-----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, OL9WX32kbbiYB9LUg5JMRgHZ3+ahVFfhKaD9ofTCRJhJblaxgQSGfd4ig/Gzk4fZ aefB0Kz8rbOPhYCmrS9tAA== 0001012870-00-000082.txt : 20000202 0001012870-00-000082.hdr.sgml : 20000202 ACCESSION NUMBER: 0001012870-00-000082 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20000111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERWOVEN INC CENTRAL INDEX KEY: 0001042431 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 943221352 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-92943 FILM NUMBER: 505018 BUSINESS ADDRESS: STREET 1: 1195 W FREMONT AVE STREET 2: STE 2000 CITY: SUNNYVALE STATE: CA ZIP: 94087 BUSINESS PHONE: 4087742000 MAIL ADDRESS: STREET 1: 1195 W FREMONT AVE STREET 2: STE 2000 CITY: SUNNYVALE STATE: CA ZIP: 94087 S-1/A 1 FORM S-1 AMENDMENT #1 As filed with the Securities and Exchange Commission on January 11, 2000 Registration No. 333- 92943 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- AMENDMENT NO.1 TO FORM S-1 REGISTRATION STATEMENT Under the Securities Act of 1933 --------------- INTERWOVEN, INC. (Exact name of Registrant as specified in its charter) Delaware 7372 77-0523543 (State or other (Primary standard (I.R.S. employer jurisdiction of industrial classification identification no.) incorporation or code number) organization) Interwoven, Inc. 1195 West Fremont Avenue, Suite 2000 Sunnyvale, California 94087 (408) 774-2000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------- David M. Allen Chief Financial Officer Interwoven, Inc. 1195 West Fremont Avenue, Suite 2000 Sunnyvale, California 94087 (408) 774-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to: Matthew P. Quilter, Esq. Mark A. Bertelsen, Esq. Horace L. Nash, Esq. Jose F. Macias, Esq. Katherine Tallman Schuda, Esq. Jon C. Avina, Esq. William L. Hughes, Esq. Brooke D. Coleman, Esq. FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI Two Palo Alto Square Professional Corporation Palo Alto, California 94306 650 Page Mill Road (650) 494-0600 Palo Alto, California 94304 (650) 493-9300 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting offers to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JANUARY 11, 2000 3,000,000 Shares [LOGO OF INTERWOVEN APPEARS HERE] Common Stock -------- We are selling 1,000,000 shares of common stock and the selling stockholders are selling 2,000,000 shares of common stock. We will not receive any of the proceeds from shares of common stock sold by the selling stockholders. Our common stock is listed on The Nasdaq Stock Market's National Market under the symbol "IWOV." On January 7, 2000, the reported last sale price of our common stock was $125.38 per share. The underwriters have an option to purchase a maximum of 450,000 additional shares to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 7.
Price Underwriting Proceeds Proceeds to to Discounts and to Selling Public Commissions Interwoven Stockholders ------- ------------- ---------- ------------ Per Share................... $ $ $ $ Total....................... $ $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Credit Suisse First Boston Robertson Stephens Dain Rauscher Wessels SoundView Technology Group Adams, Harkness & Hill, Inc. The date of this prospectus is , 2000. ----------- TABLE OF CONTENTS
Page ---- Prospectus Summary.................. 3 Risk Factors........................ 7 Special Note Regarding Forward- Looking Statements................. 15 Use of Proceeds..................... 16 Price Range of Common Stock......... 16 Dividend Policy..................... 16 Capitalization...................... 17 Dilution............................ 18 Selected Consolidated Financial Data............................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20 Business............................ 30
Page ---- Management.......................... 44 Related Party Transactions.......... 55 Principal and Selling Stockholders.. 57 Description of Capital Stock........ 61 Shares Eligible for Future Sale..... 65 Underwriting........................ 68 Notice to Canadian Residents........ 70 Legal Matters....................... 71 Experts............................. 71 Where You Can Find Additional Information........................ 71 Index to Consolidated Financial Statements......................... F-1
----------- You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus; it does not contain all the information you should consider before buying shares in this offering. You should read the entire prospectus carefully before making a decision whether to purchase our common stock. Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their over-allotment option. Interwoven Interwoven is a provider of software products and services that help businesses and other organizations manage the information that makes up the content of their web sites. In the Internet industry, this is often referred to as "web content management." We have designed our software products to help companies rapidly and efficiently develop, maintain and extend large web sites that are essential to their businesses. Our principal product, TeamSite, incorporates widely accepted Internet industry standards and is designed with an open architecture that allows it to support a wide variety of Internet software products, including web authoring tools and web application servers. Using TeamSite, our customers can manage web content, control the versions of their web sites, manage web site contribution and content approval processes, and develop Internet applications. TeamSite allows large numbers of contributors across an enterprise to add web content in a carefully-managed process. In addition, our OpenDeploy product allows customers to distribute web content automatically from one server to one or more servers. As leading companies demonstrate success on the Internet, business leaders are seeking to capitalize on new business opportunities, reach a broader customer base and reduce overall operating costs by moving their businesses to the Internet. The use of the Internet to conduct business is frequently referred to as "Internet commerce" or "eBusiness." Companies are making significant investments to develop and deploy these eBusiness initiatives. International Data Corporation, or IDC, estimates that spending on software applications and services for Internet commerce will grow from $7.8 billion in 1998 to $53.8 billion in 2002. The competitive online environment is driving companies to deploy complex web sites that offer enhanced user experiences. These web sites can contain hundreds of thousands of content-rich web pages, and this content has been increasing in volume and complexity. In addition, today's web sites must be updated frequently by numerous contributors throughout an enterprise. Web teams find it difficult to manage the increasing complexity, volume and variability of this content. At the same time, the large number of web authoring tools and web application servers have contributed to the increasing technological complexity involved in developing and maintaining web sites. These trends have created a need for content management software that can accommodate the increasing volume of web content, leverage existing investments in computers, software and associated information technology infrastructure, and allow more contributors to add content to a web site. IDC estimates that one of the markets in which we participate, which they refer to as the web development life-cycle management software market, will grow from $76.4 million in 1998 to $1.6 billion in 2003. Interwoven's content management software assists customers in accelerating their time-to-web--the rate at which they can deploy new content on their web sites--by enabling them to develop multiple eBusiness applications simultaneously. It lowers web operating costs by reducing a customer's dependence on highly-paid web professionals and reducing the time required to test and approve new content for a web site or eBusiness application. The scalability of our products also allows customers to manage hundreds of thousands of web files and enables hundreds of employees throughout the enterprise to contribute web content. In addition, our software's architecture is non-proprietary and based on recognized industry standards, so it enables businesses to take advantage of existing investments in technology and web content and, at the same time, to integrate new technologies and applications easily. 3 We market and sell our software products and services primarily through a direct sales force in North America. To date, we have licensed our software products to 175 customers, including AltaVista, AT&T/TCI, BellSouth, Best Buy, Cisco Systems, eBay, E*Trade, FedEx, Gap, General Electric, the U.S. Department of Education, USWeb/CKS, Viacom/Nickelodeon and Yahoo!/GeoCities, although we have incurred losses to date resulting in an accumulated deficit of approximately $21.3 million at September 30, 1999. We were incorporated in California in March 1995 and reincorporated in Delaware in October 1999. Our principal executive offices are located at 1195 West Fremont Avenue, Suite 2000, Sunnyvale, California 94087 and our telephone number is (408) 774-2000. Our World Wide Web address is www.interwoven.com. The information on our web site is not part of this prospectus. Recent Developments For the quarter ended December 31, 1999, we had revenues of $7.5 million, compared to revenues of $1.9 million for the quarter ended December 31, 1998. License revenues represented 65% and service revenues represented 35% of the revenues for the quarter ended December 31, 1999. Our net loss for the quarter ended December 31, 1999 was $4.6 million, or $0.23 per share on a pro forma basic and diluted basis (on approximately 20.5 million weighted average pro forma shares), compared to a net loss for the quarter ended December 31, 1998 of $1.8 million or $0.15 per share on a pro forma basic and diluted basis (on approximately 12.0 million weighted average pro forma shares). Our net loss before the effect of non-cash charges related to stock-based compensation and acquisition expenses was $3.5 million, or $0.17 per share on a pro forma basic and diluted basis, for the quarter ended December 31, 1999, compared to $1.6 million, or $0.13 per share on a pro forma basic and diluted basis, for the quarter ended December 31, 1998. 4 The Offering Common stock offered by Interwoven.................. 1,000,000 shares Common stock offered by the selling stockholders.... 2,000,000 shares Common stock to be outstanding after this offering.. 23,883,450 shares Use of proceeds..................................... For general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market symbol....................... IWOV
The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding as of December 31, 1999. It does not include: . 1,543,522 shares issuable upon exercise of options outstanding as of December 31, 1999 under our stock option plans and 2,580,402 shares available for future issuance under those plans; . 300,000 shares available for future issuance under our employee stock purchase plan; and . 45,648 shares issuable upon exercise of outstanding warrants. ---------------- Interwoven(R), TeamSite(R), OpenDeploy(TM) and SmartContext(TM) are our trademarks. This prospectus also contains trademarks of other companies and organizations. Unless otherwise indicated, all information contained in this prospectus reflects: . a 2-for-3 reverse stock split completed in October 1999; . the conversion in October 1999 of each outstanding share of our preferred stock into two-thirds of a share of common stock, except for Series B Preferred Stock, each share of which converted into 0.702205 shares of common stock; and . our reincorporation from California to Delaware, which was completed in October 1999. 5 Summary Consolidated Financial Data (in thousands, except per share amounts)
Nine Months Ended September Years Ended December 31, 30, ---------------------------- ------------------ 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- Consolidated Statement of Operations Data: Revenues..................... $ -- $ 168 $ 4,003 $ 2,109 $ 9,261 Gross profit................. -- 73 2,670 1,299 5,572 Total operating expenses..... 520 2,933 9,165 5,886 16,999 Loss from operations......... (520) (2,860) (6,495) (4,587) (11,427) Net loss..................... (510) (2,948) (6,344) (4,498) (11,011) Net loss per share: Basic and diluted.......... $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51) Weighted average shares-- basic and diluted......... 2,282 2,356 2,633 2,505 3,722 Pro forma net loss per share: Basic and diluted.......... $ (0.74) $ (0.74) Weighted average shares-- basic and diluted......... 8,530 14,957
As of September 30, 1999 ------------------------------ Pro Pro Forma Actual Forma As Adjusted -------- -------- ----------- Consolidated Balance Sheet Data: Cash, cash equivalents and investments......... $ 21,995 $ 78,195 $ 196,301 Working capital................................ 18,203 74,403 192,509 Total assets................................... 29,472 85,672 203,778 Long-term debt and capital lease obligations, less current portion.......................... 875 875 875 Manditorily redeemable convertible preferred stock......................................... 52,996 -- -- Total stockholders' equity (deficit)........... (31,218) 77,978 196,084
See Note 1 of Notes to Consolidated Financial Statements for a description of the method that we used to compute our basic and diluted net loss per share and pro forma basic and diluted net loss per share. The pro forma balance sheet data gives effect to the application of the net proceeds of approximately $56.2 million from the sale of 3,622,500 shares of our common stock in our initial public offering in October 1999. The pro forma as adjusted balance sheet data gives effect to the sale of the 1,000,000 shares of common stock that we are offering under this prospectus at an assumed public offering price of $125.38 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. See "Use of Proceeds" and "Capitalization." 6 RISK FACTORS You should carefully consider the risks described below before buying shares in this offering. The risks and uncertainties described below are not the only risks we face. These risks are the ones we consider to be significant to your decision whether to invest in our common stock at this time. We might be wrong. There may be risks that you in particular view differently than we do, and there are other risks and uncertainties that are not presently known to us or that we currently deem immaterial, but that may in fact impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be seriously harmed, the trading price of our common stock could decline and you may lose all or part of your investment. Our operating history is limited, so it will be difficult for you to evaluate our business in making an investment decision. We were incorporated in March 1995 and have a limited operating history. We are still in the early stages of our development, which makes the evaluation of our business operations and our prospects difficult. We shipped our first product in May 1997. Since that time, we have derived substantially all of our revenues from licensing our TeamSite product and related services. Before buying our common stock, you should consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, particularly those companies whose businesses depend on the Internet. These risks and difficulties, as they apply to us in particular, include: . potential fluctuations in operating results and uncertain growth rates; . limited market acceptance of our products; . concentration of our revenues in a single product; . our dependence on a small number of orders for most of our revenue; . our need to expand our direct sales forces and indirect sales channels; . our need to manage rapidly expanding operations; and . our need to attract and train qualified personnel. If we do not increase our license revenues significantly, we will fail to achieve profitability. We have incurred net losses in each quarter since our inception, and we expect our net losses to increase. We incurred net losses of approximately $510,000 in 1996, $2.9 million in 1997, $6.3 million in 1998 and $11.0 million for the nine months ended September 30, 1999. As of September 30, 1999, we had an accumulated deficit of approximately $21.3 million. To compete effectively, we plan to continue to invest aggressively to expand our sales and marketing, research and development, and professional services organizations. As a result, if we are to achieve profitability we will need to increase our revenues significantly, particularly our license revenues. We cannot predict when we will become profitable, if at all. Our operating results fluctuate widely and are difficult to predict, so we may fail to satisfy the expectations of investors or market analysts and our stock price may decline. Our quarterly operating results have fluctuated significantly in the past, and we expect them to continue to fluctuate unpredictably in the future. It is possible that in some future periods our results of operations may not meet or exceed the expectations of public market analysts and investors. If this occurs, the price of our common stock is likely to decline. 7 Our quarterly results depend on a small number of large orders, so the loss of any single large order could harm those results and cause our stock price to drop. Each quarter, we derive a significant portion of our license revenues from a small number of relatively large orders. As a result, our operating results could suffer if any large orders are delayed or cancelled in any future period. In the first, second and third quarters of 1999, our top five customers accounted for 41%, 30% and 30%, respectively, of the total revenue in those quarters. We expect that we will continue to depend upon a small number of large orders for a significant portion of our license revenues. We face significant competition, which could make it difficult to acquire and retain customers and inhibit any future growth. We expect the competition in the market in which we operate to persist and intensify in the future. Competitive pressures may seriously harm our business and results of operations if they inhibit our future growth, or require us to hold down or reduce prices, or increase our operating costs. Our competitors include: . potential customers that utilize in-house development efforts; . developers of software that directly addresses the need for web content management, such as Vignette. In addition, other enterprise software companies such as Rational Software and Documentum have announced plans to enter our market. We also face potential competition from companies--for example, Microsoft and IBM--that may decide in the future to enter our market. Many of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Many of these companies can also leverage extensive customer bases and adopt aggressive pricing policies to gain market share. Potential competitors may bundle their products in a manner that discourages users from purchasing our products. Barriers to entering the web content management software market are relatively low. Because the market for our products is new, we do not know whether existing and potential customers will purchase our products in sufficient quantity for us to achieve profitability. The market for web content management software in which we sell is new and rapidly evolving. While we have licensed our products to 175 customers, we expect that we will continue to need intensive marketing and sales efforts to educate prospective clients about the uses and benefits of our products and services. Various factors could inhibit the growth of the market, and market acceptance of our products and services. In particular, potential customers that have invested substantial resources in other methods of conducting business over the Internet may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems. We cannot be certain that a viable market for our products will emerge, or if it does emerge, that it will be sustainable. Our lengthy sales cycle makes it particularly difficult for us to forecast revenue, requires us to incur high costs of sales, and aggravates the variability of quarterly fluctuations. The time between our initial contact with a potential customer and the ultimate sale, which we refer to as our sales cycle, typically ranges between three and nine months depending largely on the customer. If we do not shorten our sales cycle, it will be difficult for us to reduce sales and marketing expenses. In addition, as a result of our lengthy sales cycle, we have only a limited ability to forecast the timing and size of specific sales. This makes it more difficult to predict quarterly financial performance, or to achieve it, and any delay in completing sales in a particular quarter could harm our business and cause our operating results to vary significantly. We rely heavily on sales of one product, so if it does not achieve market acceptance we are likely to experience larger losses. Since 1997, we have generated substantially all of our revenues from licenses of, and services related to, our TeamSite product. We believe that revenues generated from TeamSite will continue to account for a large 8 portion of our revenues for the foreseeable future. A decline in the price of TeamSite, or our inability to increase license sales of TeamSite, would harm our business and operating results more seriously than it would if we had several different products and services to sell. In addition, our future financial performance will depend upon successfully developing and selling enhanced versions of TeamSite. If we fail to deliver product enhancements or new products that customers want it will be more difficult for us to succeed. We depend on our direct sales force to sell our products, so future growth will be constrained by our ability to hire and train new sales personnel. We sell our products primarily through our direct sales force, and we expect to continue to do so in the future. Our ability to sell more products is limited by our ability to hire and train direct sales personnel, and we believe that there is significant competition for direct sales personnel with the advanced sales skills and technical knowledge that we need. Some of our competitors may have greater resources to hire personnel with that skill and knowledge. If we are not able to hire experienced and competent sales personnel, our business would be harmed. Furthermore, because we depend on our direct sales force, any turnover in our sales force can significantly harm our operating results. Sales force turnover tends to slow sales efforts until replacement personnel can be recruited and trained to become productive. See "--We must attract and retain qualified personnel, which is particularly difficult for us because we compete with other Internet-related software companies and are located in the San Francisco Bay area where competition for personnel is extremely intense." If we do not develop our indirect sales channel, we will be less likely to increase our revenues. If we do not develop indirect sales channels, we may miss sales opportunities that might be available through these other channels. For example, domestic and international resellers may be able to reach new customers more quickly or more effectively than our direct sales force. Although we are currently investing and plan to continue to invest significant resources to develop these indirect sales channels, we may not succeed in establishing a channel that can market our products effectively and provide timely and cost-effective customer support and services. In addition, we may not be able to manage conflicts across our various sales channels, and our focus on increasing sales through our indirect channel may divert management resources and attention from direct sales. We must attract and retain qualified personnel, which is particularly difficult for us because we compete with other Internet-related software companies and are located in the San Francisco Bay area where competition for personnel is extremely intense. Our success depends on our ability to attract and retain qualified, experienced employees. We compete for experienced engineering, sales and consulting personnel with Internet professional services firms, software vendors, consulting and professional services companies. It is also particularly difficult to recruit and retain personnel in the San Francisco Bay area, where we are located. Although we provide compensation packages that include incentive stock options, cash incentives and other employee benefits, the volatility and current market price of our common stock may make it difficult for us to attract, assimilate and retain highly qualified employees in the future. In addition, our customers generally purchase consulting and implementation services. While we have recently established relationships with some third-party service providers, we continue to be the primary provider of these services. It is difficult and expensive to recruit, train and retain qualified personnel to perform these services, and we may from time to time have inadequate levels of staffing to perform these services. As a result, our growth could be limited due to our lack of capacity to provide those services, or we could experience deterioration in service levels or decreased customer satisfaction, any of which would harm our business. If we do not improve our operational systems on a timely basis, we will be more likely to fail to manage our growth properly. We have expanded our operations rapidly in recent years. We intend to continue to expand our operational systems for the foreseeable future to pursue existing and potential market opportunities. This rapid growth 9 places a significant demand on management and operational resources. In order to manage our growth, we need to implement and improve our operational systems, procedures and controls on a timely basis. If we fail to implement and improve these systems in a timely manner, our business will be seriously harmed. Difficulties in introducing new products and upgrades in a timely manner will make market acceptance of our products less likely. The market for our products is characterized by rapid technological change, frequent new product introductions and Internet-related technology enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. We expect to add new content management functionality to our product offerings by internal development, and possibly by acquisition. Content management technology is more complex than most software, and new products or product enhancements can require long development and testing periods. Any delays in developing and releasing new products could harm our business. New products or upgrades may not be released according to schedule or may contain defects when released. Either situation could result in adverse publicity, loss of sales, delay in market acceptance of our products or customer claims against us, any of which could harm our business. If we do not develop, license or acquire new software products, or deliver enhancements to existing products on a timely and cost-effective basis, our business will be harmed. Our products might not be compatible with all major platforms, which could limit our revenues. Our products currently operate on the Microsoft Windows NT and Sun Solaris operating systems. In addition, our products are required to interoperate with leading web content authoring tools and web application servers. We must continually modify and enhance our products to keep pace with changes in these applications and operating systems. If our products were to be incompatible with a popular new operating system or Internet business application, our business would be harmed. In addition, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, browsers, back-office applications, and other Internet- related applications, could also harm our business. We have no significant experience conducting operations internationally, which may make it more difficult than we expect to expand overseas and may increase the costs of doing so. To date, we have derived all of our revenues from sales to North American customers. We plan to expand our international operations in the future. There are many barriers to competing successfully in the international arena, including: . costs of customizing products for foreign countries; . restrictions on the use of software encryption technology; . dependence on local vendors; . compliance with multiple, conflicting and changing governmental laws and regulations; . longer sales cycles; and . import and export restrictions and tariffs. As a result of these competitive barriers, we cannot assure you that we will be able to market, sell and deliver our products and services in international markets. If we fail to establish and maintain strategic relationships, the market acceptance of our products, and our profitablity, may suffer. To offer products and services to a larger customer base our direct sales force depends on strategic partnerships and marketing alliances to obtain customer leads, referrals and distribution. If we are unable to 10 maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase our sales and reduce expenses will be harmed. We would also lose anticipated customer introductions and co- marketing benefits. Our success depends in part on the success of our strategic partners and their ability to market our products and services successfully. In addition, our strategic partners may not regard us as significant for their own businesses. Therefore, they could reduce their commitment to us or terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products and services. Even if we succeed in establishing these relationships, they may not result in additional customers or revenues. If our services revenues do not grow substantially, our total revenues are unlikely to increase. Our services revenues represent a significant component of our total revenues--21% of total revenues for 1998 and 37% of total revenues for the nine months ended September 30, 1999. We anticipate that services revenues will continue to represent a significant percentage of total revenues in the future. To a large extent, the level of services revenues depends upon our ability to license products which generate follow-on services revenue. Additionally, services revenues growth depends on ongoing renewals of maintenance and service contracts. Moreover, if third-party organizations such as systems integrators become proficient in installing or servicing our products, our services revenues could decline. Our ability to increase services revenues will depend in large part on our ability to increase the capacity of our professional services organization, including our ability to recruit, train and retain a sufficient number of qualified personnel. We might not be able to protect and enforce our intellectual property rights, a loss of which could harm our business. We depend upon our proprietary technology, and rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect it. We currently do not have any issued United States or foreign patents, but we have applied for one U.S. patent. It is possible that a patent will not issue from our currently pending patent application or any future patent application we may file. We have also restricted customer access to our source code and required all employees to enter into confidentiality and invention assignment agreements. Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as the laws of the United States, and we expect that it will become more difficult to monitor use of our products as we increase our international presence. In addition, third parties may claim that our products infringe theirs. Our failure to deliver defect-free software could result in greater losses and harmful publicity. Our software products are complex and have in the past and may in the future contain defects or failures that may be detected at any point in the product's life. We have discovered software defects in the past in some of our products after their release. Although past defects have not had a material effect on our results of operations, in the future we may experience delays or lost revenue caused by new defects. Despite our testing, defects and errors may still be found in new or existing products, and may result in delayed or lost revenues, loss of market share, failure to achieve acceptance, reduced customer satisfaction, diversion of development resources and damage to our reputation. As has occurred in the past, new releases of products or product enhancements may require us to provide additional services under our maintenance contracts to ensure proper installation and implementation. Moreover, third parties may develop and spread computer viruses that may damage the functionality of our software products. Any damage to or interruption in the performance of our software could also harm our business. Defects in our products may result in customer claims against us that could cause unanticipated losses. Because customers rely on our products for business critical processes, defects or errors in our products or services might result in tort or warranty claims. It is possible that the limitation of liability provisions in our 11 contracts will not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. We have not experienced any product liability claims like this to date, but we could in the future. Further, although we maintain errors and omissions insurance, this insurance coverage may not be adequate to cover us. A successful product liability claim could harm our business. Even defending a product liability suit, regardless of its merits, could harm our business because it entails substantial expense and diverts the time and attention of key management personnel. Year 2000 concerns by our customers could cause them to defer purchases of our products. We may experience reduced sales of products as customers and potential customers put a priority on correcting their own Year 2000 problems or avoiding new ones and therefore defer purchases of our products until later in 2000. As a result, the demand for our products may be particularly volatile and unpredictable in early 2000. Year 2000 problems with our products may increase our costs. Our products are generally integrated into enterprise computer systems involving sophisticated hardware and complex software products, which may not be Year 2000 compliant. We may in the future be subject to claims based on Year 2000 problems in other parties' products, Year 2000 problems alleged to be found in our products, Year 2000-related issues arising from the integration of multiple products within an overall system, or other similar claims. The total cost of Year 2000 compliance may be material and may harm our business. Acquisitions may harm our business by being more difficult than expected to integrate or by diverting management's attention. In July 1999, we acquired Lexington Software Associates, a software consulting company, to help support our existing customer base and to help attract and retain new customers. As part of our business strategy, we may seek to acquire or invest in additional businesses, products or technologies that we feel could complement or expand our business. If we identify an appropriate acquisition opportunity, we might be unable to negotiate the terms of that acquisition successfully, finance it, or integrate it into our existing business and operations. We may also be unable to select, manage or absorb any future acquisitions successfully. Further, the negotiation of potential acquisitions, as well as the integration of an acquired business, would divert management time and other resources. We may have to use a substantial portion of our available cash, including proceeds of this offering, to consummate an acquisition. On the other hand, if we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately benefit our business. If widespread Internet adoption does not continue, or if the Internet cannot accommodate continued growth, our business will be harmed because it depends on growth in the use of the Internet. Acceptance of our products depends upon continued adoption of the Internet for commerce. As is typical in the case of an emerging industry characterized by rapidly changing technology, evolving industry standards and frequent new product and service introductions, demand for and acceptance of recently introduced products and services are subject to a high level of uncertainty. To the extent that businesses do not consider the Internet a viable commercial medium, our customer base may not grow. In addition, critical issues concerning the commercial use of the Internet remain unresolved and may affect the growth of Internet use. The adoption of the Internet for commerce, communications and access to content, particularly by those who have historically relied upon alternative methods, generally requires understanding and accepting new ways of conducting business and exchanging information. In particular, companies that have already invested substantial resources in other means of conducting commerce and exchanging information may be particularly reluctant or slow to adopt a new, Internet-based strategy that may render their existing infrastructure obsolete. If the use of the Internet fails to develop or develops more slowly than expected, our business may be seriously harmed. 12 To the extent that there is an increase in Internet use, an increase in frequency of use or an increase in the required bandwidth of users, the Internet infrastructure may not be able to support the demands placed upon it. In addition, the Internet could lose its viability as a commercial medium due to delays in development or adoption of new standards or protocols required to handle increased levels of Internet activity. Changes in, or insufficient availability of, telecommunications or similar services to support the Internet also could result in slower response times and could adversely impact use of the Internet generally. If use of the Internet does not continue to grow or grows more slowly than expected, or if the Internet infrastructure, standards, protocols or complementary products, services or facilities do not effectively support any growth that may occur, our business would be seriously harmed. There is substantial risk that future regulations could be enacted that either directly restrict our business or indirectly impact our business by limiting the growth of Internet commerce. As Internet commerce evolves, we expect that federal, state or foreign agencies will adopt new legislation or regulations covering issues such as user privacy, pricing, content and quality of products and services. If enacted, these laws, rules or regulations could indirectly harm us to the extent that they impact our customers and potential customers. We cannot predict if or how any future legislation or regulations would impact our business. Although many of these regulations may not apply to our business directly, we expect that laws regulating or affecting commerce on the Internet could indirectly harm our business. Our existing stockholders hold a majority of our stock and will be able to control matters requiring stockholder approval. Immediately after the closing of this offering, approximately 30.1% of our outstanding capital stock will be owned by our directors and executive officers or their affiliated entities. As a result, these stockholders, acting together, could significantly influence all matters requiring approval by the stockholders, including the election of all directors and approval of significant corporate transactions. We have various mechanisms in place to discourage takeover attempts, which might tend to suppress our stock price. Provisions of our certificate of incorporation and bylaws that may discourage, delay or prevent a change in control include: . we are authorized to issue "blank check" preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; . we provide for the election of only one-third of our directors at each annual meeting of stockholders, which slows turnover on the board of directors; . we limit who may call special meetings of stockholders; . we prohibit stockholder action by written consent, so all stockholder actions must be taken at a meeting of our stockholders; and . we require advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law and our stock incentive plans may discourage, delay or prevent a change in control of us. See "Description of Capital Stock--Anti-Takeover Provisions." Purchasers in this offering will incur immediate and substantial dilution. The public offering price of our common stock will be substantially higher than the book value per share of the outstanding common stock. As a result, if we were liquidated for book value immediately following this 13 offering, each stockholder purchasing in this offering would receive less than they paid for their common stock. To the extent that outstanding options to purchase our common stock are exercised, or options or warrants reserved for issuance are issued and exercised, each stockholder purchasing in this offering will experience further substantial dilution. If a significant number of shares become available for sale and are sold in a short period of time, the market price of our stock could decline. If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. Our common stock began trading on the Nasdaq National Market on October 8, 1999; however, to date there have been a limited number of shares trading in the public market. After this offering, a total of 6,622,500 shares of our common stock will be available on the open market. Our current stockholders who are not participating in this offering hold 2,221,198 shares that they will be able to sell in the public market beginning on April 5, 2000, when the lock-up agreements signed in connection with our initial public offering expire. In addition, 90 days after this offering, our executive officers, directors and the selling stockholders will be able to sell an additional 10,951,377 shares of our common stock. If many of these shares are sold when they become available for resale, the market price of our common stock may decline. For a detailed discussion of the shares eligible for future sale, see "Shares Eligible for Future Sale." We have broad discretion to use the offering proceeds and how we invest these proceeds may not yield a favorable, or any, return. The net proceeds of this offering are not allocated for specific uses other than working capital and general corporate purposes. Thus, our management has broad discretion over how these proceeds are used and could spend the proceeds in ways with which you may not agree. We cannot assure you that the proceeds will be invested in a way that yields a favorable, or any, return for us. 14 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward- looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this prospectus involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These factors include those listed under "Risk Factors" and elsewhere in this prospectus. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. 15 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $118.1 million from the sale of 1,000,000 shares of our common stock at an assumed public offering price of $125.38 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any portion of the proceeds from the sale of shares of common stock by the selling stockholders. The primary purposes of this offering are to obtain additional working capital, create a larger public float for our common stock and facilitate our future access to public capital markets. We intend to use the net proceeds of this offering primarily for additional working capital and other general corporate purposes, including increased sales and marketing expenditures, increased research and development expenditures and capital expenditures. We have not yet determined our expected use of these proceeds. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments and the rate of growth, if any, of our business. We may also use a portion of the net proceeds to acquire additional businesses, products and technologies, or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments to do so and are not currently engaged in any negotiations for any acquisition or joint venture. We will retain broad discretion in the allocation of the net proceeds of this offering. Pending the uses described above, we will invest the net proceeds of this offering in short-term to medium-term interest-bearing, investment-grade securities. We cannot predict whether the proceeds will be invested to yield a favorable return. We believe that our available cash, together with the net proceeds of this offering, will be sufficient to meet our capital requirements for at least the next 24 months. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol "IWOV" since our initial public offering on October 8, 1999. Before then, there was no public market for our common stock. The following table shows, for the periods indicated, the high and low prices per share of our common stock.
