997 ---- ---- Minority interest........................................... $ 79 $ 79 Deferred rent............................................... 27 6 Deferred tax liability...................................... 81 48 ---- ---- $187 $133 ==== ====
10. SEVERANCE COSTS In June and October 1997, the Company approved and completed a restructuring of its United States and European operations pursuant to which certain employees were terminated. A total of $681,000 in severance costs were charged to operating expenses in 1997 of which $364,000 relates to engineering, $190,000 to sales and marketing, and $127,000 to administration. The total number of employees terminated was 35. 11. INCOME TAXES The sources of income (loss) before income taxes for years ended December 31, 1995, 1996 and 1997 were as follows (dollars in thousands):
1995 1996 1997 ------ ----- ------- United States............................................ $ (881) $(182) $(1,881) Foreign.................................................. 1,543 850 (5,978) ------ ----- ------- Income (loss) before income taxes........................ $ 662 $ 668 $(7,859) ====== ===== =======
33 34 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of the provision for income taxes for the years ended December 31, 1995, 1996 and 1997 were as follows (dollars in thousands):
1995 1996 1997 ---- ---- ---- Current: U.S. Federal.............................................. $ -- $ 18 $ -- State..................................................... 1 5 1 Foreign................................................... 374 254 52 ---- ---- ---- 375 277 53 Deferred-foreign.......................................... (32) (92) (8) ---- ---- ---- Total............................................. $343 $185 $ 45 ==== ==== ====
The Company's provision for income taxes is primarily attributable to taxable income in foreign jurisdictions, as the Company did not generate taxable income in the United States in 1995 and 1997, and in 1996 the Company utilized $390,000 of tax loss carryforwards to offset income otherwise taxable in the United States. The Company also utilized foreign operating loss carryforwards to offset $941,000 of income subject to foreign taxation in 1995. Included in provision for income taxes in 1995 is $278,000 relating to income taxes withheld by a foreign government relating to a substantial sale in that country made from the United States. The components of the Company's net deferred taxes as of December 31, 1996 and 1997 were as follows (dollars in thousands):
1996 1997 ------- ------- Deferred tax assets: Allowance for inventory, sales returns and doubtful accounts............................................ $ 302 $ 320 Accrued vacation....................................... 71 63 Deferred revenues...................................... 476 954 Property and equipment................................. 131 194 Net operating loss carryforward........................ 1,533 1,258 Other.................................................. 45 36 ------- ------- Total deferred tax assets...................... 2,558 2,825 Valuation allowance...................................... (2,484) (2,825) ------- ------- Net deferred tax assets........................ 74 -- Deferred tax liability, property, equipment and computer software............................................... (81) (48) ------- ------- Net deferred taxes............................. ($ 7) ($ 48) ======= =======
The valuation allowance on deferred tax assets increased by $434,000, $67,000 and $341,000 in 1995, 1996 and 1997, respectively. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires that management evaluate a variety of factors in reaching a conclusion regarding whether a valuation allowance against deferred tax assets is required. The Company has considered a number of factors which impact the likelihood that the deferred tax assets will be recovered, including the Company's history of operating losses for federal and state tax reporting purposes and the likelihood that U.S. operations will generate taxable income during the carryforward period for unused net operating loss carryforwards. Management is unable to project significant taxable income from U.S. operations during the next two years and beyond and has therefore concluded, based upon a weighting of all available evidence, that it is more likely than not that deferred tax assets will not be realized. Accordingly, the Company has established a full valuation allowance against its U.S. federal deferred tax assets. Management evaluates on a quarterly basis the recoverability of the 34 35 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) deferred tax assets and the level of valuation allowance. At such time as it is determined more likely than not that deferred tax assets are realizable, the valuation allowance would be appropriately reduced. As of December 31, 1997, the Company had net operating loss carryforwards for federal and state income tax reporting purposes of approximately $4.9 million and $2.3 million, respectively, and none remaining in foreign jurisdictions. These carryforwards, if unused, expire in various periods from 1998 to 2010. The overall effective tax rate differed from the statutory tax rate for the years ended December 31, 1995, 1996 and 1997 as follows:
% OF PRETAX INCOME ----------------------- 1995 1996 1997 ----- ----- ----- Tax provision (benefit) based on the federal statutory rate...................................................... 34.0% 34.0% 34.0% U.S. loss not providing current tax benefit................. (34.0) (31.3) (34.0) Foreign taxes, net.......................................... 51.8 25.0 .6 ----- ----- ----- Effective tax rate.......................................... 51.8% 27.7% .6% ===== ===== =====
The Company has significant operations and generates a substantial portion of its taxable income in Ireland. Under a tax holiday due to terminate in 2010, the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. To qualify for this 10% tax rate, the Company must carry out "software development services" or "technical or consultancy services" (as defined in the Irish Finance Act 1980) in Ireland and qualify for an employment grant from the Industrial Development Authority of Ireland. If the Company ceases to comply with these qualifications, all or a part of its taxable profits may be subject to a 36% tax rate on its post disqualification date taxable profits. Should this occur, or should Irish tax laws be rescinded or changed, the Company's net income could be materially adversely affected. Because the Company utilized loss carryforwards to offset income otherwise taxable in Ireland in 1995, this reduced tax rate did not result in significant reductions in income tax expense for that year. 12. SHAREHOLDERS' EQUITY Preferred Stock At December 31, 1997 the Company had 2,000,000 shares of undesignated Preferred Stock but none issued or outstanding. On March 14, 1996, the date of effectiveness of the Company's initial public offering, all outstanding shares of the Company's Series A, B, C and D Preferred Stock were canceled upon their automatic conversion to Common Stock. The Series A, B, C and D Preferred Stock had stated annual dividend rates of $.22500, $.32175, $.39375 and $.90 per share, respectively. No dividends were ever declared or paid. The Series A, B, C and D Preferred Stock had a $2.50, $3.575, $4.375 and $10.00 liquidation preference over shares of Common Stock, respectively, and were redeemable anytime after July 19, 1998, upon written consent to redemption of a majority of the holders, at liquidation preference, plus declared and unpaid dividends, if any. In connection with the issuance of Series C Preferred Stock in November 1993, the Company provided the investor an option to purchase equity securities of the Company under certain conditions associated with sales by the investor and its affiliates of the Company's products in excess of specified minimum levels. The investor exercised that option and purchased 39,942 shares of Common Stock upon the closing of the initial public offering on March 14, 1996 at 80% of the per share price of such offering. In December 1995, the Company entered into a Series D Preferred Stock Purchase Agreement with a strategic investor. The agreement provided for total consideration to the Company of $3,000,000, of which $1,500,000 was received in 1995 in exchange for 150,000 shares of the Company's Series D Preferred Stock 35 36 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and the Company's commitment to product development efforts estimated to cost $825,000. These costs were accrued with the remaining proceeds of $653,000, net, attributed to the Company's Series D Preferred Stock. Per the terms of the agreement, the number of shares of Common Stock issued upon automatic conversion at the initial public offering date of this Series D Preferred Stock was calculated to provide effective per share pricing to this investor of 80% of the price per share of Common Stock paid by the public on that date. The investor was also committed to acquire and did acquire under the terms of the agreement, additional shares of the Company's Series D Preferred Stock with an aggregate purchase price of $1,500,000 at the initial public offering date of March 14, 1996. These shares also automatically converted into Common Stock such that the effective price per share of the Common Stock was the same as the Price to Public in the initial public offering on March 14, 1996. 13. STOCK OPTION AND EMPLOYEE BENEFIT PLANS The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost other than that required to be recognized by APB 25 for the difference between the fair value of the Company's Common Stock at the grant date and the exercise price of the options has been recognized. Had compensation cost for the Company's two stock option plans been determined based on the fair value at the grant date for awards in 1995, 1996 and 1997 consistent with the provisions of SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (amounts in thousands except per share amounts):
1995 1996 1997 ----- ------ -------- Net earnings (loss) as reported......................... $ 319 $ 483 $ (7,904) Net loss, pro forma..................................... $ 311 $ (584) $(11,068) Net earnings (loss) per share as reported............... $0.19 $ 0.06 $ (0.83) Net loss per share, pro forma........................... $0.19 $(0.08) $ (1.17) Net earnings (loss) per share assuming dilution, as reported.............................................. $0.04 $ 0.05 $ (0.83) Net loss per share assuming dilution, pro forma......... $0.04 $(0.08) $ (1.17)
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1997.
1996 1997 ---- ---- Risk free interest rate................................ 6.10% 6.13% Expected lives (years)................................. 4 4 Expected volatility.................................... 70% 117% Expected dividends..................................... 0 0
1992 Stock Option Plan The Company's 1992 Stock Option Plan (the "1992 Option Plan") permits the grant of both "incentive stock options" designed to qualify under IRC Section 422 and non-qualified stock options. A total of 2,600,000 shares of Common Stock has been reserved for issuance under the 1992 Stock Option Plan. Incentive stock options may only be granted to employees of the Company whereas non-qualified stock options may be granted to employees and consultants. Each option, once vested, allows the optionee the right to purchase one share of the Company's Common Stock. The Board of Directors determines the exercise price of the options based on the fair market value of such shares on the date of grant; options granted to date generally vest ratably over four years and expire ten years from the date of the grant. Compensation expense equal to the difference between the assumed fair value of the Company's Common Stock at the grant date and the exercise price of the options, if any, is recognized ratably over the vesting period. 36 37 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1996 Directors' Stock Option Plan In 1996, the Company adopted the 1996 Directors' Stock Option Plan (the "Directors' Plan"). A total of 150,000 shares of Common Stock has been reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company ("outside directors"), including an option to purchase 10,000 shares of Common Stock on the date on which the optionee first becomes a nonemployee director of the Company or January 18, 1996 with respect to the Company's then current nonemployee directors ("First Option"). Each First Option granted vests in installments cumulatively as to 25% of the shares subject to the First Option on each of the first, second, third and fourth anniversaries of the date of grant of the First Option. Thereafter, each outside director will be automatically granted an option to purchase 2,500 shares of Common Stock on the first calendar day of the Company's fiscal year commencing in or after 1997 if, on such date, the optionee shall have served on the Company's Board of Directors for at least six months ("Subsequent Option"). Each Subsequent Option shall vest on the fourth anniversary of the date of grant, subject to continued service as an outside director. The exercise price per share of all options granted under the Directors' Plan shall be equal to the fair market value of a share of the Company's Common Stock on the date of grant of the option. The following table summarizes certain information relative to the 1992 Option Plan and 1996 Directors' Stock Option Plan.
WEIGHTED AVERAGE EXERCISE PRICE WEIGHTED AVERAGE FAIR VALUE AT SHARES RANGE EXERCISE PRICE GRANT DATE --------- ---------------- ---------------- ---------------- Outstanding at December 31, 1994....................... 655,400 $.3750 to $.6250 $0.52 Granted Option price = Grant date market price............ 510,403 $.6250 to $7.50 $1.86 $1.03 Exercised.................... (30,530) $.3750 to $.6250 $0.48 Canceled or expired.......... (83,886) $.3750 to $.6250 $0.60 --------- Outstanding at December 31, 1995....................... 1,051,387 $.3750 to $7.50 $0.83 ========= Granted Option price = Grant date market price............ 1,219,700 $6.44 to $12.50 $7.06 $4.96 Exercised.................... (139,554) $.3750 to $5.00 $0.49 Canceled or expired.......... 123,945 $.3750 to $12.50 $5.13 --------- Outstanding at December 31, 1996....................... 2,007,588 $.3750 to $12.50 $1.96 ========= Granted Option price = Grant date market price............ 683,000 $2.313 to $5.50 $2.86 $2.27 Option price < Grant date market price............ 119,500 $2.625 $2.63 Exercised.................... (143,497) $.3750 to $2.625 $0.90 Canceled or expired.......... (616,326) $.3750 to $8.00 $5.75 --------- Outstanding at December 31, 1997....................... 2,050,265 $.3750 to $8.00 $2.23 =========
37 38 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about the stock options at December 31, 1995, 1996 and 1997:
1995 1996 1997 --------- ------- ------- Options exercisable.......................... 345,872 504,769 817,517 Options available for future grant........... 116,083 270,328 384,154
The following table summarizes information about the stock options outstanding and exercisable at December 31, 1997:
WEIGHTED NUMBER AVERAGE WEIGHTED OPTIONS OUTSTANDING OUTSTANDING AS OF REMAINING AVERAGE RANGE OF EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE ------------------------ ----------------- ---------------- -------------- $0.00 to $1.99................. 576,024 5.5 $0.66 $2.00 to $3.99................. 1,436,741 8.2 $2.71 $4.00 to $5.99................. 7,500 9.0 $5.50 $6.00 to $8.00................. 30,000 8.0 $8.00 --------- 2,050,265 7.4 $2.23 =========
NUMBER WEIGHTED OPTIONS EXERCISABLE EXERCISABLE AS OF AVERAGE RANGE OF EXERCISE PRICES DECEMBER 31, 1997 EXERCISE PRICE ------------------------ ----------------- -------------- $0.00 to $1.99................................. 477,150 $0.62 $2.00 to $3.99................................. 332,867 $2.63 $4.00 to $5.99................................. -- $ -- $6.00 to $8.00................................. 7,500 $8.00 ------- 817,517 $1.50 =======
Effective April 1, 1997 (the "Grant Date") all optionees under the 1992 Stock Option Plan holding stock options with exercise prices in excess of the fair market value of the Company's Common Stock received one-for-one repricing of their then-existing unexercised stock options with a new exercise price set at $2.625 per share, the closing sales price and fair market value of the Company's Common Stock on the Grant Date. The number of stock options affected was 1,235,065. Other than the change in the exercise price, the affected options remained the same. 1996 Employee Stock Purchase Plan In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 250,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan enables eligible employees to purchase Common Stock at 85% of the lower of the fair market value of the Company's Common Stock on the first day or the last day of each six-month purchase period. As of December 31, 1996 and 1997, there were zero and 96,901 shares, respectively, issued under the Purchase Plan. 401(k) Salary Reduction Plan and Trust In 1992, the Company adopted the ISOCOR 401(k) Salary Reduction Plan and Trust (the "Plan") for all qualified employees electing participation in the Plan. Employees can contribute 2%-15% of eligible earnings to the Plan, subject to Internal Revenue Service limitations. No Company contributions were made to the Plan for the years ended December 31, 1995, 1996 and 1997. 38 39 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. GEOGRAPHICAL AREA INFORMATION The Company operates in a single industry segment, the development, marketing and support of off-the-shelf electronic messaging and directory infrastructure software. The Company's operations consist of engineering, sales and marketing, administration and support in both the United States and Europe. Revenues and operating income for the years ended December 31, 1995, 1996, and 1997 and identifiable assets as of December 31, 1995, 1996 and 1997, classified by the major geographical areas in which the Company operates, were as follows (dollars in thousands):
1995 1996 1997 ------- ------- ------- REVENUES: United States................................. $ 7,942 $10,927 $11,077 Ireland....................................... 12,067 15,932 13,382 Other Europe.................................. 5,173 7,226 8,245 Intercompany elimination...................... (4,408) (7,691) (10,686) ------- ------- ------- $20,774 $26,394 $22,018 ======= ======= ======= OPERATING INCOME (LOSS): United States................................. $(1,298) $(1,361) $(3,384) Ireland....................................... 1,929 1,177 (4,182) Other Europe.................................. (45) 151 (1,502) ------- ------- ------- 586 (33) (9,068) Provision for loss on investment.............. (100) -- -- Other income.................................. 176 701 1,209 ------- ------- ------- Income before income taxes.................... $ 662 $ 668 $(7,859) ======= ======= ======= IDENTIFIABLE ASSETS: United States................................. $ 8,878 $29,304 $26,123 Ireland....................................... 7,591 9,146 5,393 Other Europe.................................. 3,025 2,848 2,707 ------- ------- ------- Total............................... $19,494 $41,298 $34,223 ======= ======= =======
The Company's transfers between geographical areas are accounted for using methods designed to approximate comparable arms-length transactions. Such transfers are eliminated in the consolidated financial statements. Export sales from the United States and Ireland for the years ended December 31, 1995, 1996 and 1997 were $3,464,000, $2,131,000 and $2,086,000, respectively. The majority of these sales were made to Asia and South America. The Company currently relies significantly on resellers in Europe for certain elements of marketing and distribution of its software products. In the event the Company is unable to retain its resellers, there is no assurance that the Company will succeed in replacing them. Any changes in the Company's distribution channel could have a significant impact on sales and adversely affect operating results. 39 40 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. RELATED PARTY TRANSACTIONS In 1991, the Company entered into a software OEM agreement with a United Kingdom based software company in connection with a license to use their software products. In 1992, the Company purchased 15% of this company for $737,668 which investment was subsequently divested in early 1996. A provision for loss on divestiture of this investment of $100,000 was recorded in the 1995 Consolidated Statement of Operations as the terms for liquidation of the Company's position were substantially agreed to in December 1995. During 1995 when this software company was a related party, royalty payments totaling approximately $355,000 were made under the agreement. The Company's cost of sales in 1995 included $210,000 of royalty costs associated with this arrangement. The Company made rental payments of approximately $100,000 for the year ended December 31, 1995 to an affiliate of a shareholder in connection with the lease of the Company's previous California offices. Included in related party revenues for the years ended December 31, 1995, 1996 and 1997 was approximately $83,000, $272,000 and $95,000, respectively, relating to software license and maintenance agreements with a shareholder. Included in revenue for the year ended December 31, 1995, 1996 and 1997 was approximately $369,000, $292,000 and $58,000 respectively relating to a software license and maintenance agreement with an affiliate of a shareholder. Included in accounts receivable as of December 31, 1996 and 1997 was $74,000 and $46,000, respectively, relating to this distributor. Included in accounts payable as of December 31, 1996 and 1997 was $0 and $96,000, respectively, relating to consulting services. Gross margins on related party revenues approximate those realized in transactions with non-affiliates. During 1996 and 1997, the Company reflected as a reduction of operating expenses $445,000 and $380,000, respectively, relating to product development efforts committed to and performed by the Company under the Series D Preferred Stock Purchase Agreement discussed in Note 12 above. 16. AGENCY GRANTS During 1992, 1994 and 1996, the IDA approved grant agreements with one of the Company's international subsidiaries for approximately $750,000, $850,000 and $793,000, respectively, over six years. The Company reflected as reduction of operating expenses $712,000, $413,000 and $69,000 relating to these grants for the years ended December 31, 1995, 1996 and 1997, respectively. These grants are based upon the Company's creation and fulfillment of new jobs in Ireland and include remedy provisions employed by the IDA to pursue partial revocation of amounts granted in the event the recipient of the grant substantially vacates its presence in Ireland during a period of five to seven years from date of grant. While the Company's level of employment within Ireland in 1997 has declined, the Company's plans include a commitment to a significant continuing presence in Ireland. There can be no assurance that the IDA will not seek partial revocation of prior grants, that the Company will continue to qualify for this grant aid or be eligible for future grants or that the Company's results of operations will not be materially adversely affected by the loss of grant aid. During 1993, the IDA purchased 20,000 shares of the Company's Common Stock. The Economic and Technological Finance Authority -- Berlin ("Authority") makes grants to promote research and development in small and medium-sized German-owned companies located in Berlin. The grants are paid quarterly based upon actual development costs, including salaries, and depend upon the work being carried out in Berlin. The Company reflected as a reduction of operating expenses $124,000, $87,000 and $0 relating to these grants for the years ended December 31, 1995, 1996 and 1997, respectively. Although remedy provisions exist for the recoverability of such grants if certain conditions are not met, the Company has been assured by the Authority that no recovery of the grants made to NetCS is contemplated, and accordingly, no liability has been recognized in the financial statements for this contingency. As of August 31, 1996, the Company was no longer eligible to receive these grants in Germany. 40 41 REPORT OF INDEPENDENT ACCOUNTANTS We have audited the consolidated financial statements and the financial statement schedule of ISOCOR and subsidiaries listed in the index on page 45 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our 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 ISOCOR and subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Los Angeles, California February 18, 1998 41 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this report because the Registrant will file its 1998 Proxy Statement within 120 days after the end of its fiscal year pursuant to Regulation 14A as promulgated by the U.S. Securities and Exchange Commission for its Annual Meeting of Shareholders to be held May 13, 1998. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The current directors and executive officers of the Company, and their ages as of December 31, 1997, are as follows:
NAME AGE POSITION ---- --- -------- Andrew De Mari............. 58 Chairman of the Board of Directors Paul Gigg.................. 44 President, Chief Executive Officer and Director C. Raomal Perera........... 40 Senior Vice President, Engineering Janine M. Bushman.......... 43 Vice President, Finance and Administration, Chief Financial Officer and Director Alex Lazar................. 40 Vice President, North American Sales Robert Lewin............... 54 Vice President, Marketing John B. Stephensen......... 45 Vice President, Technology William M. Wolfe........... 46 Vice President, Business Development Barry Wyse................. 36 Vice President, Engineering Jean-Michel Barbier 51 Director (1)(2)................... Dennis Cagan............... 53 Director Alexandra Giurgiu (1)...... 38 Director G. Bradford Jones (2)...... 41 Director
- --------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Andrew De Mari is a founder of the Company, was elected Chairman of the Board of Directors in November 1997 and has been a member of the Board of Directors since the Company's inception in 1991. Prior to becoming Chairman, Dr. De Mari served as the Company's President and Chief Executive Officer since its founding in 1991. Dr. De Mari was previously a founder and the Chairman and Chief Executive Officer of Retix from its inception in 1985 to November 1990. Retix develops, manufactures, markets and supports telecommunications software through Vertel Corporation, its principal operating subsidiary. Prior to 1985, he was Senior Vice President of Research and Development and Engineering at Compucorp, a manufacturer of office automation products. Dr. De Mari holds M.S.E.E. and Ph.D. degrees in Electrical Engineering from the California Institute of Technology and Dott. Ing. Electrical Engineering from the Politecnico di Torino, Italy. Paul R. Gigg joined ISOCOR in January 1993. He became General Manager, Europe in October 1995, was elected Vice President, European Marketing and Sales in October 1996, was elected Chief Operating Officer in April 1997 and was elected to the Board of Directors and as President and Chief Executive Officer in November 1997. For more than five years prior to joining ISOCOR, Mr. Gigg was Director of Marketing and Engineering at Dowty Communications (formerly Case Communications), a developer and supplier of networking products. Mr. Gigg holds a B.S.E.E. degree from the University of Wales, United Kingdom. C. Raomal Perera is a founder of the Company and has had overall responsibility for the Irish operations of ISOCOR since June 1991. He was elected as an officer of ISOCOR in November 1992 and currently holds 42 43 the position of Senior Vice President Engineering and General Manager ISOCOR Ireland. Prior to that, he was the Software Research and Development Manager for Artist Graphics, a manufacturer of computer peripherals, from September 1990 to June 1991. For two years prior to that, Mr. Perera was employed by Retix as Associate Vice President, OSI Technology Unit and prior to that, Director of Engineering and Software Development Manager of Retix's Research and Development Centre in Ireland. Mr. Perera holds a B.S.E.E. degree from the University of Wales, United Kingdom. Janine M. Bushman joined the Company in April 1993. She became the Vice President of Operations of the Company in October 1994, was elected to the Board of Directors in July 1995 and was elected Chief Financial Officer and Vice President, Finance and Administration in November 1995. For almost six years prior to joining the Company, Ms. Bushman was Controller and Corporate Secretary for Interactive Systems Corporation, a developer and supplier of UNIX operating systems software. Ms. Bushman holds an M.B.A. from Loyola Marymount University and a B.S. in Accounting from the California State University at Northridge. Alex Lazar joined the Company in November 1993 and was elected to the position of Vice President, North American Sales in July 1997. Prior to joining the Company, Mr. Lazar was Vice President, Sales and Support and a founder of Isicad, a network management software company, which position he held from 1987 to 1993. Mr. Lazar holds a B.S. from DePaul University. Robert Lewin joined the Company in December 1997 as Vice President, Marketing. For one and a half years prior to joining ISOCOR, Mr. Lewin was Director/Principal Analyst for the Collaborative Computing market segment for GartnerGroup/Dataquest. For two years prior to that, he was Vice President of Marketing and Sales for Enterprise Solutions Limited, and previous to that, was Vice President of Marketing Operations with X/Open Company Limited for five years. Mr. Lewin holds an M.B.A. from the University of Santa Clara and a B.S.E.E. degree from the University of California. John B. Stephensen joined the Company in October 1993 and became Vice President, Technology in November 1997. Previously he was Vice President, Product Management from July 1994 to that date. He was a co-founder of Retix where he was Senior Vice President, Technology from June 1988 until joining the Company. Prior to becoming Senior Vice President, Technology, Mr. Stephensen served Retix in a number of capacities including, most recently, Vice President, Engineering. Prior to joining Retix, Mr. Stephensen served as Director of Systems Engineering at Compucorp, a manufacturer of office automation products. Mr. Stephensen studied Electrical Engineering at the University of California at Santa Barbara. William M. Wolfe joined the Company in January 1995 as a Vice President and currently serves as Vice President, Business Development. He was with Infonet Services Corporation, a telecommunications firm, from November 1989 to December 1994, where he last held the position of General Manager of Enhanced Services. Mr. Wolfe graduated with a B.S. from the University of Milwaukee. Barry Wyse joined ISOCOR B.V. in May 1995 and became Vice President, Engineering of the Company in December 1997. Prior to joining the Company, Mr. Wyse served as Software Manager for Microsoft B.V., a subsidiary of Microsoft Corporation, a commercial software provider, from April 1994 to May 1995 and as Principal Engineer for Lotus B.V., a subsidiary of Lotus Development Corporation, which was subsequently acquired by IBM, from December 1992 to February 1994. Mr. Wyse holds an M. S. degree in Computer Science from University College, Dublin, Ireland. Jean-Michel Barbier is Directeur General of Thomson-CSF Ventures, a corporate venture capital investor, with which he has been associated since 1987. He was elected to the Board of Directors of the Company in November 1993. He also serves on the Board of Directors of the following companies: Geris Consultants, Optim, Info Radio Interactive Services, Financial Architecture Research and Resources, Thomnet, Aonix, Virtual IO, Inc., Virtual Prototypes, Inc. and Era A.S. Dennis Cagan has been President of CaganCo, Inc., a management consulting firm, since 1981 and also serves as Chairman and Chief Executive Officer of HumanRace, Inc., an Internet showcased travel adventure event. Mr. Cagan was elected to the Board of Directors of the Company in August 1997 and currently also 43 44 serves as a consultant to the Company. Mr. Cagan also serves as a member of the Board of Directors of Intervista Software, Inc. Alexandra Giurgiu is President of Olivetti Management of America, Inc., an investment subsidiary of Ing. C. Olivetti & C., S.p.A., a manufacturer of information processing systems, which position she has held since 1991. Ms. Giurgiu has also been a Managing Director and Executive Officer of 4C Ventures, L.P., a venture capital partnership, since 1994. From 1984 to 1985, she was Director of International Operations for Lifeboat Associates, a software distribution and publishing company. She became a member of the Company's Board of Directors in May 1993. Additionally, she currently serves on the Board of Directors of Object Design, Wireless Access, Hands-On Technology and Alacrity Systems. G. Bradford Jones is a general partner in the venture capital firm of Brentwood Venture Capital, which he joined in 1981. He became a member of the Company's Board of Directors in July 1991. Mr. Jones also serves on the Board of Directors of Interpore International and Onyx Acceptance Corporation. Further information regarding Registrant's directors will be set forth under the caption "Election of Directors -- Nominees" in the Registrant's 1998 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Compensation of Executive Officers" in the Company's 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the Company's 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference into this Form 10-K from the information set forth under the caption "Certain Relationships and Related Transactions" in the Company's 1998 Proxy Statement. 44 45 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE ---- (a) (1) Consolidated Financial Statements:.......................... 22 (2) Financial Statement Schedule:............................... S-1 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K):
NUMBER DESCRIPTION ------ ----------- 2.1* Stock Purchase Agreement by and among Registrant, NetCS and the stockholders of NetCS dated August 29, 1996. 2.2* Escrow Agreement dated August 29, 1996. 3.1+ Amended and Restated Articles of Incorporation of Registrant. 3.2+ Amended and Restated Bylaws of Registrant. 3.3 Certificate of Amendment to Bylaws of Registrant dated November 5, 1997. 10.1+ 1992 Stock Option Plan and forms of option agreements thereunder. 10.2+ 1996 Directors' Stock Option Plan and form of option agreement thereunder. 10.3+ 1996 Employee Stock Purchase Plan and form of subscription agreement thereunder. 10.4+ Form of Indemnification Agreement. 10.5+ Lease dated November 11, 1994 between ISOCOR and Telos Corporation. 10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas. 10.7+ Rights Agreement dated December 29, 1995 among the Registrant, its Preferred shareholders and certain of its Common shareholders, as amended. 10.8+++ International Reseller Agreement dated May 11, 1993 between the Registrant and Syseca S.A. 10.9+ Source Code Access License Agreement dated September 15, 1993 and Amendment to the Source Code Access License Agreement dated May 1, 1995, between the Registrant and Syseca S.A. 10.10+++ Report of Discussions between the Registrant and Syseca S.A. dated September 27, 1994 (translated) and Affidavit of Translations by Abbey Translations dated January 25, 1996. 10.11+++ Master Binary License Agreement dated September 30, 1994 between the Registrant and Lir S.A. 10.12+++ Master Binary License Agreement dated December 28, 1994, Amendment to the Master Binary Agreement dated March 2, 1995 and Amendment to the Master Binary License Agreement dated December 28, 1995, between the Registrant and Syseca S.A. 10.13+ Product Loan Agreement between the Registrant and Syseca S.A. dated November 1, 1995. 10.14+ Employment Agreement between the Registrant and C. Raomal Perera dated September 9, 1992. 10.15+++ Series D Preferred Stock Purchase Agreement dated December 29, 1995 between the Registrant and Intel Corporation and related Statement of Work and Product Requirements. 10.16 Lease dated March 3, 1998 between the Registrant and Spieker Properties. 10.17 Letter Agreement dated December 3, 1997 between ISOCOR B.V. and Forfas. 10.18 Agreement between Andrew De Mari and the Registrant dated November 5, 1997. 10.19 Letter Agreement between the Registrant and Paul Gigg dated December 9, 1997. 10.20 Consultancy Agreement between the Registrant and Cagan Co. Inc., dated September 1, 1997 and related work orders dated September 1, 1997 and February 11, 1998. 21.1+ Subsidiaries of Registrant. 23.1 Consent of Independent Accountants. 24.1 Power of Attorney (see page 47). 27.1 Financial Data Schedules
45 46 (b) Reports on Form 8-K: No reports on Form 8-K have been filed during the last quarter of the period covered by this report. - --------------- * Incorporated by reference to exhibits filed in response to Item 7(c), "Exhibits," of the Registrant's Current Report on Form 8-K dated August 29, 1996. + Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1 and amendments thereto (File No. 333-606) which became effective on March 13, 1996. + Incorporated by reference to exhibits filed in response to Item 8, "Exhibits," of the Registrant's Registration Statement on Form S-8, dated July 10, 1997. ++ Confidential treatment granted by order effective March 13, 1996. 46 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 1998 ISOCOR By: /s/ PAUL GIGG ------------------------------------ Paul Gigg, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Paul Gigg and Janine M. Bushman, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys- in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ANDREW DE MARI Chairman of the Board of March 31, 1998 - ----------------------------------------------------- Directors (Andrew De Mari) /s/ PAUL GIGG President, Chief Executive March 31, 1998 - ----------------------------------------------------- Officer and Director (Paul Gigg) (Principal Executive Officer) /s/ JANINE M. BUSHMAN Vice President, Finance and March 31, 1998 - ----------------------------------------------------- Administration, Chief (Janine M. Bushman) Financial Officer and Director (Principal Financial and Accounting Officer) Director March - ----------------------------------------------------- ,1998 (Jean Michel Barbier) /s/ DENNIS CAGAN Director March 31, 1998 - ----------------------------------------------------- (Dennis Cagan) /s/ ALEXANDRA GIURGIU Director March 31, 1998 - ----------------------------------------------------- (Alexandra Giurgiu) /s/ G. BRADFORD JONES Director March 31, 1998 - ----------------------------------------------------- (G. Bradford Jones)
47 48 ISOCOR VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ACCOUNT DESCRIPTION ---------- ---------- ---------- ---------- Year ended December 31, 1995 Allowance for doubtful accounts, returns, and price protection....................................... $ (294) $ (557) $ 265 $ (586) Year ended December 31, 1996 Allowance for doubtful accounts, returns, and price protection....................................... $ (586) $(2,771) $ 1,710 $(1,647) Year ended December 31, 1997 Allowance for doubtful accounts, returns, and price protection....................................... $(1,647) $(2,916) $ 3,054 $(1,509)
S-1 49 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1* Stock Purchase Agreement by and among Registrant, NetCS and the stockholders of NetCS dated August 29, 1996............. 2.2* Escrow Agreement dated August 29, 1996...................... 3.1+ Amended and Restated Articles of Incorporation of Registrant.................................................. 3.2+ Amended and Restated Bylaws of Registrant................... 3.3 Certificate of Amendment to Bylaws of Registrant dated November 5, 1997............................................ 10.1+ 1992 Stock Option Plan and forms of option agreements thereunder.................................................. 10.2+ 1996 Directors' Stock Option Plan and form of option agreement thereunder........................................ 10.3+ 1996 Employee Stock Purchase Plan and form of subscription agreement thereunder........................................ 10.4+ Form of Indemnification Agreement........................... 10.5+ Lease dated November 11, 1994 between ISOCOR and Telos Corporation................................................. 10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas.... 10.7+ Rights Agreement dated December 29, 1995 among the Registrant, its Preferred shareholders and certain of its Common shareholders, as amended............................. 10.8+++ International Reseller Agreement dated May 11, 1993 between the Registrant and Syseca S.A. ............................. 10.9+ Source Code Access License Agreement dated September 15, 1993 and Amendment to the Source Code Access License Agreement dated May 1, 1995, between the Registrant and Syseca S.A. ................................................ 10.10+++ Report of Discussions between the Registrant and Syseca S.A. dated September 27, 1994 (translated) and Affidavit of Translations by Abbey Translations dated January 25, 1996... 10.11+++ Master Binary License Agreement dated September 30, 1994 between the Registrant and Lir S.A. ........................ 10.12+++ Master Binary License Agreement dated December 28, 1994, Amendment to the Master Binary Agreement dated March 2, 1995 and Amendment to the Master Binary License Agreement dated December 28, 1995, between the Registrant and Syseca S.A.... 10.13+ Product Loan Agreement between the Registrant and Syseca S.A. dated November 1, 1995................................. 10.14+ Employment Agreement between the Registrant and C. Raomal Perera dated September 9, 1992.............................. 10.15+++ Series D Preferred Stock Purchase Agreement dated December 29, 1995 between the Registrant and Intel Corporation and related Statement of Work and Product Requirements.......... 10.16 Lease dated March 3, 1998 between the Registrant and Spieker Properties. 10.17 Letter Agreement dated December 3, 1997 between ISOCOR B.V. and Forfas.................................................. 10.18 Agreement between Andrew De Mari and the Registrant dated November 5, 1997............................................ 10.19 Letter Agreement between the Registrant and Paul Gigg dated December 9, 1997............................................ 10.20 Consultancy Agreement between the Registrant and Cagan Co. Inc., dated September 1, 1997 and related work orders dated September 1, 1997 and February 11, 1998..................... 21.1+ Subsidiaries of Registrant..................................
50
EXHIBIT NUMBER DESCRIPTION ------- ----------- 23.1 Consent of Independent Accountants.......................... 24.1 Power of Attorney (see page 47)............................. 27.1 Financial Data Schedules....................................
- --------------- * Incorporated by reference to exhibits filed in response to Item 7(c), "Exhibits," of the Registrant's Current Report on Form 8-K dated August 29, 1996. + Incorporated by reference to exhibits filed in response to Item 16(a), "Exhibits," of the Registrant's Registration Statement on Form S-1 and amendments thereto (File No. 333-606) which became effective on March 13, 1996. +Incorporated by reference to exhibits filed in response to Item 8, "Exhibits," of the Registrant's Registration Statement on Form S-8, dated July 10, 1997. ++ Confidential treatment granted by order effective March 13, 1996. EX-3.3 2 CERTIFICATE OF AMENDMENT TO BYLAWS 1 Exhibit 3.3 CERTIFICATE OF AMENDMENT OF BYLAWS The undersigned, Elias J. Blawie, hereby certifies that: 1. He is the duly elected and incumbent Secretary of ISOCOR (the "Company"). 2. By action taken at a meeting of the Board of Directors on November 5, 1997, the second sentence of Article III, Section 3.2 of the Bylaws of the Company was amended to read in its entirety as follows: "The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders." 3. The matters set forth in this certificate are true and correct of my own knowledge. Date: November 5, 1997 /s/ ELIAS J. BLAWIE -------------------------------------- Elias J. Blawie, Secretary EX-10.16 3 LEASE DATED MARCH 3, 1998 1 Exhibit 10.16 OFFICE LEASE Project: SANTA MONICA BUSINESS PARK Building: 3420 OCEAN PARK BOULEVARD [A] Tenant: ISOCOR
TABLE OF CONTENTS Article Page 1 FUNDAMENTAL LEASE PROVISIONS ............................ 1 2 PREMISES ................................................ 1 3 TERM .................................................... 2 4 RENT AND EXPENSE PAYMENTS ............................... 3 5 INTENTIONALLY OMITTED ................................... 4 6 EXPENSES ................................................ 4 7 TAXES PAYABLE SOLELY BY TENANT .......................... 8 8 LATE PAYMENTS ........................................... 8 9 SECURITY DEPOSIT ........................................ 8 10 TENANT IMPROVEMENTS ..................................... 9 11 USE ..................................................... 10 12 SERVICE AND UTILITIES ................................... 10 13 ENTRY BY LANDLORD ....................................... 11 14 MAINTENANCE AND REPAIR .................................. 12 15 ALTERATIONS AND ADDITIONS ............................... 12 16 INDEMNITY ............................................... 13 17 INSURANCE ............................................... 14 18 DAMAGE AND DESTRUCTION .................................. 15 19 CONDEMNATION ............................................ 16 20 LIENS ................................................... 16 21 DEFAULTS BY TENANT ...................................... 16 22 LANDLORD'S REMEDIES ..................................... 17 23 DEFAULTS BY LANDLORD .................................... 19 24 COSTS OF SUIT ........................................... 19 25 SURRENDER OF PREMISES; HOLDING OVER ..................... 19 26 SURRENDER OF LEASE ...................................... 20 27 TRANSFER OF LANDLORD'S INTEREST ......................... 20 28 ASSIGNMENT AND SUBLETTING ............................... 20 29 ATTORNMENT .............................................. 24 30 SUBORDINATION ........................................... 24 31 ESTOPPEL CERTIFICATE .................................... 24 32 BUILDING OCCUPANCY PLANNING ............................. 25 33 QUIET ENJOYMENT ......................................... 25 34 WAIVER OF REDEMPTION BY TENANT ......................... 25 35 WAIVER OF LANDLORD, TENANT'S PROPERTY ................... 25 36 RULES AND REGULATIONS ................................... 25 37 NOTICES ................................................. 26 38 WAIVER .................................................. 26 39 MISCELLANEOUS ........................................... 26 40 INTENTIONALLY OMITTED ................................... 28 41 SECURITY INTEREST ....................................... 28 42 INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS ........... 28 43 OPTION TO EXTEND TERM ................................... 28 44 RIGHT OF FIRST OFFER .................................... 30 45 NON-DISTURBANCE AGREEMENT ............................... 31
Exhibits A Description of Premises A-1 Description of Project B Verification of Term and Basic Rent C Construction Provisions D Subordination of Lease D-1 Subordination of Deed of Trust E Estoppel Statement F Building Rules and Regulations G Intentionally Omitted H Intentionally, Omitted 2 INDEX OF DEFINED TERMS After-Hours ............................................... EXHIBIT F - PAGE 2 Agreed Rate ........................................................... 27 Assign ................................................................ 29 assignment ............................................................ 20 Assigns ............................................................... 29 Assuming Tenant ....................................................... 18 Audit Notice .......................................................... 7 Bankruptcy Code ....................................................... 23 Base Year ............................................................. 5 Building .............................................................. 1 Commencement Date ..................................................... 2 Common Area ........................................................... 5 Expenses .............................................................. 4 Extended Term ......................................................... 28 Extension Rental Notice ............................................... 29 Fair Rental Market Value of the First Offer Space ..................... 30 First Offer Acceptance Notice ......................................... 30 First Offer Rejection Notice .......................................... 30 First Offer Space ..................................................... 30 First Offer Space Document ............................................ 30 gross area ............................................................ 1 gross square footage .................................................. 1 Initial Term .......................................................... 28 Landlord .............................................................. 1 Landlord's Base Year Costs ............................................ 4 Landlord's Work ............................................ EXHIBIT C - PAGE 1 Mortgagee ............................................................. 14 normal business hours ...................................... EXHIBIT F - PAGE 2 Notice of First Offer ................................................. 30 Notice to Extend Term ................................................. 29 Option to Extend Term ................................................. 28 Plans ...................................................... EXHIBIT C - PAGE 1 Premises .............................................................. 1 Project ............................................................... 2 Proposed Effective Date ............................................... 20 punch list ............................................................ 2 Rent .................................................................. 3 rentable area ......................................................... 2 rentable square footage ............................................... 2 Rental ................................................................ 3 Subsequent YEAR substantial completion ................................................ 2 taking ................................................................ 16 Tenant ................................................................ 1 Tenant Coordinator ......................................... EXHIBIT C - PAGE 3 Tenant's Share ........................................................ 5 Tenant's Work .............................................. EXHIBIT C - PAGE 1 TI Contractor .............................................. EXHIBIT C - PAGE 2 usable area ........................................................... 2 usable square footage ................................................. 2
ii 3 OFFICE LEASE This LEASE is made as of this _____ day of _______ 1998 by and between SPIEKER PROPERTIES, L.P., a California limited partnership ("Landlord") and ISOCOR, a California corporation ("Tenant") In consideration of the rents and covenants hereinafter set forth, Landlord hereby leases to Tenant and Tenant hereby rents from Landlord the following described Premises, upon the following terms and conditions: 1. FUNDAMENTAL LEASE PROVISIONS 1.1. PREMISES: Project: Santa Monica Business Park (Article 2) Building: 3420 Ocean Park Boulevard [Al Suite: 2010 Floor: 2nd City: Santa Monica County: Los Angeles State: California 1.2. FLOOR AREA: Rentable Area: 20,016 square feet. (Article 2) Usable Area: 17,871 square feet. 1.3. Term: 36 months. (Article 3) Commencement Date: April 1, 1998 (SEE Section 4.4) 1.4. BASIC RENT: Dollars Per Dollars Per (Article 4) Months Rentable Square Foot Month ------ -------------------- ----- 1-36 $ 1.80 $ 36,028.80 1.5. EXPENSES: Tenant shall pay Tenant's Share of all Expenses that (Article 6) exceed Landlord's Base Year COSTS together with other items of Expense as SET forth in Article 6. Tenant's Share is 19.12%. The Base Year shall be the calendar year 1998. 1.6. AFTER-HOURS After-Hours Charges payable by Tenant as of the (Article 12) CHARGES: Commencement Date shall be as follows: Air Conditioning $25.00 per unit, per hour Ventilation only Not available Lighting only $0.00 per hour 1.7. PREPAID Tenant shall pay the Basic Rent for the first (Article 4). RENT: month of the term upon execution of this Lease. 1.8. SECURITY $180,000.00 (SEE Article 9). (ARTICLE 9) DEPOSIT: 1.9. LANDLORD'S c/o TRANSPACIFIC DEVELOPMENT COMPANY (Article 37) ADDRESS FOR 2377 Crenshaw Boulevard, Suite 300 NOTICES: Torrance, California 90501-3325 1.10. TENANT'S To the Premises. (ARTICLE 37) ADDRESS FOR NOTICES: 1.11. BROKER: Pacific Properties Group and Transpacific Development (Section 39-3) Company.
2. PREMISES 2.1 The approximate location of the premises (the "Premises") leased hereunder is shown on the drawing attached hereto as Exhibit A. The Premises consist of that certain space situated in the building (the "Building") described in Section 1.1 hereof. The area of the Premises for all purposes hereunder is stipulated to be the square feet of usable area and square feet of rentable area specified at Section 1.2. As used in this Lease, the following terms have the meanings indicated: 2.1.1. The term "gross area" or "gross square footage" means the entire area being measured, including vertical elevator and ventilation shafts, maintenance, telephone, mechanical 1 4 and electrical rooms and closets, and all other public areas measured from the exterior of exterior walls and from the center line of interior demising walls; 2.1.2. The term "usable area" or "usable square footage" means the method of calculating usable area pursuant to the BOMA Standard Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996; and 2.1.3. The term "rentable area" or "rentable square footage" means the entire area measured in the same way within exterior Building walls including all common or public areas of the Building allocated proportionately to each floor of the Building but excluding public stairwells and such vertical shafts. As to the area leased by Tenant, the rentable area is stipulated to be the usable area of the Premises increased by 12%. 2.2. Intentionally Omitted. 2.3. The Premises are (or when constructed will be) a part of a business/commercial complex consisting of the Building and other buildings, landscaping, parking facilities and other improvements described as the "Project" in Section 1.1 hereof. The Project is generally shown on the drawing attached hereto as Exhibit A-1 . Landlord may, in its sole discretion, change the size, shape, location, number and extent of any or all of the improvements in the Project without any liability to or consent of Tenant, except that no material change in the size or location of the Premises shall be made without Tenant's consent. Tenant does not rely on the fact nor does Landlord represent that any specific tenant or number of tenants shall occupy any space in the Project. 2.4. Landlord reserves the right to use the roof and exterior walls of the Premises, and the area beneath, adjacent to and above the Premises, together with the right to install, use, maintain and replace equipment, machinery, pipes, conduits and wiring through the Premises, which serve other parts of the Project, in a manner and in locations which do not unreasonably interfere with Tenant's use of the Premises. No light, air or view easement is created by this Lease. 2.5. Tenant hereby acknowledges that the Project is being, or may be, constructed or reconstructed in phases, and that by reason of construction or reconstruction activities there may be temporary incidents thereof such AS dust, dirt, barricades, detours, equipment or material in the Building or Common Areas. Tenant hereby agrees that so long as Landlord conducts such activities in a reasonable manner Landlord shall not be liable for any such incidents of construction or reconstruction. 2.6. Except as specifically provided in the "Construction Provisions" describing the construction of leasehold improvements (if any), attached hereto as Exhibit C, Tenant shall lease the Premises on an "As Is" basis and Landlord shall have no obligation to improve, remodel, alter or otherwise modify the Premises for Tenant's occupancy thereof. Landlord shall commence the construction of the improvements under Exhibit C which are the obligation of Landlord thereunder promptly following the Commencement Date and shall thereafter diligently pursue the same to completion. 3. TERM 3.1. COMMENCEMENT DATE. The term of this Lease shall be for the duration set forth in Section 1.3 hereof and shall commence on the date specified at Section 1.3 as the Commencement Date (the "Commencement Date"). Following the Commencement Date, Landlord shall complete and deliver to Tenant an instrument substantially in the form set forth in Exhibit B attached hereto and Tenant shall promptly execute and deliver the same to Landlord. Failure of Tenant to execute Exhibit B within ten (10) days after written request from Landlord shall be a material default hereunder. This Lease shall be a binding contractual agreement effective upon the date of execution hereof by both Landlord and Tenant, notwithstanding the later commencement of the term of this Lease. 3.2. SUBSTANTIAL COMPLETION. For purposes hereof, the phrase "substantial completion" means the completion (as determined, in the event of a dispute, by Landlord's architect or space planner in accordance with AIA standards) of the construction work to be performed by Landlord pursuant to the "Plans" (as defined in Exhibit C, "Construction Provisions", attached hereto), except for such items that constitute minor defects or adjustments (so-called "punch list" items). On or about the date when Landlord has substantially completed all work to be performed by Landlord in the Premises, Landlord and Tenant shall inspect the Premises and all punch list items shall be noted in writing on Landlord's punch list form. Damage to the Premises caused by Tenant or its agents or contractors shall not constitute punch list items. As soon thereafter as conditions permit, Landlord shall complete all such punch list items, provided Tenant is not then in default hereunder. Tenant shall allow Landlord access to the Premises so that said punch list items may be completed. Upon Landlord's completion of such punch list items, Landlord and Tenant shall reinspect the Premises with regard to all punch list items previously noted and shall indicate on Landlord's punch list form if such items have been satisfactorily completed. Tenant's failure to reinspect any such punch list items within fifteen (15) days after 2 5 Landlord Is written request to do so shall constitute an acceptance by Tenant of such items as being satisfactorily completed. 3.3. INTENTIONALLY OMITTED. 3.4. OCCUPANCY. Tenant acknowledges that, as of the date hereof, the Premises are occupied by another tenant or occupant. Therefore, Tenant agrees that if for any reason Landlord is unable to obtain possession of the Premises from the said tenant or occupant and to deliver the same to Tenant on or before April 1, 1998, this Lease shall not be void or voidable nor shall Landlord or its agents, employees or contractors be liable therefor, monetarily or otherwise, but the Commencement Date shall be the date Landlord delivers possession of the Premises to Tenant. If Landlord is unable to obtain possession of the Premises and deliver possession thereof to Tenant on or before October 1, 1998, either Landlord or Tenant may elect to terminate this Lease by written notice to the other, which notice must be given before Tenant receives notice from Landlord that Landlord has received possession of the Premises, whereupon this Lease shall terminate and the parties hereto shall be discharged from any and all further obligations or liability hereunder. Landlord shall use all reasonable and lawful efforts to obtain possession of the Premises on April 1, 1998. Landlord acknowledges that Tenant is presently a subtenant of such occupant and Tenant occupies all or a part of the Premises. Therefore, if Landlord pursues any action to dispossess the said occupant from the Premises by reason of the failure of the said occupant to redeliver possession of the Premises to Landlord, Landlord shall not seek during such action to dispossess Tenant from the Premises (if the same shall be permitted by the judge or agency having jurisdiction over such action, without jeopardizing Landlord's action to dispossess such occupant from the Premises). 3.5. TENANT'S POSSESSION DURING CONSTRUCTION. It is understood and acknowledged by Landlord and Tenant that, as of the Commencement Date, Tenant shall be in possession of the Premises. It is further understood and acknowledged that the work of improvement to be undertaken by Landlord upon the Premises, as set forth in this Lease, shall be undertaken during Tenant's occupancy of the Premises; therefore (a) Tenant acknowledges, accepts and agrees that Tenant, its employees, invitees and others on the Premises may be disturbed or inconvenienced by such work and shall make no claim against Landlord therefor, nor shall Tenant be entitled to any abatement of rent or to any right of termination on such account, (b) Tenant shall not interfere with the progress or completion of such work and shall be responsible for any delays, costs or expenses incurred by Landlord due to any such interference, (c) Tenant shall hold Landlord harmless from and indemnify Landlord for any loss or damage to Tenant's furniture, equipment, fixtures, or merchandise and for injury to any persons arising out of the performance of such work in the Premises unless caused by the negligence of Landlord, its agents or contractors, (d) Tenant shall cooperate with Landlord in the scheduling and undertaking of such work and Tenant shall permit Landlord, its agents, contractors and employees access to the Premises for the purpose of undertaking such work and (e) Tenant shall, at its sale cost, move its trade fixtures, furniture and other personal property as may be required by Landlord or its contractor in connection with the performance of Landlord's Work. 4. RENT AND EXPENSE PAYMENTS 4.1. GENERAL. The "Rent" or "Rental" hereunder is composed of "Basic Rent" as set forth in Section 1.4 hereof and adjustments thereto as hereinafter provided. The term "Expenses" hereunder means all costs, expenses, fees, charges or other amounts described in Article 6. Tenant agrees to pay to Landlord all Rent and Expenses required under this Lease, which shall be payable monthly to Landlord (unless expressly provided otherwise), without deduction or offset, in lawful money of the United States of America at the office maintained by Landlord in the Project or at such other place as Landlord may from time to time designate in writing. Notwithstanding any contrary provisions of this Lease, all Expenses, late payment fees, interest, "After-Hours Charges", parking fees payable under the "Parking License Agreement" attached hereto, and all other sums of money or charges required to be paid pursuant to this Lease shall be deemed "Additional Rent" for the Premises; and in any notice to pay rent or quit the Premises, Landlord may include and designate same as rent then past due and owing, if such is the case. Any Rent or Expenses increases which are called for hereunder, the payment of which is delayed or prevented by reason of any wage and price control law, rent control law, or other governmental rule, law or restriction, shall accrue and be payable together with interest thereon at the "Agreed Rate" (as defined in Section 39.13 hereof), at the end of the Lease term, or sooner if allowed. No acceptance by Landlord of partial payment of any sum due from Tenant shall be deemed a waiver by Landlord of any of its rights to the full amount due, nor shall any endorsement or statement on any check or accompanying letter from Tenant be deemed an accord and satisfaction. Any Rent payments or other sums received from Tenant or any other person shall be conclusively presumed to have been paid on Tenant's behalf, unless Landlord has been given prior written notice to the contrary by Tenant. Tenant agrees that the acceptance by Landlord of any such payment shall not constitute a consent by Landlord or a waiver of any of its rights under this Lease. In no event shall the foregoing be construed as requiring Landlord to accept any Rent or other sums from any person other than Tenant. If the term hereof begins or ends on a day other than the last day of a month, then the Rent and Expenses for such month shall be prorated based on a thirty (30) day month. All prorations of Rent or Expenses under this 3 6 Lease for fractional periods shall be based on a thirty (30) day month and a three hundred sixty (360) day year. 4,2. BASIC RENT. Tenant shall pay the "Basic Rent" set forth in Section 1.4 hereof on the first day of each month in advance, beginning on the Commencement Date. Landlord may, but shall not be obligated to, send a bill or statement for Rent to Tenant each month, but Tenant shall be obligated to pay Rent on the first day of each month regardless of whether or not it receives a bill or statement. 4.3. PREPAID RENT. Tenant shall pay prepaid Basic Rent concurrently with the execution of this Lease, as set forth in Section 1.7 hereof. 4.4. CONSTRUCTION RENT. The amount of the Excess Construction Allowance, if any, which Tenant has elected to use pursuant to Section 3 of Exhibit C hereto shall be amortized by Landlord over the Initial Term (as hereinafter defined) from the Commencement Date, calculated on a monthly basis, with interest accruing on the unpaid principal at the rate of ten percent (10%) per annum, and the monthly sum so determined "Monthly Construction Rent") shall be due and payable in advance on the first day of each month during the term hereof. Landlord shall inform Tenant of the Monthly Construction Rent as soon as the sum has been calculated by Landlord. If Tenant is not so informed by Landlord until after the Commencement Date, then following Landlord's delivery of such notice to Tenant, the Monthly Construction Rent shall be adjusted retroactively to the Commencement Date and any accrued Monthly Construction Rent shall be immediately due and payable to Tenant. The Monthly Construction Rent shall be deemed, and shall be, Additional Rent hereunder. 5. INTENTIONALLY OMITTED 6. EXPENSES 6.1. Tenant shall pay its share of "Expenses" on the first day of each month during the term hereof or otherwise as set forth in this Article 6. The monthly Expenses payable by Tenant hereunder consist of the amount by which Tenant's Share of Expenses exceeds Landlord's Base Year Costs (as such terms are hereinafter defined), calculated as follows: Total Expenses (estimated or actual) multiplied by Tenant's Share minus Landlord's Base Year Costs, divided by twelve (12) months. 6.2. DEFINITIONS. As used in this Lease, the following terms have the meanings indicated: 6.2.1. "Landlord's Base Year Costs" means the annualized dollar amount which results from multiplying the total actual Expenses incurred by Landlord during the Base Year by Tenant's Share Such amount constitutes the amount per year which Landlord agrees to pay towards Expenses allocable to the Premises, without reimbursement from Tenant. Landlord's Base Year Costs shall be adjusted to be equal to Landlord's reasonable estimate of Expenses assuming at least ninety-five percent (95%) of the total rentable area of the Building was occupied for the entire year, and assuming the Building was fully completed and fully assessed for property tax assessment, maintenance and repair purposes. 6.2.2. The term "Expenses" means all expenses, costs and fees paid or incurred by Landlord during any calendar year during the term here of in connection with or attributable to the Building and Common Area (as described hereinafter), including any parking facilities therein, for: 6.2.2.1. Electricity, water, gas, sewer, and all other utility services to or for the Building or Common Area, including any utility taxes, fees, charges or other similar impositions paid or incurred by Landlord in connection therewith; and 6.2.2.2. Operation, maintenance (including reasonable reserves), security services, replacement for normal wear and tear, repair, restriping or resurfacing of paving, management (including costs of on-site offices and personnel and a reasonable home-off ice overhead allocation), insurance (including public liability and property damage, rent continuation, boiler and machinery and extended coverage insurance), and cleaning of the Building and Common Area and all furnishings, fixtures and equipment therein, but excluding the costs of special services rendered to tenants (including Tenant) for which a separate charge is made, costs of leasing and preparing space for new tenants in the Building, or costs borne solely by Tenant under the Lease. The term "Expenses" includes the annual amortization of costs (including financing at the then prevailing rate, if any) of any equipment, device or improvement required after the date of this Lease by governmental authority or incurred as a labor saving measure or to reduce operation or maintenance expenses with respect to the Building and Common Area where such costs are amortized over the useful life thereof, in accordance with generally accepted accounting principles, and which do not inure primarily to the benefit of any particular tenant; and 4 7 6.2.2.3, All real property taxes and personal property taxes, licenses, charges and assessments which are levied, assessed, imposed or collected by any governmental authority or improvement or assessment district during any calendar year with respect to the Building or Common Area and the land on which the same is located, and any improvements, fixtures, equipment and other property of Landlord, real or personal, located in the Project and used in connection with the operation or maintenance of the Building or Common Area (computed on a cash basis or as if paid in permitted installments regardless of whether actually so paid), as well as any tax which shall be levied or assessed in addition to or in lieu of such taxes (it being acknowledged that because of the passage of laws which limit increases in real property taxes, government agencies may impose fees, charges, assessments or other levies in connection with services previously furnished without charge or at a lesser charge and which were previously paid for in whole or in part, directly or indirectly by real property taxes), any gross excise tax or other similar tax, and any costs or expenses of contesting any such taxes, licenses, charges or assessments, but excluding any federal or state income or gift tax or any franchise, capital stock, estate or inheritance taxes. 6.2.3. The term "Common Area" means that portion of the Project other than the Building and other buildings for lease to tenants which is from time to time designated and improved for nonexclusive, common use by more than one person. The general location of the Common Area is shown on Exhibit A-1 attached hereto and incorporated by reference. The Common Area includes parking facilities in the Project. Any cost or expense included in Expenses which is attributable to Common Area shall be prorated by Landlord to the Building based on the proportion which the total square footage of the Building bears to the total square footage of all buildings in the Project from time to time or by such other fair and reasonable method of allocation based on use or benefit as Landlord may determine, except that, with regard to taxes, Landlord may use such allocation of taxes among the various parcels in the Project as may have been used by the taxing authority. 6.2.4. The term "Base Year" means the calendar year specified at Section 1.5. 6.2.5. The term "Subsequent Year" means the first full calendar year following the Base Year and each calendar year, or part thereof, thereafter occurring during the term of this Lease. 6.2.6. "Tenant's Share" is hereby agreed by Landlord and Tenant to be the percentage set forth in Section 1.5 hereof. 6.2.7. Notwithstanding anything to the contrary contained herein, for purposes of this Lease the following shall be excluded from Expenses: 6.2.7.1. Any costs due to the failure by Landlord to comply with any laws in effect prior to the date of this Lease. 6.2.7.2. Costs to correct any defect in the construction of the Project. 6.2.7.3. Penalties and fines not occasioned by the acts or omissions of Tenant. 6.2.7.4. Any costs attributable to the negligence or willful misconduct of Landlord, its agents, employees or contractors (however, nothing herein shall excuse Tenant from the payment of its share of insurance premiums or deductibles). 6.2.7.5. Leasing expenses (including brokers' commissions and attorneys' fees) and tenant improvement costs. 6.2.7.6. Debt service and financing costs, other than the interest factor applied to amortized capital expenses as permitted by Section 6.2.2.2. 6.2.7.7. Costs incurred to investigate or remediate hazardous substances not released or disposed of at the Project by Tenant or its agents. 6.2.7.8. Costs occasioned by a casualty under Article 18 hereof (other than insurance premiums and deductibles). 6.2.7.9. Costs for which Landlord has a right of reimbursement from third parties (other than any such party's share of Expenses) or Tenant, or which Tenant pays directly to a third party. 5 8 6.2.7.10, Overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in or to the Project to the extent the same exceeds the costs of such goods and/or services rendered by qualified, unaffiliated third parties on a competitive basis. 6.2.7.11. Any allocation for home-office overhead. 6.2.7.1 2. Wages, salaries and compensation for any employee not devoting his or her services to the Project full-time except for a pro rata share of such costs based upon time spent on the Project and time spent on other projects. 6.2.7.1 3. Repairs to or replacements of any structural portion of the Project, foundations, exterior and load-bearing walls and structural roof, except for the roof membrane (however this shall not excuse Tenant from bearing any costs associated with any structural elements installed due to Tenant's use of the Premises for any purpose other than general office use or for any floor-load requirements for the Premises regardless of use). 6.2.7.14. Costs for utilities and services not available to Tenant. 6.3. PAYMENT OF ESTIMATED EXPENSES. Tenant shall pay estimated Expenses to Landlord as- follows: 6.3.1. Landlord shall submit to Tenant, on or before March 31 of the first Subsequent Year or as soon thereafter as Landlord has sufficient data, a reasonably detailed statement showing the Expenses for the Base Year. 6.3.2. For each Subsequent Year, Landlord shall submit to Tenant, prior to January 1 of such Subsequent Year or as soon thereafter as practicable, a reasonably detailed statement showing the estimated Expenses for such Subsequent Year. The determination of estimated Expenses hereunder shall be made by Landlord based upon Landlord's experience with actual costs and projections. Tenant shall pay monthly to Landlord an amount equal to the excess of (a) the sum of the total annual estimated Expenses multiplied by Tenant's Share minus (b) Landlord's Base Year Costs, over (c) twelve (12) months. If Landlord does not submit said statement to Tenant prior to January 1 of any such Subsequent Year, Tenant shall continue to pay its share of estimated Expenses at the then existing rate until such statement is submitted, and, thereafter, at the monthly Rent payment date next following the submittal of such statement, shall pay its share of estimated Expenses based on the rate set forth in such statement together with any amounts based on such rate which may have theretofore accrued from January 1 of such Subsequent Year. Landlord may revise such estimated Expenses at the end of any calendar quarter, and Tenant shall pay Tenant's Share of such revised estimated Expenses after notice thereof as herein provided. 6.4. PAYMENT OF ACTUAL EXPENSES. Actual Expenses shall be reconciled against payments of estimated Expenses as follows: 6.4.1. On or before March 31 of the second Subsequent Year and each Subsequent Year thereafter, or as soon thereafter as Landlord has sufficient data, Landlord shall submit to Tenant a reasonably detailed statement showing the actual Expenses paid or incurred by Landlord during the previous calendar year. If Tenant's Share of such actual Expenses is less than the amount of estimated Expense's for such previous year theretofore paid by Tenant, then Landlord shall credit the amount of such difference against estimated and/or actual Expenses which may thereafter be due from Tenant; provided, however, that in no event shall Tenant receive a credit as provided herein for any amount calculated to be less than Landlord's Base Year Costs. If Tenant's Share of such actual Expenses is more than the amount of the estimated Expenses for such previous year theretofore paid by Tenant, then Tenant shall, at the monthly Rent payment date next following the submittal of such statement to Tenant, pay to Landlord the full amount of such difference. 6.4.2. The reconciliation of the Expenses paid by Tenant for the calendar year in which this Lease terminates shall be made upon Landlord's submittal to Tenant of the statement of actual Expenses for such calendar year. The estimated and actual Expenses for such calendar year shall be prorated based on the actual number of days in such calendar year that this Lease was in effect, based on a 360 day year, and shall be compared. If pursuant to such comparison it is determined that there has been an underpayment or an overpayment by Tenant for such calendar year, Landlord shall refund the overpayment to Tenant, or Tenant shall pay the amount calculated as owing to Landlord, as the case may be, within thirty (30) days after the submittal of the statement by Landlord. This provision shall survive the expiration or termination of the Lease. If Landlord deems it advisable, Landlord may submit partial year statements pursuant to this 6 9 Section 6.4.2 in order to cause an earlier reconciliation of Expenses for the calendar year in which this Lease terminates. 6.4.3. TENANT"S RIGHT OF AUDIT. If Tenant should in good faith dispute the amount of Tenant's Share of Expenses as contained in such statement ("Disputed Statement"), Tenant shall have the right to audit Landlord's records with respect thereto in accordance with the provision of this Section 6.4.3: 6.4.3.1. Tenant shall give Landlord no less than thirty (30) days' prior written notice of such dispute and of Tenant's intent to audit ("Audit Notice"), which Audit Notice must be given to Landlord within one hundred twenty (120) days following the date of Tenant's receipt of the Disputed Statement. However, in no event shall Tenant conduct an audit more than once in any calendar year. 6.4.3.2. The records relating to the Disputed Statement shall be audited by an independent certified public accountant, who shall not, however, be retained or compensated on a contingency fee basis. The audit shall be conducted at the office where such records aire maintained during regular business hours. The auditor shall deliver a certified copy of the audit to Landlord concurrently with the delivery of such audit to Tenant. No records or copies of records in any form may be removed from the office where such records are maintained. 6.4.3.3. If such audit reveals that Landlord has overcharged or undercharged Tenant, such audit shall be subject to the reasonable review of, and acceptance by, Landlord, and the results of such reasonable review by Landlord shall be binding upon the parties. 6.4.3.4. If, as a result of these audit provisions, it is determined that Tenant was overcharged in the Disputed Statement, then Landlord shall reimburse Tenant within thirty (30) days after the later to occur of (a) Landlord's receipt of Tenant's written demand therefor or (b) Landlord's receipt of the certified auditor's report, uncontested by Landlord. If, as a result of these audit provisions, it is determined that Tenant was undercharged in the Disputed Statement, then notwithstanding any contrary provision contained in this Article 6, Tenant shall pay to Landlord the difference within thirty (30) days after written demand therefor from Landlord. 