Price --------------- High Low ------- ------- 1999: Fourth quarter (starting October 8, 1999)................... $177.88 $ 36.75 2000: First quarter (through January 10, 2000).................... $180.00 $118.88
The closing sale price of our common stock as reported on the Nasdaq National Market on January 7, 2000 was $125.38. As of December 31, 1999, we had approximately 239 stockholders of record. This does not include the number of persons whose stock is in nominee or "street name" accounts through brokers. DIVIDEND POLICY We have never declared or paid cash dividends on our common stock or other securities, and we do not anticipate paying a cash dividend in the foreseeable future. Our lines of credit currently prohibit the payment of dividends. 16 CAPITALIZATION The following table sets forth the following information, as of September 30, 1999: . our actual capitalization; . our pro forma capitalization after giving effect to the conversion of all outstanding shares of preferred stock into shares of common stock in October 1999 and the application of the net proceeds of approximately 56.2 million from the sale of 3,622,500 shares of our common stock in our initial public offering; and . our pro forma as adjusted capitalization after giving effect to the sale of 1,000,000 shares of common stock by us at an assumed public offering price of $125.38 per share, less the estimated underwriting discounts and commissions and estimated offering expenses.
September 30, 1999 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (in thousands, except share data) Debt and leases, current and long-term......... $ 1,375 $ 1,375 $ 1,375 Mandatorily redeemable convertible preferred stock, 18,763,092 shares authorized, 18,543,523 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted...................................... 52,996 -- -- Stockholders' equity (deficit): Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted........................... -- -- -- Common stock, $0.001 par value, 26,666,667 shares authorized, 6,588,846 shares issued and outstanding, actual; 100,000,000 shares authorized, 22,681,885 shares issued and outstanding, pro forma; 23,681,885 shares issued and outstanding, pro forma as adjusted.................................... 7 23 24 Additional paid-in capital................... (4,590) 104,590 222,695 Notes receivable from stockholders........... (202) (202) (202) Deferred stock-based compensation............ (5,114) (5,114) (5,114) Accumulated deficit.......................... (21,319) (21,319) (21,319) -------- -------- -------- Total stockholders' equity (deficit)....... (31,218) 77,978 196,084 -------- -------- -------- Total capitalization..................... $ 23,153 $ 79,353 $197,459 ======== ======== ========
The table excludes: . 64,123 shares of common stock issued upon the exercise of warrants in October 1999; . 1,030,258 shares issuable upon exercise of options outstanding at September 30, 1999 under our stock option plans and 3,240,484 shares available for future issuance under those plans; . 300,000 shares available for future issuance under our employee stock purchase plan; and . 45,648 shares issuable upon exercise of outstanding warrants. 17 DILUTION The pro forma net intangible book value of our common stock as of September 30, 1999, after giving effect to the conversion of all outstanding shares of preferred stock into common stock and the application of the net proceeds of approximately $56.2 million from the sale of 3,622,500 shares of our common stock in our initial public offering in October 1999, was $77.4 million, or approximately $3.41 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Assuming our sale of 1,000,000 shares of common stock offered at an assumed public offering price of $125.38 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of September 30, 1999 would have been $195.5 million, or $8.26 per share. This represents an immediate increase in pro forma net tangible book value of $4.85 per share to existing stockholders and an immediate dilution in net tangible book value of $117.12 per share to new investors. Investors participating in this offering will incur immediate, substantial dilution. The following table illustrates the per share dilution: Assumed public offering price per share........................ $ 125.38 Pro forma net tangible book value per share as of September 30, 1999.................................................... $ 3.41 Increase in pro forma net tangible book value per share attributable to new investors............................... 4.85 ------ Pro forma net tangible book value per share after offering..... 8.26 -------- Dilution per share to new investors............................ $ 117.12 ========
The following table summarizes, on a pro forma basis, as of September 30, 1999, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by the new investors purchasing shares in this offering. We have used an assumed public offering price of $125.38 per share, and we have not deducted estimated underwriting discounts and commissions and estimated offering expenses in our calculations.
Average Shares Purchased Total Consideration Price ------------------ ------------------- Per Number Percent Amount Percent Share ---------- ------- ----------- ------- ------- Existing stockholders............ 22,681,885 95.8% 114,585,500 47.8% $ 5.05 New investors.................... 1,000,000 4.2 125,375,000 52.2 125.38 ---------- ----- ----------- ----- ------- Total.......................... 23,681,885 100.0% 239,960,500 100.0% $ 10.13 ========== ===== =========== ===== =======
This discussion of dilution, and the table quantifying it, assume no exercise of any outstanding stock options. The exercise of stock options outstanding under our stock option plans having an exercise price less than the offering price would increase the dilutive effect to new investors. 18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with, and is qualified by reference to, the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999 and the consolidated balance sheet data at December 31, 1997 and 1998, and September 30, 1999 are derived from and are qualified by reference to audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data at December 31, 1996 is derived from audited consolidated financial statements not included in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 1998 are derived from unaudited consolidated financial statements included elsewhere in this prospectus and, in our opinion, include all adjustments consisting solely of normal recurring accruals which are necessary to present fairly the data for that period. Historical results are not necessarily indicative of future results and the results for interim periods are not necessarily indicative of results to be expected for the entire year.
Nine Months Ended Year Ended December 31, September 30, --------------------------- -------------------- 1996 1997 1998 1998 1999 ------- -------- -------- --------- --------- (in thousands, except per share data) Consolidated Statement of Operations Data: Revenues: License ................... $ -- $ 84 $ 3,176 $ 1,570 $ 5,814 Services .................. -- 84 827 539 3,447 ------- -------- -------- --------- --------- Total revenues............ -- 168 4,003 2,109 9,261 Cost of revenues: License.................... -- -- 59 19 147 Services................... -- 95 1,274 791 3,542 ------- -------- -------- --------- --------- Total cost of revenues.... -- 95 1,333 810 3,689 ------- -------- -------- --------- --------- Gross profit................ -- 73 2,670 1,299 5,572 Operating expenses: Research and development... 328 884 1,797 1,227 2,930 Sales and marketing........ 101 1,519 4,817 2,960 9,058 General and administrative............ 91 530 1,739 1,135 2,077 Amortization of deferred stock-based compensation.. -- -- 812 564 2,685 Amortization of acquired intangible assets......... -- -- -- -- 249 ------- -------- -------- --------- --------- Total operating expenses.. 520 2,933 9,165 5,886 16,999 ------- -------- -------- --------- --------- Loss from operations........ (520) (2,860) (6,495) (4,587) (11,427) Interest and other income (expense), net............. 10 (88) 151 89 416 ------- -------- -------- --------- --------- Net loss.................... $ (510) $ (2,948) $ (6,344) $ (4,498) $ (11,011) ======= ======== ======== ========= ========= Net loss per share: Basic and diluted.......... $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51) Weighted average shares-- basic and diluted......... 2,282 2,356 2,633 2,505 3,722 Pro forma net loss per share: Basic and diluted.......... $ (0.74) $ (0.74) Weighted average shares-- basic and diluted......... 8,530 14,957
December 31, ----------------------- September 30, 1996 1997 1998 1999 ----- ------- ------- ------------- (in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and investments....................... $ 17 $ 1,019 $ 9,022 $ 21,995 Working capital.................... (208) 792 8,844 18,203 Total assets....................... 92 1,384 13,908 29,472 Long-term debt and capital lease obligations, less current portion .................................. -- 87 1,257 875 Mandatorily redeemable convertible preferred stock................... 385 4,627 20,464 52,996 Total stockholders' deficit........ (525) (3,734) (10,752) (31,218)
See Note 1 of Notes to Consolidated Financial Statements for a discussion regarding computation and presentation of pro forma basic and diluted net loss per share and shares used in computing pro forma basic and diluted net loss per share. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" and our Consolidated Financial Statements and Notes appearing elsewhere in this prospectus. Overview Interwoven was incorporated in March 1995 to provide software products and services for web content management. Designed specifically for the web, our products allow large teams of people across an enterprise to contribute and edit web content on a collaborative basis, reducing the time-to-web for critical eBusiness initiatives. From March 1995 through March 1997, we were a development stage company conducting research and development for our initial products. In May 1997, we shipped the first version of our principal product, TeamSite. We have subsequently developed and released enhanced versions of TeamSite and have introduced related products. As of December 31, 1999, we had sold our products and services to 175 customers. We market and sell our products primarily through a direct sales force and augment our sales efforts through relationships with systems integrators and other strategic partners. We are headquartered in Sunnyvale, California and maintain additional offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City, Seattle and Washington, D.C. Our revenues to date have been derived exclusively from accounts in North America. In May 1999, we opened an office in the United Kingdom. We had 205 employees as of December 31, 1999. We derive revenues from the license of our software products and from services we provide to our customers. To date, we have derived virtually all of our license revenues from licenses of TeamSite. License revenues are recognized when persuasive evidence of an agreement exists, the product has been delivered, no significant post-delivery obligations remain, the license fee is fixed or determinable and collection of the fee is probable. Services revenues consist of professional services and maintenance fees. Professional services primarily consist of software installation and integration, business process consulting and training. We generally bill our professional services customers on a time and materials basis and recognize revenues as the services are performed. Maintenance agreements are typically priced based on a percentage of the product license fee, and typically have a one-year term that is renewable annually. Services provided to customers under maintenance agreements include technical product support and an unspecified number of product upgrades as released by us during the term of a maintenance agreement. Revenues from maintenance support agreements are recognized ratably over the term of the agreement. Since inception, we have incurred substantial costs to develop our technology and products, to recruit and train personnel for our engineering, sales and marketing and services organizations, and to establish an administrative organization. As a result, we have incurred net losses in each quarter since inception and, as of September 30, 1999, had an accumulated deficit of $21.3 million. We anticipate that our cost of services revenues and operating expenses will increase substantially in future quarters as we grow our services organization to support an increased level and expanded number of services offered, increase our sales and marketing operations, develop new distribution channels, fund greater levels of research and development, and improve operational and financial systems. Accordingly, we expect to incur additional losses for the foreseeable future as we continue to expand our operations. In addition, our limited operating history makes the prediction of future results of operations difficult and, accordingly, there can be no assurance that we will achieve or sustain profitability. 20 Results of Operations The following table lists, for the periods indicated, each line as a percentage of total revenues:
Years Ended Nine Months Ended December 31, September 30, --------------- ------------------- 1997 1998 1998 1999 ------ ------ -------- -------- Revenues: License.............................. 50 % 79 % 74 % 63 % Services............................. 50 21 26 37 ------ ------ -------- -------- Total revenues..................... 100 100 100 100 Cost of revenues: License.............................. -- 1 1 2 Services............................. 57 32 37 38 ------ ------ -------- -------- Total cost of revenues............. 57 33 38 40 ------ ------ -------- -------- Gross profit........................... 43 67 62 60 Operating expenses: Research and development............. 526 45 58 32 Sales and marketing.................. 904 120 140 98 General and administrative........... 315 43 54 22 Amortization of deferred stock-based compensation........................ -- 20 27 29 Amortization of acquired intangible assets.............................. -- -- -- 3 ------ ------ -------- -------- Total operating expenses........... 1,745 228 279 184 ------ ------ -------- -------- Loss from operations................... (1,702) (161) (217) (124) Interest and other income (expense), net................................... (52) 4 4 5 ------ ------ -------- -------- Net loss............................... (1,754)% (157)% (213)% (119)% ====== ====== ======== ========
Nine Months Ended September 30, 1998 and 1999 Revenues Total revenues increased 339% from $2.1 million for the nine months ended September 30, 1998 to $9.3 million for the nine months ended September 30, 1999. This increase was attributable to greater market acceptance of our software products after their introduction in 1997 and an increase in the number of sales and marketing staff, resulting in an increased number of customers. License. License revenues increased 270% from $1.6 million for the nine months ended September 30, 1998 to $5.8 million for the nine months ended September 30, 1999. License revenues represented 74% and 63% of total revenues, respectively, in those periods. The increase in license revenues reflects continued growth from the low level of revenue in 1998, our first full year in which we licensed our products. The decline in the percentage of total revenues represented by license revenues reflects the more rapid growth of services revenues due to a growing customer base. Services. Services revenues increased 543% from $539,000 for the nine months ended September 30, 1998 to $3.4 million for the nine months ended September 30, 1999. Services revenues represented 26% and 37% of total revenues, respectively, in those periods. The increase in services revenues reflects an increase in both professional services and maintenance fees generated from an expanded number of customers who licensed our products. Cost of Revenues License. Cost of license revenues includes expenses incurred to manufacture, package and distribute software products and related documentation, as well as costs of licensing third-party software sold in conjunction with our software products. Cost of license revenues increased 674% from $19,000 for the nine 21 months ended September 30, 1998 to $147,000 for the nine months ended September 30, 1999. Cost of license revenues represented 1% and 3% of license revenues in the nine months ended September 30, 1998 and 1999, respectively. The increase in cost of license revenues, both as a percentage of license revenues and in absolute dollars, reflects increased sales of our product. Services. Cost of services revenues consists primarily of salary and related costs of our professional services, training, maintenance and support staffs, as well as subcontractor expenses. Cost of services revenues increased 348% from $791,000 for the nine months ended September 30, 1998 to $3.5 million for the nine months ended September 30, 1999. Cost of services revenues represented 147% and 103% of services revenues, respectively, in those periods. This increase in absolute dollar amounts was due to an increase in the number of in- house staff from 10 at September 30, 1998 to 43 at September 30, 1999, and a $370,000 increase in subcontractor expenses. We expect our cost of services revenues to increase in dollar amounts as a result of the increased staffing of our professional services organization due to our acquisition of Lexington Software in July 1999 and through our continued expansion of our services staff and consulting organizations. Since services revenues have substantially lower margins than license revenues, this expansion would reduce our gross margins if our license revenues were not to increase significantly. We expect cost of services revenues as a percentage of services revenues to vary from period to period depending on the mix of services we provide, whether the services are performed by our in-house staff or subcontractors, and the overall utilization rates of professional services staff. Gross Profit Gross profit increased 329% from $1.3 million for the nine months ended September 30, 1998 to $5.6 million for the nine months ended September 30, 1999 representing 62% and 60% of total revenues, respectively, in those periods. This increase in absolute dollars reflected increased license and services revenues from a growing customer base. The decrease in gross profit percentage was a result of the expansion of our professional services organization. We have made and will continue to make investments in our professional services organization to increase the capacity of that organization to meet the demand for services from our customers. We expect gross profit as a percentage of total revenues to fluctuate from period to period as a result of changes in the relative proportion of license and services revenues. Operating Expenses Research and Development. Research and development expenses consist primarily of personnel and related costs to support product development. Research and development expenses increased 139% from $1.2 million for the nine months ended September 30, 1998 to $2.9 million for the nine months ended September 30, 1999. Research and development expenses represented 58% and 32% of total revenues, respectively, in those periods. This increase in dollar amounts was due to an increase in the number of product development personnel. We believe that continued investment in research and development is critical to our strategic objectives, and we expect that the dollar amounts of research and development expenses will increase in future periods. To date, all software development costs have been expensed in the period incurred. Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs for sales and marketing personnel, sales commissions, travel and marketing programs. Sales and marketing expenses increased 206% from $3.0 million for the nine months ended September 30, 1998 to $9.1 million for the nine months ended September 30, 1999. Sales and marketing expenses represented 140% and 98% of total revenues, respectively, in those periods. The increase in dollar amounts reflected increased sales and marketing personnel costs of $2.7 million, higher sales commissions and bonuses of $1.5 million and increased marketing related costs of $300,000. We expect to continue to invest heavily in sales and marketing in order to expand our customer base and increase brand awareness. We also anticipate that the percentage of total revenues represented by sales and marketing expenses will fluctuate from period to period depending primarily on when we hire new sales personnel, the timing of new marketing programs and the levels of revenues in each period. 22 General and Administrative. General and administrative expenses consist primarily of salaries and related costs for accounting, human resources, legal and other administrative functions, as well as provisions for doubtful accounts. General and administrative expenses increased 83% from $1.1 million for the nine months ended September 30, 1998 to $2.1 million for the nine months ended September 30, 1999, representing 54% and 22% of total revenues, respectively, in those periods. This increase in absolute dollar amounts reflected additional staffing of these functions to support expanded operations during this same period. We expect general and administrative expenses to increase in dollar amounts in 1999 as we add personnel to support expanding operations, incur additional costs related to the growth of our business, and assume the reporting requirements of a public company. Amortization of Deferred Stock-Based Compensation. In 1998 and the first nine months of 1999, we recorded deferred stock-based compensation of $1.9 million and $6.7 million in connection with stock options granted during 1998 and 1999, respectively. These amounts represent the difference between the exercise price of stock options granted during those periods and the deemed fair value of our common stock at the time of the grants. Amortization of deferred stock-based compensation was $564,000 and $2.7 million for the nine months ended September 30, 1998 and 1999, respectively. We expect per quarter amortization related to these options of approximately $1.0 million during the remainder of 1999, between $500,000 and $750,000 during 2000, between $270,000 and $400,000 during 2001, between $100,000 and $185,000 during 2002 and $50,000 in the quarter ended March 31, 2003. Amortization of Acquired Intangible Assets. In July of 1999, we recorded intangible assets of approximately $800,000 in connection with the acquisition of Lexington Software. Goodwill related to this transaction approximated $300,000 and intangible assets related to the workforce of Lexington Software approximated $500,000 of the purchase price. The total purchase price for this acquisition was approximately $800,000. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. Amortization of acquired intangible assets was $249,000 for the nine months ended September 30, 1999. Interest and Other Income (Expense), Net Interest and other income (expense), net, increased 367% from $89,000 for the nine months ended September 30, 1998 to $416,000 for the nine months ended September 30, 1999. The increase was due to increased interest income earned from higher cash balances on hand as a result of sales of our preferred stock in June 1999, partially offset by increased interest expense. Income Taxes As of September 30, 1999, we had approximately $14.7 million of federal and $8.6 million of state net operating loss carryforwards available to reduce future taxable income. These net operating loss carryforwards begin to expire in 2010 and 2003 for federal and state tax purposes, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited. Events which cause limitation in the amount of net operating losses that we may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. We have provided a full valuation allowance on the deferred tax asset because of the uncertainty regarding its realization. Our accounting for deferred taxes under Statement of Financial Accounting Standards No. 109 involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a full valuation allowance was required, management primarily considered factors such as our history of operating losses and expected future losses and the nature of our deferred tax assets. See Note 6 of Notes to Consolidated Financial Statements. Years Ended December 31, 1996, 1997 and 1998 Revenues We had no revenues in 1996. Total revenues increased from $168,000 in 1997 to $4.0 million in 1998. This increase was attributable to greater market acceptance of our software products after their introduction in 1997 and an increase in the number of sales and marketing staff, resulting in an increased number of customers. 23 License. License revenues increased from $84,000 in 1997 to $3.2 million in 1998. License revenues represented 50% and 79% of total revenues, respectively, in those periods. The increase in license revenues reflects growth from the low level of revenue in 1997, our first year in which we licensed our products. Services. Services revenues increased from $84,000 in 1997 to $827,000 in 1998. Services revenues represented 50% and 21% of total revenues, respectively, in those periods. The increase in services revenues reflects an increase in both professional services and maintenance fees generated from an expanded number of customers who licensed our products. Cost of Revenues License. We had no cost of license revenues in 1996 or 1997. Cost of license revenues in 1998 was $59,000 and represented 2% of license revenues in 1998. The increase in cost of license revenues reflects increased sales of third- party products sold in conjunction with our software products. Services. We had no cost of services revenues in 1996. Cost of services revenues increased from $95,000 in 1997 to $1.3 million in 1998. Cost of services revenues represented 113% and 154% of services revenues, respectively, in those periods. This increase was due to an increase in the number of in- house staff from 3 to 11, and a $45,000 increase in subcontractor expenses. Gross Profit Gross profit increased from $73,000 in 1997 to $2.7 million in 1998, representing 43% and 67% of total revenues, respectively, in those periods. This increase reflected increased license and services revenues from a growing customer base. Operating Expenses Research and Development. Research and development expenses increased from $328,000 in 1996 to $884,000 in 1997 and $1.8 million in 1998. Research and development expenses represented 526% and 45% of total revenues in 1997 and 1998, respectively. This increase in dollar amounts was due to increases in the number of product development personnel. Sales and Marketing. Sales and marketing expenses increased from $101,000 in 1996 to $1.5 million in 1997 and $4.8 million in 1998. Sales and marketing expenses represented 904% and 120% of total revenues in 1997 and 1998, respectively. The increase in dollar amounts from 1996 to 1997 reflects increases in sales and marketing personnel costs of $900,000 and increased marketing related costs of $100,000. The increase in dollar amounts from 1997 to 1998 reflects increases in sale and marketing personnel costs of $1.4 million, higher sales commissions and bonuses of $900,000 and increased marketing related costs of $200,000. General and Administrative. General and administrative expenses increased from $91,000 in 1996 to $530,000 in 1997 and $1.7 million in 1998, representing 315% and 43% of total revenues in 1997 and 1998, respectively. This increase in dollar amounts reflects additional staffing of these functions to support expanded operations during this same period. Amortization of Deferred Stock-Based Compensation. In 1998 we recorded deferred stock-based compensation of $1.9 million, $812,000 of which was amortized in 1998. Interest and Other Income (Expense), Net Interest and other income (expense), net, decreased from $10,000 in 1996 to a net interest expense of $88,000 in 1997 and increased to a net interest income of $151,000 in 1998. The decrease from 1996 to 1997 reflected increased interest expense on promissory notes issued in conjunction with the sale of our preferred stock. The increase from 1997 to 1998 was due to increased interest income earned from cash balances on hand as a result of sales of our preferred stock in March, October, November and December 1998, partially offset by increased interest expense. 24 Quarterly Results of Operations The following tables set forth our unaudited consolidated statements of operations data in dollars and as a percentage of total revenues for each of our last seven quarters. This data has been derived from unaudited consolidated financial statements that have been prepared on the same basis as our annual audited consolidated financial statements and, in our opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information. These unaudited quarterly results should be read in conjunction with the annual consolidated audited financial statements and notes thereto appearing elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results for any future period.