6.4.3.5. Tenant shall pay the costs and expenses for such audit; however, if, as a final result of these audit procedures it is determined that (a) the difference in Expenses is in excess of five percent (5%) and (b) Tenant was overcharged in the Disputed Statement, then Landlord shall reimburse Tenant for the reasonable, usual and customary costs for such audit (exclusive, however, of travel and lodging costs and attorneys' fees), within thirty (30) days after Landlord has received from Tenant an itemized paid invoice from such auditor. 6.4.3.6. Tenant shall not be permitted to conduct an audit at any time Tenant is in default of this Lease. 6.5. OTHER EXPENSE PROVISIONS. 6.5.1. Notwithstanding any provision of this Article 6 to the contrary, if at any time during the term of this Lease any tenant, pursuant to an express provision in its lease and with Landlord's approval, contracts for certain Building or Common Area services to be provided directly to it and at its expense, which services would normally be furnished by Landlord (eg., janitorial, maintenance, utilities, etc.), then Landlord may make an appropriate adjustment in calculating Tenant's Share of Expenses to the end that the cost of the remaining services provided by Landlord are shared proportionately by all tenants receiving such services. 6.5.2. In determining the amount of Expenses hereunder, the Expenses shall be adjusted to be equal to Landlord's reasonable estimate of Expenses assuming at least ninety-five percent (95%) of the total rentable area of the Building was occupied for the entire year, and assuming the Building was fully completed and fully assessed for property tax assesment, maintenance and repair purposes. 6.5.3. The computation of Expenses pursuant to this Article 6 is intended to constitute a formula for an agreed sharing of costs by tenants, and may or may not constitute an exact reimbursement to Landlord for costs paid by Landlord, and for Landlord's administration. 6.5.4. Any delay or failure of Landlord in computing or billing for Expenses shall not constitute a waiver of, or in any way impair, the obligation of Tenant to pay Expenses hereunder. 7 10 However, Tenant shall not be charged interest on unpaid Expenses which have accrued during such time that Landlord has failed to submit a statement for such Expenses. 7. TAXES PAYABLE SOLELY BY TENANT 7.1. In addition to the Rental and Expenses to be paid by Tenant, Tenant shall pay before delinquency and without notice or demand by Landlord any and all taxes levied or assessed on and which become payable by Tenant during the term of this Lease (excluding, however, state and federal personal or corporate income taxes measured by the income of Landlord from all sources, capital stock taxes, and estate and inheritance taxes), whether or not now customary or within the contemplation of the parties hereto, which are based upon, measured by or otherwise calculated with respect to: (i)) the gross or net Rent payable under this Lease, including, without limitation, any gross receipts tax or any other gross income tax or excise tax levied by any taxing authority with respect to the receipt of the Rental hereunder, (ii) the value of Tenant's equipment, furniture, fixtures or other personal property located in the Premises; (iii) the possession, lease, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; (iv) the value of any improvements, alterations or, additions made in or to the Premises by or on behalf of Tenant, except for those improvements (if any) installed as part of Landlord's Work (as hereinafter defined) or (v) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. Real property taxes on improvements which are installed as part of Landlord's Work shall be deemed to be included in the taxes described in Section 6.2.2.3 above, as to which Tenant shall pay Tenant's Share. If it is not lawful for Tenant to reimburse Landlord for any such taxes paid or incurred by Landlord, the Rent shall be revised so as to net Landlord the same net Rent after imposition of such taxes as would have been payable prior to the imposition of such taxes. 8. LATE PAYMENTS 8.1. If Tenant fails to pay to Landlord when due any Rent, Expenses or other sums owing to Landlord pursuant to the terms of this Lease, said late payment shall bear interest at the Agreed Rate as herein provided and, in addition: 8.1.1. For each such late payment that is not paid within five (5) business days after Tenant has received (or refused to receive) written demand therefor from Landlord that such amount is due, Tenant shall pay to Landlord a service charge equal to ten percent (10%) of the overdue amount; provided, however, that Tenant shall be entitled to only one (1) such notice in any calendar year and thereafter such service charge shall be due Landlord from Tenant if such payment is not made within five (5) business days after the date the same was due without benefit of notice. Tenant acknowledges and agrees that such late payment by Tenant will cause Landlord to incur costs and expenses not contemplated by this Lease, the exact amounts of which will be extremely difficult to ascertain, and that such service charge represents a fair estimate of the costs and expenses which Landlord would incur by reason of Tenant's late payment. Tenant further agrees that such service charge shall neither constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any other right or remedy available to Landlord; and 8.1.2. Following any three (3) consecutive late payments of Rent, Landlord may, upon notice to Tenant, require that, beginning with the first payment of Rent due following the date the third (3rd) late payment was due, Rent shall no longer be paid in monthly installments but shall be payable three (3) months in advance and, in addition or in the alternative at Landlord's election. 9. SECURITY DEPOSIT 9.1. Upon Tenant's execution of this Lease, Tenant shall deposit with Landlord a "Security Deposit" in the amount set forth in Section 1.8 hereof either in cash by negotiable cheque or by a Letter of Credit pursuant to Section 9.2 following, which shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease, it being expressly understood and agreed that the deposit is neither an advance Rent deposit nor a measure of Landlord's damages in case of Tenant's default. If at any time during the term of this Lease or any extended term thereof Tenant's Basic Rent is increased pursuant to Article 5 or otherwise, the Security Deposit shall be increased in the same proportion and Tenant shall deposit cash with Landlord in an amount sufficient to increase the Security Deposit to the appropriate amount. The Security Deposit may be retained, used or applied by Landlord to remedy any default by Tenant, to repair damage caused by Tenant to any part of the Project, and to clean the Premises upon expiration or earlier termination of the Lease, as well as to reimburse Landlord for any amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefore, deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount required hereunder, and Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds, and 8 11 Tenant shall not be entitled to interest on such deposit. Tenant may not elect to use any portion of said Security Deposit as a Rental payment although Landlord may elect to do so in the event Tenant is in default hereunder or is insolvent. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, then (a) on the later of the end of the twelfth (12th) month of the Lease term or thirty (30) days after Tenant's written request therefor, the amount of the Security Deposit shall be decreased to $120,000.00 and, if Tenant has deposited cash with Landlord, Landlord shall pay to Tenant the sum of $60,000.00 from the Security Deposit, and (b) on the later of the end of the twenty-fourth (24th) month of the Lease term or thirty (30) days after Tenant's written request therefor, the amount of the Security Deposit shall be decreased to $60,000.00 and if Tenant has deposited cash with Landlord, Landlord shall pay to Tenant the sum of $60,000.00 from the Security Deposit, and (c) the balance of the Security Deposit then remaining shall be returned to Tenant at Tenant's last known address (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the Lease term has ended and the Premises have been vacated by Tenant in the manner required by this Lease. 9.2. Notwithstanding anything to the contrary contained in this Article 9, Tenant may provide Landlord with an irrevocable and unconditional letter of credit in favor of Landlord and in an amount of $1 80,000.00 ("Letter of Credit") in fulfillment of its obligation to provide cash for the full amount of the Security Deposit; provided, however, that (a) Tenant agrees to renew or arrange for the renewal of the Letter of Credit at least thirty (30) days prior to the expiration date thereof and on a continuing basis throughout the Lease Term without lapse; (b) the form, issuing bank and other matters relating to the Letter of Credit are satisfactory to Landlord in Landlord's reasonable discretion; (c) the issuing bank is located in the Los Angeles metropolitan area or, in the alternative, will permit Landlord to draw on the Letter of Credit in the Los Angeles metropolitan area; and (d) all costs and fees relating to the Letter of Credit, of whatever nature (including, without limitation, issuance, renewal and drawing upon the Letter of Credit), shall be at the sole cost and expense of Tenant. In addition to its other rights under this Article 9, at law and in equity, Landlord shall be entitled to draw down on the Letter of Credit if a then current replacement Letter of Credit is not provided within the time period set forth above or, if Landlord is unable to draw down on the Letter of Credit, Tenant shall deposit in cash with Landlord, upon demand, the full amount of the Security Deposit required hereunder. Landlord shall draw down on the Letter of Credit, as permitted pursuant hereto, by a letter bearing the signature of an officer of the Landlord (or an agent or employee of Landlord who may so execute such a letter in accordance with the By-Laws or a Resolution of the Board of Directors or similar body authorizing such agent or employee to so execute on behalf of Landlord) and stating that such money is due Landlord under the provisions of this Lease, including, without limitation, Landlord having not timely received a required replacement Letter of Credit. When the Security Deposit is decreased pursuant to subparagraphs (a) and (b) of Section 9.1 preceding and if the Security Deposit is then in the form of a Letter of Credit, Landlord shall have no obligation to surrender the Letter of Credit to Tenant until Landlord has first received from Tenant a replacement Letter of Credit in the amount required and in compliance with the provisions of this Section 9.2 and the requirements of subparagraphs (a) and (b) of Section 9.1. The right of Tenant to provide Landlord a Letter of Credit in lieu of cash as provided herein is personal to Tenant named at Article 1 hereof and in the event Tenant assigns, mortgages, pledges, hypothecates or encumbers this Lease or its interest in the Premises or sublets ail of the Premises, Landlord may by written notice to Tenant or Tenant's successor-in-interest require Tenant or Tenant's successor-in interest to deposit cash for a Security Deposit. 9.3. The Security Deposit may be in the form of another negotiable instrument, and upon such terms and conditions, as are acceptable to Landlord in Landlord's sole and absolute discretion and to which Landlord has expressly consented in writing. 10. TENANT IMPROVEMENTS 10. 1. APPLICABILITY. The provisions of the "Construction Provisions" attached as Exhibit C hereto shall govern with regard to work to be completed at Landlord's expense ("Landlord's Work"), if any, and work to be completed at Tenant's expense ("Tenant's Work"), if any. Landlord has no obligation and has made no promise to alter, remodel, decorate, paint or otherwise improve the Premises, or any part thereof except as specifically set forth in the Construction Provisions. To the extent Landlord is required to perform Landlord's Work or Tenant's Work pursuant to the Construction Provisions, Landlord shall use reasonable diligence to complete such work in a timely manner. 10.2. EFFECT ON COMMENCEMENT DATE. No delay in undertaking or completing construction shall affect or delay the Commencement Date or Tenant's obligation to pay Rent or Expenses hereunder. 10.3. INTENTIONALLY OMITTED. 9 12 11. USE 11.1 . The Premises shall be used and occupied by Tenant for general office purposes and for no other purpose without the prior written consent of Landlord, which Landlord may withhold in its sole discretion. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, or the Project, with respect to the suitability thereof for the conduct of Tenant's business. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect or cause a cancellation of any fire or other insurance covering the Building, Common Area, or the Premises or any of its contents, nor shall Tenant sell or permit to be kept, used or sold in or about the Premises any article which may be prohibited by a standard form policy of insurance. Tenant shall promptly upon demand reimburse Landlord for any additional premium charged for any such insurance by reason of Tenant's failure to comply with the provisions of this Article 1 1. Tenant agrees that it will use the Premises in such manner as not to interfere with the rights of other tenants of the Building or Common Area . Tenant shall neither use nor allow the Premises, Building or Common Area to be used for any unlawful or objectionable purpose, nor cause, maintain or permit any nuisance or waste in, on or about any portion of the Project. Tenant will not place a load upon any floor exceeding the floor load which such floor was designed to carry, and Landlord reserves the right to prescribe the location of any safe or other heavy equipment in the Premises. Tenant shall not use or allow anything to be done in or about the Premises or the Project which will in any way conflict with any law, ordinance or governmental regulation or requirement of any board of fire underwriters or any duly constituted public authority now in force or hereafter enacted or promulgated affecting the use or occupancy of the Premises, and shall promptly comply with all such laws or requirements at its sole cost and expense. The judgment of any court of competent jurisdiction or any admission by Tenant that Tenant has violated any such law, statute, ordinance, rule, regulation or requirement shall be conclusive of such fact as between Landlord and Tenant; however, Tenant shall not be obligated to make any capital expenditure in complying with such laws or requirements which were in effect prior to the date of this Lease unless compliance is necessitated due to Tenant's unique or particular use of the Premises (other than for general office use), or due to any alterations, improvements or additions performed by Tenant or Tenant's contractors in or to the Premises, or due to the placement of anything within the Premises affecting the floor load. Further, Tenant shall have no obligation to pay the cost of investigating, monitoring, remediation or other, similar costs, or for damages resulting from, the release or disposal of hazardous materials or substances in or about the Premises by anyone other than Tenant, its agents, contractors, employees or business invitees. 12. SERVICE AND UTILITIES 12.1. LANDLORD'S OBLIGATIONS. Provided Tenant is not in default there under, Landlord shall as a part of Expenses make available to the Premises during the Building's normal business hours as set forth in Rule 17 of the Rules and Regulations described in Article 36 hereof, such amounts of air conditioning, heating and ventilation as may be required in Landlord's reasonable judgment for the comfortable use of the Premises, as well as elevator service, reasonable amounts of electric current for normal lighting by Building Standard overhead fixtures, and water for lavatory and drinking purposes. "Building Standard" fixtures and equipment are as described in Schedule A to Exhibit C attached hereto or, in absence thereof, as installed in the typical common corridor. Landlord shall as a part of Expenses replace Building Standard light bulbs, tubes and ballasts which need replacing due to normal use. Landlord shall also as a part of Expenses maintain and keep lighted the common stairs, entries and toilet rooms in the Building and shall provide trash removal, janitorial service and window washing customary for similar buildings in the same geographical area. Except to the extent caused by Landlord's negligence, Landlord shall not be in default hereunder or liable for any damages directly or indirectly resulting from, nor shall the Rent be abated or shall there be deemed a constructive or other eviction of Tenant by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing utilities and services, (ii) failure to furnish, or delay in furnishing, any such utilities or services when such failure or delay is caused by acts of God, acts of government, labor disturbances of any kind, or other conditions beyond the reasonable control of Landlord, or by the making of repairs or improvements to the Premises or any part of the Project, or (iii) governmental limitation, curtailment, rationing or restriction on use of water, electricity or any other service or utility whatsoever serving the Premises, Building or Common Area. Landlord shall be entitled to cooperate with the energy conservation efforts of governmental agencies or utility suppliers. The failure of Landlord to provide such services if consistent with the foregoing shall not constitute a constructive or other eviction of Tenant. 1.2.2. AFTER-HOURS CHARGES. During non-business hours Landlord shall as a part of Expenses keep the public areas of the Building lighted and shall provide elevator service with at least one (1) elevator, but shall not be obligated to furnish ventilation, lighting or air conditioning to the Premises. If Tenant requires ventilation, lighting and/or air conditioning during non-business hours Tenant shall give Landlord at least twenty-four (24) hours prior notice of such requirement or shall follow such other procedure for activating the building energy management system as Landlord may advise Tenant, and Tenant shall pay Landlord the 'After-Hours Charges' for such extra service at the rate set forth in 10 13 Section 1.6 hereof. Such rates are subject to increase from time to time based on increases in Landlord's costs associated with providing such extra services. All payment required for After-Hours Charges shall be deemed to be Additional Rent and Landlord shall have the same remedies for a default in payment thereof as for a default in payment of Rent. 12.3. TENANT'S OBLIGATIONS. Tenant shall pay, prior to delinquency, for all telephone charges and all other materials and services not expressly required to be paid by Landlord, which may be furnished to or used in, on or about the Premises during the term of this Lease Tenant shall also pay, as Additional Rent, all charges and fees required to be paid by Tenant by the Rules and Regulations described in Article 36 of this Lease. 12.4. EXCESS UTILITY USAGE. Tenant will not without the prior written consent of Landlord use any apparatus or device in the Premises, including (without limitation) electronic data processing machines, punch card machines, and telephone switch gear, which will materially increase the amount of cooling or ventilation or electricity or water usually furnished or supplied for use of the Premises as general office space; nor shall Tenant connect with electric current (except through existing electrical outlets in the Premises) or water pipes, any apparatus or device for the purpose of using electrical current or water, except as may be provided in the Construction Provisions. If Tenant uses electricity at a rate in excess of 6 kilowatt/hours per usable square foot of the Premises per year, the cost to Landlord of any such excess use of utility service by Tenant shall be paid by Tenant based on Landlord's reasonable estimates and costs. If Tenant requires or uses ventilation, cooling, water or electric current or any other resource in excess of that usually furnished or supplied for use of the Premises as general office space, Landlord may cause a special meter or other measuring device to be installed in or about the Premises to measure the amount of water, electric current or other resource consumed by Tenant. The cost of any such meter, and of the installation, maintenance and repair thereof, shall be paid for by Tenant, and Tenant agrees to pay Landlord promptly upon demand for all such water, electric current or other resource consumed, as shown by said meter, at the rates charged by the local public utility or other supplier furnishing the same, plus any additional expense incurred by Landlord in keeping account of the foregoing and administering same If any lights, machines or equipment (including but not limited to computers) are used by Tenant in the Premises which materially affect the temperature otherwise maintained by the heating, ventilation or air conditioning system, or generate substantially more heat in the Premises than would be generated by Building Standard lights or usual fractional horsepower office equipment, Landlord shall have the right to install any machinery and equipment which Landlord deems necessary to restore the temperature balance in any affected part of the Building, including but not limited to modifications to the Building Standard air conditioning equipment, and the cost thereof including the cost of installation and any additional cost of operation and maintenance occasioned thereby shall be paid by Tenant to Landlord upon demand. Any sums payable under this Section 1 2.4 shall be considered Additional Rent, and Landlord shall have the same remedies for a default in payment of such sum as for a default in the payment of Rent. 13. ENTRY BY LANDLORD 13.1. Landlord and its authorized representatives shall have the right, upon 24-hours prior written or oral notice (except in an emergency, when no notice shall be required) to enter the Premises at all reasonable times during normal business hours and at any time in case of an emergency (i) to determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease, if Landlord has reasonable belief or evidence that Tenant is not so maintaining the Premises pursuant to the terms of this Lease (ii) to maintain or to make any repair or restoration to the Building that Landlord has the right or obligation to perform, (iii) to install any meters or other equipment which Landlord may have the right to install, (iv) to serve, post, or keep posted any notices required or allowed under the provisions of this Lease, (v) to post "for sale" signs at any time during the term, and to post "for rent" or "for lease" signs during the last three (3) months of the term or during any period while Tenant is in default, (vi) to show the Premises to prospective brokers, agents, buyers, tenants, or persons interested in an exchange, (vii) to shore the foundations, footings, and walls of the Building and to erect scaffolding and protective barricades around and about the Building or the Premises, but not so as to prevent entry into the Premises, and (viii) to do any other act or thing necessary for the safety or preservation of the Premises or the Building. Landlord shall have the right at all times to have and retain a key with which to unlock all doors in, upon and about the Premises excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to gain entry in an emergency, and any entry to the Premises to be a forcible obtained by Landlord in accordance with the foregoing shall not be construed or deemed or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business and any loss of occupancy or quiet enjoyment of the Premises by reason of Landlord's exercise of its rights of entry in accordance with this Article 1 3, and Tenant shall not be entitled to an abatement or reduction of Rent or Expenses in connection therewith. 11 14 14. MAINTENANCE AND REPAIR 14.1. LANDLORD'S OBLIGATIONS. Landlord shall as part of Expenses maintain or cause to be maintained in good order, condition and repair the structural and common portions of the Building and all Common Areas in the Project (except to the extent of damage caused by Tenant which shall be repaired by Landlord at Tenant's expense). Landlord shall not be liable, and neither Rent nor Expenses shall be abated, for any failure by Landlord to maintain and repair areas which are being used in connection with construction or reconstruction of improvements, or for any failure to make any repairs or perform any maintenance, unless such failure shall persist for an unreasonable time after written notice of the need thereof is given to Landlord by Tenant. To the extent the provisions of this Article 14 are in conflict with any statute now or hereafter in effect which would afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease, the provisions of this Article 14 shall govern. 14.2. TENANT'S OBLIGATIONS. 14.2.1.Tenant shall, at its sole cost and expense, except for janitorial services furnished by Landlord pursuant to Article 12 hereof, maintain the Premises including all improvements therein in good order, condition and repair. 14.2.2. In connection with Tenant surrendering possession of the Premises at the end of the Lease term, Tenant agrees to repair any damage caused by or in connection with the removal of any article of personal property, business or trade fixtures, machinery, equipment, cabinetwork, furniture, movable partitions or permanent improvements or additions, including without limitation thereto, repairing the floor and patching and painting the walls where required by Landlord to Landlord's reasonable satisfaction, all at Tenant's sole cost and expense Tenant shall indemnify, defend and hold Landlord harmless against any loss, liability, cost or expense (including reasonable attorney's fees) resulting from delay by Tenant in so surrendering the Premises. Tenant's obligation hereunder shall survive the expiration or termination of this Lease. 14.2.3. If Tenant fails to maintain the Premises in good order, condition and repair, Landlord may give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If within thirty (30) days thereafter Tenant fails to complete such work (or, if such work cannot be reasonably completed within thirty [30] days, Tenant fails to promptly commence such work within such thirty-day period and diligently prosecute the same to completion), then Landlord shall have the right to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord (together with a charge for Landlord's administration and overhead equal to five percent (5%) thereof) shall be paid by Tenant promptly after demand, with interest at the Agreed Rate from the date of such work. Landlord shall have no liability to Tenant for any inconvenience or interference with the use of the Premises by Tenant as a result of performing any such work. 14.3. COMPLIANCE WITH LAW. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. 15. ALTERATIONS AND ADDITIONS 15.1. Tenant shall make no alterations, additions or improvements (a) to the Premises or (b) to the Building or any portion of the Common Area or the electrical, mechanical, plumbing or other systems in the Building, without obtaining the prior written consent of Landlord in each instance. Such consent may be granted or withheld at Landlord's sole discretion; however, Landlord shall not unreasonably withhold its consent to any alterations, additions, or improvements to the interior of the Premises, provided the same does not (A) affect the exterior appearance of the Premises, the Building or the Project, or (b) affect any structural portion of the Premises, the Building or the Project, or (c) affect any electrical, mechanical, plumbing or other systems of the Building, or (d) diminish the value of the Premises, and further provided Tenant complies with the provisions this Section 15.1. Tenant shall be permitted to select a contractor and subcontractors from Landlord's list of approved contractors and subcontractors, or such other contractors and subcontractors as Landlord shall approve in writing in advance of the commencement of such work; provided, however, Landlord's designated contractors and subcontractors shall be used for any work involving the mechanical, electrical, plumbing, heating, ventilating and air conditioning systems and other Building systems and the roof. Tenant may elect to have Landlord undertake such work of alterations and additions and, provided Landlord agrees to undertake such work (which may be granted or withheld in Landlord's sole discretion), then Tenant shall reimburse Landlord for the cost thereof (together with a charge for Landlord's administration and management thereof equal to five percent (5%) of the cost incurred) within thirty (30) days after an invoice therefor is submitted to Tenant. Landlord may impose as a condition to such consent such requirements as Landlord may deem necessary in its sole discretion, including without limitation the requirement that Landlord be furnished with working drawings before work commences and that a bond be furnished, and requirements relating to the manner in which the work is done, the contractor by 12 15 whom it is performed, and the times during which it is accomplished. Prior to the expiration or earlier termination of the Lease, Tenant shall, at its sole cost and expense, remove any and all such alterations, improvements and additions to the Premises; however, if Tenant requests in writing to Landlord prior to the construction or installation of such additions or alterations that Landlord stipulate that Tenant shall not be required to remove any or all of such improvements upon the expiration or earlier termination of this Lease and Landlord agrees thereto in writing to Tenant, then Tenant shall not be obligated to so remove such improvements or additions. and restore the Premises to the condition in which they were delivered to Tenant, reasonable wear and tear excepted. Any damage done to the Premises in connection with any such removal shall be repaired at Tenant's sole cost and expense. Landlord may, in connection with any such removal or restoration which reasonably might involve damaging the Premises, require that such removal be performed by a bonded contractor or other person for which a bond satisfactory to Landlord has been furnished covering the cost of repairing the anticipated damage. Unless so removed, all such alterations, additions or improvements shall at the expiration or earlier termination of the Lease become the property of Landlord and remain upon the Premises. All such improvements, alterations, additions and restoration must be done in a good and workmanlike manner and diligently prosecuted to completion so that the Premises shall at all times be a complete unit except during the period of work. Such improvements, alterations, additions and restoration shall only be constructed by a contractor which is bondable and which shall use union employees only, except that such contractor may use non-union employees only if prior to the commencement of any work, Tenant obtains Landlord's written consent which Landlord may withhold unless it is adequately protected against any and all loss or damage that may result from labor problems or any work stoppage or interruption arising from the use of such non-union employees. Tenant shall deliver to Landlord upon commencement of such work a copy of the building permit with respect thereto. Upon completion of such work, Tenant shall file for record in the office of the County Recorder where the Project is located a Notice of Completion, as required or permitted by law. All such work shall be performed and done strictly in accordance with the laws and ordinances relating thereto and shall be performed so as not to obstruct the access to the premises of any other tenant in the Building or Project. Tenant agrees to carry insurance as required by Article 17 covering any improvements, alterations or additions to the Premises made by Tenant under the provisions of this Article 15, it being expressly agreed that none of such improvements, additions or alterations shall be insured by Landlord under the insurance Landlord may carry upon the Building, nor shall Landlord be required under any provision for reconstruction to reinstall any such improvements, additions or alterations. In addition, it is expressly agreed that if any tax is imposed, or the amount of taxes on the Building or the Project is increased, by reason of any such improvements, alterations or additions, Tenant shall be solely responsible therefor under Article 7. 16. INDEMNITY 16.1. INDEMNIFICATION BY TENANT. Tenant shall indemnify, defend and hold Landlord, its agents and employees, harmless from and against any and all claims, liability, loss, cost or expense (including reasonable attorneys' fees) arising out of or in connection with (i) any injury or damage to any person or property occurring in, on or about the Premises or any part thereof or the Building or Common Area, if such injury or damage is caused in part or in whole by any act or omission by Tenant, its agents, contractors, employees or business invitees or (ii) any breach or default in the performance of any obligation on Tenant's part to be performed under this Lease. If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause except Landlord's negligence or wrongful acts, and Tenant hereby waives all claims with respect thereto against Landlord. The foregoing provisions shall survive the termination of this Lease 16.2. EXEMPTION OF LANDLORD FROM LIABILITY. If the Premises, the Building, or the Common Area, or any part thereof, is damaged by fire or other cause against which Tenant is required to carry insurance pursuant to this Lease, Landlord shall not be liable to Tenant for any loss, cost or expense arising out of or in connection with such damage. Tenant hereby releases Landlord, its directors, officers, shareholders, partners, employees, agents and representatives, from any liability, claim or action arising out of or in connection with such damage. Furthermore, Tenant shall, pursuant to Article 17, maintain insurance against loss, injury, or damage which may be sustained by the person, goods, wares, merchandise or property of Tenant, its agents, contractors, employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water, or rain, which may leak or flow from or into any part of the Premises or the Building, or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures of the same, whether such damage or injury results from conditions arising within the Premises or other portions of the Building, or from other sources, and Landlord shall not be liable therefor, unless caused by Landlord's negligence or wrongful act, and in that event only to the extent not covered by the insurance which Tenant is required to carry pursuant to this Lease. Landlord shall not be liable to Tenant for any damages arising out of or in connection with any act or omission of any other tenant in the Project or for losses due to theft or 13 16 burglary or other wrongful acts of third parties. Nothing contained in this Section 16.2 shall relieve Landlord from liability for its negligent or wrongful acts, except (a) in no event shall Landlord be liable for consequential damages, and (b) the foregoing shall be subject to the release and waiver contained at Section 17.7. 17. INSURANCE 17.1. GENERAL. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to Landlord and the holder of any deed of trust or mortgage secured by any portion of the Premises (hereinafter referred to as a "Mortgagee"). All policies of insurance provided for herein shall be issued by insurance companies with general policyholder's rating of not less than A and a financial rating of not less than Class VIII as rated in the most current available "Best Insurance Reports". Each policy shall name Landlord and at Landlord's request any Mortgagee and the property manager of Landlord as an additional insured, as their respective interests may appear. Tenant shall deliver certificates of such insurance to Landlord, evidencing the existence and amounts of such insurance, at least ten (10) days prior to Tenant's occupancy in the Premises. Failure to make such delivery shall constitute a material default by Tenant under this Lease. All policies of insurance delivered to Landlord must contain a provision that the company writing said policy will give Landlord thirty (30) days prior written notice of any cancellation or lapse in the amounts of insurance. All general liability, property damage and other casualty insurance policies shall be written as primary policies, not contributing with, and not in excess of coverage which Landlord may carry. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least five (5) days prior to the expiration thereof. Tenant agrees that if Tenant does not procure and maintain such insurance, Landlord may (but shall not be required to) obtain such insurance on Tenant's behalf and charge Tenant the premiums therefor together with a fifteen percent (115%) handling charge, payable upon demand. Tenant may carry such insurance under a blanket policy provided such blanket policy expressly affords the coverage required by this Lease and contains a per location aggregate endorsement and evidence thereof is furnished to Landlord as required above. 17.2. CASUALTY INSURANCE. At all times during the term hereof, Tenant shall maintain in effect policies of casualty insurance covering (i) all improvements in, on or to the Premises (including any Building Standard furnishings, and any alterations, additions or improvements as may be made by Tenant), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or upon the Premises. Such policies shall include coverage in an amount not less than one hundred percent (100%) of the actual replacement cost thereof from time to time during the term of this Lease. Such policies shall provide protection against any peril included within the classification "Fire and Extended Coverage", against vandalism and malicious mischief, theft, sprinkler leakage and earthquake sprinkler leakage (however, Tenant shall be obligated to obtain such earthquake sprinkler leakage insurance if and only so long as the premiums therefor are available at commercially reasonable rates) (and including cost of demolition and debris removal). Replacement cost for purposes hereof shall be determined by an accredited appraiser selected by Landlord or otherwise by mutual agreement. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth in Article 18, the proceeds under (i) above shall be paid to Landlord, and the proceeds under (ii) above shall be paid to Tenant. 17.3. LIABILITY INSURANCE. Tenant shall at all times during the term hereof obtain and continue in force bodily injury liability and property damage liability insurance adequate to protect Landlord against liability for injury to or death of any person in connection with the activities of Tenant in, on or about the Premises or with the use, operation or condition of the Premises. Such insurance at all times shall be in an amount of not less than Two Million Dollars ($2,000,000) for injuries to persons in one (1) accident, not less than One Million Dollars ($1,000,000) for injury to any one (1) person and not less than Five Hundred Thousand Dollars ($500,000) with respect to damage to property. The limits of such insurance do not necessarily limit the liability of Tenant hereunder. All general liability and property damage policies shall contain a provision that Landlord, although named as an additional insured, shall nevertheless be entitled to recovery under said policies for any loss occasioned to it, its partners, agents and employees by reason of the negligence of Tenant. 17.4. WORKERS' COMPENSATION INSURANCE. Tenant shall, at all times during the term hereof, maintain in effect workers' compensation insurance as required by applicable statutes. 17.5. ADJUSTMENT. Every three (3) years during the term of this Lease, or whenever Tenant materially improves or alters the Premises, whichever is earlier, Landlord and Tenant shall mutually agree to increases in Tenant's insurance policy limits for the insurance to be carried by Tenant as set forth in this Article 17. If Landlord and Tenant cannot mutually agree upon the amounts of said increases within thirty (30) days after notice from Landlord, then the insurance policy limits set forth in this Article 17 shall be adjusted upward by an accredited insurance appraiser approved by Landlord to reflect increased replacement costs and increased limits of liability then prevailing generally in the local real estate industry for comparable property. 14 17 1 7.6. LANDLORD'S INSURANCE. Landlord shall at all times from and after substantial completion of the Premises maintain in effect as an item of Expense a policy or policies of insurance covering the Common Area and the buildings in the Project in an amount up to one hundred percent (100%) of the actual replacement cost thereof (exclusive of the cost of excavations, foundations and footings) from time to time during the term of this Lease, providing protection against rental loss and any peril generally included in the classification "Fire and Extended Coverage" which may include insurance against sprinkler damage, vandalism, malicious mischief, earthquake and third party liability, and including such coverages in such amounts as Landlord may designate. Landlord's obligation to carry the insurance provided for herein may be brought within the coverage of any so-called blanket policy or policies of insurance carried and maintained by Landlord, provided that the coverage afforded will not be reduced or diminished by reason of the use of such blanket policy of insurance. 17.7. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives any and all rights of recovery against the other or against the directors, officers, shareholders, partners, employees, agents and representatives of the other, on account of loss or damage of such waiving party or its property, or the property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of such loss or damage. Tenant. shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier(s) that the foregoing mutual waiver of subrogation is contained in this Lease. The waivers set forth herein shall be required to the extent that same are available from each party's insurer without additional premium, if an extra charge is incurred to obtain such waiver, it shall be paid by the party in whose favor the waiver runs within fifteen (15) days after written notice from the other party. 18. DAMAGE AND DESTRUCTION 18.1. PARTIAL DAMAGE-INSURED. If the Premises, Building or Common Area are damaged by a risk covered under fire and extended coverage insurance protecting Landlord, then Landlord shall restore such damage provided insurance proceeds are available to Landlord to pay eighty percent (80%) or more of the cost of restoration, and provided such restoration by Landlord can be completed within six (6) months after the commencement of work, in the opinion of a registered architect or engineer appointed by Landlord. In such event this Lease shall continue in full force and effect so long as the Premises can be used by Tenant, except that Tenant shall, so long as the damage is not due to the act or omission of Tenant, be entitled to an equitable reduction of Rent and Expenses while such restoration takes place, such reduction to be based upon the extent to which the damage and the restoration efforts directly and materially interfere with Tenant's use of the Premises. 18.2. PARTIAL DAMAGE-UNINSURED. If the Premises, Building or Common Area are damaged by a risk not covered by such insurance or the insurance proceeds available to Landlord are less than eighty percent (80%) of the cost of restoration, or if the restoration cannot be completed within six (6) months after the commencement of work in the opinion of the registered architect or engineer appointed by Landlord, then Landlord shall have the option either to (i) repair or restore such damage, this Lease continuing in full force and effect so long as the Premises can be used by Tenant, but the Rent and Expenses to be equitably reduced as hereinabove provided, or (ii) give notice to Tenant at any time within ninety (90) days after such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than thirty (30) nor more than sixty (60) days after giving such notice. If such notice is given, this Lease shall expire and any interest of Tenant in the Premises shall terminate on the date specified in such notice and the Rent and Expenses, reduced by an equitable reduction (except as hereinabove provided) based upon the extent, if any, to which such damage directly and materially interfered with Tenant's use of the Premises, shall be paid to the date of such termination, and Landlord agrees to refund to Tenant any Rent or Expenses theretofore paid in advance for any period of time subsequent to such termination date. 18.3. TOTAL DESTRUCTION. If the Premises are totally destroyed (i.e., over seventy percent (70 %) of the Premises is destroyed or if Tenant cannot use the Premises without major restoration or if in Landlord's judgment the Premises cannot be restored as set forth above, then, notwithstanding the availability of insurance proceeds, this Lease shall be terminated effective as of the date of the damage. 18.4. LANDLORD'S OBLIGATIONS. Landlord shall not be required to carry insurance of any kind on Tenant's property and shall not in the absence of Landlord's negligence or wrongful acts be required to repair any injury or damage thereto by fire or other cause, or to make any restoration or replacement of any paneling, decorations, partitions, ceilings, floor covering, office fixtures or any other improvements or property installed in the Premises by or at the direct or indirect expense of Tenant, and Tenant shall be required to restore or replace same in the event of damage and shall have no claim against Landlord for any loss suffered by reason of any such damage, destruction, repair or restoration. Notwithstanding anything to the contrary contained in this Article 18, Landlord and Tenant shall each have the option not to repair, reconstruct or restore the Premises with respect to damage or destruction as described in this Article 18 occurring during the last twelve (12) months of the term of this Lease or any extension thereof, provided, however, that if Landlord or Tenant exercises such option this Lease 15 18 shall be terminated upon such exercise (however, notwithstanding the preceding, if within ten [10] days after such event of damage, Tenant exercises its Option to Extend and Notice of Acceptance pursuant to the provisions of Article 43, then this Lease shall not so terminate). 18.5. TENANT'S RIGHT TO TERMINATE. Notwithstanding anything to the contrary contained in this Article 18, in the event of either an insured or an uninsured casualty loss, Tenant shall have the right to terminate this Lease if (a) the restoration work cannot be completed within six (6) months after the commencement of such work, in the opinion of Landlord's registered architect or engineer, or (b) the restoration is not completed within six (6) months after the commencement of such work, provided that Tenant gives written notice of such termination to Landlord within ten (10) business days after Landlord has notified Tenant of such determination, in the case of (a)preceding, or after the expiration of the six (6)-month period, but prior to the date restoration is substantially complete, in the case of (b) preceding. 18.6. WAIVER BY TENANT. It is expressly agreed that this Article 18 shall govern the rights of Landlord and Tenant in the event of damage and destruction and supersedes the provisions of any statutes with respect to any damage or destruction of the Premises. 19. CONDEMNATION 19.1. If all or a substantial part of the Premises, Building or Common Area is taken or appropriated for public or quasi-public use by the right of eminent domain or otherwise by a taking in the nature of inverse condemnation, with or without litigation, or is transferred by agreement in lieu thereof (any of the foregoing being referred to herein as a "taking"), either party hereto may, by written notice given to the other within thirty (30) days of receipt of notice of such taking, elect to terminate this Lease as of the date possession is transferred pursuant to the taking; provided, however, that before such party may terminate this Lease for a taking, such taking shall be of such an extent and nature as to economically frustrate its business therein, or to substantially handicap, impede or impair its use thereof. No award for any partial or entire taking shall be apportioned, and Tenant thereby assigns to Landlord any and all rights of Tenant now or hereafter arising in or to the same or any part thereof; provided, however, that Tenant may file a separate claim for an award and nothing contained herein shall be deemed to give Landlord any interest in, or to require Tenant to assign to Landlord, any award made to Tenant for the taking of personal property belonging to Tenant. In the event of a taking which does not result in a termination of this Lease, Rent and Expenses shall be equitably reduced to the extent Tenant's business in or use of the Premises is economically impaired as described above. No temporary taking of the Premises or any part of the Project shall terminate this Lease, or give Tenant any right to any abatement of Rent or Expenses hereunder, except that Rent and Expenses shall be equitably reduced as described above during that portion of any temporary taking lasting more than thirty (30) days. To the extent the provisions of this Article 19 conflict with California Code of Civil Procedure Section 1265.130 allowing either party to petition the court to terminate this Lease for a partial taking, the provisions of this Article 19 shall govern. 20. LIENS 20.1. Tenant shall keep the Premises, the Building and the Project free from any liens arising out of work performed, materials furnished, or obligations incurred by Tenant, and shall indemnify, hold harmless and defend Landlord from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Tenant. Tenant shall give Landlord at least ten (10) business days' prior written notice of the expected date of commencement of work relating to alterations, improvements, or additions to the Premises and if requested by Landlord shall secure a completion and indemnity bond for said work, satisfactory to Landlord, in an amount at least equal to one and one-half (1 1/2) times the estimated cost of such work. Landlord shall have the right at all times to keep posted on the Premises any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord and the Premises, and any other party having any interest therein, against mechanics' and materialmen's liens. If any claim of lien is filed against the Premises or any part of the Project or any similar action affecting title to such property is commenced, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. If Tenant fails, within twenty (20) days following the imposition of any lien, to cause such lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right (but not the obligation) to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all costs and expenses incurred by it in connection therewith (including reasonable attorneys' fees) shall be payable to Landlord by Tenant on demand, with interest at the Agreed Rate from the date of expenditure. 21. DEFAULTS BY TENANT 21.1. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: 16 19 21.1.1. The abandonment of the Premises by Tenant. 21.1.2. The failure by Tenant to make any payment of Rent or Expenses or of any other sum required to be made by Tenant hereunder within five (5) days after written demand therefor (which notice shall serve as the notice required under Section 1161 of the California Code of Civil Procedure or any similar or superseding statute). 21.1.3. The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, if such failure is not cured within thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that it cannot be cured solely by payment of money and more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within the thirty (30) day period and thereafter diligently prosecutes such cure to completion; provided, further, that repeated breaches or defaults by Tenant (more than three (3) in any twelve (12) month period) shall entitle Landlord at its option, to terminate this Lease unless Tenant furnishes Landlord with adequate assurances, in Landlord's sole judgment, against further defaults; and provided, further, that violations by Tenant of the Rules and Regulations described in Article 36 which interfere with the rights of other tenants or which constitute a nuisance or hazard shall be cured by Tenant within forty-eight (48) hours after written notice thereof from Landlord, failing which Landlord may (but need not) cure same, in which event Tenant shall pay Landlord, within ten (10) days after written notice thereof by Landlord, the amount expended by Landlord to effect such cure together with an administrative charge of fifteen percent (15 %) of the amount thereof. 21.1.4. The making by Tenant of any general assignment for the benefit of creditors, the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days) or, the appointment of a trustee or receiver to take possession of, or the attachment, execution or other judicial seizure of, substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. 21.1.5. Intentionally Omitted. 21.2. Any notice required or permitted by this Article 21 is intended to satisfy to the maximum extent possible any and all notice requirements imposed by law on Landlord. Landlord may serve a statutory notice to quit, a statutory notice to pay rent or quit, or a statutory notice of default, as the case may be, to effect the giving of any notice required by this Article 21. 22. LANDLORD'S REMEDIES 22.1. In the event of any material default or breach of this Lease by Tenant, Landlord's obligations under this Lease shall be suspended and Landlord may at any time thereafter, without limiting Landlord in the exercise of any other right or remedy at law or in equity which Landlord may have (all remedies provided herein being non-exclusive end cumulative), do any one or more of the following: 22.1.1. Maintain this Lease in full force and effect and recover the Rent, Expenses and other monetary charges as they become due, without terminating Tenant's right to possession irrespective of whether Tenant shall have abandoned the Premises. If Landlord does not elect to terminate the Lease, Landlord shall have the right to attempt to relet the Premises at such rent and upon such conditions, and for such a term, as Landlord deems appropriate in its sole discretion and to do all acts necessary with regard thereto, without being deemed to have elected to terminate the Lease, including re-entering the Premises to make repairs or to maintain or modify the Premises, and removing all persons and property from the Premises, which property if removed may at Landlord's election be abandoned or stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. Reletting may be for a period shorter or longer than the remaining term of this Lease, and for more or less rent, but Landlord shall have no obligation to relet at less than prevailing market rental rates. If reletting occurs, this Lease shall terminate automatically when the new tenant takes possession of the Premises and commences rent payment. Notwithstanding that Landlord fails to elect to terminate the Lease initially, Landlord at any time thereafter may elect to terminate the Lease by virtue of any uncured default by Tenant. In the event of any such termination, Landlord shall be entitled to recover from Tenant any and all damages incurred by Landlord by reason of Tenant's default (including, without limitation, the damages described in Section 22.1.2 below), as well as all costs of reletting, including commissions, reasonable attorneys' fees, restoration or remodeling costs, and costs of advertising. 22.1.2. Terminate Tenant's right to possession by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to 17 20 Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including (without limitation) the following: (1) the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (2) 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 Rent loss that Tenant proves could have been reasonably avoided; plus (3) 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 Rent loss that Tenant proves could have been reasonably avoided; plus (4) any other amount, and court costs, necessary to compensate Landlord for all the detriment proximately caused by Tenant's default or which in the ordinary course of things would be likely to result therefrom (including, without limiting the generality of the foregoing, the amount of any commissions and/or finder's fee for a replacement tenant); plus (5) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) of this Section 22.1.2, the "worth at the time of award" is to be computed by allowing interest at the then maximum rate of interest allowable under law which could be charged Tenant by Landlord, and, as used in subparagraph (3) of this Section 22.1.2, the "worth at the time of award" is to be computed by discounting such amount at the discount rate of the U.S. Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). The term "Rent", as used in this Article 22, shall be deemed to be and to mean all Rent, Expenses, parking fees and other monetary sums required to be paid by Tenant pursuant to this Lease or as defined in Section 4.1 hereof. For the purpose of determining the amount of "unpaid Rent which would have been earned after termination" or the "unpaid Rent for the balance of the term" (as referenced in subparagraphs (2) and (3) hereof), the amount of parking fees and Expenses shall be deemed to increase annually for the balance of the term by an amount equal to the average annual percentage increase in parking fees and Expenses during the three (3) calendar years preceding the year in which the Lease was terminated, or, if such termination shall occur prior to the expiration of the third calendar year occurring during the term of this Lease, then the amount of parking fees and Expenses shall be deemed to increase monthly for the balance of the term by an amount equal to the average monthly percentage increase in parking fees and Expenses during all of the calendar months preceding the month in which the Lease was terminated. 22.1.3. Collect sublease rents (or appoint a receiver to collect such rent) and otherwise perform Tenant's obligations at the Premises, it being agreed, however, that neither the filing of a petition for the appointment of a receiver for Tenant nor the appointment itself shall constitute an election by Landlord to terminate this Lease. 22.1.4. Proceed to cure the default at Tenant's sole cost and expense, without waiving or releasing Tenant from any obligation hereunder. If at any time Landlord pays any sum or incurs any expense as a result of or in connection with curing any default of Tenant (including any administrative fees provided for herein and reasonable attorneys' fees), the amount thereof shall be immediately due as of the date of such expenditure and, together with interest at the Agreed Rate from the date of such expenditures, shall be paid by Tenant to Landlord immediately upon demand, and Tenant hereby covenants to pay any and all such sums. 22.1.5. If Tenant is not occupying the Premises, to require Tenant to forthwith remove its trade fixtures, furniture, equipment, the improvements and additions Tenant is required to remove, and Tenant's personal property, and if the same are not so removed to deem them abandoned and dispose of the same in accordance with the provisions of Section 1980 et seq. of the California Civil Code, or of any similar or superseding statute relating to the disposition of personal property. 22.1.6. ADDITIONAL REMEDIES. Upon the occurrence of any of the events specified in Section 21.1.4, if Landlord shall elect not to exercise, or by law shall not be able to exercise, its right hereunder to terminate this Lease, then, in addition to any other rights or remedies of Landlord under this Lease or provided by law: (i) Landlord shall not be obligated to provide Tenant with any of the services specified in Article 12, or otherwise specified in the Lease unless Landlord has received compensation in advance for such services, and the parties agree that Landlord's reasonable estimate of the compensation required with respect to such services shall control; and (ii) neither Tenant, as debtor in possession, nor any trustee or other person (collectively, the "Assuming Tenant") shall be entitled to assume this Lease, unless on or before the date of such assumption, the Assuming Tenant (A) cures, or provides adequate assurance that such Assuming Tenant will promptly cure, any existing default under this Lease; (B) compensates, or provides adequate assurance that the Assuming Tenant will promptly compensate Landlord for any loss (including, without limitation, reasonable attorneys' fees and disbursements, including on appeal and in connection with any bankruptcy) resulting from such default; and (C) provides adequate assurance of future performance under this Lease. Tenant covenants and agrees that, for such purposes (i) any cure or compensation shall be effected by the immediate payment of any monetary default or any required compensation, or the immediate correction acceptable to 18 21 Landlord of any non-monetary default; (ii) any "adequate assurance" of such cure or compensation shall be effected by the establishment of an escrow fund for the amount at issue or by other method acceptable to Landlord; and (iii) "adequate assurance" of future performance shall be effected by the establishment of an escrow fund for the amount at issue or other method acceptable to Landlord. Provided, further, upon the occurrence of any of the events specified in Section 21.1.4 prior to the date fixed as the Commencement Date (whether or not such default is cured within the time period, if any, provided in such Article), this Lease shall ipso facto be canceled and terminated. In such event, (i) neither Tenant nor any person claiming through or under Tenant, or by virtue of any statute or order of any Court, shall be entitled to possession of the Premises; and (ii) in addition to such other rights and remedies provided in this Article 22, Landlord may retain as damages any Rent, Security Deposit (if any) or monies received from Tenant or others on account of Tenant. The foregoing is a material consideration to Landlord for the execution of this Lease 22.2. All covenants and agreements to be performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any offset to or abatement of Rent or Expenses. 23. DEFAULTS BY LANDLORD 23.1. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform such obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying such failure; provided, however, that if the nature of Landlord's default is such that more than thirty (30) days are required for its cure, then Landlord shall not be deemed to be in default if it commences such cure within the thirty (30)-day period and thereafter diligently prosecutes such cure to completion. Tenant agrees to give any Mortgagee a copy, by certified mail, of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of Notice of Assignment of Rents and Leases, or otherwise) of the address of such Mortgagee. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then any such Mortgagee shall have an additional fifteen (15) days within which to have the right, but not the obligation, to cure such default on the part of the Landlord or if such default cannot be cured within that time, then such additional time as may be necessary if within that fifteen (15) days the Mortgagee has commenced and is pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary, to effect such cure), in which event this Lease shall not be terminated while such remedies are being so pursued. If Tenant recovers any judgment against Landlord for a default by Landlord of this Lease, the judgment shall be satisfied only out of the interest of Landlord in the Project and neither Landlord nor any of its partners, shareholders, officers, directors, employees or agents shall be personally liable for any such default or for any deficiency. 24. COSTS OF SUIT 24.1. If either party brings action for relief against the other, declaratory or otherwise, arising out of this Lease, including any suit by Landlord for the recovery of Rent or possession of the Premises, the losing party shall pay the successful party its costs incurred in connection with and in preparation for said action, including its reasonable attorneys' fees (which costs shall be deemed to have accrued on the commencement of such action and shall be paid whether or not such action is prosecuted to judgment, it being agreed that to be the successful party a party need not necessarily have recovered a judgment, but shall be the party which, in light of all the facts and circumstances of the case, shall be deemed to be without fault or to have a lesser degree of fault than the other party). If Landlord, without fault on Landlord's part, is made a party to any action instituted by Tenant against a third party or by a third party against Tenant or by or against any person holding under or using the Premises by license of Tenant, or for the foreclosure of any lien for labor or material furnished to or for Tenant or any such other person, or otherwise arising out of or resulting from any act or omission of Tenant or of any such other person, Tenant shall at its cost and at Landlord's option defend Landlord therefrom and further, except to the extent Landlord is found separately liable for its own negligence or wrongful acts, indemnify and hold Landlord harmless from any judgment rendered in connection therewith and all costs and expenses (including reasonable attorneys' fees) incurred by Landlord in connection with such action. 25, SURRENDER OF PREMISES; HOLDING OVER 25.1. SURRENDER. On expiration or termination of this Lease, Tenant shall surrender to Landlord the Premises, and all Tenant's improvements thereto and alterations thereof, broom clean and in good condition (except for ordinary wear and tear, destruction to the Premises covered by Article 18 of this Lease, and for alterations that Tenant has the right to remove or is obligated to remove, so long as Tenant repairs any damage to the Premises under the provisions of this Article 25 or Article 15), and shall remove all of its personal property including any signs, notices and displays. Tenant shall perform all restoration made necessary by the removal of any such improvements or alterations or personal 19 22 property, prior to the expiration of the Lease term. If any such removal would damage the Building structure, Tenant shall give Landlord prior written notice thereof and Landlord may elect to make such removal at Tenant's expense or otherwise to require Tenant to post security for such restoration. Landlord may retain or dispose of in any manner any such improvements or alterations or personal property that Tenant does not remove from the Premises on expiration or termination of the term as allowed or required by this Lease and title to any such improvements or alterations or personal property that Landlord so elects to retain or dispose of shall vest in Landlord. Tenant waives all claims against Landlord for any damage or loss to Tenant arising out of Landlord's retention or disposition of any such improvements, alterations or personal property and shall be liable to Landlord for Landlord's costs of storing, removing and disposing of any such improvements, alterations or personal property which Tenant fails to remove from the Premises. Tenant shall indemnify, defend and hold Landlord harmless from all damages, loss, cost and expense (including reasonable attorneys' fees) arising out of or in connection with Tenant's failure to surrender the Premises in accordance with this Section 25.1. 25.2. HOLDING OVER. If Tenant holds over after the term hereof, such tenancy shall be at sufferance only, and not a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a rental in the amount of one hundred fifty percent (150%) of the Rent in effect as of the last month of the term hereof and at the time specified in this Lease, and such tenancy shall be subject to every other term, covenant and agreement contained herein other than any provisions for rent concessions, Landlord's Work, or optional rights of Tenant requiring Tenant to exercise same by written notice (such as options to extend the term of the Lease). The foregoing shall not, however, be construed as a consent by Landlord to any holding over by Tenant and Landlord reserves the right to require Tenant to surrender possession of the Premises upon expiration or termination of this Lease 26. SURRENDER OF LEASE 26.1. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work as a merger. Such surrender or cancellation shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies. The delivery of keys to the Premises to Landlord or its agent shall not, of itself, constitute a surrender and termination of this Lease. 27. TRANSFER OF LANDLORD'S INTEREST 27.1. If Landlord sells or transfers its interest in the Premises (other than a transfer for security purposes) Landlord shall be released from all obligations and liabilities accruing thereafter under this Lease, if Landlord's successor has assumed in writing Landlord's obligations under this Lease. Any Security Deposit, prepaid Rent or other funds of Tenant in the hands of Landlord at the time of transfer shall be delivered to such successor and Tenant agrees to attorn to the purchaser or assignee provided all Landlord's obligations hereunder are assumed in writing by such successor. Notwithstanding the foregoing, Landlord's successor shall not be liable. to Tenant for any such funds of Tenant which Landlord does not deliver to the successor. 28. ASSIGNMENT AND SUBLETTING 28.1. LANDLORD'S CONSENT REQUIRED. Tenant shall not sell, assign, mortgage, pledge, hypothecate or encumber this Lease (any such act being referred to herein as an "assignment"), and shall not sublet the Premises or any part thereof, without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld, and any attempt to do so without such consent shall be voidable by Landlord and, at Landlord's election, shall constitute a material default under this Lease. 28.2. TENANT'S APPLICATION. If Tenant desires at any time to assign this Lease (which assignment shall in no event be for less than its entire interest in this Lease) or to sublet the Premises or any portion thereof, Tenant shall submit to Landlord at least thirty (30) days prior to the proposed effective date of the transaction ("Proposed Effective Date"), in writing, a notice of intent to assign or sublease, setting forth: (i) the Proposed Effective Date, which shall be no less than thirty (30) nor more than ninety (90) days after the sending of such notice; (ii) the name of the proposed subtenant or assignee; (iii) the nature of the proposed subtenant's or assignee's business to be carried on in the Premises; and (iv) a description of the terms and provisions of the proposed sublease or assignment. Such notice shall be accompanied by (i) such financial information as Landlord may request concerning the proposed subtenant or assignee, including recent financial statements and bank references; (ii) evidence satisfactory to Landlord that the proposed subtenant or assignee will immediately occupy and thereafter use the affected portion of the Premises for the entire term of the sublease or assignment agreement; (iii) a conformed or photostatic copy of the proposed sublease or assignment agreement; and (iv) any fee required under Section 28.9. During the time that Landlord has in which to exercise the options available to Landlord upon the giving of such notice, as hereinafter described, Tenant shall not sublet all or any part of the Premises nor assign all or any part of this Lease. 20 23 28.3. LANDLORD'S OPTION TO RECAPTURE PREMISES. If Tenant proposes to sublease all or part of the Premises, Landlord may, at its option upon written notice to Tenant given within twenty (20) days after its receipt of the above-described notice from Tenant, elect to recapture such portion of the Premises as Tenant proposes to sublease and upon such election by Landlord, this Lease shall terminate as to the portion of the Premises recaptured. in the event a portion only of the Premises is recaptured, the Rental payable under this Lease, the Security Deposit, and Tenant's Share shall be proportionately reduced based on the rentable square footage retained by Tenant and the rentable square footage leased by Tenant hereunder immediately prior to such recapture and termination, and Landlord and Tenant shall thereupon execute an amendment of this Lease in accordance therewith. If Landlord recaptures only a portion of the Premises, it shall construct and erect at its sole cost such partitions as may be required to separate the space retained by Tenant from the space recaptured by Landlord; provided, however, that said partitions need only be finished in Building Standard condition. Landlord may, at its option, lease the recaptured portion of the Premises to the proposed subtenant without liability to Tenant. If Landlord does not elect to recapture pursuant to this Section 28.3, Tenant may thereafter enter into a valid sublease with respect to the Premises, provided Landlord, pursuant to this Article 28, consents thereto, and provided further that (i) the sublease is executed within ninety (90) days after notification to Landlord of such proposal, and (ii) the rental therefor is not less than that stated in such notification. Any termination as provided in this Section 28.3 shall be subject to the written consent of any Mortgagee of Landlord. The effective date of any such termination shall be the Proposed Effective Date so long as Tenant has complied with the provisions of Section 28.2 above, and otherwise shall be as specified in Landlord's notice of termination. 28.4. APPROVAL/DISAPPROVAL STANDARDS. In the event that Tenant complies with the provisions of Section 28.2, and Landlord does not exercise an option provided to Landlord under Section 28.3, Landlord's consent to a proposed assignment or sublease shall not be unreasonably withheld. In determining whether to grant or withhold consent to a proposed assignment or sublease, Landlord may consider any reasonable factor. Without limiting what may be construed AS a reasonable factor, it is hereby agreed that any one of the following factors will be reasonable grounds for disapproval of a proposed assignment or sublease: 28.4.1. Tenant has not complied with the requirements set forth in Section 28.2 above; 28.4.2. The proposed assignee or subtenant does not, in Landlord's reasonable judgment, have sufficient financial worth, considering the responsibility involved; 28.4.3.The proposed assignee or subtenant does not, in Landlord's reasonable judgment, have a good reputation as a tenant of property; 28.4.4.Landlord has had prior negative leasing experience with the proposed assignee or subtenant; 28.4.5.The use of the Premises by the proposed assignee or subtenant will not be identical to the use permitted by this Lease; 28.4.6.In Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in a business, and the Premises, or the relevant part thereof, will be used in a manner, that is not in keeping with the then current standards of the Building, or that will violate any restrictive or exclusive covenant as to use contained in any other lease of space in the Building or the Project; 28.4.7. The use of the Premises by the proposed assignee or subtenant will violate any applicable law, ordinance or regulation; 28.4.8.The proposed assignee or subtenant, or any person that directly or indirectly controls, is controlled by, or is under common control with, the proposed assignee or subtenant, or any person who controls the proposed assignee or subtenant, is then an occupant of a part of the Building or the Project unless no other suitable space is available in the Project; however, notwithstanding the preceding, Tenant may sublet up to a cumulative total of 5,000 rentable square feet of the Premises to up to two (2) occupants of the Project. 