Three Months Ended -------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, 1998 1998 1998 1998 1999 1999 1999 --------- -------- --------- -------- --------- -------- --------- (in thousands) Consolidated Statement of Operations Data: Revenues: License................ $ 187 $ 437 $ 946 $ 1,606 $ 1,360 $ 1,898 $ 2,556 Services............... 44 218 277 288 742 1,004 1,701 ----- ------- ------- ------- ------- ------- ------- Total revenues....... 231 655 1,223 1,894 2,102 2,902 4,257 Cost of revenues: License................ -- -- 19 40 15 104 28 Services............... 75 275 441 483 549 880 2,113 ----- ------- ------- ------- ------- ------- ------- Total cost of revenues............ 75 275 460 523 564 984 2,141 ----- ------- ------- ------- ------- ------- ------- Gross profit......... 156 380 763 1,371 1,538 1,918 2,116 Operating expenses: Research and development........... 282 453 492 570 779 922 1,229 Sales and marketing.... 473 884 1,603 1,857 2,287 2,938 3,833 General and administrative........ 185 387 563 604 598 646 833 Amortization of deferred stock-based compensation.......... 151 196 217 248 640 1,028 1,017 Amortization of acquired intangible assets................ -- -- -- -- -- -- 249 ----- ------- ------- ------- ------- ------- ------- Total operating expenses............ 1,091 1,920 2,875 3,279 4,304 5,534 7,161 ----- ------- ------- ------- ------- ------- ------- Loss from operations.... (935) (1,540) (2,112) (1,908) (2,766) (3,616) (5,045) Interest and other income (expense), net.. 4 53 32 62 65 89 262 ----- ------- ------- ------- ------- ------- ------- Net loss................ $(931) $(1,487) $(2,080) $(1,846) $(2,701) $(3,527) $(4,783) ===== ======= ======= ======= ======= ======= ======= Three Months Ended -------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, 1998 1998 1998 1998 1999 1999 1999 --------- -------- --------- -------- --------- -------- --------- As a Percentage of Total Revenues: Revenues: License................ 81% 67% 77% 85% 65% 65% 60% Services............... 19 33 23 15 35 35 40 ----- ------- ------- ------- ------- ------- ------- Total revenues....... 100 100 100 100 100 100 100 Cost of revenues: License................ -- -- 2 2 1 4 1 Services............... 32 42 36 26 26 30 49 ----- ------- ------- ------- ------- ------- ------- Total cost of revenues............ 32 42 38 28 27 34 50 ----- ------- ------- ------- ------- ------- ------- Gross profit......... 68 58 62 72 73 66 50 Operating expenses: Research and development........... 122 69 40 30 37 32 29 Sales and marketing.... 205 135 131 98 109 101 90 General and administrative........ 80 59 46 32 28 22 19 Amortization of deferred stock-based compensation.......... 65 30 18 13 30 35 24 Amortization of acquired intangible assets................ -- -- -- -- -- -- 6 ----- ------- ------- ------- ------- ------- ------- Total operating expenses............ 472 293 235 173 204 190 168 ----- ------- ------- ------- ------- ------- ------- Loss from operations.... (404) (235) (173) (101) (131) (124) (118) Interest and other income (expense), net.. 2 8 3 3 3 3 6 ----- ------- ------- ------- ------- ------- ------- Net loss................ (402)% (227)% (170)% ( 98)% (128)% (121)% (112)% ===== ======= ======= ======= ======= ======= =======
25 Our license and services revenues have grown in each of the seven quarters in the period ended September 30, 1999, except that our license revenues declined in the three month period ended March 31, 1999 from that in the three month period ended December 31, 1998. This decline reflected the unusually high revenues in the prior period, due in part to a few large license sales in that period. In addition, many companies that license enterprise-scale software products to large customers experience seasonal declines in the first fiscal quarter following the end of their fiscal year. Because of our limited operating history, we do not know whether this pattern was responsible for the declines in the three months ended March 31, 1999, or whether it will apply to future quarterly results. As a general matter, we depend on sales to a relatively few large customers. As a result, our revenues are subject to period-to-period fluctuations reflecting the impact of a few large sales. Increased services revenues beginning in the three month period ended March 31, 1999 reflect an increase in both professional services and maintenance fees generated from an expanded number of customers which had licensed our products in prior periods, and an increase in the number of professional services staff and a higher effective staff utilization rate. As a result of our limited operating history and the emerging nature of the market for web content management software and services in which we compete, it is difficult for us to forecast our revenues or earnings accurately. It is possible that in some future periods our results of operations may not meet or exceed the expectations of public market analysts and investors. If this occurs, the price of our common stock is likely to decline. Factors that have caused our results to fluctuate in the past, and are likely to cause fluctuations in the future, include: . the size of customer orders and the timing of product and service deliveries; . variability in the mix of products and services sold; . our ability to retain our current customers and attract new customers; . the amount and timing of operating costs relating to expansion of our business, including our planned international expansion; . the announcement or introduction of new products or services by us or our competitors; . our ability to attract and retain personnel, particularly management, engineering and sales personnel and technical consultants; . our ability to upgrade and develop our systems and infrastructure to accommodate our growth; and . costs related to acquisition of technologies or businesses. In addition, our products are typically shipped when orders are received, so license backlog at the beginning of any quarter in the past has represented only a small portion of expected license revenues for that quarter. Moreover, we typically recognize a substantial percentage of revenues in the last month of the quarter, frequently in the last week or even the last days of the quarter. As a result, at the beginning of a quarter we have no assurance about the levels of sales in that quarter, and the delay or cancellation of any large orders can result in a significant shortfall from anticipated revenues. These factors make license revenues in any quarter difficult to forecast. Since our expenses are relatively fixed in the near term, any shortfall from anticipated revenues could result in significant variations in operating results from quarter to quarter and harm to our business. As a result of these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indicators of our future performance. Liquidity and Capital Resources In October 1999, we completed the initial public offering of our common stock and realized net proceeds from the offering of approximately $56.2 million. Before our initial public offering, we funded our operations 26 through private sales of equity securities. We raised a total of $37.0 million, net of offering costs, from the issuance of preferred stock. At September 30, 1999, our sources of liquidity consisted of $22.6 million in cash, cash equivalents and investments and $19.2 million in working capital. We have a $3.0 million line of credit and a $1.5 million equipment line of credit with Silicon Valley Bank, each of which bear interest at the bank's prime rate, which was 7.75% at September 30, 1999, plus 0.25%. At September 30, 1999, the line of credit was unused and $1.4 million was outstanding under the equipment line of credit. The lines of credit are secured by all of our tangible and intangible assets, and contain financial covenants including; a quick asset ratio, excluding deferred maintenance revenue, of at least 2:1; a liquidity ratio of unrestricted cash plus 80% of eligible accounts receivable minus outstanding advances divided by loans outstanding of not less than 1.5:1; and a covenant that quarterly net losses will not exceed a threshold based on projected annual revenues. We intend to maintain both lines of credit. We are currently in compliance with all related financial covenants and restrictions. Net cash used in operating activities was $2.7 million in 1997 and $6.0 million in 1998. Net cash used in operating activities in 1997 and 1998 reflected net losses and, to a lesser extent, accounts receivable, offset in part by increases in accrued liabilities. Net cash used in operating activities was $5.1 million in the nine months ended September 30, 1999. Net cash used in operating activities reflected increasing net losses. From inception, our investing activities have consisted primarily of purchases of property and equipment, principally computer hardware and software for our growing number of employees. Capital expenditures, including those under capital leases, totaled $176,000, $1.7 million and $1.3 million in 1997, 1998 and the nine months ended September 30, 1999, respectively. We expect that capital expenditures will increase with our anticipated growth in operations, infrastructure and personnel. As of September 30, 1999 we had no material capital expenditure commitments. During the nine months ended September 30, 1999, our investing activities have consisted of purchases of short-term investments. To date, we have not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. We expect that, in the future, cash in excess of current requirements will continue to be invested in high credit quality, interest-bearing securities. Net cash provided by financing activities in 1997, 1998 and the first nine months of 1999 was $3.9 million, $15.8 million and $19.4 million, respectively. Net cash provided by financing activities reflected primarily the proceeds of issuances of preferred stock in each of these periods, and, in 1998, included proceeds from a bank equipment loan. We believe that the net proceeds of this offering, together with cash, cash equivalents, investments and funds available under existing credit facilities, will be sufficient to meet our working capital requirements for at least the next 24 months. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity financing or from other sources. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which could have a material adverse effect on our business, financial condition and operating results. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in 27 other contracts, and for hedging activities. We will adopt SFAS No. 133 in the quarter ending June 30, 2000 and do not expect its adoption to have an impact on our results of operations, financial position or cash flows. Qualitative and Quantitative Disclosures About Market Risk We develop products in the United States and market our products in North America, and, to a lesser extent in Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since all of our revenue is currently denominated in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income and expense is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our financial investments are short-term. Due to the short-term nature of our financial investments, we believe that there is not a material risk exposure. Year 2000 Compliance The Year 2000 issue refers generally to the problems that some software may have in determining the correct century for the year. For example, software with date-sensitive functions that is not Year 2000 compliant may not be able to distinguish whether "00" means 1900 or 2000, which may result in system failures or erroneous results. We have conducted a Year 2000 readiness review for the current and prior versions of our products. The review included: . assessment; . implementation, including remediation, upgrading and replacement of non- compliant product versions; . validation testing; and . contingency planning. We have completed all phases of our plan, except for contingency planning, with respect to the current and prior versions of all of our products. As a result, the current and prior versions of each of our products are Year 2000 compliant when configured and used in accordance with the related documentation, and provided that the underlying operating system of the host machine and any other software used with or in the host machine or our products are also Year 2000 compliant. We define "Year 2000 compliant" as the ability to: . correctly handle date information needed for the December 31, 1999 to January 1, 2000 date change; . function according to the product documentation provided for this date change, without changes in operation resulting from the advent of a new century, assuming correct configuration; . where appropriate, respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined, and predetermined manner; . store and provide output of date information in ways that are unambiguous as to century if the date elements in interfaces and data storage specify the century; and . recognize year 2000 as a leap year. We have not tested our products on all platforms or all versions of operating systems that our products currently support. 28 We have tested licensed software, shareware and freeware obtained from third parties that is incorporated into our products or sold in conjunction with our products, and have assurances from our vendors that this licensed software is Year 2000 compliant. Despite our testing, our products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in: . delay or loss of revenue; . diversion of development resources; . damage to our reputation; . increased service and warranty costs; or . liability from our customers. Accordingly, errors or defects in our products could seriously harm our business. Some commentators have predicted significant litigation regarding Year 2000 compliance issues, and we are aware of lawsuits against other software vendors. Because of the unprecedented nature of this litigation, it is uncertain whether or to what extent we will be affected by it. Our internal systems include both our computer and network systems and other systems. We have assessed our most important computer and network systems and our other systems. To the extent that we were not able to assess the technology provided by third-party vendors, we sought assurances from them that their systems are Year 2000 compliant. Although we are not currently aware of any material operational issues or costs associated with Year 2000 compliance for these systems, we may experience unanticipated problems and costs caused by undetected errors or defects in the technology used in these systems. We currently have only limited information concerning the Year 2000 compliance status of our customers. As is the case with other similarly situated software companies, if our current or future customers fail to achieve Year 2000 compliance or if they divert technology expenditures, especially technology expenditures that were reserved for enterprise software, to address Year 2000 compliance problems, our business could be harmed. We have funded our Year 2000 plan from available cash and have not separately accounted for these costs in the past. To date, these costs have not been material. We may incur additional costs related to the Year 2000 plan for: . administrative personnel to manage the project; . outside contractor assistance; . technical support for our products; and . product engineering and customer satisfaction. We may experience material problems and costs with Year 2000 compliance that could harm our business. We do not have a contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. The cost of developing and implementing a plan may itself be material. Finally, we are also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. 29 BUSINESS Overview Interwoven is a provider of software products and services that help businesses and other organizations manage the information that makes up the content of their web sites. In the Internet industry this is often referred to as "web content management." Our flagship software product, TeamSite, is designed to help customers develop, maintain and extend large web sites that are essential to their businesses. TeamSite incorporates widely accepted Internet industry standards and is designed with an open architecture that allows it to support a wide variety of web authoring tools and web application servers. Using TeamSite, our customers can manage web content, control the versions of their web sites, manage web site contribution and content approval processes, and develop eBusiness applications. TeamSite allows large numbers of contributors across an enterprise to add web content in a carefully-managed process. In addition, our OpenDeploy product allows customers to automate the distribution of web content across multiple web sites. By using our products, businesses can accelerate their time-to-web, lower web operating costs, establish a differentiated presence on the web and attract and retain customers. Currently, we have licensed our software products to 175 customers operating in a broad range of industries. Our customers include AltaVista, AT&T/TCI, BellSouth, Best Buy, Cisco Systems, eBay, E*Trade, FedEx, Gap, General Electric, the U.S. Department of Education, USWeb/CKS, Viacom/Nickelodeon and Yahoo!/GeoCities. Industry Background The use of the Internet to communicate and conduct business is increasing rapidly. Companies are accelerating their movement to the Internet to capitalize on new business opportunities, reach broader consumer audiences and reduce operational costs. Forrester Research estimates that the business-to- consumer Internet commerce market in the U.S. will grow from $7.8 billion in 1998 to $108.0 billion in 2003. In addition, Forrester Research estimates that the business-to-business Internet commerce market in the U.S. will grow from $43.1 billion in 1998 to $1.3 trillion in 2003. In this prospectus we refer to business-to-business and business-to-consumer Internet commerce as "e- commerce." Migrating to the Web. As leading companies demonstrate revenue growth and achieve competitive advantage by using the Internet, chief executives and other senior corporate decision makers are realizing that eBusiness initiatives are critical for the success of their businesses. As a result, many companies are developing eBusiness applications to enable them to market and sell products and services to consumers online, offer web-based customer self-service programs, implement business-to-business supply chain management solutions, and migrate other operational functions online. IDC estimates that spending on software applications and services for Internet commerce will grow from $7.8 billion in 1998 to $53.8 billion in 2002. In this prospectus we refer to the use of the Internet to conduct business generally as "Internet commerce" or "eBusiness." Moving Online Successfully. To compete online and to capitalize on Internet revenue opportunities, businesses must rapidly build a differentiated presence on the web and must continuously maintain and extend that presence. Since first-mover advantage is amplified on the web, companies must deploy high quality eBusiness applications quickly to create an online brand and establish a loyal base of customers. Accelerating the time required to develop and deploy eBusiness applications, or time-to-web, is essential to attracting customers and generating revenue opportunities. In addition, to retain customers, a company must differentiate its web site from competing sites by offering rich, accurate and relevant content. Once customers discover value in a web site, they may be less likely to visit competing web sites. Web site reliability is also important, since customers are only a click away from competitors' sites and may lose patience with an incomplete or non-functioning web site. Moreover, poor quality web sites can easily damage a business' online brand. Evolving Web Sites. As a result of this competitive environment and the available online business opportunities, web sites have rapidly evolved from simple online corporate brochures to complex online storefronts. Early web sites contained relatively limited content, consisting primarily of static text and simple graphics. This content was infrequently updated and web sites required only a few developers to build and maintain them. Today, companies are seeking to differentiate their online presence and to become leaders on 30 the Internet by transforming their businesses through sophisticated eBusinesses applications featuring content-rich web sites. In many cases, the content on these web sites must be updated on a daily or hourly basis to meet consumer expectations and to exploit emerging business opportunities. For example, a large online retailer may need to showcase tens of thousands of products through the use of graphic images and product descriptions. All of this information must be continuously refreshed as products are introduced or discontinued and as descriptive product information is revised. As the volume of web content has grown and sophisticated eBusiness applications have emerged, the responsibility for the development and management of web content has shifted from a few developers in small web teams to many contributors working in different departments across the enterprise. Furthermore, the large number of web authoring tools and web application servers required by these applications have contributed to the increasing technological complexity involved in developing these web sites. Managing Web Content. Web content, such as high-resolution graphics, audio segments, video clips, hyperlinked text and executable software, is the basis for every web page and most eBusiness applications. IDC estimates that the number of web pages will grow from 925 million in 1998 to 13.1 billion in 2003. In addition, complex eBusiness initiatives may contain hundreds of thousands of web pages. This dramatic growth in content has created a strong need for solutions to content management problems. These solutions must be highly automated to accommodate the volume, complexity and variability of this web content. In addition, these solutions must leverage existing investments in information technology, be highly scalable, and enable participation by increasing numbers of content contributors. IDC estimates that one of the markets in which we participate, which IDC refers to as the "web development life-cycle management software" market, will grow from $76.4 million in 1998 to $1.6 billion in 2003. Market Opportunity. Until recently, businesses have attempted to satisfy their web content management needs largely through in-house solutions. In-house solutions can be expensive and difficult to maintain, which can increase the risk of delaying the launch of important eBusiness initiatives. For example, in-house solutions may need to be extensively re-engineered each time a new web authoring tool or eBusiness application is introduced. Other businesses have used third-party solutions, typically turning to either workgroup software or web publishing software. Workgroup software is generally designed to enable small groups of developers to manage relatively simple web sites. They generally do not scale to support large numbers of contributors or the increasing complexity and volume of web content. Using workgroup software may impair a company's ability to deliver up-to-date and accurate web content. Web publishing software is generally designed only to collect and display information on a web site, and because it is often proprietary, does not accommodate many popular web authoring tools or web application servers. In addition, other third-party solutions do not allow large numbers of contributors to add content to a web site, do not allow web teams to work on applications simultaneously, and do not integrate new web technologies easily, thereby slowing the deployment of eBusiness initiatives. With the proliferation of eBusiness initiatives, the need has emerged for a common infrastructure, or "platform," that can enable large and diverse groups of content contributors, accommodate popular web authoring tools, and integrate to leading web application servers. An open architecture for such a platform enables customers to leverage their existing investments in information technology and facilitates rapid adoption of new web technologies and standards. 31 The Interwoven Solution Interwoven provides web content management software that serves as a platform from which its customers may develop multiple eBusiness applications. Our software products are specifically designed to help our customers rapidly and efficiently build, maintain and extend large web sites and eBusiness initiatives that are essential to their businesses. [graphic representing web software positioning (p. 32)] A multi-layer graphical representation of web software positioning from development to delivery. The top layer consists of four boxes. The box on the far left reads "Customer Relationship Management." The next box to the right reads "Electronic Commerce." The next box to the right reads "Knowledge Management." The next box to the right reads "Global Supply Chain." The layer immediately below the top layer reads "Web Application Servers." The next layer down contains the Interwoven logo and reads "Deploy," "QA" and "Develop" and a description to the left of the layer reads "Content Management." The next layer down reads "Web Authoring Tools." The bottom layer consists of three boxes. The box on the far left reads "Non-Technical Contributors." The next box to the right reads "Business Contributors." The next box to the right reads "Technical Contributors." Our products offer customers the following primary benefits: Accelerate eBusiness Revenue Opportunities. Our products enable customers to migrate their businesses to the web rapidly, thereby increasing their ability to generate more revenues and compete more effectively. Today, the volume and complexity of web content and the number of eBusiness applications continue to grow so rapidly that it can be difficult for businesses to meet their web site development schedules. Our products enable customers to develop and deploy multiple eBusiness applications simultaneously. This approach allows companies to complete their eBusiness initiatives more rapidly. In addition, our products allow content contributors to perform quality assurance functions on content modifications, which significantly reduces testing time. Reduce Cost of Web Operations. Complex web sites can consist of up to hundreds of thousands of pages containing both static and dynamic content supplied by departments throughout the enterprise. As a result, these sites can be expensive to deploy and manage. Our products lower the costs of web operations primarily by reducing the dependency on specialized web development personnel and by improving operating efficiency through automation of workflow processes, such as task assignment, routing, and approval. Automated workflow processes can reduce the time required to assemble, test and validate new web content. In addition, our products support evolving web standards and our open architecture is compatible with third-party web authoring tools and web application servers. As a result, businesses can productively leverage their existing information technology infrastructure. Create Highly Differentiated Web Sites. To attract and retain online customers, today's leading web sites continuously enhance their users' online experience. Businesses seek to achieve this by introducing new web 32 technologies and refreshing content frequently. The open architecture of our products facilitates rapid integration of new web technologies and simultaneous development of multiple eBusiness applications, such as global supply chain management, customer relationship management, knowledge management and e- commerce applications. In addition, our products are highly scalable, permitting the collaborative efforts of hundreds of contributors to be coordinated as the need arises. Improve Web Site Quality. Protecting brand and image online has become critical for companies doing business on the Internet. Non-functioning or poor quality sites can significantly harm a business' online brand. With TeamSite, companies can create reliable, high-quality web sites. TeamSite enables our customers to conduct comprehensive testing of the entire web site as it is built, updated or extended. In addition, TeamSite promotes individual accountability, and faster and more accurate authoring, by enabling all web developers and content contributors to control their own portion of the quality assurance and test process. This improves a site's overall quality. By using sophisticated workflow processes to maintain quality control, TeamSite also ensures that no unauthorized or unapproved content or application is deployed to the customer's site. The Interwoven Strategy Our goal is to establish our software as the platform of choice for web content management across the enterprise. To achieve this goal, we intend to pursue the following key strategies: Establish Position as a Leading Provider of Content Management Software Products. We intend to establish our leadership in content management solutions by continuing to offer comprehensive, easy-to-use software products. Our feature-rich products address our customers' complete eBusiness life-cycle needs as they build, maintain and extend their web sites. We intend to extend that leadership position by introducing enhanced web content management products that assist our customers in accelerating their eBusiness initiatives, and aggressively increasing our sales and marketing efforts. Become the Preferred Web Development Platform for Industry-Leading Internet Technology Vendors. We intend to increase demand for our products among the customers of industry-leading Internet technology vendors. We intend to do so by providing a robust web development platform to complement their own eBusiness production applications. Unlike existing closed-architecture, or proprietary products, our products are designed to integrate easily with the products of industry-leading technology providers. This is attractive to Internet technology vendors because it expands their markets and eliminates costly integration and customization. We intend to continue to strengthen our existing relationships with vendors such as ATG, Bluestone, BroadVision, IBM, InterWorld, Microsoft and Netscape. We also intend to enter into additional relationships with other leading technology providers, including additional reseller relationships. We believe our products can become widely adopted as a standard web development platform across Internet technology vendors. Expand Relationships with Systems Integrators and Internet Professional Services Firms. We have begun establishing relationships with leading systems integrators, such as Andersen Consulting and KPMG, and Internet professional services firms, such as USWeb/CKS and iXL. These firms provide consulting services to assist their clients in designing and developing eBusiness applications. Our existing relationships with the leading systems integrators and Internet professional services firms have allowed us to expand our market reach and increase our access to senior decision makers. These firms have significant influence on a customer's technology selection, and their recommendations represent significant endorsements. We intend to continue to expand and build additional relationships with key systems integrators and Internet professional services firms. Extend our Technology Leadership Through Adherence to Industry Standards. Our products integrate easily and cost-effectively with web authoring tools and web application servers offered by other Internet technology vendors. In addition, our products have been designed to meet the demanding openness and scalability required of Internet software products. Our open architecture supports web authoring tools and web application servers that adhere to industry standards. The scalability of our products allows customers to manage hundreds of thousands of computer files that contain web content and enables hundreds of employees throughout the enterprise to contribute web content. We intend to continue to invest significantly in research 33 and development to increase the functionality of our products while adopting industry standards. We also intend to continue to participate actively in the promotion of industry standards, such as XML. Increase International Sales. As the Internet adoption rate accelerates overseas, we believe that significant international market demand will exist for content management solutions, especially in Europe and Asia. We intend to devote significant resources to penetrate international markets. To that end, we have begun expanding our overseas direct and indirect sales channels and our international marketing presence. We have recently opened an office in the United Kingdom, and intend to open additional offices in Europe and the Pacific Rim during the next twelve months. Products and Services Our product line consists of TeamSite, our web content management product, and OpenDeploy, our web content replication and syndication product. We generally license our products on a per-server and per-user basis and occasionally on an enterprise or site license basis. We also provide services, including professional services, maintenance and support. The following table highlights the features of our products: Product Description Server Platforms TeamSite 4.0 Server-based content management . Sun Solaris application . Windows NT . allows numerous developers and contributors to add content to a web site . interoperates with leading web authoring tools and web application servers . SmartContext Editing allows direct edits to web site content through a simple browser interface . supports simultaneous eBusiness application development and deployment . offers real-time testing capability and sophisticated workflow processes . offers comprehensive file versioning and whole-site versioning - -------------------------------------------------------------------------------- TeamSite Server-based content templating . Sun Solaris Templating application . Windows NT . allows content contribution using standard templates . promotes participation from non- technical contributors . allows contribution through standard web browsers . optional software module licensed with TeamSite - -------------------------------------------------------------------------------- TeamSite Reporting and auditing application . Sun Solaris Global . allows administrators to monitor system . Windows NT Report activity Center . delivers sophisticated reporting and auditing functionality . optional software module licensed with TeamSite - -------------------------------------------------------------------------------- OpenDeploy Content replication and distribution . Sun Solaris 3.1.2 application . Windows NT . transfers content among multiple web . IBM AIX servers simultaneously . Silicon . enables automated scheduling of web Graphics IRIX site updates . ensures conformity of web site roll-out . offers secure and transactional content deployment over the Internet - -------------------------------------------------------------------------------- 34 TeamSite -- Content Management Our flagship product, TeamSite, is a software product that is designed to develop, maintain and extend large web sites. Web Content Management. TeamSite is designed to version, manage and control all web content. It supports parallel, distributed content contribution across the enterprise. TeamSite allows large numbers of contributors across an enterprise to add web content in a carefully-managed process. TeamSite is compatible with leading web authoring tools and web application servers, allowing businesses to leverage existing investments in information technology systems, content and expertise. This enables a faster time-to-web for eBusiness initiatives. TeamSite captures and stores the history of all modifications to the web content. These content histories, or versions, are managed and tracked for individual web files and for whole web sites. Workflow. TeamSite is designed for a diverse group of users, including non-technical and technical users, participating in building and contributing content to the web site operations. To facilitate the management of these web content contributors, TeamSite automates workflow processes such as task assignment, resource scheduling, content routing, content approval and web site release. Web Application Development. TeamSite provides programmers with a software development system that accommodates their choice of software development tools. TeamSite's computer file versioning features allow programmers to track software code modifications. Using TeamSite, programmers can reduce the time required to build, install and test the developed software code by working in a copy of the running web site. The architecture of TeamSite enables businesses to implement it without making significant changes to their existing web content or systems architecture, resulting in rapid implementation. Additionally, TeamSite's open architecture allows customers to use their preferred web content authoring software, web application servers and other web-based technologies. TeamSite currently operates on Sun Solaris and Microsoft Windows NT operating systems. TeamSite was first shipped in May 1997. We first shipped the current version of TeamSite, TeamSite 4.0, in October 1999. We also license optional software modules with TeamSite that extend its functionality. TeamSite Templating allows web content to be contributed using customer-defined templates, thereby eliminating the need for contributors to be familiar with HTML or client-side applications. TeamSite Global Report Center enables TeamSite administrators to generate reports on web operations activity. OpenDeploy -- Content Replication and Syndication Our OpenDeploy software product transfers web content from development to production web servers. OpenDeploy allows users automatically and precisely to distribute the same web content to numerous servers that can be located in one or multiple sites. This "synchronizes" web content so that regardless of which server your request for a web page reaches, you view the same content. By automating this process, businesses can maximize the availability of their web sites and minimize the time required for users to access content offered by those sites. Customers using OpenDeploy can also automate the scheduled deployment of content. We believe that OpenDeploy provides the most effective method for distribution and integration of dynamic content across web sites. OpenDeploy is typically licensed with TeamSite by our customers, but it may be used on a stand-alone basis. OpenDeploy encrypts content for secure transfer over TCP/IP. The version of OpenDeploy shipped within the United States uses 128-bit SSL encryption. Due to U.S. export regulations, the international version does not utilize encryption. OpenDeploy operates on Sun Solaris, Microsoft Windows NT, IBM AIX and Silicon Graphics IRIX operating systems. We first shipped OpenDeploy in January 1998. The current version of OpenDeploy 3.1.2, was first shipped in November 1999. 