28.4.9.The proposed assignee or subtenant is a person with whom Landlord has entered into a letter of intent to lease space in the Building or the Project; 28.4.10. Tenant shall have advertised or publicized the availability of the Premises without prior notice to Landlord; 28.4.11. The proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this Article 28; or 21 24 28.4.12. Tenant is then in default of any obligation of Tenant under this Lease beyond any applicable cure period, or Tenant has defaulted under this Lease on three (3) or more occasions during the twelve (12) months preceding the date that Tenant shall request consent. 28.5. APPROVAL/DISAPPROVAL PROCEDURE. Landlord shall approve or disapprove the proposed assignment or sublease by written notice to Tenant. If Landlord shall exercise any option to recapture the Premises as herein provided, or denies a request for consent to a proposed sublease or assignment, Landlord shall not be liable to the proposed assignee or subtenant, or to any broker or other person claiming a commission or similar compensation in connection with the proposed assignment or sublease. If Landlord approves the proposed assignment or sublease, Tenant shall, prior to the Proposed Effective Date, submit to Landlord all executed originals of the assignment or sublease agreement and, in the event of a sublease, Landlord's customary consent to subletting form executed by Tenant and sublease for execution by Landlord. Provided such assignment or sublease agreement is in accordance with the terms approved by Landlord, Landlord shall execute each original as described above and shall retain two originals for its file and return the others to Tenant. No purported assignment or sublease shall be deemed effective as against Landlord and no proposed assignee or subtenant shall take occupancy unless such document is delivered to Landlord in accordance with the foregoing. 28.6. REQUIRED PROVISIONS. Any and all assignment or sublease agreements shall (i) contain such terms as are described in Tenant's notice under Section 28.2 above or as otherwise agreed by Landlord; (ii) prohibit further assignments or subleases, (iii) impose the same obligations and conditions on the assignee or sublessee as are imposed on Tenant by this Lease except as to Rent and term or as otherwise agreed by Landlord; (iv) be expressly subject and subordinate to each and every provision of this Lease, (v) have a term that expires on or before the expiration of the term of this Lease; (vi) provide that if Landlord succeeds to sublessor's position, Landlord shall not be liable to sublessee for advance rental payments, deposits or other payments which have not been actually delivered to Landlord by the sublessor, and (vii) provide that Tenant and/or the assignee or sublessee shall pay Landlord the amount of any additional costs or expenses incurred by Landlord for repairs, maintenance or otherwise as a result of any change in the nature of occupancy caused by the assignment or sublease. Any and all sublease agreements shall also provide that in the event of termination, re-entry, or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant as sublessor under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of the sublease, except that Landlord shall not: (i) be liable for any previous act or omission of Tenant under the sublease; (ii) be subject to any offset not expressly provided in the sublease, that theretofore accrued to the subtenant against Tenant; or (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one (1) month's fixed rent or any additional rent then due. 28.7. PAYMENT OF ADDITIONAL RENT UPON ASSIGNMENT OR SUBLEASE. If Landlord shall give its consent to any assignment of this Lease or to any sublease of the Premises, Tenant shall, in consideration therefor, pay to Landlord, as additional Rent: 28.7.1.In the case of an assignment, an amount equal to all sums and other consideration paid to Tenant by the assignee for, or by reason of, such assignment (including, without limiting the generality of the foregoing, all sums paid for the sale of Tenant's leasehold improvements); and 28.7.2. In the case of a sublease, one hundred percent (100%) of any rents, additional charges, or other consideration payable under the sublease by the subtenant to Tenant that are in excess of the rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof (including, without limiting the generality of the foregoing, all sums paid for the sale or rental of Tenant's leasehold improvements, but excluding reasonable and customary leasing commissions paid by Tenant in connection with such transaction, the reasonable and verifiable costs of leasehold improvements paid for by Tenant and installed for such sublessee, and the unamortized value of Tenant's leasehold improvements paid for by Tenant, amortized on a straight line basis over the initial term of this Lease). 28.8. The sums payable under Section 28.7.1 above shall be paid to Landlord upon the effective date of the assignment. The sums payable under Section 28.7.2 above shall be paid to Landlord as and when payable by the sublessee to Tenant. Within fifteen (15) days after written request therefor by Landlord, Tenant shall at any time and from time to time furnish evidence to Landlord of the amount of all such sums or other consideration received or expected to be received. 28.9. FEES FOR REVIEW. Simultaneously with the giving of the notice described in Section 28.2 above, Tenant shall pay to Landlord or Landlord's designee a non-refundable fee in the amount of Three Hundred Dollars ($300.00) as reimbursement for expenses incurred by Landlord in connection with reviewing each such transaction. In addition to such reimbursement, if Landlord retains the services of an attorney to review the transaction, Tenant shall pay to Landlord the reasonable attorneys' fees 22 25 incurred by Landlord in connection therewith; provided that in no event shall Tenant be obligated to reimburse Tenant more than a total of $1,000.00 under this Section 28.9, per instance. Tenant shall pay such attorneys' fees to Landlord within fifteen (15) days after written request therefor. 28.10. NO RELEASE OF TENANT. No consent by Landlord to any assignment or subletting by Tenant shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether occurring before or after such consent, assignment or subletting, including Tenant's obligation to obtain Landlord's express prior written consent to any other assignment or subletting. In no event shall any permitted subtenant assign its sublease, further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space, or any part thereof, to be used or occupied by others, except upon compliance with, and subject to the provisions of this Article 28. The acceptance by Landlord of payment from any person other than Tenant shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any subsequent assignment or sublease, or to be a release of Tenant from any obligation under this Lease. 28.11. ASSUMPTION OF OBLIGATIONS. Each assignee of Tenant shall assume the obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of the Rent and the performance of all the terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the term of this Lease. No assignment shall be binding on Landlord unless the assignee or Tenant delivers to Landlord a counterpart of the instrument of assignment in recordable form which contains a covenant of assumption by the assignee satisfactory in substance and form to Landlord, and consistent with the requirements of this Article 28. The failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge the assignee from its liability to Landlord hereunder. Landlord shall have no obligation whatsoever to perform any duty to or respond to any request from any sublessee, it being the obligation of Tenant to administer the terms of its subleases. 28.12. CORPORATE OR PARTNERSHIP TRANSFERS. If the Tenant is a privately held corporation, or is an unincorporated association or partnership, the cumulative or aggregate transfer, assignment or hypothecation of fifty percent (50%) or more of the total stock or interest in such corporation, association or partnership shall be deemed an assignment or sublease within the meaning and provisions of this Article. This Article shall, however, not apply to assignments or subleases to a corporation (i) into or with which Tenant is merged or consolidated; (ii) to which substantially all of Tenant's assets are transferred, or (iii) that controls, is controlled by, or is under common control with Tenant, provided that, in any of such events: 28.12.1. The successor of Tenant has a net worth, computed in accordance with generally accepted accounting principles, at least equal to the net worth of Tenant herein named on the date of this Lease; 28.12.2. Proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of such transaction; 28.12.3. Any such assignment or sublease shall be subject to all of the terms and provisions of this Lease, and such assignee or sublessee shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord promptly upon the assignment or sublease, all the obligations of Tenant under this Lease; 28.12.4. Tenant shall remain fully liable for all obligations to be performed by Tenant under this Lease; and 28.12.5. Tenant shall reimburse Landlord, promptly on demand, for Landlord's reasonable attorneys' fees incurred in conjunction with the processing and documentation of any such transaction. 28.13. INVOLUNTARY ASSIGNMENT. Subject to the provisions of Section 21.1.4, no interest of Tenant in this Lease shall be assignable by operation of law (including without limitation, the transfer of this Lease by testacy or intestacy, or in any bankruptcy or insolvency proceeding). Each of the following acts shall be considered an involuntary assignment: (i) If Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes a proceeding under any bankruptcy law in which Tenant is the bankrupt; or, if Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other such person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; (ii) If a writ of attachment or execution is levied on this Lease; (iii) If, in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises; or (iv) there is any assumption, assignment, sublease or other transfer under or pursuant to the Bankruptcy Code, 11 U.S.C. 101 et seq. (hereinafter referred to as the "Bankruptcy Code"). An involuntary assignment shall constitute a default by Tenant and Landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. If Landlord shall elect not to exercise its right 23 26 hereunder to terminate this Lease in the event of an involuntary assignment, then, in addition to any other rights or remedies of Landlord under this Lease or provided by law, the provisions of Sections 28.3, 28.6, 28.7, 28.9, 28.10, and 28.14 shall apply to any such involuntary assignment. Such sums, if any, payable pursuant to the referenced Sections shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Such sums which are not paid or delivered to Landlord shall be held in trust for the benefit of Landlord, and shall be promptly paid or turned over to Landlord upon demand. Any person or entity to which this Lease is assigned pursuant to the provisions of said Code shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver such instruments and documents reasonably requested by Landlord confirming such assumption. 28.14. ASSIGNMENT OF SUBLEASE RENTS. Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or any part of the Premises, and Landlord, as assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver for Tenant appointed on Landlord's application, may collect such rents and apply same toward Tenant's obligations under this Lease; except that, until the occurrence of an act of default by Tenant, Tenant shall have the right and license to collect such rents. 29. ATTORNMENT 29.1. If any proceeding is brought for default under any ground or underlying lease to which this Lease is subject, or in the event of foreclosure or the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall attorn to the successor upon any such foreclosure or sale and shall recognize that successor as Landlord under this Lease, provided such successor expressly agrees in writing to be bound to all future obligations by the terms of this Lease, and, if so requested, Tenant shall enter into a new lease with that successor on the same terms and conditions as are contained in this Lease (for the unexpired term of this Lease then remaining). 30. SUBORDINATION 30.1. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to: (i) all ground or underlying leases which may now exist or hereafter be executed affecting the Premises, and (ii) the lien of any first mortgage or first deed of trust which may now exist or hereafter be executed in any amount for which the Premises, such ground or underlying leases, or Landlord's interest or estate in any of them, is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground or underlying leases or any such liens to this Lease. If any ground or underlying lease terminates for any reason, Tenant shall, notwithstanding any subordination, attorn to and become tenant of the successor in interest to Landlord at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any documents evidencing the priority or subordination of this Lease with respect to any such ground or underlying leases or the lien of any such first mortgage, or first deed of trust, and specifically to execute, acknowledge and deliver to Landlord from time to time within ten (10) days after written request to do so a subordination of lease, or a subordination of deed of trust, in substantially the form set forth in Exhibit D or Exhibit D-1, respectively, attached hereto, or such other form as may be customarily required by any Mortgagee of Landlord, and failure of Tenant to do so shall be a material default hereunder. Tenant hereby irrevocably appoints Landlord as its attorney-in-fact to execute, deliver and record any such documents in the name and on behalf of Tenant if Tenant fails to comply with the foregoing. 31. ESTOPPEL CERTIFICATE 31.1. Tenant shall from time to time within ten (10) days after prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing in the form set forth in Exhibit E attached hereto, or such other form as may be customarily required by Landlord's Mortgagee, (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the Rent and other charges are paid in advance, if any; (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder (or specifying such defaults if they are claimed); and (iii) containing such other matters as are set forth in such form. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there are no uncured defaults in Landlord's performance, and that not more than one (1) month's Rent has been paid in advance. Failure of Tenant to so deliver such statement shall be a material default hereunder. Tenant hereby irrevocably appoints Landlord as its attorney-in-fact to execute and deliver such statement to any third party in the name and on behalf of Tenant if Tenant fails to comply with the foregoing. 24 27 32. BUILDING OCCUPANCY PLANNING 32.1. Notwithstanding any contrary provision of this Lease, if Landlord requires the Premises for use in conjunction with another suite or for other reasons related to Landlord's occupancy plans for the Building, then upon at least thirty (30) days' prior written notice to Tenant, Landlord shall have the right to move Tenant to other space in the Project, and thereupon such other space shall be deemed to be the Premises covered by this Lease. The expense of moving Tenant, its property and equipment to the substituted space and of improving same to a condition similar to the then current condition of the Premises shall be borne by Landlord. If the substituted space is smaller or larger than the Premises the Basic Rent, Security Deposit and Tenant's Share specified in this Lease shall be adjusted proportionately, and Landlord and Tenant shall execute an amendment to this Lease in accordance therewith. However, if the substituted space does not meet with Tenant's approval, Tenant may cancel this Lease upon thirty (30) days' prior written notice to Landlord, given within ten (10) days after Tenant's receipt of Landlord's notice referred to above. 32.2. Notwithstanding anything to the contrary contained in Section 32.1, if and so long as Tenant leases the entire second floor of the Building, then Landlord shall not have the right to relocate Tenant from the Premises located on the second floor of the Building. 33. QUIET ENJOYMENT 33.1. So long as Tenant pays all Rent and other sums due under this Lease, performs its covenants and obligations under this Lease and recognizes any successor to Landlord in accordance with the terms of this Lease, Tenant shall lawfully and quietly have, hold and enjoy the Premises without hindrance or molestation by Landlord or anyone claiming by, through or under Landlord, subject, however, to all the provisions of this Lease. 34. WAIVER OF REDEMPTION BY TENANT 34.1. Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease. 35. WAIVER OF LANDLORD, TENANT'S PROPERTY 35.1. Landlord shall, within thirty (30) days after written request from Tenant, execute and deliver to Tenant any statement in form acceptable to Landlord as may be required by any supplier, lessor, installment seller or chattel mortgagee in connection with the installation in the Premises of any personal property or trade fixtures of Tenant, pursuant to which Landlord shall agree to waive any rights it may have or may acquire with respect to any such property, provided in all cases that such supplier, lessor, installment seller or chattel mortgagee expressly agrees in writing that: (i) It will remove at its sole cost and expense all such property from the Premises before the expiration or termination of the Lease and if it fails to do so within ten (10) days after written request from Landlord it shall be deemed to have waived any and all rights it may have had to such property; (ii) Prior to making any such removal it will advise Landlord in writing of the date and time of such removal and will at the time of such removal, allow a representative of Landlord to be present; (iii) It will promptly and diligently and at its sole cost and expense repair any and all damage to the Premises attributable to such removal and shall restore the Premises to substantially the same condition it was in prior to such removal; (iv) It will allow Landlord to select the person or persons who will effect such removal, repair and restoration, and will bear the costs and expenses thereof; (v) It will, if Landlord chooses not to exercise its rights under (iv) above, cause a performance and completion bond, satisfactory to Landlord, to be furnished to Landlord with regard to the work of such removal, repair and restoration; no it will promptly pay Landlord any costs and expenses incurred by Landlord in connection with the enforcement of Landlord Is rights hereunder, including attorneys' fees, and will indemnify and hold Landlord harmless against any and all claims, loss, cost or expense arising out of or in connection with such removal, repair and restoration; (vii) It will pay Landlord interest on any outstanding amounts payable by it to Landlord at the "Agreed Rate" (as hereinafter defined); (viii) It will not record such statement without Landlord's prior written consent which Landlord may withhold in its sole discretion and (ix) It will not assign its rights or delegate its duties under such statement without Landlord's prior written consent. 36. RULES AND REGULATIONS 36.1. The Rules and Regulations attached hereto as Exhibit F are expressly made a part hereof. Tenant agrees to comply with such Rules and Regulations and any reasonable amendments, modifications or additions thereto as may hereafter be adopted and published by notice to tenants in the Building, and to cause its agents, contractors and employees to comply therewith, and agrees that the violation of any of them shall constitute a default by Tenant under this Lease. If there is a conflict between the Rules and Regulations and any of the provisions of this Lease, the provisions of this Lease 25 28 shall prevail. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building or of the Project of any of the Rules and Regulations. 37. NOTICES 37.1. Any notice, demand or communication required or permitted to be given hereunder to Landlord by Tenant shall be addressed to Landlord at Landlord's address as set forth in Section 1.9 hereof, or to such other address(es) and/or to such other parties as Landlord may from time to time designate and shall be (a) deposited in the United States mails, duly registered or certified with postage fully prepaid thereon or (b) delivered by an overnight courier service that confirms delivery. Any notice, demand or communication required or permitted to be given hereunder to Tenant by Landlord shall be addressed to Tenant at Tenant's address as set forth in Section 1.10 hereof, or may be delivered to the Premises, or both, and shall be (i) personally served, or (ii) deposited in the United States mails, duly registered or certified with postage fully prepaid thereof or (iii) delivered by an overnight courier service that confirms delivery. Either party may by written notice similarly given designate a different address for notice purposes, except that Landlord may in any event use the Premises as Tenant's address for notice purposes. Notice shall be effective upon receipt or refusal to receive, in the event of personal service; or upon receipt or refusal to receive (but in no event more than three [3] days after the date first mailed in the manner herein required), in the event of depositing notice in the United States mails; or upon receipt or refusal to receive, in the event of delivery by overnight courier service. 38. WAIVER 38.1. No delay or omission in the exercise of any right or remedy of Landlord for any default by Tenant shall impair such right or remedy or be construed as a waiver. The receipt and acceptance by Landlord of delinquent payments shall not constitute a waiver of any other default, and shall not constitute a waiver of timely payment of the particular payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only an express notice to such effect from Landlord to Tenant shall constitute acceptance of the surrender of the Premises sufficient to terminate this Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not constitute a consent or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of this Lease. 39. MISCELLANEOUS 39.1. EXECUTION BY LANDLORD. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or an option for, the Premises. This document becomes effective and binding only upon execution by Tenant and by Landlord. No act or omission of any employee or agent of Landlord or of Landlord's broker shall after, change or modify any of the provisions hereof. 39.2, LANDLORD AND TENANT. As used in this Lease, the words "Landlord" and "Tenant" include the plural as well as the singular. Words used in the neuter gender include the masculine and feminine and words in the masculine or feminine gender include the neuter. If there is more than one person or entity constituting Landlord or Tenant, the obligations imposed hereunder upon Landlord or Tenant are joint and several. If Tenant consists of a husband and wife, the obligations of Tenant hereunder extend individually to the sole and separate property of each of them as well as to their community property. The obligations contained in this Lease to be performed by Landlord shall be binding on Landlord's successors and assigns only during their respective periods of ownership of the Premises. 39.3. BROKERS. Tenant shall hold Landlord harmless from all damages (including reasonable attorneys' fees and costs) resulting from any claims that may be asserted against Landlord by any broker, finder, or other person with whom Tenant has or purportedly has dealt, except as set forth at Section 1.11 39.4. SIGNS. Tenant shall not place or permit to be placed in or upon the Premises, where visible from outside the Premises, or outside the Premises on any part of the Building or Project, any signs, notices, drapes, shutters, blinds, or displays of any type, without the prior written consent of Landlord. Landlord reserves the right in its sole discretion to place and locate on the roof or exterior of the Building, and in any area of the Project not leased to Tenant, any signs, notices, displays and similar items as Landlord deems. appropriate. Tenant, at its sole cost and expense, shall have the right to install a directional sign, consistent in materials, color, lettering and appearance as Building Standard signs, displaying Tenant's name and suite number in the second floor elevator lobby, the location, size and appearance of which shall be subject to the Landlord's prior written approval. 39.5. NAME OF BUILDING. Tenant shall not use the name of the Building or the Project for any purpose other than the address of the business to be conducted by Tenant in the Premises. Tenant shall 26 29 not use any picture of the Building or the Project in its advertising, stationery or in any manner so as to imply that the entire Building is leased by Tenant. Landlord expressly reserves the right at any time to change the name of the Building or Project without in any manner being liable to Tenant therefor. 39.6. PARKING. During the term of this Lease, Tenant shall only be entitled to such use of parking spaces in the parking areas located in the Project as shall be confirmed in writing by the parties, and absent any written agreement to the contrary, parking for Tenant and its employees, agents, customers, invitees and licensees shall be on a first-come, first-served basis, at rates and upon other terms and conditions as may be established from time to time by Landlord or Landlord's operator of the parking areas. Parking rates may be hourly, weekly or monthly, or such other rate system as Landlord deems advisable, and Tenant acknowledges that its employees shall not be entitled to park in such parking areas located in and about the Building which may from time to time be designated for visitors of the Building. Landlord may also designate areas for assigned, reserved or employee parking either within the parking areas located in and about the Building, or in other areas reasonably close thereto. Landlord shall have the right to change any such designated parking areas from time to time. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty as to the suitability of the parking areas for the conduct of Tenant's business. 39.7. INTENTIONALLY OMITTED. 39.8. APPROVAL OF LANDLORD'S MORTGAGEE. Tenant acknowledges that this Lease is subject to the approval of Landlord's Mortgagee, and Tenant agrees to make such reasonable modifications to this Lease as may be ordinarily and customarily requested by Landlord's Mortgagee, so long as such modifications shall not affect the Rent payable, hereunder, increase Tenant's obligations hereunder, or otherwise adversely affect Tenant in any material way. 39.9. NON RECORDABILITY OF LEASE. Tenant agrees that in no event shall this Lease or a memorandum hereof be recorded without Landlord's express prior written consent. 39.10. MATTERS OF RECORD. This Lease and Tenant's rights hereunder are subject and subordinate in all respects to matters affecting Landlord's title recorded in the official records of the county recorder's office for the county in which the Project is located prior or subsequent to the date of execution of this Lease, and is expressly subject and subordinate to the following: Declaration of Restrictions dated September 15, 1978, and recorded on October 2, 1978, as Document No. 781093326 in the Official Records of Los Angeles County, State of California, as amended, and Reciprocal Parking Agreement dated January 3, 1979, and recorded on January 19, 1 979, as Document No. 7986214 in the Official Records of Los Angeles County, State of California, as amended. Tenant agrees that as to its leasehold estate it, and all persons in possession or holding under it, will conform with and will not violate any such covenants, conditions and restrictions, or other matters of record. 39.11. SEVERABILITY. If any provision of this Lease shall, to any extent, be determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this LEASE shall not be affected thereby, and every other term and provision of this LEASE shall be valid and enforceable to the fullest extent permitted by law. 39.12. CONSTRUCTION. All provisions hereof, whether covenants or conditions, shall be deemed to be both covenants and conditions. The definitions contained in this Lease shall be used to interpret this Lease. 39.13. INTEREST. Except as expressly provided otherwise in this Lease, any amount due to Landlord which is not paid when due shall bear interest from the date due at the prime commercial rate of interest charged from time to time by Citibank N.A. plus two percent (2%) per annum, but not to exceed the maximum rate of interest allowable under the LAW (the "AGREED Rate"). Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 39.14. BINDING EFFECT; CHOICE OF LAW. Except as expressly provided otherwise in this Lease, all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. This Lease shall be governed by the laws of the State of California. 39.15. WAIVER OF TRIAL BY JURY. Landlord and Tenant each hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease or Tenant's use or occupancy of the Premises, including any claim of injury or damage, and any emergency and other statutory remedy with respect thereto. Landlord and Tenant also agree that the venue of any such action, proceeding or counterclaim shall be in the City and County of Los Angeles, State of California. 27 30 39.16. TIME; RIGHTS CUMULATIVE. Time is of the essence of this Lease and each and every provision hereof, except as may be expressly provided otherwise. All rights and remedies of the parties shall be cumulative and non-exclusive of any other remedy at law or in equity, 39.17. INABILITY TO PERFORM. This Lease and the obligations of Landlord and Tenant hereunder shall not be affected or impaired because such party is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of force majeure, strike, labor troubles, acts of God, acts of government, unavailability of materials or labor, or any other cause beyond the control of such party, except that nothing herein shall excuse Tenant from the timely payment of rent. 39.18. CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant, and that Tenant is qualified to do business in the State of California, and shall deliver appropriate certification to that effect if requested. 39.19. PARTNERSHIP AUTHORITY. If Tenant is a partnership, joint venture, or other unincorporated association, each individual executing this Lease on behalf of Tenant represents that this Lease is binding on Tenant. Furthermore, Tenant agrees that the execution of any written consent hereunder, or of any written modification or termination of this Lease, by any general partner of Tenant or any other authorized agent of Tenant, shall be binding on Tenant. 39.20. SUBMITTAL OF FINANCIAL STATEMENT. At any time and from time to time during the term of this Lease, within fifteen (15) days after request therefor by Landlord, Tenant shall supply to Landlord and/or any Mortgagee a current financial statement or such other financial information as may be required by any such party. 39.21. RIDERS. Clauses, plats, addenda, and riders, if any, that are signed by Landlord and Tenant and affixed to this Lease, are a part hereof. 40. INTENTIONALLY OMITTED 41. SECURITY INTEREST 41.1. In consideration of the covenants and agreements contained herein, and as a material consideration to Landlord for entering into this LEASE, Tenant hereby unconditionally grants to Landlord a continuing security interest in and to all money and property of any kind or description, including, without limitation, the Security Deposit, if any, and any advance Rental payment or other deposit, now in or hereafter delivered to or coming into the possession, custody or control of Landlord, by or for the account of Tenant, in any manner and for any purpose, together with any increase in profits or proceeds from such property. The security interest granted to Landlord hereunder secures payment and performance of all obligations of Tenant under this Lease now or hereafter arising or existing, whether direct or indirect, absolute or contingent, or due of to become due In the event of a default under this Lease which is not cured within the applicable grace period, if any, Landlord is and shall be entitled to all the rights, powers and remedies granted a secured party under the California Uniform Commercial Code and otherwise available at law or in equity, including but not limited to, the right to retain as damages the Security Deposit and other funds held by Landlord, without additional notice or demand regarding this security interest. Tenant agrees that it will execute such other documents or instrument as may be reasonably necessary to carry out and effectuate the purpose and terms of this Article 41, or as otherwise reasonably requested by Landlord, including without limitation, execution of a UCC-1 financing statement. Landlord's rights and remedies under this Article 41 are in addition to, and not in lieu of, the provisions of Article 9. 42. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS 42.1. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement, negotiations, brochures, arrangements, or understanding pertaining to any such matter shall be effective for any purpose unless expressed herein. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. 43. OPTION TO EXTEND TERM 43.1. GRANT OF OPTION TO EXTEND TERM. Landlord hereby grants Tenant one (1) option ("Option to Extend Term") to extend the initial Lease term ("Initial Term") in accordance with the terms of this Article 43. 43.2. OPTION TERM. The Option to Extend Term shall extend the term of the Lease for an additional thirty-six (36) months ("Extended Term") commencing upon the expiration of the Initial Term. 28 31 43.3. Terms. If Tenant exercises the Option to Extend Term, then all of the terms contained in this Lease shall continue in full force and effect during the Extended Term, except with respect to the following: 43.3.1. CALCULATION OF BASIC RENT. Basic Rent for the Extended Term shall be adjusted on the first day of the Extended Term to the then Fair Market Rental Value of the Premises, including escalations, but in no event less than the Basic Rent payable immediately preceding the Extended Term. The term "Fair Market Rental Value of the Premises" shall be Landlord's good faith calculation of the then prevailing fair market rental rate for the Premises as of the commencement of the Extended Term. 43.3.2. NO FURTHER EXTENSIONS. Tenant shall have no further right to extend the term of this Lease whether pursuant to the provisions of this Article 43 or otherwise. 43.4. NOTICE TO EXTEND TERM. The Option to Extend shall be exercised, if at all, only by written notice ("Notice to Extend Term") delivered by Tenant to Landlord at least nine (9) months, but not more than twelve (12) months, prior to the expiration of the Initial Term. If Tenant does not deliver the Notice to Extend Term within the time period set forth herein, the Option to Extend Term shall lapse and Tenant shall have no right to extend the Lease term. 43.5. EXTENSION RENTAL NOTICE. Within thirty (30) days after Landlord's receipt of the Notice to Extend Term, Landlord shall provide Tenant written notice setting forth the Fair Market Rental Value of the Premises for the Extended Term ("Extension Rental Notice"). Within twenty (20) days following the date Landlord delivers the Extension Rental Notice to Tenant, Tenant shall, by written notice delivered to Landlord, either (a) accept the Fair Market Rental Value of the Premises as stated in the Extension Rental Notice ("Notice of Acceptance") or (b) reject the Fair Market Rental Value of the Premises as stated in the Extension Rental Notice ("Notice of Rejection"). 43.6. EFFECT OF NOTICES. If Tenant delivers the Notice of Acceptance in the manner and within the time frames herein provided, this Lease shall be deemed extended at the Basic Rent and upon the terms specified in this Article 43 without the need for any further notice or documentation. If Tenant does not deliver to Landlord either the Notice of Acceptance or the Notice of Rejection within the said twenty (20)-day period, the same shall constitute Tenant's Notice of Rejection, which shall be deemed delivered on the said twentieth day. If Tenant delivers, or is deemed to have delivered, the Notice of Rejection to Landlord within the said twenty (20)-day period, then this Lease shall expire upon the expiration date of the Initial Term, unless terminated earlier in accordance with the provisions of this Lease. The Notice of Acceptance or Notice of Rejection, as the case may be, shall be irrevocable, and shall be binding upon both Landlord and Tenant without the need for any further documentation. 43.7. DOCUMENTATION. If, within thirty (30) days following Landlord's receipt of the Notice of Acceptance, either party shall request that both parties enter into an amendment documenting the Extended Term and Basic Rent during the Extended Term, then Landlord shall prepare an amendment to this Lease setting forth the Extended Term and Basic Rent for the Extended Term pursuant to this, Article 43 ("Extended Term Amendment"). The Extended Term Amendment shall be submitted to Tenant for execution and Tenant shall have thirty (30) days following receipt thereof from Landlord in which to execute and deliver the Extended Term Amendment to Landlord and Landlord shall have thirty (30) days after receipt of the same in which to execute the Extended Term Amendment and to deliver one fully-executed copy to Tenant. The failure of either or both Landlord or Tenant to execute the Extended Term Amendment shall not have the effect of nullifying Tenant's Notice of Acceptance, and the Lease shall nevertheless be extended for the Extended Term as herein provided. 