35 Interwoven Services Our services organization consists of 60 professional employees who utilize a comprehensive methodology to deliver our web content management products to our customers. These services professionals may configure each solution they deliver to meet the specific needs of the customer. We sell our services in conjunction with licenses of our software products. These services include: .needs analysis and web operations strategy; .software installation and configuration support; .project management; .workflow mapping; .content and web site release management; and .education and training. In addition to professional services, we offer various levels of product maintenance to our customers. Maintenance services are typically subject to an annual, renewable contract and are typically priced as a percentage of product license fees. Customers under maintenance contracts receive technical product support and product upgrades as they are released throughout the life of the maintenance contracts. Technology We believe that our technology offers our customers and partners a highly- scalable web content management solution that is implemented through an open architecture that incorporates widely accepted Internet industry standards and supports a wide variety of web-based software applications. Our products are specifically designed for the web. Our customers typically use our technology as the platform to manage their enterprise-wide web content operations. Content Management Process. The following graph illustrates how TeamSite manages content: [flow diagram representing web workflow process (p. 36)] 36 Collaboration Through Work Areas, Staging Areas and Editions. TeamSite provides a virtual work area for each contributor. A virtual work area is a local, desktop web site representation that appears to a contributor as a complete, fully-functioning web site. This provides web developers and contributors the ability to see changes instantaneously in the development environment as they would appear in the actual production site. This approach improves quality by promoting individual accountability, allowing web developers to discover costly bugs and helping web contributors prevent deployment of inaccurate content to the production site. Users submit revised content from work areas to a common staging area, a pre-production version of the web site which consolidates web site changes. After the consolidated changes in the staging area are approved, the next edition of the production site can be authorized and deployed. This content management process makes site-level rollbacks, site recovery and site audits possible. Content Versioning. TeamSite captures the history of modifications to web content within each contributors' work area as well as the content within the common staging area. Our comprehensive content versioning technology allows customers to record and manage all web content modifications and capture complete histories of all web files. TeamSite Global Report can then be used to audit and report on historical changes made to a company's web files and site. Whole-Site Versioning. An extension of our techniques for content versioning allows TeamSite to capture editions of the entire web site. As the content for an edition of an entire web site is approved, a full version of this site can be captured and recorded providing a complete history of whole site editions. This provides customers with an effective way to review and roll back to previous editions of their web sites as necessary for audit, disaster recovery and compliance requirements. Concurrent Development. TeamSite supports multiple contributors working on a single project, and multiple teams working on many projects simultaneously, by utilizing a technique we refer to as branching. A development branch typically consists of many work areas connected to one staging area. Branches, for example, might represent a company's intranet and extranet sites. When required, the content within these independent branches can be synchronized. Templating Our TeamSite Templating module enables non-technical content contributors to add content through customer-specific style templates, allowing a preferred look and feel to be leveraged where desired. Product Features Open Architecture. Our architecture incorporates widely accepted Internet industry standards and supports a wide variety of web-based software applications to integrate into our customers' heterogeneous environments. As a result, TeamSite also integrates with commercially available content web authoring tools and web application servers that adhere to industry standards. This allows our customers' content contributors to use their favorite web authoring software. For example, a graphics designer may use Adobe Photoshop, a layout expert may use Macromedia Dreamweaver, and a non-technical contributor may use Microsoft Office 2000, to add content to a site. In addition, TeamSite's browser interface has been developed primarily in Java and JavaScript. Project Management and Workflow. TeamSite allows customers to manage web development tasks through automated workflow processes, such as task assignment, resource scheduling, routing and approval. This enables TeamSite users to build, enforce and automate the business processes necessary to maintain high-quality web sites. Ease of Use. Our SmartContext Editing feature provides non-technical users with a simple and efficient interface for contributing content as they browse through the web site. With SmartContext Editing, non-technical contributors are only required to be familiar with a web browser. For web sites with many content 37 contributors, TeamSite offers an easy to use, sophisticated technique for tracking multiple content changes and merging them into a single file. Deployment and Content Syndication. OpenDeploy allows customers to deploy content to numerous web sites through a single transaction to ensure consistent site roll-outs. In addition, it can be used to deploy and run application programs automatically as well as to replicate content from relational databases. OpenDeploy can also be used in an encrypted mode for the secure deployment of content over the Internet. Scalability, Performance and Availability Scalability and Performance. TeamSite uses a multi-threaded approach to promote faster server performance through parallel software code execution. It also uses C++ and object-oriented programming to promote scalability and performance. In addition, OpenDeploy can distribute content to a single or to multiple production web servers simultaneously. This content replication functionality meets the requirements for the most demanding web sites that are often located on geographically dispersed servers. Availability. Our design also promotes reliability and availability by allowing customers to employ their normal data backup and recovery tools. In addition, critical data is duplicated, providing the necessary redundancy for data recovery to minimize the potential for data loss. Industry Standards Open to All Files, Tools and Applications. Unlike proprietary, closed implementations, our products have been developed to accommodate industry leading Internet technologies, such as XML and Java, and other evolving industry standards. The TeamSite server presents its content through popular file management systems such as Unix Network File System and Microsoft Windows Network File System. eXtensible Markup Language. XML provides customers the ability to integrate new applications and data with other XML-compliant technologies and legacy applications. Together with companies such as Microsoft and IBM, we are a sponsoring member of OASIS, an industry association promoting XML standards. Our products use and support XML, and promote XML for data and content exchange. 38 Customers Our products and services are marketed and sold to a diverse group of customers operating in a broad range of industries. Our customers include both established companies migrating their operations online and new companies formed specifically to deliver products and services over the Internet. These customers typically consider the web and their web operations to be critical to their future success. As of December 31, 1999, 175 companies had licensed our products. In 1998, Cisco Systems accounted for 13% of our total revenues. The following table is a representative list of our customers. Each of these customers had purchased more than $50,000 in licenses and services from us. In August 1999 we entered into an enterprise license agreement with General Electric.
Technology Consulting Services Financial Services ---------- ------------------- ------------------ AIM Technology American Management Systems ABN Amro AltaVista Business Net On-line AG Edwards Ascend/Lucent Information AON Service Canon Computer Systems Cenquest FleetBoston Cisco Systems Dahlin, Smith & White BancTec Consensus DynaMind Barclays Global Documentum Hewitt Associates Block Financial Doublebill.com iXL Credit Suisse Electronic Arts MacLaren McCan First Boston Hitachi Opus 360 Charles Schwab Honeywell International Origin International Channel Point How 2 HQ Single Source IT Edward Jones & Co iNextv Targetbase E*TRADE Intraware USWeb/CKS Fidelity Investment LookSmart First American Financial MicroAge Retail Ford Motor Credit NCR ------ Frank Russell NTT Data Asimba John Hancock Network Associates Asset Depot.com Minnesota Life Nortel Networks Best Buy Sun Bank Novell Birthday Express.com PMC Sierra Bizbuyer Health Storagetek Brandwise.com ------ Sun Microsystems BuyerZone.com atheart.com TechRepublic eBay Baxter Healthcare Tivoli eBookers.com Blue Cross California Xerox Gap Empire Blue Cross and Blue Shield Yahoo!/GeoCities Gazoontite.com ePatients.com Learning Curve International Healthstream Telecommunications/Utilities Lowes Kaiser ---------------------------- National Automotive PacificCare Alltel Parts Association Principal Life Insurance AT&T/TCI Paper Exchange Azurix Petopia Media/Entertainment BellSouth Petstore.com ------------------- Interpath PlanetRx.com Ancestry.com Pennyslvania Power & Light Royal Caribbean Cruises Ask Jeeves Salt River Project Service Master ChipCenter Sempra Energy Shoplink Clubmom Telia SmallOffice.com CondeNet Tesco VitaminShoppe.com Walgreens
39
Media/Entertainment Industrial/Transportation Government/Professional ------------------- ------------------------- ----------------------- Discovery Online American Airlines American Bar Association Earthweb Boeing Federal Bureau of Prisons Educational Testing Service Carlson Companies U.S. Department of Justice Egreetings Clorox U.S. Department of Education HearMe.com FedEx U.S. Postal Service Hearst New Media General Electric Hungry Minds Gordon Food Services iConnect.com Phoenix Group Lawloop.com United Airlines Los Angeles Times Whirlpool Loquesa.com W.W. Grainger Mars Music.com Yellow Services Monster.com MTVN-Online myPlay National Public Radio/Minnesota Public Radio Netflicks.com PhotoDisc Pure Entertainment Quokka Sports SmartAge Sega Tavolo Viacom/Nickelodeon whynotu.com
Technology Vendors and Service Providers Technology Vendors To ensure that our products are well integrated with related web technologies, we work with vendors of web authoring tools and web application servers. Web authoring tools, such as Macromedia's Dreamweaver, Microsoft's Office 2000 and Adobe's Photoshop, provide the content that we manage. Web application servers, such as Akamai's FreeFlow, ATG's Dynamo, Bluestone's Sapphire/Web, BroadVision's One-to-One Commerce, IBM's Net.Commerce, Interworld's Commerce Exchange, Intershop's efinity, Microsoft's SiteServer and net.Genesis' net.Analysis, distribute the content managed by our software over the Internet. We have developed specific product interfaces for some of these companies, such as software and service modules for BroadVision and ATG, and some companies refer customers to us or resell our products. BroadVision and Bluestone, for example, resell our products. Service Providers We work with leading systems integrators, including Andersen Consulting, Cambridge Technology Partners, Computer Sciences Corporation, EDS, Ernst & Young and KPMG, and Internet professional services firms, including Agency.com, AnswerThink, iXL and USWeb/CKS. Our prospective customers frequently retain the services of these firms for the delivery and implementation of eBusiness applications, and these firms may recommend a content management solution as part of the eBusiness application they deliver. We intend to devote significant resources to develop these relationships further. 40 We believe that these relationships with these entities are essential as we continue to seek to integrate our products with current and future web technologies and deploy and implement our solution at customer sites. Our relationships with technology providers and service providers are not binding, however, and can be terminated by these providers at any time. Sales and Marketing To date, we have sold our products and services primarily through our direct sales force in North America and Europe. As of December 31, 1999, we had 67 professionals in our direct sales force, of which 63 were located in the United States and 4 were in Europe. We intend to increase the size of our direct sales force and establish additional sales offices domestically and internationally. In May 1999, we opened our first international sales office in the United Kingdom to support the management of direct and indirect sales channels in Europe. We are also aggressively developing our indirect sales channel by expanding our relationships with leading Internet technology vendors, Internet professional services firms and systems integrators that recommend and, when appropriate, resell our products. For example, BroadVision and Bluestone currently resell our products. We believe that demand is increasing for content management solutions such as those we sell. We may not be able to expand our sales and marketing staff, either domestically or internationally, to take advantage of any increase in demand for those solutions. Our failure to expand our sales and marketing organization or other distribution channels could materially adversely affect our business. See "Risk Factors--We must attract and retain qualified personnel, which is particularly difficult for us because we compete with other Internet-related software companies and are located in the San Francisco Bay area where competition for personnel is extremely intense." Research and Development We invest significantly in research and development to enhance our current products, and develop new products. Our research and development expenses were $884,000 in 1997, $1.8 million in 1998 and $2.9 million for the nine months ended September 30, 1999. We expect that we will increase our product development expenditures substantially in the future. As of December 31, 1999, 36 employees were engaged in research and development activities and we plan to continue to hire additional engineers to further our research and development activities. Our business could be harmed if we were not able to hire and retain the required number of engineers. See "Risk Factors--We must attract and retain qualified personnel, which is particularly difficult for us because we compete with other Internet-related software companies and are located in the San Francisco Bay area where competition for personnel is extremely intense." We may fail to complete our product development efforts within our anticipated schedules, and even if completed, the products developed may not have the features necessary to make them successful in the marketplace. Future delays or problems in the development or marketing of product enhancements or new products could harm our business. See "Risk Factors--Difficulties in introducing new products and upgrades in a timely manner will make market acceptance of our products less likely." Competition The market for content management solutions is rapidly emerging and is characterized by intense competition. We expect existing competition and competition from new market entrants to increase dramatically. A growing number of companies are vying to provide web content management solutions. In this market, new products are frequently introduced and existing products are often enhanced. In addition, new companies, or alliances among existing companies, may be formed that may rapidly achieve a significant market position. 41 Potential customers may have developed in-house solutions which might make it more difficult for us to sell products to them. We compete with third-party content management solution providers, primarily Vignette, and, to a lesser extent, with workgroup solutions, and content publishing application providers. We may face increased competition from these providers in the future. Other potential competitors include client/server software vendors which are developing or extending existing products which address our market. In addition, although we currently partner with a number of companies that provide complementary products such as web tools, enterprise document repositories and web servers, they may introduce competitive products in the future. Other large software companies, such as Microsoft and IBM, may also introduce competitive products. Many of our existing and potential competitors have greater technical, marketing and financial resources than we do. We believe that competitive factors in the web content management industry include: . the quality, scalability and reliability of software; . functionality that enables a broad base of contributors to add and modify web content; . interoperability with all leading web authoring tools and web application servers based on industry standards; . ability to provide advanced workflow functionality; . the ability to leverage existing information technology infrastructure; and . adherence to emerging industry standards, including XML. We believe our products compete favorably on each of these factors. Proprietary Rights and Licensing Our success depends upon our ability to maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law, and contractual restrictions, to protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We currently do not have any issued United States or foreign patents, but we have applied for one U.S. patent. It is possible that a patent will not issue from our currently pending patent application. These legal protections afford only limited protection for our technology. Our license agreements impose restrictions on our customers' ability to utilize our software. We also seek to protect our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. There can be no assurance that all employees or consultants have signed or could sign these agreements. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are equally as important as the various legal protections of our technology to establishing and maintaining a technology leadership position. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and while we are unable to determine the extent to which piracy of our software exists, software piracy can be expected to be a persistent problem. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. However, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Any resulting litigation could result in substantial costs and diversion of resources and could seriously harm our business, operating results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure by us to meaningfully protect our property could seriously harm our business, operating results and financial condition. 42 To date, we have not been notified that our products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by us with respect to our current or future products. We expect that developers of web-based commerce software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and as the functionality of products in different segments of the software industry increasingly overlaps. Any claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful infringement claim against us and our inability to license the infringed technology or develop or license technology with comparable functionality could seriously harm our business, financial condition and operating results. See "Risk Factors--We might not be able to protect and enforce our intellectual property rights, a loss of which could harm our business." Employees As of December 31, 1999, we had a total of 205 employees, including 87 in sales and marketing, 36 in research and development, 60 in professional services and 22 in administration and finance. Of these employees, 200 were located in the United States and 5 were located in the United Kingdom. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good. Our future operating results depend in significant part on the continued service of our key technical, sales and senior management personnel. Other than as described in "Management--Employment and Severance Agreements," none of these individuals is bound by an employment agreement. Our future success also depends on our continuing ability to attract and retain highly qualified technical, sales and senior management personnel. Competition for these personnel is intense, and we may not be able to retain our key technical, sales and senior management personnel or attract these personnel in the future. We have experienced difficulty in recruiting qualified technical, sales and senior management personnel, and we expect to experience these difficulties in the future. If we are unable to hire and retain qualified personnel in the future, this inability could seriously harm our business. Facilities Our principal office occupies approximately 40,000 square feet in Sunnyvale, California, under a lease that expires in August 2003. In addition, we also lease sales and service offices in the metropolitan areas of Atlanta, Boston, Chicago, Dallas, London, Los Angeles, New York City, Seattle and Washington, D.C. We believe that our existing facilities will be adequate for our current needs. Legal Proceedings We are not a party to any material legal proceedings. We could become involved in litigation from time to time relating to claims arising out of our ordinary course of business. 43 MANAGEMENT Executive Officers and Directors The following table presents information regarding our executive officers and directors as of January 10, 2000.
Name Age Position - ---- --- -------- Martin W. Brauns............ 40 President, Chief Executive Officer and Director Peng T. Ong................. 36 Chairman of the Board David M. Allen.............. 41 Vice President and Chief Financial Officer Michael A. Backlund......... 45 Senior Vice President of Worldwide Sales and Field Operations Jeffrey E. Engelmann........ 38 Vice President of Product Marketing and Technology Partnerships Jack S. Jia................. 36 Vice President of Engineering Jozef Ruck.................. 48 Vice President of Corporate and Channels Marketing John Van Siclen............. 43 Vice President of Corporate Development Kathryn C. Gould............ 49 Director Mark W. Saul................ 38 Director Mark C. Thompson............ 42 Director Ronald E.F. Codd............ 44 Director
Martin W. Brauns has served as our President, Chief Executive Officer and member of the Board of Directors since March 1998. Before joining Interwoven, Mr. Brauns served as President and Chief Operating Officer of Sqribe Technologies, Inc., a software company from July 1997 to November 1997. From March 1996 to June 1997, Mr. Brauns served in a number of positions, including most recently as Vice President of North American Sales, at Informix Software, Inc., a software company. From 1992 to January 1996, Mr. Brauns served as Vice President of Worldwide Sales of Adaptec Inc., a hardware and software manufacturer. Mr. Brauns holds a Bachelor of Science in international business and a Master of Business Administration from San Jose State University. Peng T. Ong is our founder and Chairman of our Board of Directors. He also served as a Vice President until January 2000. Prior to founding Interwoven, Mr. Ong was a founder of Electric Classifieds, Inc., an Internet classifieds company, and its Chief Architect from March 1994 to May 1995. From 1994 to December 1995, he served as a consultant to Illustra Information Technologies, Inc., a software company. Mr. Ong holds a Bachelor of Science in electrical engineering from the University of Texas at Austin and a Master of Science in computer science from the University of Illinois at Urbana-Champaign. David M. Allen has served as our Vice President and Chief Financial Officer since joining Interwoven in March 1999. Before joining Interwoven, Mr. Allen served as Vice President and Chief Financial Officer of Object Systems Integrators, Inc., a telecommunications network management company, from July 1996 to March 1999. From 1985 to July 1996, he served in a number of positions, including most recently as Vice President and Chief Financial Officer, at Telecommunications Techniques Corporation, a communications test equipment manufacturing company. Mr. Allen holds a Bachelor of Science in accounting from the University of Maryland. Michael A. Backlund has served as our Senior Vice President of Worldwide Sales and Field Operations since October 1999. From May 1998 to October 1999, he served as our Vice President of Worldwide Sales. From January 1997 to May 1998, Mr. Backlund served in a number of positions at Computer Associates International, a software company, including most recently as Vice President of Divisional Sales. Prior to joining Interwoven, he was a founder of CMS Communications, Inc., a telecommunications equipment company, and served in a number of capacities from August 1986 to December 1996, including most recently 44 as Vice President of Sales and Marketing. Mr. Backlund holds a Bachelor of Arts and a Master of Arts in economics from the University of Southern California. Jeffrey E. Engelmann has served as our Vice President of Product Marketing and Technology Partnerships since January 2000. From January 1999 through December 1999, he served as our Vice President of Business Development. Before joining Interwoven in January 1999, Mr. Engelmann served as Executive Operations Officer of the Internet division of IBM. From 1991 to December 1997, he served in a number of development, consulting and sales positions within IBM, including most recently as Business Unit Executive of eBusiness Solution Sales. Mr. Engelmann holds a Bachelor of Science in chemical engineering and an Bachelor of Arts in computer science from the University of Wisconsin at Madison. Jack S. Jia has served in a variety of positions, including most recently as our Vice President of Engineering, since joining Interwoven in January 1997. Prior to joining Interwoven, Mr. Jia was a founder of V-Max America, Inc., a computer distribution company, and served as the Chief Executive Officer from June 1993 to October 1998. From May 1995 to January 1997, he served as a Project Manager at Silicon Graphics, Inc., a computer systems company, and from January 1993 to May 1995, he served in a number of senior engineering positions at Sun Microsystems, Inc., a computer systems company. Mr. Jia holds a Bachelor of Science in electrical engineering and a Master of Science in computer science from the Northern Jiao-Tong University, Beijing, a Master of Science in electrical engineering from Polytechnic University of New York, and a Master of Business Administration from Santa Clara University. Jozef Ruck has served as our Vice President of Corporate and Channels Marketing since January 2000. From March 1999 through December 1999, he served as our Vice President of Marketing. From April 1997 to April 1999, Mr. Ruck served in a number of positions at Genesys Telecommunications Laboratories, a call center software company, including most recently as Vice President of Customer Marketing. From September 1994 to March 1997, he served in a number of positions, including most recently as Western Region Sales Director, at Network Appliance, Inc., a data storage company. Mr. Ruck holds a Bachelor of Science in mechanical engineering from Oregon State University and a Master of Business Administration from Santa Clara University. John Van Siclen has served as our Vice President of Corporate Development since joining Interwoven in December 1999. Before he joined Interwoven, Mr. Van Siclen served as President and Chief Executive Officer of Perspecta, Inc., a start-up Internet software company, from February 1997 to November 1999. Perspecta was acquired by Excite@Home in October 1999. From February 1996 to February 1997, Mr. Van Siclen served as Vice President, Alternate Channels at Informix Software, Inc., a database software company. From 1990 through January 1996, Mr. Van Siclen held various sales and marketing management positions, including, most recently, Vice President of Worldwide Sales and Marketing at NetFrame Systems, a network systems company. Mr. Van Siclen holds a Bachelor of Arts in history from Princeton University. Kathryn C. Gould has been one of our directors since March 1998. She is a founder of Foundation Capital, a venture capital firm, and has been a managing member since December 1995. Since 1989, Ms. Gould has been a general partner of Merrill, Pickard, Anderson & Eyre, a venture capital firm. Ms. Gould holds a Bachelor of Science in physics from the University of Toronto and a Master of Business Administration from the University of Chicago. Mark W. Saul has been one of our directors since July 1997. Since September 1999, Mr. Saul has served as a member of Foundation Capital, a venture capital firm. From June 1996 to September 1999, Mr. Saul served as President and Chief Executive Officer and Chairman of the Board of Acuity Corporation, a web-based customer interaction solutions company. From May 1995 to May 1996, Mr. Saul was Vice President of Marketing for Network Appliance, Inc. From March 1994 to May 1995, he served as Vice President of World Wide Field Operations of Minerva Systems, Inc., a video technology company. Mr. Saul holds a Bachelor of Arts in history and a Bachelor of Science in engineering from Stanford University and a Master of Business Administration from the Harvard Business School. 45 Mark C. Thompson has been one of our directors since July 1999. Since 1988, Mr. Thompson has served in a number of positions with Charles Schwab since 1988, a financial services center, including most recently Senior Vice President and Executive Producer of Schwab.com. Mr. Thompson holds a Bachelor of Arts in international relations, and a Master of Arts in new media from Stanford University. Ronald E.F. Codd has been one of our directors since July 1999. Mr. Codd has served as President, Chief Executive Officer and a director of Momentum Business Applications, Inc., a publicly held software company, since January 1999. From 1991 to December 1998, he served as Senior Vice President, Finance and Administration, Chief Financial Officer and Secretary of PeopleSoft, Inc., an enterprise software developer. Mr. Codd also serves on the board of directors of Adept Technology, Inc., a robotics manufacturer and Intraware, Inc., a provider of business-to-business e-commerce services. Mr. Codd holds a Bachelor of Science in accounting from the University of California at Berkeley and a Master of Management from the J.L. Kellogg Graduate School of Management (Northwestern University). There are no family relationships among any of our directors or officers. Board Composition We currently have six directors. Our bylaws state that our board of directors is divided into three classes: Class I, the term for which will expire at the annual meeting of stockholders to be held in 2000, Class II, the term for which will expire at the annual meeting of stockholders to be held in 2001, and Class III, the term for which will expire at the annual meeting of stockholders to be held in 2002. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. The Class I directors are Messrs. Brauns and Saul; the Class II directors are Mr. Peng and Ms. Gould; and the Class III directors are Messrs. Thompson and Codd. In addition, our bylaws provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. This classification of the board of directors may have the effect of delaying or preventing a change in control. See "Description of Capital Stock-- Anti-Takeover Provisions." Board Committees Our board of directors has a compensation committee and an audit committee. Compensation Committee. The current members of our compensation committee are Mr. Saul and Ms. Gould. The compensation committee reviews and makes recommendations to our board concerning salaries and incentive compensation for our officers and employees. The compensation committee also administers our stock plans. Audit Committee. The current members of our audit committee are Messrs. Codd and Thompson. Our audit committee reviews and monitors our financial statements and accounting practices, makes recommendations to our board regarding the selection of independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors. Compensation Committee Interlocks and Insider Participation Before July 1999, the compensation committee consisted of Mr. Brauns, Ms. Gould and Eileen Richardson, a former director. No compensation decisions were made by this committee before our initial 46 public offering in October 1999; rather, all compensation decisions were made by the full board of directors. Since July 1999, our compensation committee has consisted of Mr. Saul and Ms. Gould, both of whom are "non-employee directors" under federal securities laws and "outside directors" under federal tax laws. No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has an interlocking relationship existed in the past. Preferred Stock Financings. Entities associated with Foundation Capital purchased 2,480,419 shares of Series C Preferred Stock at $1.6186 per share in March 1998, 613,896 shares of Series D Preferred Stock at $2.80668 per share in October 1998 and 146,666 shares of Series E Preferred Stock at $8.49 per share in June 1999. Ms. Gould is a member of Foundation Capital and may be deemed to own beneficially the shares held by entities associated with Foundation Capital. Mr. Saul is a member of Foundation Capital but does not own beneficially the shares held by entities associated with Foundation Capital. Loan to Martin W. Brauns. In March 1998, we loaned $240,000 to Mr. Brauns, our President and Chief Executive Officer, secured by a promissory note and stock pledge agreement, in connection with his purchase of 1,333,333 shares of our common stock. The note accrued interest at a rate of 6% per year and has been paid in full. Director Compensation Our directors receive no cash compensation for their services as directors but are reimbursed for their reasonable expenses in attending board and board committee meetings. Each eligible director who is not our employee will be granted an option to purchase 20,000 shares of common stock under our 1999 Equity Incentive Plan at the time the director first joins our board. Immediately following each annual meeting of our stockholders, each eligible director will automatically be granted an additional option to purchase 10,000 shares under the plan if the director has served continuously as a member of the board for at least one year. Mr. Codd and Mr. Thompson were each granted an option to purchase 20,000 shares of Common Stock under our 1998 Stock Option Plan in July 1999. Ms. Gould and Mr. Saul were each granted an option to purchase 10,000 shares of Common Stock under the 1999 Equity Incentive Plan in October 1999. These options have 10-year terms and terminate three months following the date the director ceases to be one of our directors or consultants or 12 months following that date if the termination is due to death or disability. All options granted to outside directors under the plan are fully vested and immediately exercisable as of the date of grant. Executive Compensation The following table presents information on compensation for 1998 and 1999 paid to or accrued by our chief executive officer and each of our four other most highly compensated executive officers whose salary and bonus for 1999 was more than $100,000. The restricted stock value is calculated based upon a purchase price of $0.18 per share for Mr. Brauns and a purchase price of $0.39 per share for Mr. Ruck, and assuming that the estimated fair market value on the date of grant is equal to $17.00 per share, which was the initial public offering price of a share of our common stock on October 8, 1999. On December 31, 1999, Mr. Brauns held 1,333,333 shares of our common stock and Mr. Ruck held 246,666 shares of our common stock pursuant to restricted stock awards and subject to our right to repurchase these shares upon termination of employment. Our right to repurchase Mr. Brauns' shares expires ratably over a 48-month period that began in March 1998. Our right to repurchase Mr. Ruck's shares expires for 53,333 shares on March 15, 2000 and for the remaining shares ratably each month over 36 months. If declared by the board, dividends will be paid on these restricted 47 stock awards. At December 31, 1999, the value of the restricted stock awards was $161,926,626 for Mr. Brauns and $29,904,552 for Mr. Ruck, based on the closing price per share of our common stock of $121.63 on that date. Summary Compensation Table
Long Term Annual Compensation Compensation Awards ------------------------------ ---------------------- Other Securities Name and Principal Annual Restricted Underlying Positions Year Salary Bonus Compensation Stock Award Options - ------------------ ---- -------- -------- ------------ ----------- ---------- Martin W. Brauns....... 1999 $250,000 $100,000 $-- $ -- 86,103 President and Chief 1998 206,119 100,000 320 22,426,661 -- Executive Officer Peng T. Ong............ 1999 135,000 108,000 840 -- -- Chairman 1998 114,315 125,000 -- -- -- Michael A. Backlund.... 1999 145,000 155,000 -- -- 93,332 Senior Vice President 1998 80,826 65,450 -- -- 156,666 of Worldwide Sales and Field Operations Jack S. Jia............ 1999 115,000 92,000 840 -- 36,666 Vice President of 1998 104,988 55,000 960 -- 96,666 Engineering Jozef Ruck............. 1999 115,606 60,000 -- 4,097,122 -- Vice President of 1998 -- -- -- -- Corporate and Channels Marketing
Option Grants in 1999 The following table presents the grants of stock options during 1999 under our 1996 Stock Option Plan and 1998 Stock Option Plan to each of the persons listed in the Summary Compensation Table. All options granted under the 1996 plan and 1998 plan are immediately exercisable and are either incentive stock options or nonqualified stock options. We have a right to repurchase the shares issued upon exercise of these options at the original purchase price if they are unvested at the time the grantee terminates employment with us. This repurchase right generally lapses as to 25% of the shares on the first anniversary of the date of grant and the remainder expire ratably over a 36-month period thereafter. We have also granted nonqualified stock options that do not contain a repurchase right or contain repurchase terms that are negotiated between the optionee and us. Options expire 10 years from the first date of employment. Options were granted at an exercise price equal to the fair market value of our common stock, as determined by our board, on the date of grant. In 1999, we granted to our employees and consultants options to purchase a total of 2,522,393 shares of our common stock. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock prices. The potential realizable values at 0%, 5% and 10% appreciation are calculated by assuming that the value of the shares appreciates at the indicated rate for the entire term of the options and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. For options granted before our initial public offering in October 1999, we assumed that the fair market value on the date of grant was $17.00 per share, which was the initial public offering price. 48
Individual Grants --------------------------------------------- Potential Realizable Value at Assumed Number of Percent of Annual Rates of Stock Securities Total Options Price Appreciation Underlying Granted to Exercise for Option Term Options Employees Price Expiration -------------------------------- Name Granted in 1999 Per Share Date 0% 5% 10% - ---- ---------- ------------- --------- ---------- ---------- ---------- ---------- Martin W. Brauns........ 86,103 3.4% $0.39 3/18/09 $1,430,171 $2,350,716 $3,763,013 Peng T. Ong............. -- -- -- -- -- -- -- Michael A. Backlund..... 66,666 2.7 0.39 1/28/09 1,107,322 1,820,062 2,913,546 13,333 0.5 7.64 7/22/09 124,797 267,343 486,036 13,333 0.5 14.00 10/06/09 39,999 182,545 401,238 Jack S. Jia............. 16,666 0.7 0.39 1/28/09 276,822 455,002 728,365 20,000 0.8 7.64 7/22/09 187,200 401,024 729,072 Jozef Ruck.............. -- -- -- -- -- -- --
Aggregate Option Exercises in 1999 and Option Values at December 31, 1999 The following table presents the number of shares acquired and the value realized upon exercise of stock options during 1999 and the number of shares of common stock subject to "exercisable" and "unexercisable" stock options held as of December 31, 1999 by each of the persons listed in the Summary Compensation Table. Also presented are values of "in-the-money" options, which represent the positive difference between the exercise price of each outstanding stock option and the closing price of our common stock on December 31, 1999, which was $121.63. Each of these options was exercisable immediately upon grant, subject to our right to repurchase the option shares at the exercise price upon termination of the optionee's employment. The repurchase right generally expires as to 25% of the shares on the first anniversary of the date of grant and the remainder expires ratably over a 36-month period thereafter. For options exercised before our initial public offering in October 1999, the amounts shown under the column "Value Realized" are based on the initial public offering price of $17.00 per share, net of the exercise price.
Number of Securities Value of Unexercised Number of Underlying Unexercised In-the-Money Options at Shares Options at December 31, 1999 December 31, 1999 Acquired on Value ------------------------------- ------------------------- Name Exercise Realized Exercisable(1) Unexercisable(1) Exercisable Unexercisable - ---- ----------- ----------- -------------- ---------------- ----------- ------------- Martin W. Brauns........ 86,103 $ 1,430,171 -- 722,221 $ -- $ 87,840,129 Peng T. Ong............. -- -- -- -- -- -- Michael A. Backlund..... 66,666 1,107,322 -- 187,984 -- 22,863,554 Jack S. Jia............. 96,666 1,471,422 -- 116,317 -- 14,147,055 Jozef Ruck.............. -- -- -- -- -- --
- --------------------- (1) Options granted under our stock option plans are generally exercisable immediately but the shares acquired upon exercise are subject to lapsing rights of repurchase at the exercise price. The heading "exercisable" refers to unexercised options to purchase shares as to which our right of repurchase has lapsed. The heading "unexercisable" refers to shares that we still have the right to repurchase upon termination of the optionee's employment. Employee Benefit Plans 1996 Stock Option Plan. As of December 31, 1999, options to purchase 22,332 shares of common stock were outstanding under the 1996 Stock Option Plan and options to purchase 610,994 shares had been exercised, but remain subject to our repurchase right. No additional options may be granted under this plan. Options granted under the stock option plan are subject to terms substantially similar to those described below with respect to options granted under the 1999 Equity Incentive Plan. 1998 Stock Option Plan. As of December 31, 1999, options to purchase 1,055,189 shares of common stock were outstanding under the 1998 Stock Option Plan and options to purchase 1,383,726 shares had been 49 exercised, but remain subject to our repurchase right. No additional options may be granted under this plan. Options granted under the stock option plan are subject to terms substantially similar to those described below with respect to options granted under the 1999 Equity Incentive Plan. 1999 Equity Incentive Plan. On July 22, 1999, the board adopted the 1999 Equity Incentive Plan and reserved 2,900,000 shares of common stock to be issued under this plan. As of December 31, 1999, options to purchase 466,001 shares of common stock were outstanding under the 1999 Equity Incentive Plan, options to purchase 2,433,999 shares remained available for issuance and no options had been exercised. In addition, shares under the 1996 Stock Option Plan and the 1998 Stock Option Plan not issued or subject to outstanding grants on the effective date of the 1999 Equity Incentive Plan and any shares issued under these plans that are forfeited or repurchased by us or that are issuable upon exercise of options that expire or become unexercisable for any reason without having been exercised in full will be available for grant and issuance under the equity incentive plan. As a result these provisions, a total of 146,403 shares from the 1998 Stock Option Plan were available for issuance under the 1999 Equity Incentive Plan as of December 31, 1999. Shares will again be available for grant and issuance under the equity incentive plan that: . are subject to issuance upon exercise of an option granted under the equity incentive plan that cease to be subject to the option for any reason other than exercise of the option; . have been issued upon the exercise of an option granted under the equity incentive plan that are subsequently forfeited or repurchased by us at the original purchase price; . are subject to an award granted pursuant to a restricted stock purchase agreement under the equity incentive plan that are subsequently forfeited or repurchased by us at the original issue price; or . are subject to stock bonuses granted under the equity incentive plan that terminates without shares being issued. This plan became effective in October 1999 and will terminate on July 21, 2009, unless it is terminated earlier by our board. The plan authorizes the award of options, restricted stock awards and stock bonuses. No person is eligible to receive more than 1,000,000 shares in any calendar year under the plan other than a new employee who is eligible to receive no more than 1,500,000 shares in the calendar year in which the employee commences employment. The plan is administered by our compensation committee, all of the members of which are "non-employee directors" under applicable federal securities laws and "outside directors" as defined under applicable federal tax laws. The compensation committee has the authority to construe and interpret the plan, grant awards and make all other determinations necessary or advisable for the administration of the plan. Also, our non-employee directors are entitled to receive automatic annual grants of fully vested options to purchase shares of our common stock, as described under "Management--Director Compensation." The plan provides for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. Incentive stock options may be granted only to our employees or employees of our parent or subsidiary, if any. Awards other than incentive stock options may be granted to employees, officers, directors, consultants, independent contractors and advisors of ours or of our parent or subsidiary, if any, provided the consultants, independent contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital- raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of that value. The exercise price of nonqualified stock options must be at least equal to 85% of the fair market value of our common stock on the date of grant. Options may be exercisable only as they vest or may be immediately exercisable with the shares issued subject to our right of repurchase that lapses as the shares vest. In general, options vest over a four-year period. The maximum term of options granted under the plan is 10 years. 50 Awards granted under the plan may not be transferred in any manner other than by will or by the laws of descent and distribution. They may be exercised during the lifetime of the optionee only by the optionee. The compensation committee can determine otherwise and provide for these provisions in the award agreement, but only with respect to awards that are not incentive stock options. Options granted under the plan generally may be exercised for a period of time after the termination of the optionee's service to us or to our parent or subsidiary, if any. Options generally terminate immediately upon termination of employment for cause. The purchase price for restricted stock is determined by our compensation committee. Stock bonuses may be issued for past services or may be awarded upon the completion of certain services or performance goals. If we are dissolved or liquidated or have a "change in control" transaction, outstanding awards may be assumed or substituted by the successor corporation, if any. In the discretion of the compensation committee the vesting of these awards may accelerate upon one of these transactions. 1999 Employee Stock Purchase Plan. The board has adopted the 1999 Employee Stock Purchase Plan and has reserved 300,000 shares for issuance under this plan. This plan became effective in October 1999. On each January 1, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of our outstanding shares on December 31 of the preceding year. The aggregate number of shares reserved for issuance under the plan may not exceed 3,000,000 shares. The plan is administered by our compensation committee, which has the authority to construe and interpret the plan. Employees generally are eligible to participate in the plan if they are employed ten days before the beginning of an offering period and they are customarily employed by us, or our parent or any subsidiaries that we designate, for more than 20 hours per week and more than five months in a calendar year and are not, and would not become as a result of being granted an option under the plan, 5% stockholders of us or our designated parent or subsidiaries. Under the plan, eligible employees are permitted to acquire shares of our common stock through payroll deductions. Eligible employees may select a rate of payroll deduction between 2% and 15% of their compensation and are subject to maximum purchase limitations. Participation in the plan will end automatically upon termination of employment for any reason. Each offering period under the plan will be for two years and consist of four six-month purchase periods. The first offering period began on October 8, 1999. Additional offering periods and purchase periods will begin on May 1 and November 1 of each year. However, because the first offering period began on a date other than May 1 or November 1, the length of the first offering period will be more than two years, and the length of the first purchase period will be more than six months. The plan provides that, in the event of our proposed dissolution or liquidation, each offering period that commenced prior to the closing of the proposed event continues for the duration of the offering period, provided that the compensation committee may fix a different date for termination of the plan. The purchase price for our common stock purchased under the plan is 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of the applicable purchase period. The compensation committee has the power to change the duration of offering periods without stockholder approval, if the change is announced at least 15 days prior to the beginning of the affected offering period. The plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. Rights granted under the plan are not transferable by a participant other than by will or the laws of descent and distribution. The plan will terminate on July 21, 2009, unless it is terminated earlier under the terms of the plan. The board has the authority to amend, terminate or extend the term of the plan, except that no action may adversely affect any outstanding shares previously purchased under the plan. Except for the automatic annual increase of 51 shares described above, stockholder approval is required to increase the number of shares that may be issued or to change the terms of eligibility under the plan. The board may make amendments to the plan as it determines to be advisable if the financial accounting treatment for the plan is different from the financial accounting treatment in effect on the date the plan was adopted by the board. 401(k) Plan. We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code, or a 401(k) plan. All employees are generally eligible to participate and may enter the plan as of the first day of each calendar month. Participants may make pre-tax contributions to the plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. Contributions to the plan by the participants or by us, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions by us, if any, are generally deductible by us when made. Participant and company contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. Employment and Severance Agreements Mr. Brauns, our President and Chief Executive Officer, entered into an employment agreement with us in February 1998. This agreement establishes Mr. Brauns' initial annual salary of $250,000 and eligibility for benefits and bonuses tied to our revenues. This agreement also provides for his election to the Board of Directors as a condition of employment. This agreement continues until it is terminated upon written notice by Mr. Brauns or by us. If his employment is terminated by us for cause or if he voluntarily elects to terminate his employment, we must pay his salary and other benefits through the date of his termination. If his employment is terminated by us without cause or if he terminates his employment under some circumstances, we must pay his benefits through the date of his termination and his salary for up to 12 additional months after this date, unless Mr. Brauns is employed full-time by another employer. Under this agreement, Mr. Brauns agreed to purchase 1,333,333 shares of common stock at an exercise price of $0.18 per share. The shares purchased by Mr. Brauns are subject to our right to repurchase the shares upon termination of his employment. Our repurchase right expires ratably over a 48 month period from March 1998. Our repurchase right also expires as to all of the shares in the event that we merge or consolidate with another entity or sell all or substantially all of our assets. In connection with this stock purchase, we agreed to loan Mr. Brauns the entire purchase price. This loan has been repaid in full. See "Management-- Compensation Committee Interlocks and Insider Participation." Mr. Ong's offer letter, dated February 29, 1996, provided for an initial annual salary of $48,000 commencing on March 1, 1996. Mr. Ong's employment is at will and may be terminated at any time, with or without formal cause. Mr. Allen's offer letter, dated February 12, 1999, provides for an initial annual salary of $140,000 commencing on March 3, 1999 and eligibility for an incentive bonus of $35,000. The offer letter also provides for reimbursement for relocation expenses. Mr. Allen received options to purchase 186,666 shares of our common stock at an exercise price of $0.39 per share under the 1998 Stock Option Plan, of which options to purchase 46,667 shares vest on March 3, 2000 and the remainder will vest ratably over a 36-month period thereafter. Half of the unvested portion of these options will vest if we sell the company. Mr. Allen's employment is at will and may be terminated at any time, with or without formal cause. Mr. Backlund's offer letter, dated May 1, 1998, provides for an initial annual salary of $135,000 commencing on May 26, 1998 and eligibility for an incentive bonus of up to $100,000. The offer letter also provides for reimbursement for relocation expenses. Mr. Backlund received options to purchase 156,666 shares of our common stock at an exercise price of $0.21 per share under the 1996 Stock Option Plan, of which options to purchase 39,166 shares vested on May 26, 1999 and the remainder will vest ratably over a 36- month period thereafter. On January 28, 1999, Mr. Backlund received options to purchase an additional 66,666 shares 52 of our common stock at an exercise price of $0.39 per share as a result of meeting revenue objectives in 1998 and in lieu of a portion of his cash bonus earned in 1998. Mr. Backlund's employment is at will and may be terminated at any time, with or without formal cause. Mr. Engelmann's offer letter, dated December 11, 1998, provides for an initial annual salary of $130,000 commencing on January 18, 1999 and eligibility for an incentive bonus of up to $40,000. The offer letter also provides for reimbursement for relocation expenses. Pursuant to the offer letter, Mr. Engelmann purchased 183,333 shares of our common stock at an exercise price of $0.39 per share. The shares purchased by Mr. Engelmann are subject to our right to repurchase all of the shares of common stock upon termination of his employment. Our right to repurchase his shares at the original purchase price upon termination lapses with respect to 45,833 shares on January 18, 2000, and expires ratably as to the remaining shares over a 36- month period. The repurchase right will expire as to half of the shares of common stock subject to repurchase at any given time if we are acquired. If we terminate Mr. Engelmann's employment without cause, we must pay him an amount equal to two months base salary. Pursuant to the offer letter, on January 28, 1999, Mr. Engelmann purchased an additional 86,666 shares of our common stock at an exercise price of $0.39 per share, subject to attainment of individual and corporate objectives, and subject to the same repurchase rights as described above. We loaned Mr. Engelmann $105,300 pursuant to a partial recourse secured promissory note representing the purchase price for his shares. The note bears interest at the rate of 6% per year. The principal sum of the note will become due and payable in eighteen equal monthly installments beginning in October 2000. The note is due earlier in the event of our acquisition or Mr. Engelmann's termination of employment. Mr. Engelmann's employment is at will and may be terminated at any time, with or without formal cause. Mr. Jia's offer letter, dated January 6, 1997, provides for an initial annual salary of $70,000 commencing January 27, 1997. Mr. Jia received options to purchase 60,000 shares of our common stock at an exercise price of $0.09 per share under the 1996 Stock Option Plan, of which options to purchase 15,000 shares vested on January 28, 1998 and the remainder will vest ratably over a 36 month period thereafter. Mr. Jia's employment is at will and may be terminated at any time, with or without formal cause. Mr. Ruck's offer letter, dated February 18, 1999, provides for an initial annual salary of $140,000 commencing March 15, 1999 and eligibility for an incentive bonus of up to $60,000. Pursuant to the offer letter, Mr. Ruck purchased 213,333 shares of our common stock at an exercise price of $0.39 per share. The shares purchased by Mr. Ruck are subject to our right to repurchase all of the shares of common stock upon termination of his employment. Our right to repurchase his shares upon termination lapses with respect to 53,333 shares on March 15, 2000, and expires ratably as to the remaining shares over a 36- month period. If we terminate Mr. Ruck's employment without cause, within his first year of employment, our right to repurchase his common stock will be equal to the shares granted less 4,444 shares for each full month of employment for Mr. Ruck after March 15, 1999. On March 18, 1999, Mr. Ruck purchased an additional 33,333 shares of our common stock at an exercise price of $0.39 per share, subject to the attainment of individual and corporate objectives, and subject to the same repurchase rights as described above. Also, pursuant to his offer letter, we loaned Mr. Ruck $96,200 pursuant to a partial recourse secured promissory note representing the purchase price for his shares. The note bears interest at the rate of 6% per year. The principal sum of the note will become due and payable in eighteen equal monthly installments beginning in October 2000. The note is due earlier in the event of our acquisition or Mr. Ruck's termination of employment. Mr. Ruck's employment is at will and may be terminated at any time, with or without formal cause. Mr. Van Siclen's offer letter, dated December 17, 1999, provides for an annual salary of $150,000 and eligibility for an incentive bonus of up to $90,000. Mr. Van Siclen received options to purchase 70,000 shares of our common stock at an exercise price of $121.63 per share, and an option to purchase an additional 34,000 shares at a purchase price of $103.38 per share. Mr. Van Siclen's offer letter also calls for 12 additional monthly grants of options to purchase 5,000 shares at the then-current fair market value, which Mr. Van Siclen may elect to receive in a single option grant. All such options were or will be granted under the 1999 Equity Incentive Plan. Options to purchase 26,000 shares will vest on the first anniversary of the grant date and the remainder will vest ratably over the 36-month period thereafter. Mr. Van Siclen's employment is at will and may be terminated at any time, with or without formal cause. 53 Indemnification of Directors and Executive Officers and Limitation of Liability Our certificate of incorporation includes a provision that eliminates the personal liability of our directors for monetary damages resulting from breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to us or our stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or . for any transaction from which the director derived an improper personal benefit. These provisions are permitted under Delaware law. Our bylaws provide that: . we must indemnify our directors and executive officers to the fullest extent permitted by Delaware law, subject to very limited exceptions; . we may indemnify our other employees and agents to the same extent that we indemnify our directors and executive officers, unless otherwise required by law, our certificate of incorporation, bylaws or agreements; and . we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to very limited exceptions. We have entered into indemnification agreements with each of our current directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification provided in our certificate of incorporation and bylaws and to provide additional procedural protections. Presently, there is no pending litigation or proceeding involving any of our directors, executive officers or employees for which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. We have liability insurance for our directors and officers. 54 RELATED PARTY TRANSACTIONS Other than the employment and severance agreements described in "Management," and the transactions described below, since we were formed there has not been nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: . in which the amount involved exceeded or will exceed $60,000; and . in which any director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. Preferred Stock Financings In March and June 1996, we sold an aggregate of 1,199,998 shares of Series A Preferred Stock at a purchase price of $0.30 per share. In May and June 1997, we sold an aggregate of 2,134,548 shares of Series B Preferred Stock at a purchase price of $1.9293 per share. In March 1998, we sold an aggregate of 4,161,082 shares of Series C Preferred Stock at a purchase price of $1.6186 per share, and warrants to purchase 612,079 shares of Series C Preferred Stock at an exercise price of $1.9293 per share. In October, November and December 1998, we sold an aggregate of 2,494,142 shares of Series D Preferred Stock at a purchase price of $2.80668 per share. In June 1999, we sold an aggregate of 2,263,136 shares of Series E Preferred Stock at a purchase price of $8.49 per share. Purchasers of our preferred and common stock include, among others, the following executive officers, directors and holders of more than 5% of our outstanding stock. All of the share numbers in the following table reflect the conversion of each outstanding share of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock into two-thirds of a share of common stock and the conversion of each outstanding share of Series B Preferred Stock into 0.7022705 of a share of common stock.
Shares of Preferred Stock ---------------------------------------------- Series A Series B Series C Series D Series E -------- --------- --------- -------- -------- Stockholder ----------- Kathryn C. Gould Entities associated with Foundation Capital....... -- -- 2,480,419 613,896 146,666 Entities associated with JK&B Capital............... -- 1,310,408 650,153 485,233 132,861 Entities associated with Draper Fisher Jurvetson.......... 333,333 167,030 277,410 202,632 1,313 Entities associated with Accel Partners............. -- -- 1,063,038 263,098 72,039 Peng T. Ong................. 66,666 -- -- -- -- Mark W. Saul................ 83,333 13,919 -- -- --
Ms. Gould, one of our directors, is a managing member of Foundation Capital and may be deemed to own beneficially the shares held by entities associated with Foundation Capital. Mr. Ong disposed of his shares of Series A Preferred Stock in 1997. Mr. Saul, one of our directors, is a member of Foundation Capital but does not own beneficially the shares held by entities associated with Foundation Capital. 55 Warrants On January 9, 1997, in connection with a bridge financing, we issued warrants to purchase shares of our Series B Preferred Stock with an exercise price of $1.92932 per share to the following executive officers, directors and holders of more than 5% of our outstanding stock:
Number of shares Warrant holder subject to warrant Expiration date -------------- ------------------ --------------- Mark W. Saul............................. 3,412 January 9, 2002 Entities associated with Draper Fisher Jurvetson............................... 40,950 January 9, 2002
In October 1999, these warrants were exercised. In March 1998, in connection with the Series C Preferred Stock financing, we issued warrants to purchase shares of our Series C Preferred Stock with an exercise price of $1.92932 per share to the following executive officers, directors and holders of more than 5% of our outstanding stock. In October 1998, all warrants to purchase Series C Preferred Stock were exercised in connection with the Series D Preferred Stock financing.