43.8. PERSONAL OPTION. The Option to Extend Term is personal to Tenant named at page 1 of this Lease and Affiliates of Tenant (as hereinafter defined). IF Tenant assigns, mortgages, pledges, hypothecates or encumbers this Lease or its interest in the Premises or sublets all or any portion of the Premises to any person or entity other than an Affiliate of Tenant ("Assigns" or "Assign" for purposes of this Article 43 only) prior to the exercise of the Option to Extend Term, then the Option to Extend Term shall lapse. If Tenant Assigns any interest of Tenant in the Lease or the Premises to an entity after the exercise of the Option to Extend Term, but prior to the commencement of the Extended Term, the Option to Extend Term shall lapse and this Lease shall expire as if the Option to Extend Term had not been exercised, unless such restriction is expressly waived in writing by Landlord (which election shall be in Landlord's sole discretion). The term "Affiliate of Tenant" shall mean any corporation that controls, is controlled by or under common control with Isocor, a California corporation. 43.9. ADDITIONAL CONDITIONS. The Option to Extend Term shall be exercisable by Tenant on the express conditions that at the time of the exercise of the Option to Extend Term and at all times prior to, and upon the date of, the commencement of the Extended Term, Tenant shall not be in default under any of the provisions of this Lease, unless such restriction is expressly waived in writing by Landlord (which election shall be in Landlord's sole discretion). The Option granted herein is subject to 29 32 any existing or prior rights of expansion, extension, renewal, negotiation, offer and other rights and options which third parties may have for the Premises. 44. RIGHT OF FIRST OFFER 44.1. RIGHT OF FIRST OFFER. From and after the Commencement Date, prior to entering into a lease with any person or entity for that certain space on the second floor of the Building, which space is commonly referred to as of the date of this Lease as suite 2000 containing approximately 9,176 rentable square feet, the approximate location of which is identified on Exhibit A-2 hereof ("First Offer Space"), Landlord shall first offer to lease to Tenant the First Offer Space subject to, and upon all of the terms, covenants and conditions set forth in this Article 44, and further subject to any existing or prior rights of expansion, extension, renewal, negotiation, offer or other options or rights thereto which third parties may have for the First Offer Space ("Right of First Offer"). 44.2. RENT FOR FIRST OFFER SPACE. The First Offer Space shall be offered to Tenant at the Fair Market Rental Value of the First Offer Space. The term "Fair Rental Market Value of the First Offer Space" shall mean Landlord's good faith determination of the then prevailing fair market rental rate for the First Offer Space. 44.3. NOTICE OF FIRST OFFER. The First Offer and the terms of the First Offer for such First Offer Space shall be provided by Landlord to Tenant in writing ("Notice of First Offer"). Tenant shall notify Landlord in writing of its acceptance of the Notice of First Offer ("First Offer Acceptance Notice") or rejection of the Notice of First Offer and, consequently, of its right to such First Offer Space ("First Offer Rejection Notice") within five (5) days after receiving the Notice of First Offer. If Tenant does not for any reason deliver the First Offer Acceptance Notice or the First Offer Rejection Notice to Landlord within the time frames herein contained, the same shall constitute Tenant's First Offer Rejection Notice. The First Offer Acceptance Notice or the First Offer Rejection Notice, as the case may be, shall be irrevocable, and shall binding upon both Landlord and Tenant without the need for any further documentation. 44.3.1. FIRST OFFER ACCEPTANCE NOTICE. If Tenant delivers the First Offer Acceptance Notice as specified in Section 44.3, then Landlord shall prepare a document ("First Offer Space Document") setting forth the terms by which Tenant shall lease the First Offer Space, as set forth in this Article 44. The First Offer Space Document shall otherwise contain the same terms as are in this Lease, except (a) the rent shall be adjusted to reflect the Fair Market Rental Value of the First Offer Space, (b) this Article 44 shall be excluded therefrom, and (c) Article 43 shall be excluded therefrom to the extent that it has already been exercised with respect to the Premises. The First Offer Space Document shall be submitted to Tenant for execution and Tenant shall have twenty (20) days in which to execute and deliver to Landlord the First Offer Space Document. Landlord shall have twenty (20) days following receipt of the First Offer Space Document from Tenant in which to execute and deliver one (l) fully-executed copy to Tenant. The failure of either or both Landlord or Tenant to execute the First Offer Document shall not have the effect of nullifying Tenant's First Offer Acceptance Notice, and the First Offer Space shall nevertheless be leased by Tenant as herein provided. 44.3.2. FIRST OFFER REJECTION NOTICE. If Tenant delivers, or is deemed to have delivered, the First Offer Rejection Notice as specified in Section 44.3, then Tenant shall have no further right during the term of this Lease, as the same may be extended, to lease the First Offer Space pursuant to this Article 44. 44.4. EFFECT OF DEFAULT. If Tenant is in default of this Lease beyond any applicable cure period on the date (a) Landlord is otherwise obligated to provide Tenant with the Notice of First Offer, Landlord (in its sole discretion) shall not be obligated to provide Tenant with the Notice of First Offer in which case the rights of Tenant to the First Offer Space under this Article 44 shall be void and of no further force or effect, or (b) Tenant is required to accept delivery of possession of the First Offer Space, then Landlord (in its sole discretion) shall not be obligated to deliver possession of the First Offer Space to Tenant in which case the rights of Tenant to the First Offer Space under this Article 44 shall be void and of no further force or effect. The foregoing rights of Landlord shall be in addition to any other rights and remedies available to Landlord at law and in equity. 44.5. FIRST OFFER PERSONAL. The First Offer granted herein is personal to Tenant named at page 1 of this Lease and Affiliates of Tenant. If Tenant assigns, mortgages, pledges, hypothecates or encumbers this Lease or its interests in the Premises or sublets all or any portion of the Premises to anyone other than an Affiliate of Tenant (a) on or before the Landlord is otherwise obligated to provide Tenant with the Notice of First Offer, the rights of Tenant to the First Offer Space under this Article 44 shall be void and of no further force or effect or (b) on or before the date Tenant is required to accept delivery of possession of the First Offer Space, then Landlord (in its sole discretion shall not be obligated to deliver possession of the First Offer Space to Tenant in which case the rights of Tenant, 30 33 its sublessee, successor or transferee to the First Offer Space under this Article 44 shall be void and of no further force or effect. 45. NON-DISTURBANCE AGREEMENT 45.1. Landlord shall use reasonable efforts to obtain from Landlord's Mortgage a subordination, non-disturbance and attornment agreement within thirty (30) days after the later to occur of (a) the execution and dating of this Lease by Landlord, or (b) Landlord's receipt of the said agreement from Tenant executed in recordable form by Tenant. If Tenant fails to return to Landlord a Tenant-executed and notarized subordination, non-disturbance and attornment agreement in the form submitted by Landlord to Tenant within thirty (30) days following the date Landlord first delivers the same to Tenant for execution, the same shall constitute Tenant's waiver of the rights of Tenant and obligations of Landlord under this Article 45, and Landlord shall have no obligation to obtain such subordination, nondisturbance and attornment agreement from Landlord's Mortgagee. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: SPIEKER PROPERTIES, L.P., a California limited partnership By: Spieker Properties, Inc., a Maryland corporation, its general partner By: -------------------------------------- Its: --------------------------------- Date: ---------------------------------------- TENANT: ISOCOR a California corporation By:/s/ JANINE BUSHMAN ------------------------------------------- Janine Bushman Vice President, Finance and Administration/ Chief Financial Officer Date: 2/11/98 ---------------------------------------- 31 34 EXHIBIT A DESCRIPTION OF PREMISES [FLOOR PLAN DIAGRAM] Second Floor: Suite 2010 3420 Ocean Park Boulevard [Al Santa Monica, California EXHIBIT A 35 EXHIBIT A-1 DESCRIPTION OF PROJECT [DIAGRAM] SANTA MONICA BUSINESS PARK Santa Monica Airport Facility EXHIBIT A-1 36 EXHIBIT A-2 RIGHT OF FIRST OFFER SPACE [FLOOR PLAN DIAGRAM] Second Floor: Suite 2000 3420 Ocean Park Boulevard Santa Monica, California EXHIBIT A-2 37 EXHIBIT B VERIFICATION OF TERM AND INITIAL RENT RE: Lease dated ________________________ between _______________________________ ___________________________________________________________________ ("Landlord") and _________________________________________________________________ ("Tenant") for premises in _______________________________________________________________. Tenant hereby verifies that the information stated below is correct and further acknowledges and accepts possession of the Premises. Area:_________________________(rentable/usable/gross) sq. ft. Commencement Date:________________________________________________________ Termination Date:________________________________________________________ Options:________________________________________________________ Initial Rent:________________________________________________________ Address for Notices:________________________________________________________ ________________________________________________________ ________________________________________________________ Billing Address:________________________________________________________ ________________________________________________________ ________________________________________________________ ATTN:___________________________________________________ Telephone:(___) __________________________________________________ Federal Tax ID No:________________________________________________________ By:_____________________________________________________ Title:__________________________________________________ Date:____________________________________________, 19___ EXHIBIT B 38 EXHIBIT C CONSTRUCTION PROVISIONS 1. SCOPE OF WORK. These provisions define the scope of work to be provided by Landlord in the Premises under the terms of the Lease. Words and phrases used herein which are defined in the Lease have the meanings set forth therein unless provided otherwise. 2. INTENT OF EXHIBIT. It is the intent of these provisions that Tenant shall be permitted freedom in the interior design and layout of its space so long as same is consistent with Landlord's policies and structural requirements, applicable building codes, and with sound architectural and construction practices, and provided further that no interference is caused to the operation of the Building's mechanical heating, cooling or electrical systems or structure, or other Building operations or functions, and that no unusual increase in maintenance, insurance, taxes, fees or utility charges will be incurred by Landlord or other tenants in the Building as a result thereof. Any additional cost of design, construction, operation, insurance, maintenance, taxes, fees or utilities which results therefrom shall be charged to Tenant and paid for by Tenant in accordance with the provisions hereof and of the Lease. 3. LANDLORD'S WORK. Landlord hereby grants Tenant a construction allowance not to exceed $5.00 per usable square foot of the Premises ("Construction Allowance"), which shall be used only as a credit towards the cost of the following services and materials (hereinafter referred to as "Landlord's Work"): 3.1. The services of Landlord's space planner to prepare one (1) approved space layout and one (1) set of approved working drawings [with five (5) prints]. One minor revision to the original space layout will be included without charge. All other revisions and prints as well as all interior design or decorating fees, shall be at Tenant's sole cost and expense. 3.2. The construction of the improvements and the installation of the items shown in Schedule A attached hereto, which shall be installed in the Premises substantially in accordance with the Plans hereinafter defined. 3.3. Fees for engineering, construction management by Landlord's Tenant Coordinator (as hereinafter set forth), and previously installed materials used in the construction (if any). 3.4. Permits and license fees relating to construction of Tenant's improvements. In the sole discretion of Tenant, Tenant may elect to have Landlord grant to Tenant an additional amount ("Excess Construction Allowance"), up to a maximum of $3.00 per usable square foot of the Premises, for the work described in this Section 3 by specifying the amount of the Excess Construction Allowance, and Tenant's election hereunder to use such sum, in written notice delivered to Landlord prior to the Commencement Date. If Tenant makes such timely election, then Tenant shall reimburse Landlord therefor all as more particularly set forth at Section 4.4 of the Lease. If Tenant does not make such timely election, Landlord shall have no obligation to provide Tenant with any sums beyond the Construction Allowance 4. TENANT'S WORK. All costs incurred in excess of the foregoing allowance for improvements, services or materials required by Tenant in or for the Premises (hereinafter referred to as "Tenant's Work") shall be for the account of Tenant and at Tenant's sole cost and expense. Tenant shall pay building lifting charges (if any) for Tenant's Work to the extent the same are not otherwise included in the cost of Landlord's Work. 5. SPACE PLANNER. Tenant shall use the services of the space planner retained by Landlord to prepare a space layout and working drawings and specifications for all construction work in the Premises. Interior design, and details and specifications for improvements other than Landlord's Work, shall be for the account of Tenant and shall be paid by Tenant upon invoice therefor. Tenant shall devote such time in consultation with Landlord's space planner as shall be necessary to enable the planner to develop complete working drawings and specifications (hereinafter referred to as the "Plans") for construction of improvements in the Premises, showing thereon partitions, doors, electrical and telephone outlets, light fixture locations, wall finishes, floor coverings and special requirements (if any) for Tenant's review and approval. Failure of Tenant to approve the Plans within the time limit specified in Section 7 hereof shall be deemed disapproval. If Tenant requests or necessitates any changes or revisions in the Plans after they have been approved, Tenant shall bear all costs associated therewith. 6. COST ESTIMATES. As soon as practicable after Tenant's approval of the Plans, Landlord will advise Tenant of the estimated cost payable by Tenant due to costs for improvements, services or materials in excess of the Construction Allowance for Landlord's Work (i.e., the estimated cost for Tenant's Work). Landlord will have no obligation whatsoever to commence construction of any improvements in the Premises unless Tenant approves same and pays estimated costs for Tenant's EXHIBIT C - PAGE 1 39 Work in advance, and Landlord's refusal to proceed under such circumstances shall not defer the Commencement Date. Upon Tenant's authorization to proceed and payment of such estimated costs, Landlord shall commence the construction of improvements in the Premises. Upon substantial completion of the Premises (which in the event of dispute shall be determined by Landlord's project architect pursuant to AIA standards), Tenant shall pay the amount of actual costs in excess of such estimated costs previously paid by Tenant or, if the actual costs are less than such estimated costs previously paid by Tenant, Landlord shall reimburse the difference to Tenant. If Tenant fails to make such payment within ten (10) days after receipt of a demand therefor, Landlord shall have the same rights and remedies as in the case of a default by Tenant in the payment of Rent under the Lease, and interest will accrue thereon at the Agreed Rate. 7. TIME LIMITS. The following maximum time periods shall be allowed for the indicated matters:
Time Limit After Completion of Action Preceding Item - ------ ------------------------------ 7.1. Tenant meets with Landlord's space planner and 5 business days after approves initial space layout. Lease execution 7.2. Tenant furnishes all required working drawing 10 business days information to Landlord's space planner. 7.3. Landlord's space planner submits working 15 business days drawings to Tenant for review and approval. 7.4. Tenant gives Landlord its approval of working 5 business-days drawings, with any required changes in detail. 7.5. Landlord quotes estimated costs to Tenant for 10 business days Tenant's Work. 7.6. Tenant approves such estimated costs and pays 5 business days the amount thereof to Landlord and authorizes Landlord to proceed. 7.7. Upon substantial completion of the improvements in the Premises (i.e., exclusive of punchlist items) Tenant shall pay the entire then remaining balance of actual costs in excess of the Construction Allowance within ten (10) days after its receipt of a billing statement from Landlord.
8. CONSTRUCTION BY LANDLORD"S CONTRACTOR. Unless otherwise agreed in writing in this Exhibit C, all construction work in the Premises including Tenant's Work shall be performed by the Tenant Improvement Contractor ("The Contractor") retained by Landlord. The Contractor shall perform such work in a good and workmanlike manner and shall construct the improvements in the Premises substantially in accordance with the Plans. All such construction work shall be performed in accordance with all laws, ordinances and requirements of government agencies having jurisdiction. If Landlord shall, pursuant to this Exhibit C, permit Tenant to have any work performed by a contractor retained by Tenant rather than by the The Contractor, then (i) Tenant shall use only such contractor as shall have first been approved by Landlord; (ii) such contractor shall be bondable and shall use union employees only, except that such contractor may use non-union employees only if prior to the commencement of any work Tenant shall purchase and deliver to Landlord an indemnity bond fully protecting Landlord against any and all loss or damage that may result from any work stoppage or interruption arising from the use of such non-union employees; (iii) Landlord will permit entry of such contractor into the Premises for the purpose of performing such work, prior to commencement of the term of the Lease, and while the The Contractor is working at the Premises, but only at such time or times as Landlord shall deem feasible in the circumstances; (iv) such license to enter before commencement of the term is expressly conditioned upon the contractor retained by Tenant working in harmony and not interfering with the workmen, mechanics and contractors of Landlord or of any other tenant in the Building or the Project, and if at any time such entry or work by Tenant's contractor shall cause any disharmony or interference, such permission to enter may be withdrawn by Landlord immediately upon written notice in amounts to Tenant; (v) worker's compensation, public liability and property damage insurance, all and with companies and on forms satisfactory to Landlord, shall be provided and at all times maintained by Tenant's contractor, and before proceeding with the work, certificates of such insurance shall be furnished to the Landlord; (vi) such entry shall be deemed to be under all the terms, covenants, provisions and conditions of the Lease, except the covenant to pay Rent and Expenses; and (vii) all EXHIBIT C - PAGE 2 40 materials, work, installations and decorations of any nature whatsoever brought on or installed in the Premises before the commencement of the term of the Lease shall be at Tenant's risk, and neither Landlord nor any party acting on Landlord's behalf shall be responsible for any damage thereto or loss or destruction thereof. 9. TENANT COORDINATOR. Landlord has designated a "Tenant Coordinator" who shall be responsible for the management and coordination of all work to be performed in the Premises and coordination with Tenant on all matters governed by these Construction Provisions. The Tenant Coordinator shall be paid a fee equal to five percent (5%) of the cost of the improvements, services and materials furnished as part of Landlord's Work and Tenant's Work as reimbursement for the expense of administration and coordination of such work. With regard to all matters involving such work, Tenant shall communicate with the Tenant Coordinator rather than the TI Contractor. Landlord shall not be responsible for any statement, representation or agreement made between Tenant and TI Contractor. It is hereby expressly acknowledged by Tenant that such TI Contractor is not Landlord's agent and has no authority whatsoever to enter into agreements on Landlord's behalf or otherwise bind Landlord. The Tenant Coordinator will furnish Tenant with notices of substantial completion, cost estimates for Tenant's Work, Landlord's approvals or disapprovals of Plans and changes thereto, billings for actual costs of Tenant's Work and other similar notices. Tenant shall deliver all payments required hereunder to the Tenant Coordinator unless writ-ten notice is given by Landlord to the contrary. 10. CHANGES. If Tenant requests or necessitates any change, addition or deletion to the Premises after approval of the Plans, as described in Section 7 above, a request for the change shall be submitted to the Tenant Coordinator accompanied by revised plans prepared by Landlord's space planner at Tenant's sole expense. The Tenant Coordinator shall thereafter notify Tenant in writing of the estimated cost which will be chargeable to Tenant by reason of such change, addition or deletion. Such estimated cost shall include Landlord's cost of any delay in completion of the Premises resulting from such change (including, but not limited to, loss of income, additional interest, penalties, and extra labor costs incurred in order to minimize further delay). Tenant shall within five (5) business days thereafter notify the Tenant Coordinator in writing whether it desires to proceed with such change. In the absence of such written authorization and payment in full of the total estimated cost within that five (5)-day period, Landlord shall not be obligated to perform such change and shall be deemed to have been authorized by Tenant to proceed without making such change. 11. SUBSTITUTIONS. Tenant may select different new materials (except exterior window levelors which must be installed on all exterior windows, the ceiling system, parabolic light fixtures, and the doors and frames and hardware) in substitution for the materials specified as the Building Standard, provided the selection is indicated on the approved Plans. 12. RESPONSIBILITY FOR DELAYS. Tenant hereby expressly agrees that if Tenant is responsible for any delay in substantial completion of the Premises, whether by reason of (i) failure to meet the time schedule set forth in Section 7 above, (ii) delays in performance or completion by a party employed by Tenant, NO building code problems arising from Tenant's design, or (iv) an unapproved change in the work necessitated by Tenant, or (iv) any other reason, the same shall not delay the Commencement Date. 13. INCORPORATION BY REFERENCE. This Exhibit C is and shall be incorporated by reference in the Lease, and all of the terms and provisions of the Lease are incorporated herein by this reference. Schedule A to this Exhibit C is hereby incorporated by this reference in the Lease and in this Exhibit C. 14. ATTORNEYS' FEES. In the event of any action or proceeding initiated by a party hereto for the enforcement or interpretation of the provisions contained herein, the prevailing party shall be entitled to recover its costs incurred in connection therewith, including its reasonable attorneys' fees. EXHIBIT C - PAGE 3 41 SCHEDULE A TO EXHIBIT C SANTA MONICA BUSINESS PARK 3420 OCEAN PARK BOULEVARD BUILDING STANDARD 1. INTERIOR PARTITIONS 1.1. Ceiling height, 2 1/2" metal studs at 2'0" on center with one layer of 5/8" type "X" gypboard on each side. 2. DEMISING PARTITIONS 2.1. As above except they are full height one side with sound batt between the studs. Openings with sound insulation for return-air plenum (include fire dampers in fire walls). 3. DOORS 3.1. Legacy (dark brown). 4. FRAME 4.1. Timely Browntone. 5. HARDWARE 5.1. Schlage "Rhodes", cylindrical leversets, 5" backset, 6 pin "C" keyway, #613 oil rubbed bronze finish with bronze base metal. Ball bearing hinges. 6. CEILING 6.1. Standard 2'x4' flat grid with Armstrong "Cortega" tiles (8) 1 x 1 sections panel. 6.2. First Floor 6.2.1. Concealed spline "Sanserma" by Armstrong. 6.2.2. 2x2 Cortega tegular by Armstrong. 6.3. Second and Third Floors 6.3.1. 2x2 Second Look II 7. LIGHT FIXTURES 7.1. Standard 277V 2'x4' with prismatic lens. 7.2. Corridor - 2x2 prismatic. 8. FIRE PROTECTION 8.1. Semi-recessed sprinklers with chrome escutcheons. Fire extinguishers as required to meet code requirements. Semi-recessed cabinets. 9. HVAC 9.1. Rooftop package units, VAV distribution system with 2'x2' perforated supply and return grilles. Johnson pneumatic thermostats. Return air plenum. Exterior zones cooling with hot water terminal re-heat. Interior zones cooling only. Maximum of four (4) supply air grilles per zone. Fire dampers in all ducts penetrating fire separation walls. 10. ELECTRICAL 10.1. Standard ivory receptacles and cover plates. Telephone subcontractor to provide telephone/data outlet cover plates. No circuits common to adjacent tenants. SCHEDULE A - PAGE 1 42 11. CARPET 11.1. Designweave "Tempest II" 32 oz. cut pile over 3/8" commercial synthetic fiber pad and Burke 4" rubber base (black or brown). 12. PAINT 12.1. Sinclair Interior Colors flat (stock colors only). 13. WINDOWS 13.1. Standard 1" mini-blinds (gray). SCHEDULE A - PAGE 2 43 EXHIBIT D SUBORDINATION OF LEASE ================================================================================ THE CHASE MANHATTAN BANK AND ------------------------- SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ------------------------- Dated: Location: Santa Monica, California ================================================================================ EXHIBIT D - PAGE 1 44 SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (Lease) THIS AGREEMENT made the __________ day of __________, between THE CHASE MANHATTAN BANK, a New York banking corporation having an office at 380 Madison Avenue, New York, New York 10017 2591 (the "MORTGAGEE"), and ______________ having an office at ___________________ Santa Monica, California 90405 (the "TENANT"); WITNESSETH: WHEREAS the Mortgagee is the present owner and holder of a certain mortgage or mortgages (the "MORTGAGE") encumbering the premises located in the County of Los Angeles, City of Santa Monica and State of California, known as Suite No. ___ (the "PREMISES"); WHEREAS the Tenant is the holder of a leasehold estate in a portion of the Premises under and pursuant to the provisions of a certain lease dated __________ with Spieker Properties, L.P., as landlord (the "LEASE"); and WHEREAS the Tenant has agreed to subordinate the Lease to the Mortgage and to the lien thereof and the Mortgagee has agreed to grant non-disturbance to the Tenant under the Lease on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of Ten ($10) Dollars and other good and valuable consideration, the receipt of which is hereby acknowledged, the Mortgagee and the Tenant hereby covenant and agree as follows: 1. The Tenant agrees that the Lease and all of the terms, covenants and provisions thereof and all rights, remedies and options of the Tenant thereunder are and shall at all times continue to be subject and subordinate in all respects to the Mortgage and all of the terms, covenants and provisions thereof and to the lien thereof and to any and all increases, renewals, modifications, spreaders, consolidations, replacements and extensions thereof, and to any and all sums secured thereby, with the same force and effect as if the Mortgage had been executed, delivered and recorded prior to the execution and delivery of the Lease. 2. The Mortgagee agrees that if any action or proceeding is commenced by the Mortgagee to foreclose the Mortgage or to sell the Premises, the Tenant shall not be named as a party in any such action nor shall the Tenant be named a party in connection with any sale of the Premises, provided that at the time of the commencement of any such action or proceeding or at the time of any such sale (i) the term of the Lease shall have commenced pursuant to the provisions thereof, (ii) the Tenant shall be in possession of the premises demised under the Lease, subject to any subleases previously approved by Mortgagee, (iii) the Lease shall be in full force and effect, and (iv) the Tenant shall not be in default under any of the terms, covenants or conditions of the Lease or of this Agreement on the part of the Tenant to be observed or performed thereunder or hereunder beyond any applicable cure periods set forth in the Lease, unless applicable law requires the Tenant to be made a party thereto as a condition to proceeding against the Landlord or protecting such rights and remedies. In the latter case, the Mortgagee may join the Tenant as a defendant in such action only for such purposes and not to terminate the Lease. 3. The Tenant agrees that if the Mortgagee or any successors in interest to the Mortgagee shall become the owner of the Premises by reason of the foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise, the Lease shall not be terminated or affected thereby but shall continue in full force and effect as a direct lease (including without limitation, the right, if any, to extend the lease term or to exercise any right of first offer) between the Mortgagee and the Tenant upon all of the terms, covenants and conditions set forth in the Lease and in that event the Tenant agrees to attorn to the Mortgagee and the Mortgagee agrees to accept such attornment, provided, however, that the provisions of the Mortgage shall govern with respect to the disposition of any casualty insurance proceeds or condemnation awards and the Mortgagee shall not be (i) obligated to complete any construction work required to be done by the Landlord (as hereinafter defined) pursuant to the provisions of the Lease or to reimburse the Tenant for any construction work done by the Tenant, (ii) liable for any accrued obligation of the Landlord, or for any act or omission of the Landlord, whether prior to or after such foreclosure or sale, (iii) liable under any indemnity provision of whatever nature contained in the Lease, including, but not limited to, any environmental indemnification, (iv) required to make any repairs to the Premises and/or to the premises demised under the Lease as a result of fire or other casualty or by reason of condemnation, (v) required to make any capital improvements to the Premises and/or to the premises demised under the Lease which the Landlord may have agreed to make, but had not completed, or to perform or provide any services not EXHIBIT D - PAGE 2 45 related to possession or quiet enjoyment of the premises demised under the Lease which obligations of quiet enjoyment include Landlord's obligation to repair and maintain the Premises and the Project as more fully set forth in the Lease arising on or after the Mortgagee becomes the owner of the Project, (vi) subject to any offsets, claims or counterclaims which shall have accrued to the Tenant against the Landlord prior to the date on which the Mortgagee or its successor in interest shall become the owner of the Premises, NO liable for any security deposit or other monies not actually received by the Mortgagee. 4. The Tenant shall not, without the prior written consent of the Mortgagee (i) enter into any agreement amending, modifying or terminating the Lease, (ii) prepay any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due date thereof, (iii) voluntarily surrender the premises demised under the Lease or terminate the Lease without cause or shorten the term thereof, or (iv) assign the Lease or sublet the premises demised under the Lease or any part thereof; and any such amendment, modification, termination, prepayment, voluntary surrender, assignment or subletting, without the prior written consent of the Mortgagee shall not be binding on the Mortgagee. 5. The Tenant hereby represents and warrants to the Mortgagee that as of the date hereof (i) the Tenant is the owner and holder of the Tenant's interest under the Lease, (ii) the Lease has not been modified or amended, (iii) the Lease is in full force and effect and the term thereof commenced on _________, pursuant to the provisions thereof, (iv) the premises demised under the Lease have been completed and the Tenant has taken possession of the same on a rent paying basis, (v) neither the Tenant nor the Landlord is in default under any of the terms, covenants or provisions of the Lease and the Tenant to the best of its knowledge knows of no event which but for the passage of time or the giving of notice or both would constitute an event of default by the Tenant or the Landlord under the Lease, (vi) neither the Tenant nor the Landlord to the best knowledge of Tenant has commenced any action or given or received any notice for the purpose of terminating the Lease, (vii) all rents, additional rents and other sums due and payable under the Lease have been paid in full and no rents, additional rents or other sums payable under the Lease have been paid for more than one (1) month in advance of the due dates thereof, and (viii) there are no offsets or defenses to the payment of the rents, additional rents, or other sums payable under the Lease 6. The Tenant shall notify the Mortgagee of any default by the Landlord under the Lease or any other circumstance which would entitle the Tenant to cancel or terminate the Lease or abate the rents, additional rents or other sums payable thereunder, and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation, termination or abatement thereof shall be effective unless the Mortgagee shall have received notice of the default or other circumstance giving rise to such cancellation, termination or abatement and shall have failed within forty-five (45) days after receipt of such notice to cure such default or remedy such circumstance, or if such default cannot be cured within forty-five (45) days, shall have failed within forty-five (45) days after receipt of such notice to commence and to thereafter diligently pursue any action necessary to cure such default or remedy such circumstance, as the case may be 7. Anything herein or in the Lease to the contrary notwithstanding, in the event that the Mortgagee shall acquire title to the Building, or shall otherwise become liable for any obligations of the Landlord under the Lease, the Mortgagee shall have no obligation, nor incur any liability, beyond the Mortgagee's then interest, if any, in the Building and the Tenant shall look exclusively to such interest of the Mortgagee, if any, in the Building for the payment and discharge of any obligations imposed upon the Mortgagee hereunder or under the Lease and the Mortgagee is hereby released or relieved of any other liability hereunder and under the Lease. The Tenant agrees that with respect to any money judgment which may be obtained or secured by the Tenant against the Mortgagee, the Tenant shall look solely to the estate or interest owned by the Mortgagee in the Building and the Tenant will not collect or attempt to collect any such judgment out of any other assets of the Mortgagee. 8. Any notice, request, demand, statement, authorization, approval or consent made hereunder shall be in writing and shall be sent by Federal Express, or other reputable courier service, or by postage pre-paid registered or certified mail, return receipt requested, and shall be deemed given when received or refused (as indicated on the receipt) and addressed as follows: If to the Mortgagee: The Chase Manhattan Bank Real Estate Finance Group 380 Madison Avenue New York, New York 1001 7 Attention:Mr. James M. Reilly, Vice President EXHIBIT D - PAGE 3 46 With a copy to: The Chase Manhattan Bank Legal Department 270 Park Avenue - 40th Floor New York, New York 10017 Attention: Michael R. Zients, Esq. With a copy to: Loeb & Loeb LLP 1000 Wilshire Boulevard, Suite 1800 Los Angeles, California 90017 Attention: Joseph P. Heffernan, Esq. If to the Tenant: Attention: With a copy to: Attention: It being understood and agreed that each party will use reasonable efforts to send copies of any notices to the addresses marked "With a copy to" hereinabove set forth; provided, however, that failure to deliver such copy or copies shall have no consequence whatsoever to the effectiveness of any notice made to the Tenant or the Mortgagee. Each party may designate a change of address by notice given, as hereinabove provided, to the other party, at least fifteen (11 5) days prior to the date such change of address is to become effective. 9. This Agreement shall be binding upon and inure to the benefit of the Mortgagee and the Tenant and their respective successors and assigns. 10. The term "Mortgagee" as used herein shall include the successors and assigns of the Mortgagee and any person, party or entity which shall become the owner of the Premises by reason of a foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise. The term "Landlord" as used herein shall mean and include the present landlord under the Lease and such landlord's predecessors and successors in interest under the Lease. The term "Premises" as used herein shall mean the Premises, the improvements now or hereafter located thereon and the estates therein encumbered by the Mortgage. 