Number of shares Warrant holder subject to warrant -------------- ------------------ Entities associated with Foundation Capital.............. 318,075 Entities associated with Accel Partners.................. 136,317 Entities associated with JK&B Capital.................... 83,371 Entities associated with Draper Fisher Jurvetson......... 35,573
Loans to Executive Officers Jeffrey E. Engelmann. In April 1999, we loaned an aggregate of $105,300 to Mr. Engelmann, our Vice President of Product Marketing and Technology Partnerships, secured by two promissory notes and a stock pledge agreement, in connection with his purchase of 270,000 shares of our common stock. In October 1999, the notes were amended to adjust the repayment schedule in the event of an initial public offering of our common stock. The notes accrue interest at a rate of 6% per year. Interest is payable annually. The principal sum of each note will become due and payable in eighteen equal monthly installments beginning in October 2000. If Mr. Engelmann breaches his obligations under the notes we may enforce our right to payment of 25% of the principal and any accrued interest out of any of Mr. Engelmann's assets, but may enforce our right to payment of the balance due under the notes only out of the stock subject to the stock pledge agreement. As of December 31, 1999, $109,723 remained outstanding under the notes. Jozef Ruck. In April 1999, we loaned an aggregate of $96,200 to Mr. Ruck, our Vice President of Corporate and Channels Marketing, secured by two promissory notes and a stock pledge agreement, in connection with his purchase of 246,666 shares of our common stock. In October 1999, the notes were amended to adjust the repayment schedule in the event of an initial public offering of our common stock. The notes accrue interest at a rate of 6% per year. Interest is payable annually. The principal sum of each note will become due and payable in eighteen equal monthly installments beginning in October 2000. If Mr. Ruck breaches his obligations under the notes we may enforce our right to payment of 25% of the principal and any accrued interest out of any of Mr. Ruck's assets, but may enforce our right to payment of the balance due under the notes only out of the stock subject to the stock pledge agreement. As of December 31, 1999, $100,208 remained outstanding under the notes. Please refer to "Management--Compensation Committee Interlocks and Insider Participation" for a description of a loan to Mr. Brauns. 56 PRINCIPAL AND SELLING STOCKHOLDERS The following table presents information as to the beneficial ownership of our common stock as of December 31, 1999 and as adjusted to reflect the sale of the common stock in this offering by: . each stockholder known by us to be the beneficial owner of more than 5% of our common stock; . each of our directors; . each executive officer listed in the Summary Compensation Table; . all executive officers and directors as a group; and . the selling stockholders.
As of December 31, 1999 After Offering ---------------------------------------------------- -------------------------- Shares Issuable under Shares Options or Total Shares Subject to Warrants Percentage of Total Shares Percentage of Beneficially Repurchase Exercisable Outstanding Shares Beneficially Outstanding Name Owned Right within 60 days Shares Offered Owned Shares ---- ------------ ---------- -------------- ------------- ------- ------------ ------------- Kathryn C. Gould (1).... 3,250,980 -- 10,000 14.2% 324,085 2,926,895 12.2% Foundation Capital entities 70 Willow Road, Suite 200 Menlo Park, CA 94025 JK&B entities (2)....... 2,578,655 -- -- 11.3 465,609 2,113,046 8.8 205 North Michigan Avenue, Suite 808 Chicago, IL 60601 Peng T. Ong (3)......... 1,933,333 -- -- 8.4 153,333 1,780,000 7.5 Ong Leong Family Trust UDT June 29, 1999..... Martin W. Brauns (4).... 1,419,436 808,324 -- 6.2 133,333 1,286,103 5.4 Martin and Margaret Brauns Trust UDT January 9, 1995 Accel Partners entities (5).................... 1,398,175 -- -- 6.1 -- 1,398,175 5.9 428 University Avenue Palo Alto, CA 94301 Michael A. Backland (6).................... 249,998 161,318 26,666 1.1 25,000 224,998 * Jozef Ruck.............. 246,666 246,666 -- 1.1 -- 246,666 1.0 Jack S. Jia (7)......... 194,333 116,317 -- * -- 194,333 * Mark W. Saul............ 133,530 -- 10,000 * 40,062 93,468 * Mark C. Thompson........ 20,000 -- 20,000 * 2,000 18,000 * Ronald E. F. Codd....... 20,000 -- 20,000 * 2,000 18,000 * All eleven directors and executive officers as a group (8).............. 7,904,940 1,680,609 113,332 35.0 704,813 7,200,127 30.1 Draper Fisher Jurvetson entities (9)........... 1,022,668 -- -- 4.5 184,654 838,014 3.5 Integral Capital entities (10).......... 751,324 -- -- 3.3 135,661 615,663 2.6 Charter Ventures entities (11).......... 590,496 -- -- 2.6 106,621 483,875 2.0 The Chatterjee Group entities (12).......... 537,174 -- -- 2.3 96,991 440,183 1.8 Russell Nakano.......... 420,000 2,500 -- 1.8 8,000 412,000 1.7 Steven Farber........... 204,380 -- -- * 40,000 164,380 * Douglas and Eva Jones... 159,999 14,444 66,666 * 16,000 143,999 * Cambridge Technology Capital Fund I, L.P............ 117,785 -- -- * 21,267 96,518 * Lion Investments Limited................ 117,785 -- -- * 50,000 67,785 * Charter Growth entities (13)................... 117,784 -- -- * 21,087 96,697 * Gary Koh................ 100,000 -- -- * 15,000 85,000 * John Lee................ 80,722 -- -- * 8,072 72,650 *
57
As of December 31, 1999 After Offering ---------------------------------------------------- ------------------------- Shares Issuable under Shares Options or Total Shares Subject to Warrants Percentage of Total Shares Prcentage of Beneficially Repurchase Exercisable Outstanding Shares Beneficially Outstanding Name Owned Right within 60 days Shares Offered Owned Shares ---- ------------ ---------- -------------- ------------- --------- ------------ ------------ Kevin Cochrane.......... 68,666 9,500 -- * 3,867 64,799 * Henricks Family Trust... 59,600 -- -- * 5,960 53,640 * Comdisco, Inc........... 58,892 -- -- * 58,892 0 * Star Bay Partners, L.P.. 58,892 -- -- * 10,633 48,259 * Trust of Marc Carignan and Gret Betlan........ 36,666 21,833 7,333 * 3,000 33,666 * Jones Family Trust dated July 15, 1985.......... 33,333 -- -- * 3,333 30,000 * Mark Jones.............. 30,000 -- -- * 3,000 27,000 * Douglas Mosher.......... 26,666 15,555 -- * 750 25,916 * Robert Bracey........... 20,000 -- 13,750 * 2,000 18,000 * Cam Collins............. 20,000 -- 13,750 * 2,000 18,000 * 32 other selling stockholders as a group.................. 196,963 47,330 58,981 * 57,790 139,173 * All selling stockholders as a group (73 individuals and entities).............. 14,425,727 1,080,804 237,146 * 2,000,000 12,425,727 *
- --------------------- (1) Represents 2,878,855 shares held by Foundation Capital II, L.P., of which 287,885 shares are being offered, 200,077 shares held by Foundation Capital II Entrepreneurs Fund, L.L.C., of which 20,000 shares are being offered, and 162,048 shares held by Foundation Capital II Principals Fund, L.L.C., of which 16,200 shares are being offered. Foundation Management II, L.L.C. is the general partner of Foundation Capital II, L.P. James C. Anderson, William B. Elmore, Paul G. Koontz, Kathryn Gould and Michael N. Schuh are the managing members of Foundation Management II, L.L.C. and share voting and investment power of the shares. The managing members of Foundation Management II, L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Foundation Management II, L.L.C. is the managing member of both Foundation Capital II Entrepreneurs Fund, L.L.C. and Foundation Capital II Principals Fund, L.L.C. The managing members of Foundation Management II, L.L.C. are deemed to beneficially own the shares held by Foundation Capital II Entrepreneurs Fund, L.L.C. and Foundation Capital II Principals Fund, L.L.C. and have voting and investment power of the shares. The managing members of Foundation Management II, L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. (2) Represents 1,800,630 shares held by JK&B Capital, L.P., of which 325,127 shares are being offered, and 778,025 shares held by JK&B Capital II, L.P., of which 140,482 shares are being offered. JK&B Management, L.L.C. is the general partner of JK&B Capital, L.P. and JK&B Capital II, L.P. David Kronfeld is the sole managing member of JK&B Management, L.L.C. Mr. Kronfeld is deemed to own beneficially the shares held by JK&B Capital, L.P. and JK&B Capital II, L.P. and has voting and investment power of the shares. Mr. Kronfeld disclaims beneficial ownership of the shares, except to the extent of his direct pecuniary interest in the shares. (3) Represents 1,933,333 shares of common stock held of record by the Ong- Leong Family Trust U/D/T 6/29/99, Peng Tsin Ong and Wai Ping-Leong, trustees, who share voting and investment control. (4) Represents 1,419,436 shares of common stock held of record by Martin W. Brauns and Margaret R. Brauns, trustees U/D/T 1/9/95. (5) Represents 1,097,568 shares held by Accel V L.P., 145,410 shares held by Accel Internet/Strategic Technology Fund, L.P., 57,325 shares held by Accel Keiretsu V L.P., 67,112 held by Accel Investors '97 L.P. and 30,760 held by Ellmore C. Patterson Partners. Accel V Associates L.L.C. is the general partner of Accel V L.P. and has the sole voting and investment power of the shares held by Accel V L.P. Arthur C. Paterson, ACP Family Partnership L.P., James R. Swartz, James W. Breyer, The Breyer 1995 Trust dated 10/4/95, Eugene D. Hill, Swartz Family Partnership L.P., Luke B. Evnin, J. Peter Wagner, and G. Carter 58 Sednaoui are the managing members of Accel V Associates L.P. and share voting and investment power of the shares. The managing members of Accel V Associates L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares, Accel Internet/Strategic Technology Fund Associates L.L.C, is the general partner of Accel Internet/Strategic Technology Fund L.P. and therefore has the sole voting and investment power of the shares held by Accel Internet/Strategic Technology Fund L.P. Arthur C. Paterson, ACP Family Partnership L.P., James R. Swartz, James W. Breyer, Eugene D. Hill, Swartz Family Partnership L.P., Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing members of Accel Internet/Strategic Technology Fund L.P. and share voting and investment power of the shares. The managing members of Accel Internet/Strategic Technology Fund Associates L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Accel Keiretsu V Associates L.L.C. is the general partner of Accel Keiretsu V L.P. and has the sole voting and investment power. Arthur C. Paterson, James R. Swartz, James W. Breyer, Eugene D. Hill, Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the managing members of Accel Keiretsu V L.P. and share voting and investment power of the shares held by Accel Keiretsu V L.P. The managing members of Accel Keiretsu V L.L.C. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Arthur C. Paterson, James R. Swartz, James W. Breyer, Luke B. Evnin, J. Peter Wagner, and G. Carter Sednaoui are the general partners of Accel Investors '97 L.P. and share voting and investment powers of the shares held by Accel Investors '97 L.P. The general partners of Accel Investor '97 L.P. disclaim beneficial ownership of the shares, except to the extent of their direct pecuniary interest in the shares. Arthur C. Patterson is the sole general partner of Ellmore C. Patterson Partners and has sole voting and investment power with respect to the shares held by Ellmore C. Patterson Partners. Mr. Patterson disclaims beneficial ownership of the shares except to the extent of his direct pecuniary interest in the shares. (6) Includes 116,666 shares of common stock held of record by the Backlund Family Trust. (7) Includes 1,000 shares of common stock held by family members, as to which Mr. Jia disclaims beneficial ownership. (8) Includes 500 shares held by a relative of one executive officer, as to which the officer disclaims beneficial ownership. (9) Of the shares offered, Draper Fisher Associates Fund III is offering 173,391 shares and Draper Fisher Partners, LLC is offering 11,263 shares. (10) Of the shares offered, Integral Capital Partners IV, L.P. is offering 134,942 shares and Integral Capital Partners IV MS Side Fund, L.P. is offering 719 shares. (11) Of the shares offered, Charter Ventures II, L.P. is offering 81,126 shares and Charter Ventures III LLC is offering 25,495 shares. (12) Of the shares offered, Quantum Industrial Partners, LDC is offering 48,497 shares, S-C Phoenix Holdings, LLC is offering 32,330 shares, Winston Partners II, LDC is offering 10,776 shares and Winston Partners II, LLC is offering 5,388 shares. (13) Of the shares offered, Charter Growth Capital, L.P. is offering 17,014 shares, Charter Growth Capital Co-Investment Fund, L.P. is offering 3,190 shares and CGC Investors, L.P. is offering 883 shares. Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless indicated above, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of common stock subject to options and warrants that are currently exercisable or exercisable within 60 days of December 31, 1999 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as 59 outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated above, the address for each listed stockholder is c/o Interwoven, Inc., 1195 West Fremont Avenue, Suite 2000, Sunnyvale, California 94087. The number of shares of common stock outstanding after this offering includes shares of common stock being offered. The percentage of common stock outstanding as of December 31, 1999 is based on 22,883,450 shares of common stock outstanding on that date. If the underwriters' over-allotment option is exercised in full, 17 selling stockholders will sell a total of 450,000 shares of common stock. The following table shows the number of shares subject to the over-allotment option for each selling stockholder and the shares each will own beneficially after the offering, assuming that the over-allotment option is exercised in full. If the over-allotment option is not exercised in full, any shares sold will be allocated proportionately among the selling stockholders listed below.
Shares Shares Beneficially Owned Subject After Option Exercise to ------------------------------ Name Option Number Percentage ---- ------- --------------- -------------- JK&B Capital, L.P....................... 132,741 1,922,949 8.1% JK&B Capital II, L.P.................... 57,356 1,922,949 8.1 Draper Fisher Associates Fund III....... 70,791 762,624 3.2 Draper Fisher Partners, LLC............. 4,599 762,624 3.2 Integral Capital Partners IV, L.P....... 55,094 560,276 2.3 Integral Capital Partners IV MS Side Fund, L.P.............................. 293 560,276 2.3 Charter Ventures II, L.P................ 33,122 440,344 1.8 Charter Ventures III, LLC............... 10,409 440,344 * Quantum Industrial Partners, LDC........ 19,800 400,583 1.7 S-C Phoenix Holdings, LLC............... 13,200 400,583 1.7 Winston Partners II, LDC................ 4,400 400,583 1.7 Winston Partners II, LLC................ 2,200 400,583 1.7 Mark Saul............................... 24,723 68,745 * Cambridge Technology Capital Fund I, L.P.................................... 8,683 87,835 * Charter Growth Capital, L.P............. 6,946 88,449 * Charter Growth Capital Co-Investment Fund, L.P.............................. 1,302 88,449 * Star Bay Partners, L.P.................. 4,341 43,918 * ======= 450,000
60 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. Common Stock As of December 31, 1999, there were 22,883,450 shares of common stock outstanding held by 239 stockholders of record. The number of stockholders does not include persons whose stock is in nominee or "street name" accounts through brokers. Dividend Rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board may from time to time determine. Voting Rights. Each common stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. No preemptive or similar rights. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Right to receive liquidation distributions. Upon a liquidation, dissolution or winding-up of Interwoven, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock We are authorized, subject to the limits imposed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The board can also increase or decrease the number of shares of any series, but not below the number of shares of a given series then outstanding, without any further vote or action by the stockholders. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock. Warrants As of December 31, 1999, we had outstanding the following warrants to purchase our common stock:
Total number of shares Subject Exercise price Expiration to Warrants per share date --------------- -------------- ---------- 6,552 1.93 September 2004 39,096 8.49 July 2006
In October 1999, warrants to purchase 64,123 shares of common stock were exercised. 61 Registration Rights The holders of approximately 12,360,198 shares of common stock, not including shares of common stock issuable upon exercise of outstanding warrants, have the right to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold. They and the holders of an additional 58,888 shares of common stock, not including shares of common stock issuable upon exercise of outstanding warrants, have the right to require us to include their shares in any registration statement we file. Right to demand registration At any time after April 7, 2000, holders of approximately 12,360,198 shares of our common stock, not including shares of common stock issuable upon exercise of outstanding warrants, can request that we file a registration statement so they can publicly sell their shares. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement. Who may make a demand. At any time after April 7, 2000, any holder of shares of common stock issued upon conversion of Series B Preferred Stock, any number of holders who together hold an aggregate of at least 954,633 shares of common stock issued upon conversion of Series C Preferred Stock, any number of holders who together hold an aggregate of at least 498,829 shares of common stock issued upon conversion of Series D Preferred Stock, any number of holders who together hold an aggregate of at least 452,628 shares of common stock issued upon conversion of Series E Preferred Stock, or the holders of at least 40% of the shares having registration rights, including some holders of common stock issued upon conversion of Series A Preferred Stock, have the right to demand that we file a registration statement on a form other than Form S-3, so long as the amount of securities to be sold in that registration exceeds $5,000,000. If we are eligible to file a registration statement on Form S-3, the same holders of the registration rights described above will have the right to demand that we file a registration statement on Form S-3, so long as the amount of securities to be sold in that registration exceeds $1,000,000. Number of times holders can make demands. We will only be required to file one registration statement on a form other than Form S-3 for each of two registrations. If we are eligible to file a registration statement on Form S-3, we are not required to file more than one registration statement during any 12- month period. Postponement. We may postpone the filing of a registration statement for up to 90 days once in a 12-month period if we determine that the filing would be seriously detrimental to us or our stockholders. Piggyback registration rights If we register any securities for public sale, holders of approximately 12,419,086 shares of common stock, not including shares of common stock issuable upon exercise of outstanding warrants, will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement. Expenses of registration We will pay all of the expenses relating to any demand or piggyback registration. However, we will not pay for any expenses of any demand registration if the request is subsequently withdrawn by the holders of a majority of the shares having registration rights, subject to very limited exceptions. Expiration of registration rights The registration rights described above will expire in October 2004. The registration rights will terminate earlier with respect to a particular stockholder if that holder owns less than 1% of our outstanding securities or can resell all of its securities in a three month period under Rule 144 of the Securities Act and we are subject to the reporting requirements of the Securities Exchange Act of 1934. 62 Anti-Takeover Provisions The provisions of Delaware law, our certificate of incorporation and our bylaws described below may have the effect of delaying, deferring or discouraging another person from acquiring control of our company. Delaware Law We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents certain Delaware corporations from engaging, under limited circumstances, in a "business combination," which includes a merger or sale of more than 10% of the corporation's assets, with any "interested stockholder," or a stockholder who owns 15% or more of the corporation's outstanding voting stock, as well as affiliates and associates of stockholders, for three years following the date that the stockholder became an "interested stockholder" unless: . the transaction is approved by the board prior to the date the "interested stockholder" attained that status; . upon the closing of the transaction that resulted in the stockholder's becoming an "interested stockholder," the "interested stockholder" owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or . on or subsequent to the date the "business combination" is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the "interested stockholder." A Delaware corporation may "opt out" of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. However, we have not "opted out" of this provision. Section 203 could prohibit or delay mergers or other takeover or change-in-control attempts and, accordingly, may discourage attempts to acquire us. Bylaw Provisions Our bylaws state that our board of directors is divided into three classes. The directors in each class will serve for a three-year term, with our stockholders electing one class each year. For more information on the classification of our board, please see "Management--Board Composition." This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors. Our bylaws provide that any action required or permitted to be taken by our stockholders at an annual meeting or a special meeting of the stockholders may only be taken if it is properly brought before the meeting. Our stockholders may not take any action by written consent instead of by a meeting. Our certificate of incorporation provides that our board of directors may issue preferred stock with voting or other rights without stockholder action. Our bylaws and certificate of incorporation provide that special meetings of the stockholders may only be called by our board, the chairman of our board, our chief executive officer or our president. Our bylaws provide that we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in our management. 63 Indemnification of Directors and Executive Officers and Limitation of Liability Our certificate of incorporation limits the liability of directors to the fullest extent permitted by Delaware law. In addition, our certificate of incorporation and bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We have entered into separate indemnification agreements with our directors and executive officers that provide them with indemnification protection in the event the certificate of incorporation is subsequently amended. Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions may have the effect of preventing changes in the management. Transfer Agent and Registrar The Transfer Agent and Registrar for our common stock is ChaseMellon Shareholder Services, L.L.C., Ridgefield Park, New Jersey. Listing Our common stock is quoted on The Nasdaq Stock Market's National Market under the symbol "IWOV." 64 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding warrants or options, in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. Sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, based on shares outstanding at December 31, 1999, we will have outstanding 23,883,450 shares of common stock, assuming no exercise of outstanding options and warrants. Of these shares, the 3,622,500 shares sold in our initial public offering, the 3,000,000 shares sold in this offering and the 26,667 shares sold in the public market after our initial public offering will be freely tradable without restriction under the Securities Act unless purchased by our "affiliates." The remaining 17,234,283 shares will become eligible for public sale as follows:
Approximate Number of Shares Eligible for Date Future Sale Comment ---- --------------------- ------- April 5, 2000 2,221,198 Underwriters' lock-up in connection with our initial public offering released. These shares may be sold under Rules 144, 144(k) or 701 April , 2000 10,951,377 Underwriters' lock-up in connection with this offering released. These shares may be sold under Rules 144, 144(k) or 701 October 7, 2000 2,669,361 These shares may be sold under Rules 144, 145 or 701 At various times 1,392,347 These shares may be sold under Rules thereafter 144 or 701
Lock-Up Agreements All of our officers and directors and substantially all of our stockholders signed lock-up agreements in connection with our initial public offering under which they agreed not to sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock without the prior written consent of Credit Suisse First Boston Corporation until April 5, 2000. In addition, in connection with this offering, each executive officer, director and selling stockholder has signed a similar lock-up agreement that extends for a period of 90 days after the date of this prospectus. Credit Suisse First Boston Corporation may choose to release some of these shares from these restrictions prior to the expiration of either lock-up period, though it has no current intention to do so, except for the shares sold in this offering. 65 Rule 144 In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of common stock then outstanding, which will equal approximately 238,834 shares immediately after this offering; or . the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k) Under Rule 144(k), a person who has not been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, these shares may be sold immediately upon the completion of this offering. Rule 701 Any of our employees, officers, directors or consultants who purchased his or her shares under a written compensatory plan or contract may be entitled to sell his or her shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. However, all shares issued under Rule 701 are subject to lock-up agreements and will only become eligible for sale when the applicable lock-up agreement expires. Registration Rights Upon completion of this offering, the holders of 10,782,636 shares of common stock, not including shares of common stock issuable upon exercise of outstanding warrants, will be entitled to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold. They and the holders of an additional 16,579 shares of common stock, not including shares of common stock issuable upon exercise of outstanding warrants, have the right to require us to include their shares in any registration statement we file. For a discussion of these rights see "Description of Capital Stock--Registration Rights." After these shares are registered, they will be freely tradable without restriction under the Securities Act. Stock Options We have registered under the Securities Act a total of 4,444,828 shares of common stock reserved for issuance under our stock option and employee stock purchase plans. As of December 31, 1999, options to purchase 1,543,522 shares of common stock were issued and outstanding. Upon the expiration of the 180-day lock-up agreements described above, 121,928 shares of common stock will be subject to vested options, based on options outstanding as of December 31, 1999. Subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, these shares will be available for sale in the open market immediately after the 180-day lock up agreements expire, unless the holder is an executive officer, director or selling stockholder, in which case the shares will be available for sale in the open market 90 days after the date of this prospectus. 66 Warrants As of December 31, 1999, we had outstanding warrants to purchase 45,648 shares of common stock. When these warrants are exercised and the exercise price is paid in cash the shares must be held for one year before they can be sold under Rule 144. These warrants also contain "net exercise provisions," which allow a holder to exercise the warrant for a lesser number of shares of common stock in lieu of paying cash. The number of shares which would be issued in this case would be based upon the market price of the common stock at the time of the net exercise. If the warrant had been held for at least one year, the shares of common stock could be publicly sold under Rules 144 and 145. After the 180-day lock-up agreements described above expire, these warrants will have been outstanding for at least one year. 67 UNDERWRITING Under the terms and subject to the conditions contained in the underwriting agreement dated , 2000, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc., Dain Rauscher Incorporated, SoundView Technology Group, Inc. and Adams, Harkness & Hill, Inc. are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- --------- Credit Suisse First Boston Corporation............................ FleetBoston Robertson Stephens Inc................................ Dain Rauscher Incorporated........................................ SoundView Technology Group, Inc. ................................. Adams, Harkness & Hill, Inc. ..................................... --------- Total........................................................... 3,000,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering, if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. Several of the selling stockholders have granted to the underwriters a 30- day option to purchase on a pro rata basis up to 450,000 additional shares from them at the initial public offering price, less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay.
Per Share Total ----------------------------- ----------------------------- Without With Without With Over-allotment Over-allotment Over-allotment Over-allotment -------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us.. $ $ $ $ Expenses payable by us.. $ $ $ $ Underwriting discounts and commissions paid by selling stockholders........... $ $ $ $ Expenses payable by the selling stockholders... $ $ $ $
We and our executive officers and directors and the selling stockholders have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to any additional shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior 68 written consent of Credit Suisse First Boston Corporation for a period of 90 days after the date of this prospectus, except in our case of issuances pursuant to the exercise of employee stock options outstanding on the date of this prospectus and grants of employee stock options under plans in effect on the date of this prospectus. We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. Our common stock is quoted on The Nasdaq National Market under the symbol "IWOV." In June 1999, we issued an aggregate of 3,394,719 shares of our Series E Preferred Stock at a per share price of $5.66 in a private placement. These shares of Series E Preferred Stock converted into an aggregate of 2,263,136 shares of common stock at $8.49 per share in October 1999. Credit Suisse First Boston Corporation acted as the placement agent for this private placement, and it received a customary fee for its services. In addition, Merchant Capital, Inc., an affiliate of Credit Suisse First Boston Corporation, purchased 229,682 shares of Series E Preferred Stock. These shares of Series E Preferred Stock converted into 153,121 shares of common stock. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and "passive" market making in accordance with Regulation M under the Exchange Act. . Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. . In "passive" market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to certain limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 69 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us, the selling stockholders and the dealer from whom the purchase confirmation is received that (i) the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under the securities laws, (ii) where required by law, that the purchaser is purchasing as principal and not as agent, and (iii) the purchaser has reviewed the text above under "Resale Restrictions." Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or recission or rights of action under the civil liability provisions of the U.S. federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or these persons. All or a substantial portion of the assets of the issuer and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or these persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or these persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser in this offering. This report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and with respect to the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 70 LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. The underwriters have been represented by Wilson Sonsini Goodrich & Rosati, Palo Alto, California. Fenwick & West LLP holds 2,750 shares of our common stock. EXPERTS The consolidated financial statements as of December 31, 1997 and 1998 and September 30, 1999 and for each of the three years in the period ended December 31, 1998 and the nine months ended September 30, 1999 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, a registration statement on Form S-1 under the Securities Act with respect to the common stock. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified by the filed exhibit. The registration statement, including exhibits and schedules, may be inspected without charge at the principal office of the Securities and Exchange Commission in Washington, D.C., and copies of all or any part of it may be obtained from that office after payment of fees prescribed by the Securities and Exchange Commission. We file reports, proxy statements and other information with the Securities and Exchange Commission. Copies of our reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC: Judiciary Plaza Citicorp Center Seven World Trade Room 1024 5000 West Madison Street Center 450 Fifth Street, N.W. Suite 1400 13th Floor Washington, D.C. 20549 Chicago, Illinois 60661 New York, New York 10048 Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission at http://www.sec.gov. 71 INTERWOVEN, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants.......................................... F-2 Consolidated Balance Sheet................................................. F-3 Consolidated Statement of Operations....................................... F-4 Consolidated Statement of Changes in Stockholders' Deficit................. F-5 Consolidated Statement of Cash Flows....................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Interwoven, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' deficit and of cash flows present fairly, in all material respects, the financial position of Interwoven, Inc. and its subsidiary at December 31, 1997 and 1998 and September 30, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 and for the nine months ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California December 10, 1999 F-2 INTERWOVEN, INC. CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts)
December 31, Pro Forma ----------------- September 30, September 30, 1997 1998 1999 1999 ------- -------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents..... $ 1,019 $ 9,022 $ 12,576 Short-term investments........ -- -- 8,416 Accounts receivable, net...... 140 2,405 2,594 Prepaid expenses.............. -- 179 1,314 Other current assets.......... 37 80 122 ------- -------- -------- Total current assets......... 1,196 11,686 25,022 Investments..................... -- -- 1,003 Property and equipment, net..... 188 1,617 2,297 Intangible assets, net.......... -- -- 545 Restricted cash................. -- 605 605 ------- -------- -------- $ 1,384 $ 13,908 $ 29,472 ======= ======== ======== LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.............. $ 213 $ 484 $ 1,179 Accrued liabilities........... 169 1,473 2,592 Debt and leases, current...... 22 258 500 Deferred revenue, current..... -- 627 2,548 ------- -------- -------- Total current liabilities.... 404 2,842 6,819 Debt and leases, long-term.... 87 1,257 875 Deferred revenue, long-term... -- 97 -- ------- -------- -------- 491 4,196 7,694 ------- -------- -------- Mandatorily redeemable convertible preferred stock 4,942,133, 15,163,093 and 18,763,092 shares authorized, respectively; 4,839,505, 15,060,465 and 18,543,523 shares issued and outstanding, respectively, actual; no shares authorized, issued or outstanding pro forma.......... 4,627 20,464 52,996 $ -- ------- -------- -------- -------- Commitments (Note 4) Stockholders' Equity (Deficit): Preferred stock, $0.001 par value, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma.... -- -- -- -- Common Stock, 10,000,000, 16,666,667, 26,666,667 and 100,000,000 shares authorized, respectively; 2,433,333, 4,909,232, 6,588,846 and 19,059,385 shares, respectively, issued and outstanding.............. 3 5 7 19 Additional paid-in capital.... (243) 881 (4,590) 48,394 Notes receivable from stockholders................. (3) (240) (202) (202) Deferred stock-based compensation................. -- (1,090) (5,114) (5,114) Accumulated deficit........... (3,491) (10,308) (21,319) (21,319) ------- -------- -------- -------- Total stockholders' equity (deficit)................... (3,734) (10,752) (31,218) $ 21,778 ------- -------- -------- ======== $ 1,384 $ 13,908 $ 29,472 ======= ======== ========
See accompanying notes to financial statements. F-3 INTERWOVEN, INC. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts)
Nine Months Ended Year Ended December 31, September 30, --------------------------- -------------------- 1996 1997 1998 1998 1999 ------- -------- -------- ----------- -------- (unaudited) Revenues: License................... $ -- $ 84 $ 3,176 $ 1,570 $ 5,814 Services.................. -- 84 827 539 3,447 ------- -------- -------- ------- -------- Total revenues.......... -- 168 4,003 2,109 9,261 Cost of revenues: License................... -- -- 59 19 147 Services.................. -- 95 1,274 791 3,542 ------- -------- -------- ------- -------- Total cost of revenues.. -- 95 1,333 810 3,689 ------- -------- -------- ------- -------- Gross profit................ -- 73 2,670 1,299 5,572 Operating expenses: Research and development.. 328 884 1,797 1,227 2,930 Sales and marketing....... 101 1,519 4,817 2,960 9,058 General and administrative........... 91 530 1,739 1,135 2,077 Amortization of deferred stock-based compensation............. -- -- 812 564 2,685 Amortization of acquired intangible assets........ -- -- -- -- 249 ------- -------- -------- ------- -------- Total operating expenses............... 520 2,933 9,165 5,886 16,999 Loss from operations........ (520) (2,860) (6,495) (4,587) (11,427) Interest and other income (expense), net............. 10 (88) 151 89 416 ------- -------- -------- ------- -------- Net loss.................... $ (510) $ (2,948) $ (6,344) $(4,498) $(11,011) Accretion of mandatorily redeemable convertible preferred stock to redemption value........... -- (261) (1,165) (463) (13,227) ------- -------- -------- ------- -------- Net loss attributable to common stockholders........ $ (510) $ (3,209) $ (7,509) $(4,961) $(24,238) ======= ======== ======== ======= ======== Basic and diluted net loss per share.................. $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51) ======= ======== ======== ======= ======== Shares used in computing basic and diluted net loss per share.................. 2,282 2,356 2,633 2,505 3,722 ======= ======== ======== ======= ======== Pro forma basic and diluted net loss per share......... $ (0.74) $ (0.74) ======== ======== Shares used in computing pro forma basic and diluted net loss per share............. 8,530 14,957 ======== ========
See accompanying notes to financial statements. F-4 INTERWOVEN, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (in thousands)
Note Common Stock Additional Receivable Deferred -------------- Paid-In from Stock-Based Accumulated Shares Amount Capital Stockholders Compensation Deficit Total ------ ------ ---------- ------------ ------------ ----------- -------- Balance at December 31, 1995................... 1,933 $ 2 $ 13 $ -- $ -- $ (33) $ (18) Issuance of Common Stock for cash............... 200 -- 3 -- -- -- 3 Issuance of Common Stock for notes receivable... 233 -- 3 (3) -- -- -- Net loss................ -- -- -- -- -- (510) (510) ----- --- ------- ----- ------- -------- -------- Balance at December 31, 1996................... 2,366 2 19 (3) -- (543) (525) Repurchase of Common Stock.................. (33) -- (5) -- -- -- (5) Issuance of Common Stock on exercise of stock options................ 100 1 4 -- -- -- 5 Accretion of mandatorily redeemable convertible preferred stock........ -- -- (261) -- -- -- (261) Net loss................ -- -- -- -- -- (2,948) (2,948) ----- --- ------- ----- ------- -------- -------- Balance at December 31, 1997................... 2,433 3 (243) (3) -- (3,491) (3,734) Issuance of Common Stock for notes receivable... 1,333 1 239 (240) -- -- -- Note repayment.......... -- -- -- 3 -- -- 3 Repurchase shares of Series A mandatorily redeemable convertible preferred stock........ -- -- -- -- -- (473) (473) Accretion of mandatorily redeemable convertible preferred stock........ -- -- (1,165) -- -- -- (1,165) Issuance of Common Stock on exercise of stock options................ 1,143 1 148 -- -- -- 149 Deferred stock-based compensation........... -- -- 1,902 -- (1,902) -- -- Amortization of stock- based compensation..... -- -- -- -- 812 -- 812 Net loss................ -- -- -- -- -- (6,344) (6,344) ----- --- ------- ----- ------- -------- -------- Balance at December 31, 1998................... 4,909 $ 5 $ 881 $(240) $(1,090) $(10,308) $(10,752) ===== === ======= ===== ======= ======== ======== Issuance of Common Stock for services .......... 9 -- 27 -- -- -- 27 Issuance of Common Stock for notes receivable ...... 517 -- 202 (202) -- -- -- Repurchase of Common Stock ................. (98) -- (10) -- -- -- (10) Note repayment.......... -- -- -- 240 -- -- 240 Accretion of mandatorily redeemable convertible preferred stock........ -- -- (13,227) -- -- -- (13,227) Issuance of Common Stock on exercise of stock options ............... 1,251 2 829 -- -- -- 831 Deferred stock-based compensation........... -- -- 6,708 -- (6,708) -- -- Amortization of stock- based compensation .... -- -- -- -- 2,684 -- 2,684 Net loss................ -- -- -- -- -- (11,011) (11,011) ----- --- ------- ----- ------- -------- -------- Balance at September 30, 1999................... 6,588 $ 7 $(4,590) $(202) $(5,114) $(21,319) $(31,218) ===== === ======= ===== ======= ======== ========
See accompanying notes to financial statements. F-5 INTERWOVEN, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Nine Months Ended Year Ended December 31, September 30, -------------------------- -------------------- 1996 1997 1998 1998 1999 ------- -------- -------- ----------- -------- (unaudited) Cash flows used in operating activities: Net loss.................... $ (510) $ (2,948) $ (6,344) $(4,498) $(11,011) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 17 56 294 194 589 Amortization of deferred stock-based compensation... -- -- 812 564 2,685 Amortization of acquired intangible assets.......... -- -- -- -- 249 Issuance of common stock for services............... -- -- -- -- 27 Non-cash interest expense... 7 135 -- -- -- Provisions for doubtful accounts................... -- -- 270 -- 18 Changes in assets and liabilities: Accounts receivable........ -- (140) (2,535) (1,192) (34) Prepaid expenses and other assets.................... (1) (30) (222) (61) (1,177) Restricted cash............ -- -- (605) (605) -- Accounts payable........... 116 96 271 71 695 Accrued liabilities........ 48 121 1,304 459 994 Deferred revenue........... -- -- 724 317 1,824 ------ -------- -------- ------- -------- Net cash used in operating activities............... (323) (2,710) (6,031) (4,751) (5,141) ------ -------- -------- ------- -------- Cash flows used in investing activities: Purchase of property and equipment.................. (64) (138) (1,723) (1,413) (1,269) Purchase of investments..... -- -- -- -- (9,428) Maturities of investments... -- -- -- -- 9 ------ -------- -------- ------- -------- (64) (138) (1,723) (1,413) (10,688) Cash flows from financing activities: Proceeds from (repurchases of) Series A Preferred Stock, net................. 309 -- (632) (632) -- Proceeds from Series B Preferred Stock, net....... -- 3,415 -- -- -- Proceeds from Series C Preferred Stock, net....... -- -- 7,887 6,712 -- Proceeds from Series D Preferred Stock, net....... -- -- 6,944 -- -- Proceeds from Series E Preferred Stock, net....... -- -- -- -- 18,462 Proceeds from issuance of Common Stock............... 3 -- -- -- -- Proceeds from exercise of stock options.............. -- 5 149 68 831 Proceeds from notes payable, net of discount............ 75 375 -- -- -- Repayment (issuance) of stockholders loans......... 10 (11) 3 3 240 Proceeds from bank borrowings................. -- 76 1,500 574 -- Repurchase of Common Stock.. -- (5) -- -- (10) Principal payments of debt and leases................. -- (5) (94) (70) (140) ------ -------- -------- ------- -------- Net cash provided by financing activities..... 397 3,850 15,757 6,655 19,383 ------ -------- -------- ------- -------- Net increase in cash and cash equivalents................. 10 1,002 8,003 491 3,554 Cash and cash equivalents at beginning of period......... 7 17 1,019 1,019 9,022 ------ -------- -------- ------- -------- Cash and cash equivalents at end of period............... $ 17 $ 1,019 $ 9,022 $ 1,510 $ 12,576 ====== ======== ======== ======= ======== Supplemental cash flow disclosures: Cash paid for interest...... $ -- $ -- $ 41 $ 19 $ 94 ====== ======== ======== ======= ======== Supplemental non-cash investing and finance activities: Property and equipment leases..................... $ -- $ 38 $ -- $ -- $ -- ====== ======== ======== ======= ======== Issuance of Series A Preferred Stock upon conversion of stockholder loans...................... $ 50 $ -- $ -- $ -- $ -- ====== ======== ======== ======= ======== Common Stock issued for notes receivable........... $ 3 $ -- $ 240 $ 240 $ 202 ====== ======== ======== ======= ======== Common Stock issued for services................... $ -- $ -- $ -- $ -- $ 27 ====== ======== ======== ======= ======== Series B Preferred Stock issued upon conversion of convertible notes payable and accrued interest....... $ -- $ 460 $ -- $ -- $ -- ====== ======== ======== ======= ======== Issuance of warrants to purchase Series B Preferred Stock...................... $ -- $ 106 $ -- $ -- $ -- ====== ======== ======== ======= ========
See accompanying notes to financial statements. F-6 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information for the nine months ended September 30, 1998 is unaudited 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company Interwoven, Inc. (the "Company") is a leading provider of software products and services that help businesses and other organizations manage the information that makes up the content of their web sites. In the Internet industry this is often referred to as "web content management." Our flagship software product, TeamSite, is designed to help customers develop, maintain and extend large web sites that are essential to their businesses. The Company also markets and sells its software products and services through its wholly owned subsidiary in the United Kingdom. Reincorporation In June 1999, the Company's Board of Directors authorized the reincorporation of the Company in the State of Delaware. As a result of the reincorporation, the Company is authorized to issue 75,000,000 shares of $0.001 par value Common Stock and 5,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors has the authority to issue undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. Share and per share information for each of the periods presented has been retroactively adjusted to reflect the reincorporation. Basis of Presentation The condensed consolidated interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows as of September 30, 1999. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. Principles of consolidation The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary after elimination of all significant intercompany accounts and transactions. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Revenue recognition In October 1997 and March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP No. 97-2") and Statement of Position No. 98-4, "Deferral of the Effective Date of a Provision of SOP No. 97-2" ("SOP No. 98-4"). SOP 98-4 defers for one year the application of certain provisions of SOP 97-2. In December 1998, the AICPA issued Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP No. 98-9"), which is effective for transactions entered into beginning April 1, 1999. SOP 98-9 extends F-7 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited the effective date of SOP 98-4 and provides additional interpretive guidance. The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 have not had and are not expected to have a material impact on the Company's results of operations, financial position or cash flows. The Company's revenues are derived from licenses of its software products and from services the Company provides to its customers. Revenues are recognized for the various contract elements based upon vendor-specific objective evidence of fair value of each element. License revenues are recognized when persuasive evidence of an agreement exists, the product has been delivered, no significant post-delivery obligations remain, the license fee is fixed or determinable and collection of the fee is probable. The Company does not offer product return rights to resellers or end users. Services revenues consist of professional services and maintenance fees. Professional services primarily consists of software installation and integration, business process consulting and training. Professional services are billed on a time and materials basis and revenues are recognized as the services are performed. Maintenance agreements are typically priced based on a percentage of the product license fee and have a one-year term, renewable annually. Services provided to customers under maintenance agreements include technical product support and unspecified product upgrades. Deferred revenues from advanced payments for maintenance agreements are recognized ratably over the term of the agreement, which is typically one year. Cash, cash equivalents, and investments The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of cash on deposit with banks and high quality money market instruments. All other liquid investments are classified as either short-term or long-term investments. Short-term investments consist of commercial paper and corporate bonds. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At September 30, 1999, all investment securities were designated as available-for-sale. Available-for-sale securities are carried at fair value, using available market information and appropriate valuation methodologies, with unrealized gains and losses reported in stockholders' equity. Realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale securities are included in the statements of income. There have been no such transactions in the nine months ended September 30, 1999. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. At September 30, 1999, the Company's available-for-sale securities consisted of the following: Commercial paper $11.9 million; corporate notes $2.0 million, corporate bonds $.5 million, medium term notes $1.0 million and United States government agencies $1.0 million and money market funds $3.8 million. Of these securities, $10.8 million and $8.4 million was classified as cash equivalents and short-term investments, respectively. The Company had approximately $1.0 million in corporate notes with a maturity that exceeded one year, accordingly this note was classified as a long-term investment. As of September 30, 1999 the difference between the fair value and the amortized cost of available-for-sale securities was insignificant; therefore, no unrealized gains or losses were recorded in stockholders' equity. For the nine months ended September 30, 1999, there were no realized gains and losses. F-8 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited Concentration of credit risk Financial instruments, which potentially subject the Company to a concentration of credit risk, consist primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss by placing its cash and cash equivalents with a major financial institution. The Company's accounts receivable are derived from revenues earned from customers located in the U.S. and are denominated in U.S. dollars. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon expected collectibility of accounts receivable. The following table summarizes the revenues from customers in excess of 10% of the total revenues.
Nine Months Year ended Ended December 31, September 30, --------------- ---------------- 1997 1998 1998 1999 ------ ------ ----------- ---- (Unaudited) Company A................................. 20% --% --% --% Company B................................. 20% --% --% --% Company C................................. 18% --% --% --% Company D................................. 11% --% --% --% Company E................................. 10% --% --% --% Company F................................. --% 13% 16% --% Company G................................. --% --% 12% --% Company H................................. --% --% --% --%
At December 31, 1997, Company A, B and C accounted for 25%, 22% and 21% of total accounts receivable, respectively. At December 31, 1998, Company F accounted for 10% of total accounts receivable. At September 30, 1999 no customer accounted for 10% of total accounts receivable. Fair value of instruments The Company's financial instruments including cash and cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximate fair value due to the short-term maturity of these instruments. Debt and capital lease obligations are carried at cost, which approximates fair value due to the proximity of the implicit rates of these financial instruments and the prevailing market rates for similar instruments. Software development costs Software development costs incurred in the research and development of new products and enhancements to existing products are charged to expense as incurred. Software development costs are capitalized after technological feasibility has been established. The period between achievement of technological feasibility, which the Company defines as the establishment of a working model, until the general availability of such software to customers, has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs since its inception. F-9 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited Capitalization of internal-use software costs In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1 is effective for financial statements for years beginning after December 15, 1998 and provides guidance for the accounting of computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company adopted the provisions of SOP 98-1 in its fiscal year beginning January 1, 1999. Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the useful lives of the assets, generally five years or less, or the shorter of the lease term or the estimated useful lives of the assets, if applicable. Impairment of long-lived assets The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires recognition of impairment of long- lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributed to such assets. Stock-based compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation expense is based on the difference, if any, on the date of grant between fair value of the Company's stock and the exercise price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus on Issue No. 96-18. Income taxes Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Net loss per share The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is computed by dividing the net loss attributed to common stockholders for the period F-10 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited by the weighted average number of shares of Common Stock outstanding during the period excluding shares of Common Stock subject to repurchase. Such shares of Common Stock subject to repurchase aggregated 73,333, 1,737,435, 1,597,862 (unaudited), and 2,154,779 as of December 31, 1997 and 1998 and September 30, 1998 and 1999, respectively. The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):
Nine Months Year Ended December 31, Ended September 30, --------------------------- -------------------- 1996 1997 1998 1998 1999 ------- -------- -------- ----------- -------- (unaudited) Numerator: Net loss attributable to common stockholders...... (510) (3,209) (7,509) (4,961) (24,238) Denominator: Weighted average shares... 2,282 2,405 3,949 4,614 4,900 Weighted average unvested shares of Common Stock subject to repurchase.... -- (49) (1,316) (2,109) (1,178) ------- -------- -------- ------- -------- Denominator for basic and diluted calculation...... 2,282 2,356 2,633 2,505 3,722 Net loss per share: Basic and diluted......... $ (0.22) $ (1.36) $ (2.85) $ (1.98) $ (6.51) ======= ======== ======== ======= ======== The following table sets forth potential shares of Common Stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands): Nine Months Year Ended December 31, Ended September 30, --------------------------- -------------------- 1996 1997 1998 1998 1999 ------- -------- -------- ----------- -------- (unaudited) Weighted average effect of Common Stock equivalents... Series A Preferred Stock.. 796 1,200 878 921 747 Series B Preferred Stock.. -- 1,235 2,107 2,098 2,135 Series C Preferred Stock.. -- -- 3,092 1,791 4,773 Series D Preferred Stock.. -- -- 359 -- 2,494 Series E Preferred Stock.. -- -- -- -- 1,014 Warrants to purchase mandatorily redeemable convertible preferred stock.................... 1 66 71 70 72 Shares of Common Stock subject to repurchase.... -- 49 1,316 2,109 1,178 Common Stock options...... 250 1,480 1,870 494 545 ------- -------- -------- ------- -------- 1,047 4,030 9,693 7,483 12,958 ======= ======== ======== ======= ========
Pro forma net loss per share Pro forma net loss per share is computed using the weighted average number of shares of Common Stock outstanding, including the pro forma effects of the exercise of warrants to purchase Series B Preferred Stock and automatic conversion of the Company's Series A, B, C, D and E Preferred Stock into shares of the Company's Common Stock effective upon the closing of the Company's initial public offering as if such F-11 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited conversion occurred at the beginning of the period, or at the date of issuance, if later. The resulting pro forma adjustment for the year ended December 31, 1998 and the nine months ended September 30, 1999 includes (i) an increase in the weighted average shares used to compute the basic net loss per share of 5,896,280 and 11,234,191, respectively, and (ii) a decrease in the net loss attributable to common stockholders for the accretion of mandatorily redeemable convertible preferred stock of $1,165,000 and $13,227,000, respectively. The calculation of diluted net loss per share excludes potential shares of Common Stock as their effect would be antidilutive. Pro forma potential Common Stock consists of Common Stock subject to repurchase rights and incremental shares of Common Stock issuable upon the exercise of stock options. Pro forma stockholders' equity Effective upon the closing of the Company's initial public offering, the outstanding shares of Series A, B, C, D and E Preferred Stock will automatically convert into 746,664, 2,134,548, 4,773,161, 2,494,142, and 2,322,024 shares of Common Stock, respectively. The pro forma effects of these transactions have been reflected in the accompanying pro forma balance sheet at September 30, 1999. Comprehensive income Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. As of December 31, 1998 and September 30, 1999, the Company had not had any transactions that are required to be reported in comprehensive income. Segment information Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." The Company identifies its operating segment based on business activities, management responsibility and geographic location. During all periods presented, the Company operated in a single business segment. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to the current period presentation. F-12 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited NOTE 2--ACQUISITION Effective July 1, 1999, the Company acquired all the assets and liabilities of Lexington Software Associates Incorporated, which is a provider of configuration management solutions and development methodologies, including consulting and education. The acquisition has been accounted for using the purchase method of accounting. The total purchase price for this acquisition was approximately $800,000. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. The purchase price consisted of 88,339 shares of the Company's Series E Preferred Stock (estimated fair value of $500,000), seven-year warrants to purchase 17,668 shares of Series E Preferred Stock at $5.66 per share (estimated fair value of $77,000) and acquisition-related expenses (including legal and accountancy fees) of approximately $223,000. The allocation of the purchase price was as follows: Allocation of Purchase Price Tangible Assets................................................. $ 385,000 Intangible Assets Workforce..................................................... 500,000 Goodwill...................................................... 300,000 Liabilities..................................................... (385,000) --------- $ 800,000 =========
The amortization of the intangible assets will occur over the estimated periods to be benefited. The workforce asset will be amortized on the straight- line basis over two years from the acquisition date, however, retention of the acquired employees will be evaluated in future periods to assess whether accelerated amortization of this asset is warranted. The goodwill is expected to be amortized on a straight-line basis over three years from the acquisition date. Amortization of acquired intangible asset was $249,000 for the nine months ended September 30, 1999. NOTE 3--BALANCE SHEET COMPONENTS (in thousands):
December 31, ------------- September 30, 1997 1998 1999 ------------- ------------- Accounts receivable, net: Accounts receivable........................... $ 140 $ 2,675 $2,882 Less: Allowance for doubtful accounts......... -- (270) (288) ----- ------- ------ $ 140 $ 2,405 $2,594 ===== ======= ======
F-13 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited There were no write-offs against the allowance for doubtful accounts in the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1999.
December 31, -------------- September 30, 1997 1998 1999 ------ ------- ------------- Property and equipment, net: Computer equipment and purchased software.. $ 254 $ 952 $2,096 Furniture and fixtures..................... 10 586 661 Leasehold improvements..................... -- 449 501 ----- ------- ------ 264 1,987 3,258 Less: Accumulated depreciation and amortization.............................. (76) (370) (961) ----- ------- ------ $ 188 $ 1,617 $2,297 ===== ======= ======
Property and equipment includes $38,000, $23,000 and $0 of fixed assets under capital leases at December 31, 1997 and 1998 and September 30, 1999, respectively. Accumulated depreciation of such assets was $7,000, $8,000 and $0 at December 31, 1997 and 1998 and September 30, 1999, respectively.