11. This Agreement may not be modified in any manner or terminated except by an instrument in writing executed by the parties hereto. EXHIBIT D - PAGE 4 47 12. This Agreement shall be governed by and construed under the laws of the State in which the Premises are located. IN WITNESS WHEREOF, the Mortgagee and the Tenant have duly executed this Agreement as of the date first above written. THE CHASE MANHATTAN BANK By: ----------------------------------- Vice President (TENANT) By: ----------------------------------- Its: ----------------------------------- EXHIBIT D - PAGE 5 48 THE CHASE MANHATTAN BANK ACKNOWLEDGEMENT STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) On __________________, before me, ___________________, a Notary Public, personally appeared _______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signatures) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. - --------------------------------- Notary Public TENANT ACKNOWLEDGEMENT STATE OF CALIFORNIA ) ) ss: COUNTY OF ) On _____________________, before me, ________________________, a Notary Public, personally appeared ______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signatures on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. - --------------------------------- Notary Public EXHIBIT D - PAGE 6 49 EXHIBIT D-1 SUBORDINATION OF DEED OF TRUST _________________________________________________________________________ (hereinafter called "Lender") as owner and holder of a certain promissory note dated ____________ in the principal sum of ____________________ Dollars ($__________) and a Deed of Trust dated of even date therewith securing said Note, now a first lien upon the premises more particularly demised and described in those certain leases by and between , as Landlord, and the persons named (whose agreement hereto is evidenced by unrecorded agreements in the possession of Landlord and Lender) in Exhibit A attached hereto and made a part hereof, as Tenant, and upon other property, in consideration of such leasing and of the sum of One Dollar ($1.00) and other good and valuable consideration, receipt of which is hereby acknowledged, DOES hereby covenant and agree that the said Deed of Trust shall be, and the same is hereby made, SUBJECT AND SUBORDINATE to said leases with the same force and effect as if the said leases had been executed, delivered and recorded prior to the execution, delivery and recording of said Deed of Trust, without regard to the date on which said leases had been executed, delivered and recorded in relation to the date on which said Deed of Trust has become an effective lien by the terms therein demised; EXCEPT, HOWEVER, that this Subordination shall not affect or be applicable to and does hereby expressly exclude: (a) The prior right, claim and lien of the said Deed of Trust in, to and upon any award or other compensation heretofore or hereafter to be made for any taking by eminent domain of any part of said premises, and to the right of disposition thereof in accordance with the provisions of said Deed of Trust, (b) The prior right, claim and lien of the said Deed of Trust in, to and upon any proceeds payable under all policies of fire and rent insurance upon the said premises and as to the right of disposition thereof in accordance with the terms of said Deed of Trust, and (c) Any lien, right, power or interest, if any which may have arisen or intervened in the period between the recording of the said Deed of Trust and the execution of the said leases, or any lien or judgment which may arise at any time under the terms of such leases. The subordination shall inure to the benefit of and shall be binding upon the undersigned, its successors and assigns. IN WITNESS WHEREOF, this Subordination has been duly signed and delivered by the undersigned this _________ day of _______________, 19___. "LENDER": EXHIBIT D-1 - PAGE 1 50 EXHIBIT E ESTOPPEL STATEMENT TENANT ESTOPPEL CERTIFICATE The Chase Manhattan Bank 380 Madison Avenue New York, New York 1001 7-2591 Attention: Mr. James M. Reilly Vice President Re: Tenant Lease for Santa Monica, California; Suite No Ladies and Gentlemen: We understand that you are the proposed lender to Spieker Properties, L.P., the owner of the Santa Monica Office Park, located in Santa Monica, California (the "Property") in which the undersigned is a tenant of the suites referred to above. We further. understand that in connection with the loan it is necessary that you understand the precise nature of our tenancy and in order to so do, we hereby warrant and represent to you that, with respect to our lease, as amended (as amended, the "Lease"), attached as Exhibit 1 and more particularly described in the attached Schedule "A" which is hereby incorporated (the "Schedule"). 1. The Lease constitutes the entire agreement between the undersigned and the landlord thereunder with respect to the subject matter thereof and the Lease has not been modified, amended or supplemented in any way except by the amendments or other agreements described in the Schedule. 2. The summary of the terms of the Lease contained in. the Schedule is true and correct. 3. Except as provided in the Schedule, the undersigned has not assigned or entered into a sublease for any portion of the Premises covered by the Lease and no person or firm other than the undersigned or its employees is in possession of such Premises or any portion thereof. 4. The undersigned is not in default (or with the giving of notice or the passage of time, or both, will not be in default) under the Lease and the undersigned has no current claim against, off-set, credit, defense, counterclaim or deductions against the landlord thereunder, and to the undersigned's best knowledge the landlord is not in default (or with the giving of notice or the passage of time, or both, will not be in default) under the Lease and has fulfilled all obligations with respect thereto as of the date hereof. 5. The undersigned is not a party to, and to the undersigneds best knowledge, Tenant, its agents, contractors and invitees have not used, stored or disposed of any hazardous or toxic wastes or substances in, on or under, or in the vicinity of the Premises demised by the Lease except for normal and customary off ice supplies there are no agreements for any rent concessions which have not expired or brokerage commissions or improvement allowances which have not been paid, relating to the Lease or the Premises for which the landlord thereunder may be responsible. 6. The undersigned has no option, right of first refusal or otherwise to purchase the Property or any portion thereof, or any interest therein pursuant to the terms of the Lease or contained in any other document or agreement (written or oral) whatsoever. The only interest of the undersigned in the Property is that of a tenant pursuant to the terms of the Lease, as set forth in Schedule A. The undersigned hereby waives any option, right of first refusal or otherwise to purchase the Property or any portion thereof or interest therein that is contained in the Lease, if any. 7. The undersigned does not engage in the generation, storage or disposal of hazardous or toxic wastes or substances on the Property and to the best of the undersigned's knowledge, there are no hazardous or toxic wastes or substances located in, on, under or in the vicinity of the Premises demised by the Lease except for normal and customary office supplies. 8. The undersigned is not the subject of any bankruptcy, insolvency, debtor's relief, reorganization, receivership or other similar proceedings. EXHIBIT E - PAGE 1 51 9. The person(s) executing this Certificate hereby warrants and represents that he or she has the power and authority to execute and deliver this Certificate on behalf of the tenant named herein. 10. Tenant hereby ratifies and confirms the Lease and the tenancy created pursuant to the terms thereof. 11. All required contributions by Lessor to Lessee on account of Lessee's improvements have been received. We understand that you will be securing the loan with a deed of trust of the Property and an assignment of leases of the Property, including the Lease, and the statements made in this Estoppel Certificate may be relied upon by you in connection with your making of the loan. Very truly yours, By ------------------------------------- Its ------------------------------------- ----------------------------------------- Date EXHIBIT E - PAGE 2 52 SCHEDULE "A" SUMMARY OF LEASE TERMS (1) Name of Tenant: (2) Lease Date: (3) Amendment Dates: (4) Separate Agreements: (5) Suite Nos.: (6) Square Footage: (7) Lease Commencement Date: Expiration Date of Term: (8) Monthly Base Rent as of December 1, 1996: $ Monthly CAM Charges as of December 1, 1996: $ Total Monthly Rent as of December 1, 1996: $ (9) Tenant's Percentage Share of Operating Costs: (10) Base Year: (11) Security Deposit: (12) Prepaid Rent if Still Unapplied: (13) Assignees/Subtenants: (14) Lease Guarantor(s): (15) Free Rent Months remaining:
By ----------------------- Date ----------------------- EXHIBIT E - PAGE 3 53 EXHIBIT 1 (Copy of Lease) EXHIBIT E - PAGE 4 54 EXHIBIT F BUILDING RULES AND REGULATIONS The following rules and regulations shall be applicable to the Building: 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, or printed or affixed on or to any part of the Building or Premises if visible from outside the Premises, without the prior written consent of Landlord. Tenant's identification signs and lettering shall be in accordance with Landlord's standard requirements for the Building unless otherwise approved in writing by Landlord, and shall be printed, painted, affixed, or inscribed at the expense of Tenant by a person approved by Landlord. 2.Tenant shall not place or maintain any window covering, blinds or drapes on any window without Landlord's prior written approval. A breach of this rule will directly and adversely affect the exterior appearance of the Building. Upon request by Landlord, Tenant shall remove any window covering, or any other item visible from outside the Premises, if installed or placed without Landlord's written approval. 3. A directory of the Building will be provided for the display of the name and location of tenants. Landlord will install at Tenant's expense directory strips for Tenant's name and a reasonable number of the principal employees thereof, and Landlord reserves the right to exclude any other names therefrom. 4. The sidewalks, halls, passages, exits, entrances, elevators, escalators, and stairways shall not be obstructed by Tenant or used by it for any purpose other than for ingress to and egress from the Premises. The halls, passages, exits, entrances, elevators, escalators, stairways, balconies and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Landlord might be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed so as to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities or are creating a nuisance. No employee, invitee, contractor or agent of Tenant shall go upon the roof of the Building. 5. Tenant shall be responsible for assuring that doors to the Premises are locked during non-business hours. Such doors shall not be left open during business hours, except while moving furniture or other items in or out of the Premises, unless Landlord consents otherwise. 6. The toilet rooms and urinals, wash bowls and other apparatus therein shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be placed therein; the expense of breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees, invitees, contractors or agents, shall have caused it. 7. Except as to normal pictures and furnishings, Tenant shall not mark, drive nails, screw or drill into partitions, woodwork or plaster or in any way deface the Premises or any part thereof. No boring, cutting or stringing of wires shall be permitted except with the prior written consent of Landlord and as Landlord may direct. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant. 8. Tenant shall not overload any floor of the Premises or the Building. No furniture, freight or equipment of any kind shall be brought into the Building by Tenant or its contractors or agents without prior consent of Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy objects brought into the Building and also the time and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute weight. Landlord will not be responsible for loss or damage to any property from any such cause, and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expense of Tenant. There shall not be used in any part of the Building any hand truck unless it is equipped with rubber tires and side guards. 9. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises unless otherwise agreed to in writing by Landlord. Except with the prior written consent of Landlord, no person or persons other than those approved by Landlord shall EXHIBIT F - PAGE 1 55 be permitted to enter the Building for the purpose of cleaning same. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall in no way be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done, to the effects of Tenant or any of its employees or other persons by the janitor of Landlord. Janitor service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include clearing of carpets or rugs, except normal vacuuming, or moving of furniture and other special services. Janitor service will not be furnished to rooms which are occupied after 9:30 p.m. Window cleaning shall be done only by Landlord at reasonable intervals and as Landlord deems necessary. 10. Tenant shall not use, keep or permit to be used or kept any noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those having business therein. No tenant shall make or permit to be made any loud or disturbing noises or disturb or interfere with occupants of the Building or those having business with them whether by the use of any musical instrument, radio, phonograph, shouting or in any other manner. Tenant shall not throw anything out of doors or down the passageways. 11. The Premises shall not be used for the storage of merchandise except as such storage may be incidental to the use of the Premises authorized by the Lease. No cooking shall be done or permitted in the Premises without Landlord's consent, except that use by Tenant of Underwriter's Laboratory approved microwave ovens or equipment for brewing coffee or similar beverages shall be permitted. Tenant shall not advertise for day laborers giving an address at the Premises. The Premises shall not be used for lodging or for any illegal purposes. Tenant shall not keep or maintain pets or animals of any type and shall not store or keep bicycles, mopeds or motorcycles in the Premises or the Building. 12. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or flammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied or permitted by Landlord. 13. Landlord will direct electricians as to where and how electrical, telephone and telegraph wires are to be introduced to the Premises. No boring or cutting for wires will be allowed without the prior consent of Landlord. The location of telephone switching equipment, call boxes and other similar equipment in the Premises shall be subject to the approval of Landlord. 14. Landlord will furnish Tenant free of charge two (2) keys for each locking door in the Premises. Any additional or replacement keys will be furnished at a reasonable charge All keys to offices, rooms. and toilet rooms shall be obtained from Landlord and Tenant shall not duplicate or obtain such keys from any other source Upon termination of the Lease, Tenant shall deliver to Landlord the keys to the offices, rooms and toilet rooms which were previously furnished to Tenant, failing which Tenant shall pay Landlord the cost of replacing same or of changing the lock or locks opened by any unreturned key if Landlord deems it necessary to make such changes. Landlord shall have the right periodically to change all locks and furnish Tenant with new keys therefor. Tenant shall not alter any lock or install any new or additional locks or any bolts on any door of the Premises without the prior written consent of Landlord (except as to safes, vaults and other secured areas of Tenant approved by Landlord). 15. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours and in such elevators as shall be designated by Landlord. 16. Landlord reserves the right to close and keep locked all entrances and exit doors of the Building on Saturdays, Sundays, legal holidays and on other days between non-business hours, and during such further hours as Landlord may deem advisable for the adequate protection of the Building and the property of its tenants (such hours are referred to as "After-Hours"). However, during such After-Hours Tenant and/or authorized employees as well as guests, licensees or invitees of Tenant who are accompanied by Tenant or an authorized employee of Tenant, shall be allowed access to the Building upon proper identification. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building during the continuance of same. 17. The "normal business hours" for the Building are from 7:00 a.m. to 6:00 p.m. Monday through Friday, excluding nationally recognized standard holidays. All other hours are deemed "After-Hours". 18. Tenant shall not canvass or solicit other tenants in the Building and Tenant shall cooperate to prevent any such canvassing and/or solicitation. Canvassing and peddling in the Building is prohibited. Tenant shall not obtain for use in the Premises food, beverage, shoe-shine or other services except as expressly permitted by Landlord. EXHIBIT F - PAGE 2 56 19. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, has no legitimate purpose to be in the Building, or is violating the rules and regulations of the Building. 20. The requirements of Tenant will be attended to only upon application to Landlord's designated property manager. Tenant acknowledges that employees of Landlord shall have no obligation to perform work for Tenant or do anything outside their regular duties for Tenant unless under special instructions from Landlord, and that no employee will have any obligation to admit any person (Tenant or otherwise) to any office of Landlord without specific instructions from Landlord. 21. No vending machines of any description shall be installed, maintained, or operated by Tenant upon the Premises or in the Building, without the prior written consent of Landlord. 22. Tenant agrees that it shall comply with all fire and security regulations that may be issued from time to time by Landlord, and Tenant shall also provide Landlord with the name of a designated responsible employee to represent Tenant in all matters pertaining to such fire or security regulations. 23. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building. Tenant shall not interfere with broadcasting or reception from or in the Building or elsewhere. 24. Tenant shall store its trash and garbage within the Premises or in other facilities designated by Landlord. Tenant shall not place in any trash receptacle any material which cannot be disposed of in the ordinary practice of trash disposal. All trash and garbage disposal shall be made pursuant to directions issued from time to time by Landlord. 25. Landlord may waive any one or more of the rules and regulations as to any tenant without being construed as having waived same as to any other tenant. 26. Tenant shall be responsible for the observance of the rules and regulations by Tenant's employees, agents, customers, invitees and guests. 27. Landlord reserves the right upon written notice to Tenant, to rescind, alter or waive any rule or regulation at any time prescribed for the Building, or to establish additional rules and regulations when, in Landlord's sole judgment, it is necessary, desirable or proper for the best interest of the Building and its tenants. 28. The rules and regulations shall be administered fairly by Landlord and Landlord shall not enforce them in a discriminatory manner as between the tenants of the Building. EXHIBIT F - PAGE 3 57 EXHIBIT G Exhibit G has been intentionally omitted. EXHIBIT G - PAGE 1 58 EXHIBIT H Exhibit H has been intentionally omitted. EXHIBIT H - PAGE 1 59 SUBORDINATION OF LEASE ================================================================================ THE CHASE MANHATTAN BANK AND ISOCOR -------------------------- SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT -------------------------- Dated: Location: Santa Monica, California ================================================================================ 1 60 SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (Lease) THIS AGREEMENT made the ___ day of _________, between THE CHASE MANHATTAN BANK, a New York banking corporation having an office at 380 Madison Avenue, New York, New York 1001 7- 2591 (the "MORTGAGEE"), and ISOCOR, a California corporation, having an office at 3420 Ocean Park Boulevard, Suite 2010, Santa Monica, California 90405 (the "TENANT"); WITNESSETH: WHEREAS the Mortgagee is the present owner and holder of a certain mortgage or mortgages (the "MORTGAGE") encumbering the premises located in the County of Los Angeles, City of Santa Monica and State of California, known as Suite No. 2010, 3420 Ocean Park Boulevard (the "Premises"); WHEREAS the Tenant is the holder of a leasehold estate in a portion of the Premises under and pursuant to the provisions of a certain lease dated ________________ with Spieker Properties, L.P., as landlord (the "LEASE"); and [INITIAL HERE] WHEREAS the Tenant has agreed to subordinate the Lease to the Mortgage and to the lien thereof and the Mortgagee has agreed to grant non-disturbance to the Tenant under the Lease on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of Ten ($10) Dollars and other good and valuable consideration, the receipt of which is hereby acknowledged, the Mortgagee and the Tenant hereby covenant and agree as follows: 1 . The Tenant agrees that the Lease and all of the terms, covenants and provisions thereof and all rights, remedies and options of the Tenant thereunder are and shall at all times continue to be subject and subordinate in all respects to the Mortgage and all of the terms, covenants and provisions thereof and to the lien thereof and to any and all increases, renewals, modifications, spreaders, consolidations, replacements and extensions thereof, and to any and all sums, secured thereby, with the same force and effect as if the Mortgage had been executed, delivered and recorded prior to the execution and delivery of the Lease. 2. The Mortgagee agrees that if any action or proceeding is commenced by the Mortgagee to foreclose the Mortgage or to sell the Premises, the Tenant shall not be named as a party in any such action nor shall the Tenant be named a party in connection with any sale of the Premises, provided that at the time of the commencement of any such action or proceeding or at the time of any such sale (i) the term of the Lease shall have commenced pursuant to the provisions thereof, (ii) the Tenant shall be in possession of the premises demised under the Lease, subject to any subleases previously approved by Mortgagee, (iii) the Lease shall be in full force and effect, and (iv) the Tenant shall not be in default under any of the terms, covenants or conditions of the Lease or of this Agreement on the part of the Tenant to be observed or performed thereunder or hereunder beyond any applicable cure periods set forth in the Lease, unless applicable law requires the Tenant to be made a party thereto as a condition to proceeding against the Landlord or protecting such rights and remedies. In the latter case, the Mortgagee may join the Tenant as a defendant in such action only for such purposes and not to terminate the Lease 3. The Tenant agrees that if the Mortgagee or any successors in interest to the Mortgagee shall become the owner of the Premises by reason of the foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise, the Lease shall not be terminated or affected thereby but shall continue in full force and effect as a direct lease (including without limitation, the right, if any, to extend the lease term or to exercise any right of first offer) between the Mortgagee and the Tenant upon all of the terms, covenants and conditions set forth in the Lease and in that event the Tenant agrees to attorn to the Mortgagee and the Mortgagee agrees to accept such attornment, provided, however, that the provisions of the Mortgage shall govern with respect to the disposition of any casualty insurance proceeds or condemnation awards and the Mortgagee shall not be (i) obligated to complete any construction work required to be done by the Landlord (as hereinafter defined) pursuant to the provisions of the Lease or to reimburse the Tenant for any construction work done by the Tenant, (ii) liable for any accrued obligation of the Landlord, or for any act or omission of the Landlord, whether prior to or after such foreclosure or sale, (iii) liable under any indemnity provision of whatever nature contained in the Lease, including, but not limited to, any environmental indemnification, (iv) required to make any repairs to the Premises and/or to the premises demised under the Lease as a result of fire or other casualty or by reason of condemnation, (v) required to make any capital improvements to the Premises and/or to the premises demised under the Lease which the Landlord may have agreed to make, but had not completed, or to perform or provide any services not 2 61 related to possession or quiet enjoyment of the premises demised under the Lease which obligations of quiet enjoyment include Landlord's obligation to repair and maintain the Premises and the Project as more fully set forth in the Lease arising on or after the Mortgagee becomes the owner of the Project, (vi) subject to any offsets, claims or counterclaims which shall have accrued to the Tenant against the Landlord prior to the date on which the Mortgagee or its successor in interest shall become the owner of the Premises, (vii) liable for any security deposit or other monies not actually received by the Mortgagee. 4. The Tenant shall not, without the prior written consent of the Mortgagee (i) enter into any agreement amending, modifying or terminating the Lease, (ii) prepay any of the rents, additional rents or other sums due under the Lease for more than one (1) month in advance of the due date thereof, (iii) voluntarily surrender the premises demised under the Lease or terminate the Lease without cause or shorten the term thereof, or (iv) assign the Lease or sublet the premises demised under the Lease or any part thereof; and any such amendment, modification, termination, prepayment, voluntary surrender, assignment or subletting, without the prior written consent of the Mortgagee shall not be binding on the Mortgagee. 5. The Tenant hereby represents and warrants to the Mortgagee that as of the date hereof (i) the Tenant is the owner and holder of the tenant's interest under the Lease % (ii) the Lease has not been modified or amended, (iii) the Lease is in full force and effect and the term thereof commenced on _______________ , pursuant to the provisions thereof, (iv) the premises' demised under the Lease have been completed and the Tenant has taken possession of the same on a rent paying basis, M neither the Tenant nor the Landlord is in default under any of the terms, covenants or provisions of the Lease and the Tenant to the best of its knowledge knows of no event which but for the passage of time or the giving of notice or both would constitute an event of default by the Tenant or the Landlord under the Lease, (vi) neither the Tenant nor the Landlord to the best knowledge of Tenant has commenced any action or given or received any notice for the purpose of terminating the Lease, (vii) all rents, additional rents and other sums due and payable under the Lease have been paid in full and no rents, additional rents or other sums payable under the Lease have been paid for more than one (1) month in advance of the due dates thereof, and (viii) there are no offsets or defenses to the payment of the rents, additional rents, or other sums payable under the Lease. [INITIAL HERE] 6. The Tenant shall notify the Mortgagee of any default by the Landlord under the Lease or any other circumstance which would entitle the Tenant to cancel or terminate the Lease or abate the rents, additional rents or other sums payable thereunder, and agrees that, notwithstanding any provisions of the Lease to the contrary, no notice of cancellation, termination or abatement thereof shall be effective unless the Mortgagee shall have received notice of the default or other circumstance giving rise to such cancellation, termination or abatement and shall have failed within forty-five (45) days after receipt of such notice to cure such default or remedy such circumstance, or if such default cannot be cured within forty-five (45) days, shall have failed within forty-five (45) days after receipt of such notice to commence and to thereafter diligently pursue any action necessary to cure such default or remedy such circumstances as the case may be. 7. Anything herein or in the Lease to the contrary notwithstanding, in the event that the Mortgagee shall acquire title to the Building, or shall otherwise become liable for any obligations of the Landlord under the Lease, the Mortgagee shall have no obligation, nor incur any liability, beyond the Mortgagee's then interest, if any, in the Building and the Tenant shall look exclusively to such interest of the Mortgagee, if any, in the Building for the payment and discharge of any obligations imposed upon the Mortgagee hereunder or under the Lease and the Mortgages is hereby released or relieved of any other liability hereunder and under the Lease. The Tenant agrees that with respect to any money judgment which may be obtained or secured by the Tenant against the Mortgagee, the Tenant shall look solely to the estate or interest owned by the Mortgagee in the Building and the Tenant will not collect or attempt to collect any such judgment out of any other assets of the Mortgagee. 8. Any notice, request, demand, statement, authorization, approval or consent made hereunder shall be in writing and shall be sent by Federal Express, or other reputable courier service, or by postage pre-paid registered or certified mail, return receipt requested, and shall be deemed given when received or refused (as indicated on the receipt) and addressed as follows: If to the Mortgagee: The Chase Manhattan Bank Real Estate Finance Group 380 Madison Avenue New York, New York 1001 7 Attention: Mr. James M. Reilly, Vice President 3 62 With a copy to: The Chase Manhattan Bank Legal Department 270 Park Avenue - 40th Floor New York, New York 10017 Attention: Michael R. Zients, Esq. With a copy to: Loeb & Loeb LLP 1000 Wilshire Boulevard, Suite 1800 Los Angeles, California 90017 Attention: Joseph P. Heffernan, Esq. If to the Tenant: Isocor 3420 Ocean Park Boulevard, Suite 2010 Santa Monica, California 90405 Attention: Ms. Janine Bushman - ------------------- It being understood and agreed that each party will use reasonable efforts to send copies of any notices to the addresses marked "With a copy to" hereinabove set forth; provided, however, that failure to deliver such copy or copies shall have no consequence whatsoever to the effectiveness of any notice made to the Tenant or the Mortgagee. Each party may designate a change of address by notice given, as hereinabove provided, to the other party, at least fifteen (11 5) days prior to the date such change of address is to become effective. 9. This Agreement shall be binding upon and inure to the benefit of the Mortgagee and the Tenant and their respective successors and assigns. 10. The term 'Mortgagee' as used herein shall include the successors and assigns of the Mortgagee and any person, party or entity which shall become the owner of the Premises by reason of a foreclosure of the Mortgage or the acceptance of a deed or assignment in lieu of foreclosure or otherwise The term 'Landlord' as used herein shall mean and include the present landlord under the Lease and such landlord's predecessors and successors in interest under the Lease. The term "Premises' as used herein shall mean the Premises, the improvements now or hereafter located thereon and the estates therein encumbered by the Mortgage. 11. This Agreement may not be modified in any manner or terminated except by an instrument in writing executed by the parties hereto. 4 63 1 2. This Agreement shall be governed by and construed under the laws of the State in which the Premises are located. IN WITNESS WHEREOF, the Mortgagee and the Tenant have duly executed this Agreement as of the date first above written. THE CHASE MANHATTAN BANK By: Vice President (TENANT) ISOCOR a California corporation By: /s/ JANINE BUSHMAN ------------------------------- Janine Bushman Vice President, Finance and Administration/ Chief Financial Officer 5 64 THE CHASE MANHATTAN BANK ACKNOWLEDGEMENT STATE OF NEW YORK ) )Ss: COUNTY OF NEW YORK ) On _______________, before me ________________, a Notary Public, personally appeared ___________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ------------------------------ Notary Public TENANT ACKNOWLEDGEMENT ---------------------- STATE OF CALIFORNIA ) )Ss: COUNTY OF LOS ANGELES ) On February 11, 1998 before me, DONNA WEBB a NOTARY Public, personally appeared Janine Bushman, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) WHOSE name(s) is/are SUBSCRIBED TO the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. DONNA WEBB [SEAL] COMM. # 1048278 NOTARY PUBLIC - CALIFORNIA /s/ DONNA WEBB LOS ANGELES COUNTY ---------------------- Notary Public MY COMM. EXPIRES DEC 29.1998 6 65 PARKING LICENSE AGREEMENT SPIEKER PROPERTIES, L.P., a California limited partnership ("Licensor"), hereby grants to ISOCOR, a California corporation ("Licensee"), the right and license to use parking spaces in Santa Monica Business Park (the "Project"), as described below and subject to the following conditions: 1. TYPE AND NUMBER OF PARKING SPACES. Licensee shall have the right to use up to 60 unassigned automobile parking spaces. If the area of Licensee's Premises in the Project is reduced, Licensee's allotment of parking spaces will be adjusted proportionately. If the area of Licensee's Premises is increased, Licensee may, at its option, increase the number of its allotted parking spaces proportionately. Notwithstanding the preceding, Licensee shall have no right to use any number of parking spaces in excess of the number of employees of Licensee actually employed at the Premises. 2. MONTHLY FEE. Licensee shall pay for the right and license granted hereby the prevailing rates charged for such spaces by Licensor from time to time plus applicable taxes thereon ("market rate"). Such sums shall be payable in advance on the first day of each calendar month. Licensor shall have no obligation to accept any such payment from anyone other than Licensee (e.g. Licensee's employees, subtenants, etc.). If Licensee fails to make any such payment when due, Licensor, at its option and after five (5) days' notice to Licensee, may forthwith terminate this license and all rights of Licensee hereunder. Any late payment of the monthly fee will result in additional administrative and processing costs being incurred by Licensor, the exact amount of which would be extremely difficult to determine, and it is agreed that with respect thereto a late fee of Ten Dollars ($10.00) per space is a reasonable estimate thereof and will be payable by Licensee with regard to any monthly fee not paid when due. 3. TERM. Licensee shall be entitled to the foregoing parking rights and obligations for a period equivalent to the term of that certain "Lease" of Premises in the Project entered into by Licensor and Licensee. Licensee's rights to any and all parking spaces shall automatically be revoked and shall terminate upon any material default hereunder, or any expiration or termination of said Lease, as well as upon any assignment of such Lease or sublease of such Premises, in violation of the terms of such Lease. Licensee must exercise its rights under this Agreement by delivering all required security deposits and the initial monthly fee for the parking spaces described above within thirty (30) days after the "Commencement Date" of the aforementioned Lease (as defined herein) unless otherwise agreed by Licensor. Failure of Licensee to so exercise its rights will entitle Licensor without notice to transfer to others Licensee's rights to park in any and all parking spaces as to which Licensee has not so exercised its rights hereunder, and Licensee will be deemed to have waived its rights hereunder with regard thereto. 4. LOCATION OF PARKING SPACES. Licensor shall have the right in its sole discretion to designate the particular location of said parking space(s), which designation is subject to change from time to time. 5. RIGHTS NON-TRANSFERRABLE. The foregoing parking rights are personal to Licensee and Licensee shall not assign, convey, or otherwise transfer said rights in any manner whatsoever without Licensor's prior written consent. Any attempt by Licensee to do so shall be null and void and, at Licensor's election, shall constitute a material default hereunder. If the Premises or any portion thereof is assigned or sublet pursuant to the terms of the Lease, the number of parking spaces allotted to Licensee under paragraph 1 hereof shall automatically be adjusted accordingly and Licensor and Licensee shall immediately execute an amendment to this Agreement setting forth (i) the number of spaces retained by Licensee, (ii) the number of spaces allotted to Licensee's assignee or subtenant (which number shall not exceed the amount stated in paragraph 1 above), (iii) the then current "market rate" to be charged Licensee for the spaces allotted to its assignee or subtenant, and (iv) the security deposit to be paid by Licensee for its assignee's or subtenant's parking cards. 6. LICENSEE INDEMNIFICATION. Use of said parking spaces and of the parking areas in the Project shall be at the sole risk of Licensee. Unless caused by the negligence or wrongful acts of Licensor, its agents or employees, Licensee hereby agrees to defend, indemnify and hold Licensor harmless against any liability, loss, cost or expense (including reasonable attorneys' fees) for any damage to or loss or theft of any vehicle or property within any vehicle or any other property (including property of Licensee), or injury to or death of any person (including Licensee and Licensee's family, agents, employees, visitors or customers), arising directly or indirectly out of or in connection with the use by Licensee or such other persons of the parking areas or any part thereof. 7. INTERRUPTION OF USE. Licensor shall not be liable to Licensee for any interruption of Licensee's use of the rights granted hereunder due to repairs, improvements or alterations of the parking areas or the Project, or due to any labor controversy, or resulting from any cause beyond the reasonable control of Licensor. However, Licensee shall be entitled to an abatement of the monthly fee with regard to any assigned parking space to the extent it is prevented from using such space and no reasonably similar alternative space is made available to it by Licensor. PARKING LICENSE AGREEMENT PAGE 1 66 8. RULES AND REGULATIONS. Licensor's parking rules and regulations are attached hereto. Licensor may adopt such other rules and regulations relating to the use of the parking areas as in Licensor's opinion are necessary or desirable for the proper, orderly and safe use of the parking areas. If Licensee fails to comply with the rules and regulations and modifications thereto after receiving notice thereof, Licensor may at its option forthwith terminate this license and all rights of Licensee hereunder, and may also, whether or not such license is so terminated, take such action as shall be required to remedy such failure, and Licensee agrees to pay Licensor on demand the reasonable cost to Licensor of such actions including attorneys' fees. Licensee shall at all times be required to park in a lawful manner, and no vehicle shall at any time be parked in more than one marked space at a time. Licensor shall be entitled to tow away any vehicle which is improperly parked, at the vehicle owner's sole cost and expense. In the event of such tow away, neither Licensor nor any Mortgagee of Licensor shall have any liability therefor to Licensee or to such vehicle owner. 9.LICENSOR'S PROPERTY RIGHTS. Licensor shall have the right to decrease the size of any or all of the parking areas in the Project, to alter or rearrange parking spaces and improvements in the parking areas, to take all or any portion of the parking areas for purposes of maintaining, repairing or restoring same, or for purposes of construction and operating structures thereon or adjacent thereto, to have ingress and egress in connection with the exercise of any such rights, and to do and perform such other acts with respect to the parking areas as Licensor shall in its discretion deem appropriate. Licensor may at any time and from time to time in its discretion designate any portion of the parking areas in the Project for use as assigned parking, visitor parking or employee parking. If Licensor establishes an employee parking' area or other assigned parking area for Licensee's employees to park in, Licensee shall furnish Licensor, within five (5) days after written request to do so, with a list of the vehicle license numbers of Licensee's employees parking in the Project. Licensor may charge Licensee Ten Dollars ($10.00) per day for each day or partial day for each vehicle parked by Licensee or any of its employees in a parking space or area other than the space or parking area assigned or designated for such vehicle. Licensor may tow away any such improperly parked vehicles and may also attach violation notices or stickers to improperly parked vehicles. In the event of such tow away, neither Licensor nor any Mortgagee of Licensor shall have any liability therefor to Licensee or to such vehicle owner. 10. SECURITY DEPOSIT. If parking is in a controlled lot, a monthly parking card or decal may be issued to Licensee for each parking space to be used by Licensee hereunder. Licensee will pay a security deposit for each parking card at the time of issuance of the card. Licensor shall have no obligation to accept any such security deposit from anyone other than Licensee, The security deposit shall be held by Licensor to secure Licensee's due performance of its obligations with regard to parking hereunder and the return to Licensor of such parking card(s) in good condition, normal wear and tear excepted, upon termination of Licensee's rights hereunder. Licensee shall be obligated to take reasonable steps to protect such cards from warping or mutilation. Without limitation as to the generality of the foregoing, Licensor may apply such security deposit to remedy any default by Licensee hereunder and further, if such card(s) are lost or mutilated, Licensor may apply any or all of said deposit toward Licensor's cost of such card(s). If at any time Licensor applies any or all of such security deposit as provided herein, Licensee shall be obligated to deposit with Licensor the amount so applied by Licensor within ten (1 0) days after written request therefor is given. Upon termination of Licensee's rights hereunder and the return to Licensor of the aforementioned card(s) (or cards issued in substitution thereof) the security deposit or balance thereof shall be returned to Licensee provided Licensee is not then in default hereunder. Licensor need not hold said security deposit in a separate account. 11. REPLACEMENT CARDS. If for any reason (other than a malfunction for which Licensee is not responsible hereunder) any card issued to Licensee is requested by Licensee to be replaced, Licensee shall pay Licensor the then current non-refundable charge for said replacement card. PARKING LICENSE AGREEMENT PAGE 2 67 12. MISCELLANEOUS. No waiver by Licensor of any breach of this agreement by Licensee shall constitute a waiver of any other breach. Any amount due to Licensor that is not paid when due shall bear interest at the maximum rate allowable under law. In the event of any legal action taken or proceeding brought to enforce the provisions hereof, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs incurred in connection therewith. DATED this ___________ day of _____________________________________1998. LICENSOR: SPIEKER PROPERTIES, L.R, a California limited partnership By: Spieker Properties, Inc., a Maryland corporation, its general partner By: ---------------------------------- Its: ------------------------------ Date: ------------------------------------ LICENSEE: ISOCOR, a California corporation BY: /s/ JANINE BUSHMAN ------------------------------------- Janine Bushman Vice President, Finance and Administration/ Chief Financial Officer Date: 2/11/98 ---------------------------------- PARKING LICENSE AGREEMENT PAGE 3 68 PARKING RULES AND REGULATIONS 1. All claimed damage or loss must be reported and itemized in writing delivered to the parking facility office or property manager's office within ten business days after any claimed damage or loss occurs. Any claim not so made is waived. Licensor has the option to make repairs at its expense of any claimed damage within ten business days after filing a claim. In all court actions the burden of proof to establish a claim remains with Licensee. Court actions by Licensee for any claim must be filed within ninety days from date of parking, in a court of jurisdiction where the claimed loss occurred. Licensor is not responsible for damage by water, fire, or defective brakes, or parts, or for the acts or omissions of others, or for loss of articles left in vehicles. The total liability of Licensor is limited to $250.00 for all damages or loss to any vehicle. Licensor is not responsible for loss of use. 2. Licensee shall not park or permit the parking of any vehicle under its control in any parking area designated by Licensor as areas for parking by visitors. Licensee shall not leave vehicles in the parking area overnight nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. 3. Parking stickers or any other device or form of identification supplied by Licensor as a condition of use of the parking facilities shall remain the property of Licensor. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable and any device in the possession of an unauthorized holder will be void. 4. No extended term storage of vehicles shall be permitted. 5. Vehicles must be parked entirely within the painted stall lines of a single parking stall. 6. All directional signs and arrows must be observed. 7. The speed limit within all parking areas shall be 5 miles per hour. 8. Parking is prohibited: (a) in areas not striped for parking; (b) in driveways; (c) where "no parking" signs are posted; (d) in cross-hatched areas; and (e) in such other areas as may be designated by Licensor or its parking operator. 9. Every Parker is required to park and lock his own vehicle unless Licensor furnishes valet service. Valet parking attendants may refuse to drive any vehicle reasonably believed to be unsafe. 10. Loss or theft of parking identification devices from vehicles must be reported to the parking operator immediately, and a lost or stolen report must be filed at that time. Licensor has the right to exclude any vehicles from the parking facilities that does not have an identification device. 1 1. Any parking identification devices reported lost or stolen found on any unauthorized vehicle will be confiscated and the illegal holder will be subject to prosecution. 1 2. Lost or stolen identification devices found by the Licensee should be reported to the parking facility office or property manager immediately to avoid confusion. 1 3. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 14. Licensee shall acquaint all persons to whom Licensee assigns parking space of these Rules and Regulations. Parking facility managers or attendants are not authorized to make or allow any exceptions to these Rules and Regulations. 1 5. Licensor reserves the right to refuse the sale of monthly stickers or other parking identification devices to any person and/or his agents or representatives who willfully refuses to comply with these Rules and Regulations. PARKING LICENSE AGREEMENT PAGE 4 EX-10.17 4 LETTER AGREEMENT DATED DECEMBER 17, 1997 1 Exhibit 10.17 [FORFAS LETTERHEAD] 3rd December 1997 Mr. Kevin McGrath Isocor Knockmaun House 42-47 Lower Mount Street Dublin 2. Dear Kevin, KNOCKMAUN HOUSE LEASE EXTENSION I am writing to you to confirm our consent to Isocor extending the lease for the Ground, First and Second Floors and part of the Fourth Floor as defined in their respective leases until 6th July 1999. Yours sincerely, /s/ LIAM SHERIDAN - ---------------------------- Liam Sheridan Facilities Department EX-10.18 5 AGREEMENT BETWEEN ANDREW DE MARI AND REGISTRANT 1 Exhibit 10.18 Agreement between Isocor (The Company) and Andrew De Mari (ADM) 1. ADM resigns voluntarily from CEO and President positions as of November 13, 1997. 2. ADM remains in the employment of the Company on a full time basis until December 31, 1997 and on a part-time basis throughout the period January 1, 1998 and December 31, 1999. During such employment ADM will, in agreement with the Company CEO: 2.1 lead the evolution of the Company's product direction towards new growth areas such as Meta-directories through strategic alliances (e.g. Zoomit) and coordination of Company internal inter-departmental efforts 2.2 promote the Company and maintain relations with investors especially in Europe and in Asia 2.3 Liaise with key customers and partners for business development 2.4 any other project agreed with the Company CEO 3. ADM remains on the Board of Directors and will be proposed for reelection at the 1998 Shareholders Meeting. 4. ADM's compensation remains unchanged until December 31, 1997 at $190,000 (annualized) plus participation to the executive incentive plan for $17,500 at target for Q4 1997. 5. ADM's compensation throughout the period January 1, 1998 - December 31, 1999 is set at $100,000 per year and participation to the executive incentive plan for $9,000 at target per quarter. 6. ADM's option vesting and benefits continue until December 31, 1999. 7. ADM's employment is normally terminated on December 31, 1999, with no further obligation on the Company of employment or compensation. 8. ADM's employment may e terminated earlier than December 31, 1999 by either party. In the case of constructive or involuntary termination by the Company, other than for cause, the Company will pay ADM at the time of termination the amount of compensation for salary and benefits that ADM would have earned between the date of termination and December 31, 1999, and option vesting, for the same number of options that ADM would have normally vested during the same period above, will be accelerated. The above is agreed on November 5, 1997, by: /s/ ANDREW DE MARI /s/ JEAN MICHEL BARIBIER /s/ G. BRADFORD JONES - ---------------------- ------------------------ ---------------------- Andrew De Mari Jean Michel Baribier Bradford Jones 2 EX-10.19 6 LETTER AGREEMENT BETWEEN REGISTRANT AND PAUL GRIGG 1 Exhibit 10.19 [ISOCOR LETTERHEAD] December 9, 1997 Mr. Paul Gigg 1272 Corsica Drive Pacific Palisades, CA 90272 Dear Mr. Gigg: This letter shall confirm your appointment to the position of Chief Executive Officer and President of ISOCOR serving at the pleasure of the Board of Directors, effective November 14, 1997. Employment is at will. During your initial year in this position, your compensation will be: 1. Weekly base salary of US$4,153.84, paid on a bi-weekly basis. 2. ISOCOR's standard benefits including medical insurance, 401K Plan, life insurance, vacation and holidays. 3. ISOCOR's standard executive compensation plan for non-commissioned executives, as approved by the Board of Directors, with an annual target bonus of US$54,000 upon ISOCOR's achievement of 100% of its consolidated targeted financial performance. 4. Reimbursement rental of a home of US$3,000 per month terminating upon the earlier of your purchase of a home in the vicinity of the Company or March 31, 1999. This housing allowance is irrevocable once granted; except in the event of your voluntary termination of employment or involuntary termination of employment for cause. 5. Between November 14, 1998 and March 31, 1999, you will also be reimbursed for the air fare of up to two Los Angeles/London round trips for yourself and your immediate family members (or relatives) in accordance with Company policies for company air travel, payable upon presentation of invoices. 6. Upon your purchase of a home within the vicinity of the Company, you will be eligible for a loan from ISOCOR of up to US$500,000. This loan will be 2 secured against that home, bear the lowest legal interest rate at the time of the loan, and will have a six year term with no payments for the first 36 months of the loan period. Payments of interest and principal will be due monthly commencing upon the 37th month of the loan period and ending with the 72nd month of the loan period, fully amortized. In the event that your residence in the UK is sold by you, you commit to use the proceeds from the sale of that house to pay down this loan. This loan is irrevocable once granted; except in the event of your voluntary termination of employment or involuntary termination of employment for cause in which case the loan will become immediately due and payable in full. 7. The Board of Directors has approved on November 14, 1997, a stock option grant of 50,000 shares with a vesting period of 26 months. 8. Should your employment be involuntarily terminated other than for cause, you will be entitled to a severance package consisting of six months of your then current base salary at the date of the involuntary termination. You agree to provide three months notice of termination in the event of voluntary termination of employment. You further agree that for a period of 12 months following the date of termination of employment, and without the prior written consent of the Board, that you will not in connection with the carrying on of any business similar to or in competition with the business (defined as the provision of standards based solutions for electronic document transfer and messaging) of ISOCOR either on your own or on behalf of any person, firm, or company, directly or indirectly: - seek to procure orders from or do business with any person, firm, or company who has at any time during the 12 month period immediately preceding the date of termination done business with ISOCOR, or - for yourself or for any other person, firm, corporation, partnership, association or other entity, solicit or attempt to solicit any person employed by ISOCOR to terminate or otherwise cease his or her employment with ISOCOR or interfere in any manner with the contractual or employment relationship between ISOCOR and any customer, vendor or employee of ISOCOR. 9. Except with respect to the 75,000 options you were granted pursuant your compensation arrangement dated March 11, 1997 and the previously executed standard ISOCOR confidentiality agreement, this letter supersedes your prior compensation arrangement dated March 11, 1997. 3 In addition, we confirm your election to the Board of Directors for the current term. We look forward to a successful future at ISOCOR. Sincerely, /s/ BRAD JONES - -------------------------------- Brad Jones Director Member of Compensation Committee /s/ JEAN MICHEL BARBIER - -------------------------------- Jean Michel Barbier Director Member of Compensation Committee EX-10.20 7 CONSULTANCY AGREEMENT BETWEEN REGISTRANT AND CAGAN 1 Exhibit 10.20 CONSULTANCY AGREEMENT This CONSULTING AGREEMENT (this "Agreement"), is made and entered into this first day of September 1997 (the "Effective Date"), by and between ISOCOR, a California Corporation, having a principal place of business at 3420 Ocean Park Blvd., Suite 2010, Santa Monica, California USA 90405-3306 (hereinafter "ISOCOR"), and Consultant, Cagan Co Inc., a C corporation registered under the laws of California, with offices at 1170 Coast Village Road, Suite 212, Santa Barbara, CA 93108 (hereinafter "Consultant"). ISOCOR is desirous of securing the services of a Consultant skilled and experienced in high technology disciplines of strategy, sales, marketing, services and distribution. NOW, THEREFORE, the parties agree as follows: 1.00 DEFINITIONS 1.10 "CLIENT" shall mean any third party with whom ISOCOR contracts or negotiates to supply products, consulting or software support services, whether solely or in part. 1.20 "PROJECT COMMENCEMENT" shall mean the date by which the Consultant shall begin consulting at an ISOCOR location, Client's location, some other location or via some other medium. 1.30 "WORK ORDER" shall mean a writing signed by each party which includes at a minimum the name of the client to be worked for, if any, the projected start date of the project, an estimate of the total hours to be worked for the project, and a brief outline of the tasks involved in completing the project. The initial Work Order is attached hereto as Exhibit A. 2.00 TERM AND TERMINATION 2.10 TERM. This Agreement will become effective on the date first shown above and will continue in effect for one year, and shall be automatically renewed for a second year unless either party gives notice in writing at least ten (10) days in advance of the renewal date. 2.20 TERMINATION. This Agreement can be terminated by either party in writing with fourteen (14) days notice after the initial one year term. If this Agreement is terminated, ISOCOR's sole obligation shall be to pay Consultant the amount due for the Services completed as of the effective date of termination. Termination of a Work Order at ISOCOR's discretion, as set forth following in Section 4.31, will not serve to terminate this Agreement unless the Agreement is also expressly terminated in the same or separate writing as set forth above. Notwithstanding the foregoing, the initial Work Order incorporated herein as Exhibit A shall not be terminated by ISOCOR except in the event of cause or material breach of this Agreement by Consultant. 2.30 SURVIVAL. In the event of any termination of this Agreement, Section 6 hereof shall survive and continue in effect. 3.00 INDEPENDENT CONTRACTOR STATUS 3.10 INTENTION OF PARTIES. It is the intention of the parties that Consultant be an independent contractor and not an employee, agent, joint venturer, or partner of ISOCOR. Nothing in this Agreement shall be interpreted or construed as creating or establishing the relationship of employer and employee between ISOCOR and either Consultant or any employee or agent of Consultant. Consultant shall have no right or power to enter into any contract or commitment on behalf of ISOCOR. 3.20 LIMITED EXCLUSIVITY. Consultant shall retain the right to perform work for others during the terms of this Agreement, except as noted in Section 3.21. ISOCOR shall retain the right to cause work of the same or a different kind to be performed by its own personnel or other contractors during the term of this Agreement. 3.21 During the term hereof, and for a period of two years following termination of this agreement, Consultant shall not solicit ISOCOR's Clients for consultancy or other services regarding any products with similar functions, such as Internet- or X.400-based messaging services, as those available from ISOCOR, except as specifically agreed to beforehand in writing by ISOCOR. 2 4.00 SERVICES TO BE PERFORMED BY CONSULTANT 4.10 WORK ORDERS. ISOCOR will advise Consultant of upcoming consulting projects at least one week in advance of the date for Project Commencement. The parties shall agree upon a detailed description of services to be provided. ISOCOR will then forward to Consultant a Work Order. Consultant is only authorized to provide services under this agreement pursuant to signed Work Orders. ISOCOR shall have no liability to Consultant for any services performed which were not authorized by a written and signed Work Order. 4.20 RETURN OF DATA. Upon termination of this Agreement, Consultant shall return to ISOCOR all materials supplied to it and all materials produced and acquired by Consultant in the course of rendering services under this Agreement. 4.40 METHOD OF PERFORMING SERVICES. Consultant will reasonably determine the method, details, and means of performing the work to be carried out by it for ISOCOR's clients. ISOCOR shall be entitled to exercise a broad general power of supervision and control over the results of work performed by Consultant to ensure satisfactory performance. This power of supervision shall include the right to inspect, stop work, make suggestions or recommendations as to the details of the work, and request modifications to the scope of a project for its Clients. 4.41 ISOCOR's power of supervision shall also include the right to stop, or pause any work on any Work Order being done by Consultant for ISOCOR's Clients. Any such action by ISOCOR shall be in writing, and ISOCOR and its Clients' liability for services rendered shall be limited on any such stopped, paused or terminated Work Order to work performed by Consultant prior to receipt of the request to stop, pause or terminate. 5.00 COMPENSATION 5.10 COMPENSATION AND BILLING FOR SERVICES. Compensation to Consultant for services Consultant has performed shall be as set out in the applicable Work Order. Consultant's fee shall include and Consultant shall be responsible for the payment of all taxes imposed by any governmental agency of any kind which are attributable to the compensation it receives. In no event shall ISOCOR be liable to Consultant for services rendered on a Work Order in the face of non-payment or suit by Client for poor work, incomplete services or other harm or damage caused by Consultant and not the fault of ISOCOR. 5.20 WORK REPORTS. Consultant shall submit Work Reports to ISOCOR on a calendar month basis for the services furnished and other expenses incurred hereunder. Each Work Report will provide a breakdown and distribution of services performed and expense items. 5.30 DATE FOR PAYMENT OF COMPENSATION. ISOCOR shall pay Consultant for its services as set out in the applicable Work Order, or, if not specified, within fifteen (15) days from the end of each calendar month for services completed in that month. 5.4 EXPENSES. Except as otherwise agreed in this Agreement, Consultant shall be responsible for all costs and expenses incident to the performance of services for ISOCOR, including all costs incurred by Consultant to do business. In the event, telephone, travel, communication or on-site room and board expenses are incurred by Consultant, ISOCOR agrees to pay these expenses in accordance with ISOCOR's corporate policy attached hereto as Exhibit B. 6.00 INTELLECTUAL PROPERTY RIGHTS 6.10 CONFIDENTIAL INFORMATION. Consultant agrees that all Confidential Information which it may acquire from ISOCOR or from ISOCOR's employees or associates, shall be regarded as strictly confidential and held in trust solely for the benefit of ISOCOR. Consultant shall not use or directly or indirectly disclose such Confidential Information to any other party without the written consent of ISOCOR during the term of and for three years following the termination of this Agreement. Confidential Information includes, for example, trade secrets, data, know-how, developments, designs, techniques, marketing plans, promotional ideas, strategies, forecasts, new products, licenses, costs, customer and supplier lists, specifications, computer software programs, manuals, and any information marked "Confidential" by ISOCOR. These restrictions shall not be construed to apply to (1) information generally available to the public; (2) information released by ISOCOR generally without restriction; (3) information independently developed 2 3 or acquired by Consultant without reliance in any way on other protected information of ISOCOR; or (4) information approved for the use and disclosure of Consultant. Neither party shall furnish to the other party any Confidential Information which it does not have the right to furnish and shall defend and indemnify the receiving party against any claim or liability resulting from breach of such obligation. 6.20 OWNERSHIP OF WORK PRODUCT. All copyrights, patents, trade secrets, or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Consultant during the course of performing ISOCOR's work (collectively, the "Work Product") shall belong exclusively to ISOCOR and shall, to the extent possible, be considered a work made for hire for ISOCOR within the meaning of Title 17 of the United States Code. Consultant automatically assigns at the time of creation of the Work Product, without any requirement of further consideration, any right, title, or interest it may have in such Work Product, including any copyrights or other intellectual property rights pertaining thereto. Upon request of ISOCOR, Consultant shall take such further actions including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment. 6.30 RESIDUAL RIGHTS. Notwithstanding anything to the contrary herein, Consultant shall be free to use and employ its general skills, know-how, and expertise, and to use, disclose, and employ any generalized ideas, concepts, know-how, methods, techniques, or skills gained or learned during the course of any assignment, so long as it acquires and applies such information without disclosure of any confidential or proprietary information of ISOCOR and without any unauthorized use or disclosure of Work Product. 7.00 CONSULTANT PERSONNEL 7.10 COMPENSATION OF CONSULTANT'S PERSONNEL. Consultant shall bear sole responsibility for payment of compensation to and taxes for any of its personnel or agents performing services hereunder. Consultant shall pay and report, for itself and any such personnel, all applicable taxes due on amounts paid to it hereunder. Consultant shall bear sole responsibility for any liability, health or disability insurance, retirement benefits, or other welfare or pension benefits (if any) to which itself and any of its personnel may be entitled. Consultant agrees to defend, indemnify, and hold harmless ISOCOR, ISOCOR's officers, directors, employees, and agents, and the administrators of ISOCOR's benefit plans from and against any claims, liabilities, or expenses relating to such compensation, tax, insurance, or benefit matters; provided that ISOCOR shall promptly notify Consultant of each such claim when and as it comes to ISOCOR's attention, cooperate with Consultant in the defense and resolution of such claim, and not settle or otherwise dispose of such claim without Consultant's prior written consent, such consent not to be unreasonably withheld. 7.20 WORKERS' COMPENSATION. Notwithstanding any other workers' compensation or insurance policies maintained by ISOCOR, Consultant shall procure and maintain workers' compensation coverage sufficient to meet the statutory requirements of every state where Consultant's personnel assigned to ISOCOR's work are located. 7.30 CONSULTANT'S AGREEMENTS WITH PERSONNEL. Consultant shall obtain and maintain in effect written agreements with each of its personnel, if any, who participate in any of the ISOCOR's work hereunder. Such agreements shall contain terms sufficient for Consultant to comply with all provisions of this Agreement. 7.40 STATE AND FEDERAL TAXES. As neither Consultant nor its personnel are ISOCOR's employees, ISOCOR shall not take any action or provide Consultant's personnel with any benefits or commitments inconsistent with any of such undertakings by Consultant. In particular: 1. ISOCOR will not withhold FICA (Social Security) from Consultant's payments. 2. ISOCOR will not make state or federal unemployment insurance contributions on behalf of Consultant or its personnel. 3. ISOCOR will not withhold state and federal income tax from payment to Consultant. 4. ISOCOR will not make disability insurance contributions on behalf of Consultant. 5. ISOCOR will not obtain workers' compensation insurance on behalf of Consultant or its personnel. 8.00 GENERAL PROVISIONS 3 4 8.10 NOTICES. Any notices to be given hereunder by either party to the other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses appearing in the introductory paragraph of this Agreement, but each party may change such address by written notice in accordance with this paragraph. Notices delivered personally will be deemed communicated as of actual receipt. Mailed notices will be deemed communicated as of two days after mailing. 8.30 ENTIRE AGREEMENT OF THE PARTIES. This Agreement supersedes any and all agreements, either oral or written, between the parties hereto with respect to the rendering of Services by Consultant for ISOCOR and contains all the covenants and agreements between the parties with respect to the rendering of such services in any manner whatsoever. Each party to this agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, that are not embodied herein, and that no other agreement, statement, or promise not contained in this agreement shall be valid or binding. Any modification of this agreement will be effective only if it is in writing signed by the party to be charged. Notwithstanding the foregoing, the parties specifically acknowledge that the Confidentiality Agreement dated August 22, 1997 between the parties shall remain in full force and effect. 8.40 PARTIAL INVALIDITY. If any provision in this agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way. 8.50 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized representative. All copies of this Amendment, signed by both parties, shall be deemed originals. ISOCOR CONSULTANT Signed: /s/ JANINE BUSHMAN Signed: /s/ DENNIS J. CAGAN ---------------------------- -------------------------------- Name: JANINE BUSHMAN Name: DENNIS J. CAGAN ---------------------------- -------------------------------- Title: CFO Title: PRESIDENT ---------------------------- -------------------------------- Date: 8/30/97 Date: 8-30-97 ---------------------------- -------------------------------- 4 5 EXHIBIT A WORK ORDER #1 - INITIAL WORK ORDER CONTRACTOR PERSONNEL: DENNIS CAGAN DURATION OF PROJECT September 1, 1997 - August 31, 1998 COMPENSATION: $6,000 per calendar month; plus contingent compensation of up to $6,000 per calendar month, based upon the Executive Bonus Program as approved by the Board of Directors of ISOCOR, which Program for the period September 1, 1997 through December 31, 1997 is attached hereto as Exhibit B. ISOCOR reserves the right to change the Executive Bonus Program at the discretion of the Board of Directors. EXPENSES Minimal telephone, travel and living directly incurred in performance of this Work Order, and in accordance with ISOCOR reimbursement policies SCOPE OF WORK: 1.25 days per week shall be exclusively devoted to ISOCOR strategy, sales, marketing, services and distribution.
Work Order Approved by ISOCOR : /s/ JANINE BUSHMAN Date: 8-30-97 --------------------- ---------------- Work Order Accepted by Consultant: /s/ DENNIS CAGAN Date: 8-30-97 --------------------- ---------------- 5 6 Exhibit B - Executive Bonus Program Period Covering September 1, 1997 - December 31, 1997 Participation in this Program for the second calendar half of 1997 is based upon the weighted actual achievement of consolidated revenues and net income/(loss) against planned levels of consolidated revenues and net income/(loss) of ISOCOR. The Program provides for linear interpolation between the floor (at 85% weighted performance) and 100% weighted performance, with the same rate beyond 100% weighted performance. Calculations of contingent compensation will be made on a calendar six month basis. The weighted factors used in the Program are:
Driver Weight ------ ------ Revenue 60% Net Income/(Loss) (post bonus) 40%
Contingent Compensation Opportunity At 100% weighted performance - $24,000 At 85% floor weighted performance - $1,200 (Below 85% weighted performance no contingent compensation is payable) At 112% weighted performance - $42,240 The goals for performance for the second calendar six months of 1997 are as follows and exclude the impact of any acquisition activity ISOCOR may complete in 1997:
Second Half 1997 ---------------- Revenue $14,600,000 Net Loss $1,193,000
6 7 EXHIBIT A WORK ORDER #2: PURSUANT TO CONSULTANCY AGREEMENT SIGNED SEPTEMBER 1, 1997 (CANCELS AND SUPERSEDES WORK ORDER #1) CONTRACTOR: DENNIS CAGAN DURATION OF February 9, 1998 to August 31, 1998 PROJECT COMPENSATION: $3,000 per calendar month; plus contingent compensation of up to $3,000 per calendar month, based upon the Executive Bonus Program as approved by the Board of Directors of ISOCOR (ISOCOR reserves the right to change the Executive Bonus Program at the discretion of the Board of Directors). EXPENSES minimal telephone, travel, and living expenses directly incurred in performance of this Work Order in accordance with ISOCOR's reimbursement policies (receipts must accompany any invoice) SCOPE OF WORK: 1 day every 2 weeks shall be exclusively devoted to ISOCOR strategy, sales, marketing, professional services issues, and distribution development; such work shall be performed in ISOCOR's Santa Monica, California office unless otherwise agreed
THIS WORK ORDER #2 CANCELS AND SUPERSEDES WORK ORDER #1. Work Order Approved by ISOCOR: [SIG] Date: 2/11/98 ---------------------- ---------------- Work Order Accepted by Consultant: [SIG] Date: 2-11-98 ---------------------- ---------------- 1 EX-23.1 8 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of ISOCOR on Form S-8 (File No. 333-05275) of our report dated February 18, 1998, on our audits of the financial statements of ISOCOR as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. ---------------------------- Coopers & Lybrand L.L.P. Los Angeles, California March 30, 1998 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997, SEPTEMBER 30, 1997, JUNE 30, 1997 AND MARCH 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1997, NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1997, SIX MONTHS IN THE PERIOD ENDED JUNE 30, 1997 AND THREE MONTHS IN THE PERIOD ENDED MARCH 30, 1997 AND ARE QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. SECTION XIB.4.b REQUIRES RETROACTIVELY RESTATEMENT OF PREVIOUSLY FILED FINANCIAL DATA SCHEDULE AS A RESULT OF SFAS No. 128, EARNINGS PER SHARE. 1,000 12-MOS 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-30-1997 10,784 10,322 12,393 8,397 9,677 10,693 10,802 15,505 10,609 10,755 10,883 10,594 1,509 1,972 2,035 2,112 0 0 0 0 31,554 31,660 34,244 34,500 7,056 7,040 7,053 6,972 4,651 4,382 4,138 3,941 34,223 34,605 37,459 37,857 8,406 7,528 9,576 7,756 0 0 0 0 0 0 0 0 0 0 0 0 39,359 39,258 39,096 39,082 (13,675) (12,325) (11,369) (9,150) 34,223 34,605 37,459 37,857 22,018 15,376 9,189 3,834 22,018 15,376 9,189 3,834 2,863 1,743 935 430 5,667 3,769 2,208 988 25,419 19,013 13,114 6,361 382 251 218 107 (1,170) (893) (616) (308) (7,859) (6,420) (5,408) (3,169) 45 22 19 8 (7,904) (6,442) (5,427) (3,177) 0 0 0 0 0 0 0 0 0 0 0 0 (7,904) (6,442) (5,427) (3,177) 0.83 0.69 (0.58) 0.34 0.83 0.69 (0.58) 0.34
EX-27.2 10 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996, SEPTEMBER 30, 1996, JUNE 30, 1996 AND MARCH 31, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1996, NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1996, SIX MONTHS IN THE PERIOD ENDED 1,000 12-MOS 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-30-1996 13,374 13,317 13,511 27,113 11,739 12,475 12,518 0 12,881 10,803 8,590 9,963 1,647 1,169 1,093 993 0 0 0 0 37,965 37,512 35,831 37,922 6,795 6,357 4,361 3,367 3,805 3,409 1,987 780 41,298 40,766 38,534 40,858 7,907 7,577 5,968 7,495 0 0 0 0 0 0 0 0 0 0 0 0 39,047 39,034 38,940 39,063 (5,843) (6,114) (6,674) (6,212) 41,298 40,766 38,534 40,858 26,394 19,388 12,976 5,329 26,394 19,388 12,976 5,329 2,663 2,066 1,549 447 5,068 3,823 3,705 937 21,359 15,372 10,277 4,136 223 102 102 32 (1,010) (687) (361) (68) 668 649 291 306 185 136 280 106 483 274 (15) 200 0 0 0 0 0 0 0 0 0 0 0 0 483 274 (15) 200 0.06 0.04 (0.00) 0.03 0.05 0.03 (0.00) 0.02
-----END PRIVACY-ENHANCED MESSAGE-----