December 31, ------------- September 30, 1997 1998 1999 ------------- ------------- Accrued liabilities: Payroll and related expenses................... $ 59 $ 1,247 $1,787 Other.......................................... 110 226 805 ----- ------- ------ $ 169 $ 1,473 $2,592 ===== ======= ======
NOTE 4--DEBT: In June 1999, the Company amended a financing agreement (the "Financing Agreement") originally entered into in June 1998, whereby the bank will loan up to 80% of eligible accounts receivable up to a maximum of $3,000,000 for working capital purposes. Working capital advances accrue interest at the bank's prime rate and are payable monthly with principal due one year subsequent to the date of any advance. The Financing Agreement provides for additional borrowings of up to $1,500,000 to finance equipment purchases. Advances for equipment purchases accrue interest at the bank's prime rate plus .25% and advances are payable monthly for one year subsequent to the date of any advance. Thereafter, the outstanding balance will be due in 36 monthly installments. The Agreement requires the Company to comply with certain financial covenants. The Company was in compliance with all covenants at December 31, 1998 and for the nine months ended September 30, 1999. Future minimum principal payments under the Financing Agreement are as follows (in thousands): Year Ending December 31, 1999................................................................ $ 250 2000................................................................ 500 2001................................................................ 500 2002................................................................ 250 ------ $1,500 ======
F-14 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited In January 1997, the Company issued $375,000 of convertible promissory notes payable. The notes bore interest at 6% per year. In connection with the issuance of the notes, the Company issued to the note holders warrants to purchase 82,219 shares of Series B Preferred Stock at $1.29 per share. The warrants expire at the earlier of November 2001 or upon an initial public offering of the Company's Common Stock. The Company recorded a $94,000 discount to the notes for the value of the warrants, which was recognized in 1997 as additional interest expense. In May 1997, the principal amounts and accrued interest outstanding for the notes were converted into 357,182 shares of Series B Preferred Stock (see Note 7). NOTE 5--COMMITMENTS: The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through May 2003. Rent expense for the year ended December 31, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999 totaled $52,000, $557,000, $373,000 (unaudited) and $743,000, respectively. Future minimum lease payments under noncancelable operating and capital leases, as of December 31, 1998, are as follows (in thousands):
Capital Operating Sublease Leases Leases Income ------- --------- -------- Year Ending December 31, 1999.......................................... $10 $ 938 $356 2000.......................................... 7 951 211 2001.......................................... -- 979 -- 2002.......................................... -- 1,009 -- 2003.......................................... -- 426 -- --- ------ ---- Total minimum lease payments and sublease income....................................... 17 $4,303 $567 ====== ==== Less: Amount representing interest............ 2 --- Present value of capital lease obligations.... $15 ===
Restricted cash During fiscal 1998, $605,000 of cash was pledged as collateral on an outstanding letter of credit relating to the building lease agreement and is classified as restricted cash on the balance sheet. The restricted cash will be reduced by $226,875 on the 31st month after the signing of the agreement provided no event of default has occurred. The Company was in compliance with all such covenants at December 31, 1998 and September 30, 1999. NOTE 6--INCOME TAXES: As of September 30, 1999, the Company had approximately $14,700,000 of federal and $8,600,000 of state net operating tax loss carryforwards available to reduce future taxable income. These net operating loss carryforwards begin to expire in 2010 and 2003 for federal and state tax purposes, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. F-15 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited Deferred tax assets consists of the following (in thousands):
December 31, -------------- Sept 30, 1997 1998 1999 ------ ------ -------- Deferred tax assets: Net operating loss carryforwards.................. $1,105 $2,882 $5,506 Accruals and reserves............................. 61 235 642 Research credits.................................. 40 120 414 Depreciation...................................... 60 128 0 ------ ------ ------ 1,266 3,365 6,562 Valuation allowance................................. (1,266) (3,365) (6,436) ------ ------ ------ Net deferred tax assets............................. -- -- 126 Deferred tax liabilities: Depreciation...................................... -- -- 16 Non-deductible intangible assets.................. -- -- 110 ------ ------ ------ Net deferred tax liabilities........................ 0 0 126 Net deferred tax assets............................. $ -- $ -- $ -- ====== ====== ======
The acquisition of Lexington Software Associates was structured as a tax- free acquisition of stock, therefore, the differences between the recognized fair values of acquired net assets and their historical tax bases are not deductible for tax purposes. A deferred tax liability has been recognized for the differences between assigned fair values of intangibles for book purposes and the tax bases of such assets. For financial reporting purposes, the Company has incurred a loss in each year since its inception. Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided for a valuation allowance against its net deferred tax assets at December 31, 1997 and 1998 and September 30, 1999. NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK: At December 31, 1998, mandatorily redeemable convertible preferred stock consists of the following (in thousands):
Shares ---------------------- Liquidation Redemption Series Authorized Outstanding Amount Amount ------ ---------- ----------- ----------- ---------- Series A Preferred Stock...... 1,120 1,120 $ 224 $ 626 Series B Preferred Stock...... 3,142 3,040 3,909 4,756 Series C Preferred Stock...... 7,160 7,160 7,726 7,989 Series D Preferred Stock...... 3,741 3,741 7,000 7,093 ------ ------ ------- ------- 15,163 15,061 $18,859 $20,464 ====== ====== ======= =======
F-16 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited At September 30, 1999, mandatorily redeemable convertible preferred stock consists of the following (in thousands):
Shares ---------------------- Liquidation Redemption Series Authorized Outstanding Amount Amount ------ ---------- ----------- ----------- ---------- Series A Preferred Stock...... 1,120 1,120 $ 224 $ 1,650 Series B Preferred Stock...... 3,142 3,040 3,909 7,429 Series C Preferred Stock...... 7,160 7,160 7,726 14,132 Series D Preferred Stock...... 3,741 3,741 7,000 10,149 Series E Preferred Stock...... 3,600 3,483 19,714 19,636 ------ ------ ------- ------- 18,763 18,544 $38,573 $52,996 ====== ====== ======= =======
The holders of Series A, B, C, and D Preferred Stock have certain rights and privileges as follows: Warrants The Company issued warrants to purchase 20,409, 82,219 and 5,480 in 1996, 1997 and 1998, respectively, shares of Series B Preferred Stock at $1.29 per share to the holders of the warrants. The warrants expire at the earlier of November 2001 or upon an initial public offering of the Company's Common Stock. Voting Each share of Series A, B, C, and D Preferred Stock has voting rights equivalent to Common Stock on an "as if" converted basis. Dividends Holders of Series A, B, C and D Preferred Stock are entitled to receive non- cumulative annual dividends of $0.01, $0.10, $0.09 and $0.15 per share, respectively, when and if declared by the Company's Board of Directors. Dividends on the Series A, B, C and D Preferred Stock shall be payable in preference and prior to any payment of any dividend on the Common Stock. The holders of the Series A, B, C and D will also be entitled to participate in dividends on the Common Stock, when and if declared by the Board of Directors, on an as-converted to Common Stock basis. No dividends have been declared from inception through December 31, 1998. Liquidation In the event of any liquidation, dissolution, winding up or merger where less than 50% of the voting power is maintained by the Company, the holders of the Series A, B, C, and D Preferred Stock shall be entitled to receive, prior and in preference to any distribution to the holders of the Common Stock, an amount equal to $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus any declared but unpaid dividends. Any amounts remaining after such distribution shall be distributed among the holders of Series B, C and D Preferred Stock, and Common Stock on an "as if" converted basis until the holders of Series B, C and D Preferred Stock have received an aggregate liquidation payment of $2.57, $2.16 and $2.81, thereafter any remaining amounts shall be distributed among the holders of Common Stock. F-17 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited Redemption Upon the request of holders of at least 50% of the outstanding shares of Series A, B, C or D Preferred Stock, the shares of all of the preferred stock may be redeemed in four equal installments beginning in May 2002. The redemption price for Series A, B, C and D Preferred Stock will be the greater of the original issuance price for Series A, B, C and D Preferred Stock, $0.20, $1.29, $1.08 and $1.87 per share, respectively, plus any undeclared and unpaid dividends and an amount equal to that amount which would result in the holder of such shares realizing an 8% annually compounded return on the purchase price or the fair market value of Series A, B, C and D Preferred Stock on the first redemption date. Conversion Each share of Series A, C, and D Preferred Stock is convertible at the option of the holder into two-thirds of a share of Common Stock at any time, subject to adjustment for antidilution. Each share of Series B Preferred Stock is convertible at the option of the holders into .7022705 of a share of Common Stock at any time, subject to adjustment for antidilution. Each share of Series A, B, C and D Preferred Stock will be automatically converted upon an initial public offering of the Company's Common Stock with aggregate proceeds in excess of $20,000,000 and a price per share of not less than $5.79. The Company has reserved sufficient shares of Common Stock for issuance upon conversion of the Series A, B, C and D Preferred Stock. Series E Preferred Stock Each share of Series E Preferred Stock has voting rights equivalent to Common Stock on an "as if" converted basis. Holders of Series E Preferred Stock are entitled to receive non-cumulative annual dividends of $0.45 per share, when and if declared by the Company's Board of Directors. Dividends on the Preferred Stock shall be payable in preference and prior to any payment of any dividend on the Common Stock. The holders of the Series E Preferred Stock will also be entitled to participate in dividends on the Common Stock, when and if declared by the Board of Directors, based on the number of shares of Common Stock held on an as-converted basis. No dividends have been declared from inception through September 30, 1999. In the event of any liquidation, dissolution, winding up or merger where less than 50% of the voting power is maintained by the Company, the holders of the Series E Preferred Stock shall be entitled to receive, prior and in preference to any distribution to the holders of the Common Stock, an amount equal to $5.66 per share, respectively, plus any declared but unpaid dividends. Any amounts remaining after such distribution shall be distributed among the holders of Series E Preferred Stock, and Common Stock on an "as if" converted basis until the holders of Series E have received an aggregate liquidation payment of $8.49, thereafter any remaining amounts shall be distributed among the holders of Common Stock. Upon the request of holders of at least 50% of the outstanding shares of Series E Preferred Stock, the shares of all of the preferred stock may be redeemed in four equal installments beginning in May 2002. The redemption price for Series E Preferred Stock will be the greater of the original issuance price for Series E Preferred Stock, $5.66 per share, respectively, plus any undeclared and unpaid dividends and an amount equal to that amount which would result in the holder of such shares realizing an 8% annually compounded return on the purchase price or the fair market value of Series E Preferred Stock on the first redemption date. Each share of Series E Preferred Stock is convertible at the option of the holder into two-thirds of a share of Common Stock at any time, subject to adjustment for antidilution. Each share of Series E Preferred Stock will be automatically converted upon an initial public offering of the Company's Common Stock with aggregate proceeds in excess of $20,000,000 and a price per share of not less than $8.49. The Company has reserved sufficient shares of Common Stock for issuance upon conversion of the Series E Preferred Stock. F-18 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited NOTE 8--COMMON STOCK: In March 1995, the Company issued 1,933,333 shares of Common Stock to its founder in exchange for $14,500 in total consideration. Additionally, in March 1996, the Company issued 233,333 shares of Common Stock to an employee in consideration of a $3,500 promissory note. In addition, the Company issued a further 200,000 shares of Common Stock in consideration of $3,000 in cash. Under the terms of the stock purchase agreements, the Company has the right to repurchase up to 2,166,667 shares of such Common Stock at the original issue price upon termination. The repurchase rights expired as to 25% of such Common Stock in January 1997 and the remainder expire ratably over a 36 month period thereafter with 586,667 and 180,555 shares of Common Stock subject to repurchase at December 31, 1998 and September 30, 1999. The Company had reserved shares of Common Stock for issuance as follows (in thousands):
As of September 30, 1999 ------------- Mandatorily redeemable convertible preferred stock: Series A Preferred Stock..................................... 747 Series B Preferred Stock..................................... 2,135 Series C Preferred Stock..................................... 4,773 Series D Preferred Stock..................................... 2,494 Series E Preferred Stock..................................... 2,400 Exercise of options under stock option plans................... 1,030 ------ 13,579 ======
Notes receivable from stockholders In March 1998, the Company issued 1,333,333 shares of Common Stock to an officer of the Company in exchange for a $240,000 note receivable. The note bore interest at 6% per year. The note was secured by the underlying stock and is classified as a note receivable from stockholder in the accompanying balance sheet at December 31, 1998. Under the terms of the agreement, the Company has the right to repurchase all of the shares of such stock at the original issue price upon termination. The repurchase rights expire ratably over a 48 month period with 1,055,555 and 805,555 shares of Common Stock subject to repurchase at December 31, 1998 and September 30, 1999, respectively. In June 1999, the note was paid. In April 1999 the Company issued a total 516,667 shares of Common Stock to two officers of the Company in exchange for notes receivable totalling $201,500. The notes bears interest at the rate of 6% per year. The principal sum of the notes will become due and payable in eighteen equal monthly installments beginning in October 2000. The notes are secured by the underlying stock and are classified as notes receivable from stockholders in the accompanying balance sheet at September 30, 1999. Under the terms of the agreement, the Company has the right to repurchase all of the shares of such stock at the original issue price upon termination. The repurchase rights will expire as to 25% of such Common Stock in April 2000, and the remainder will expire ratably over a 36 month period thereafter with 516,667 shares of Common Stock subject to repurchase at September 30, 1999. NOTE 9--EMPLOYEE STOCK OPTION PLAN: In August 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan") and in March 1998 it adopted the 1998 Stock Option Plan (the "1998 Plan") (collectively, the "Plans"). The Plans provide for F-19 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited grants of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options or nonqualified stock options. Incentive stock options ("ISO") may be granted only to employees (including officers and directors who are also employees) of the Company. Nonqualified stock options may be granted to employees and consultants of the Company. Options under the Plans may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO shall not be less than 100% of the estimated fair value of the shares on the date of grant and (ii) the exercise price of an ISO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant and are for periods not to exceed five years. Options are immediately exercisable but are subject to repurchase by the Company at the original exercise price. The repurchase feature generally expires for 25% of the shares after the first year of service and then expires ratably over the next 36 months. The following table summarizes the activity under the Plans for the years ended December 31, 1997, 1998 and the nine months ended September 30, 1999 (shares in thousands):
Year Ended December 31, --------------------------------- Nine Months ended 1997 1998 September 30, 1999 ---------------- ---------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- --------- ---------- Outstanding at beginning of period.............. 487 $0.03 1,276 $0.11 622 $ 0.17 Granted................. 1,074 0.14 824 0.21 1,895 3.37 Canceled................ (185) 0.09 (334) 0.18 (236) 0.98 Exercised............... (100) 0.05 (1,144) 0.13 (1,251) 0.91 ----- ------ --------- Outstanding at end of period................. 1,276 0.11 622 0.17 1,030 4.97 ----- ------ --------- Options exercisable at end of period.......... 1,276 622 1,030 ----- ------ --------- Weighted average fair value of options granted during the period................. $0.03 $0.05 $ 0.67 ===== ===== ========
The following table summarizes information about stock options outstanding and exercisable at December 31, 1998 (shares in thousands):
Options Exercisable Options Outstanding at December 31, 1998 at December 31, 1998 ------------------------------------------------ -------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (Years) Price Exercisable Price -------- ----------- ------------ -------- ----------- -------- $0.03- 0.09 206 8.0 $ 0.07 206 $0.07 0.15- 0.21 362 9.4 0.19 362 0.19 0.39 54 9.9 0.39 54 0.39 ------------ --- 622 9.0 0.17 622 0.17 ============ ===
F-20 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited The following table summarizes information about stock options outstanding and exercisable at September 30, 1999 (shares in thousands):
Options Outstanding at September Options Exercisable 30, 1999 at September 30, 1999 ------------------------------------- ----------------------- Weighted Average Remaining Weighted Weighted Range of Contractual Average Average Exercise Number Life Exercise Number Exercise Prices Outstanding (Years) Price Exercisable Price -------- ----------- ----------- -------- ----------- -------- $0.15- 0.21 77 8.6 $0.19 77 $0.19 0.39- 1.20 162 9.4 0.64 162 0.64 1.65- 2.25 298 9.7 2.15 298 2.15 7.64-10.01 493 9.9 8.85 493 8.85 ----- ----- 1,030 9.7 4.97 1,030 4.97 ===== =====
Fair value disclosures The Company calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following assumptions:
Year Ended Nine Months December 31, Ended --------------- September 30, 1997 1998 1999 ------ ------ ------------- (unaudited) Risk-free interest rates..................... 6.5% 6.5% 5.5% Expected lives (in years).................... 4.0 4.0 4.0 Dividend yield............................... 0.0 0.0 0.0 Expected volatility.......................... 0.0 0.0 0.0
The compensation cost associated with the Company's stock-based compensation plans, determined using the minimum value method prescribed by SFAS No. 123, did not result in a material difference from the reported net income for the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999. 1999 Equity Incentive Plan In July 1999, the Board adopted, subject to stockholder approval, the 1999 Equity Incentive Plan (the "1999 Plan") and reserved 2,900,000 shares of Common Stock for issuance thereunder. The 1999 Plan authorized the award of options, restricted stock awards and stock bonuses (each an "Award"). No person will be eligible to receive more than 1,000,000 shares in any calendar year pursuant to Awards under the 1999 Plan other than a new employee of the Company who will be eligible to receive no more than 1,500,000 shares in the calendar year in which such employee commences employment. Options granted under the 1999 Plan may be either incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only to Company employees (including officers and directors who are also employees). NSOs may be granted to Company employees, officers, directors, consultants, independent contractors and advisors of the Company. Options under the Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO may not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a 10% stockholder may not be less than 110% of the estimated fair value of the shares on the date of grant. The maximum term of options granted under the 1999 Plan is ten years. F-21 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited Members of the Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to participate in the 1999 Plan. The option grants under the 1999 Plan are automatic and nondiscretionary, and the exercise price of the options must be 100% of the fair market value of the Common Stock on the date of grant. Each eligible director who first becomes a member of the Board on or after the effective date of the Registration Statement of which this Prospectus forms a part (the "Effective Date") will initially be granted an option to purchase 20,000 shares (an "Initial Grant") on the date such director first becomes a director. Immediately following each Annual Meeting of the Company, each eligible director will automatically be granted an additional option to purchase 10,000 shares if such director has served continuously as a member of the Board since the date of such director's Initial Grant or, if such director was ineligible to receive an Initial Grant, since the Effective Date. The term of such options is ten years, provided that they will terminate three months following the date the director ceases to be a director or a consultant of the Company (twelve months if the termination is due to death or disability). All options granted under the Directors Plan will vest 100% of the shares upon the date of issuance. Employee Stock Purchase Plan In July 1999, the Board adopted, subject to stockholder approval, the 1999 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 300,000 shares of Common Stock for issuance thereunder. On each January 1, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of the Company's outstanding shares on December 31 of the preceding year. The aggregate number of shares reserved for issuance under the Purchase Plan shall not exceed 3,000,000 shares. The Purchase Plan will become effective on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. Employees generally will be eligible to participate in the Purchase Plan if they are customarily employed by the Company for more than 20 hours per week and more than five months in a calendar year and are not (and would not become as a result of being granted an option under the Purchase Plan) 5% stockholders of the Company. Under the Purchase Plan, eligible employees may select a rate of payroll deduction between 2% and 10% of their W- 2 cash compensation subject to certain maximum purchase limitations. Each offering period will have a maximum duration of two years and consists of four six-month Purchase Periods. The first Offering Period is expected to begin on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market. Depending on the Effective Date, the first Purchase Period may be more or less than six months long. Offering Periods and Purchase Periods thereafter will begin on February 1 and August 1. The price at which the Common Stock is purchased under the Purchase Plan is 85% of the lesser of the fair market value of the Company's Common Stock on the first day of the applicable offering period or on the last day of that purchase period. The Purchase Plan will terminate after a period of ten years unless terminated earlier as permitted by the Purchase Plan. Deferred stock-based compensation In connection with certain stock option grants during the year ended December 31, 1998 and the nine months ended September 30, 1999, the Company recognized deferred stock-based compensation totaling $1.9 million and $6.7 million, respectively, which is being amortized over the vesting periods of the applicable options. Amortization expense recognized during the year ended December 31, 1998 and the nine months ended September 30, 1999 totaled approximately $812,000 and $2.7 million, respectively. F-22 INTERWOVEN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information for the nine months ended September 30, 1998 is unaudited NOTE 10--SUBSEQUENT EVENTS: Stock Split Prior to the effectiveness of the Company's initial public offering, the Company's Board of Directors effected a two-for-three reverse stock split of the outstanding shares of Common Stock. All common share and per share information included in these financial statements have been retroactively adjusted to reflect this stock split. Initial public offering On October 14, 1999 the Company completed its initial public offering of Common Stock. A total of 3,622,500 shares were sold by the Company at a price of $17.00 per share. The offering resulted in net proceeds to the Company of approximately $56.2 million, net of an underwriting discount of $4.3 million and estimated offering expenses of $1.2 million. Conversion of Preferred Stock Effective upon the closing of the Company's initial public offering, the outstanding shares of Series A, B, C, D and E Preferred Stock were converted into 746,664, 2,134,548, 4,773,161, 2,494,142, and 2,322,024 shares of Common Stock, respectively. Repayment of debt On November 24, 1999, the Company repaid its equipment financing agreement with Silicon Valley Bank. The amount repaid was approximately $1.3 million. F-23 [LOGO OF INTERWOVEN APPEARS HERE] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses to be paid by the Registrant in connection with the sale of the shares of common stock being registered hereby. None of these expenses will be paid by the selling stockholders. All amounts are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market filing fee. Securities and Exchange Commission registration fee.............. $ 122,048 NASD filing fee.................................................. 30,500 Nasdaq National Market filing fee................................ 17,500 Accounting fees and expenses..................................... 100,000 Legal fees and expenses.......................................... 250,000 Road show expenses............................................... 20,000 Printing and engraving expenses.................................. 250,000 Blue sky fees and expenses....................................... 10,000 Transfer agent, custodial and registrar fees and expenses........ 15,000 Miscellaneous.................................................... 184,952 ---------- Total.......................................................... $1,000,000 ==========
Item 14. Indemnification of Directors and Officers. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's Certificate of Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to the Registrant or its stockholders, . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, . under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases), or . for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's Bylaws provide that: . the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, . the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law, . the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions, and . the rights conferred in the Bylaws are not exclusive. II-1 The Registrant has entered into Indemnity Agreements with each of its current directors and officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrant's Amended and Restated Certificate of Incorporation and to provide additional procedural protections. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Registrant regarding which indemnification is sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification. Reference is also made to Section 7 of the draft Underwriting Agreement to be entered into between the Registrant and the underwriters, which will provide for the indemnification of officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provisions in the Registrant's Amended and Restated Certificate of Incorporation, Bylaws and the Indemnity Agreements to be entered into between the Registrant and each of its directors and officers may be sufficiently broad to permit indemnification of the Registrant's directors and officers for liabilities arising under the Securities Act. The Registrant maintains directors' and officers' liability insurance. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document Number ---------------- ------ Form of Underwriting Agreement...................................... 1.01 Registrant's Third Amended and Restated Certificate of Incorporation...................................................... 3.03 Registrant's Restated Bylaws, as amended............................ 3.04 Third Amended and Restated Investors' Rights Agreement dated June 10, 1999........................................................... 4.02 Form of Indemnity Agreement......................................... 10.01
Item 15. Recent Sales of Unregistered Securities. Since inception we have issued and sold the following securities: 1. Through October 8, 1999, we issued and sold an aggregate of 2,620,787 shares of our common stock to employees, consultants, directors, and other service providers at prices ranging from $0.03 to $10.01 per share under direct issuances or exercises of options granted under our 1996 Stock Option Plan and 1998 Stock Option Plan. All shares purchased under our 1996 Stock Option Plan and 1998 Stock Option Plan are subject to our right to repurchase such shares at their original exercise price. The repurchase feature generally expires for 25% of the shares after the first year of service and then expires ratably over the next 36 months. 2. In March and June 1996, we issued and sold an aggregate of 1,800,000 shares of our Series A Preferred Stock to private investors for an aggregate purchase price of approximately $360,000. In March 1998, we repurchased 680,000 shares of our Series A Preferred Stock at $0.93 per share. The remaining 1,120,000 shares of Series A Preferred Stock converted into 746,664 shares of common stock in October 1999. 3. In August 1996, we issued a warrant to a certain bank in connection with a loan agreement. The warrant was exercised in October 1999 for 6,552 shares of common stock. 4. In January 1997, in connection with a bridge loan that converted into Series B Preferred Stock, we issued warrants to private investors to purchase 93,298 shares of Series B Preferred Stock at an exercise price of $1.2862 per share. These shares of Series B Preferred Stock converted into 65,519 shares of common stock in October 1999. 5. In May and June 1997, we issued and sold an aggregate of 3,039,505 shares of our Series B Preferred Stock to private investors for an aggregate purchase price of approximately $3,890,566. These shares of Series B Preferred Stock converted into 2,134,548 shares of common stock in October 1999. II-2 6. In March 1998, we issued and sold an aggregate of 6,241,619 shares of our Series C Preferred Stock to private investors for an aggregate purchase price of approximately $6,375,181, and warrants to purchase 918,124 shares of Series C Preferred Stock at an exercise price of $1.2862 per share. In connection with the Series D Preferred Stock financing, all warrants to purchase Series C Preferred Stock were exercised for an aggregate purchase price of approximately $1,180,891. These shares of Series C Preferred Stock converted into 4,773,161 shares of common stock in October 1999. 7. In October, November and December 1998, we issued and sold an aggregate of 3,741,217 shares of our Series D Preferred Stock to private investors for an aggregate purchase price of approximately $6,996,075. These shares of Series D Preferred Stock converted into 2,494,142 shares of common stock in October 1999. 8. In June 1999, we issued and sold an aggregate of 3,394,719 shares of our Series E Preferred Stock to private investors for an aggregate purchase price of approximately $19,214,109. These shares of Series E Preferred Stock converted into 2,263,136 shares of common stock in October 1999. 9. In July 1999, we issued 88,339 shares of Series E Preferred Stock and warrants to purchase 17,668 shares of Series E Preferred Stock to certain stockholders of Lexington Software Associates, Inc. in exchange for their shares of that company. These shares of Series E Preferred Stock converted into 58,888 shares of common stock in October 1999. These warrants are exercisable for 11,770 shares of common stock. 10. In July 1999, we issued a warrant to purchase 40,989 of shares of Series E Preferred Stock to General Electric Company in connection with a commercial transaction. This warrant is exercisable for 27,326 shares of common stock. All sales of common stock made pursuant to the exercise of stock options were made in reliance on Rule 701 under the Securities Act or on Section 4(2) of the Securities Act. All sales of preferred stock and warrants to purchase preferred stock were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. These sales were made without general solicitation or advertising. Each purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the shares were being acquired for investment. The conversion of the preferred stock into common stock in October 1999 was effected in reliance on the exemption provided under Section 3 (a) (9) of the Securities Act. Item 16. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed herewith:
Number Exhibit Title ------ ------------- 1.01* Form of Underwriting Agreement. 2.01** Agreement and Plan of Merger, dated October 1, 1999, between Interwoven, Inc., a California corporation, and the Registrant. 3.03*** Registrant's Third Amended and Restated Certificate of Incorporation. 3.04** Registrant's Restated Bylaws, as amended. 4.01** Form of Certificate for Registrant's common stock. 4.02** Third Amended and Restated Investors' Rights Agreement, dated June 10, 1999. 4.03** Form of Consent concerning the Third Amended and Restated Investors' Rights Agreement dated June 10, 1999. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 10.01** Form of Indemnity Agreement between Registrant and each of its directors and executive officers.
II-3
Number Exhibit Title ------ ------------- 10.02** 1996 Stock Option Plan and related agreements. 10.03** 1998 Stock Option Plan and related agreements. 10.04** 1999 Equity Incentive Plan and related agreements. 10.05** 1999 Employee Stock Purchase Plan and related agreements. 10.06** Regional Prototype Profit Sharing Plan and Trust/Account Standard Plan Adoption Agreement AA #001. 10.07** Employment Agreement between Interwoven, Inc. and Martin W. Brauns dated February 27, 1998. 10.08** Offer Letter to David M. Allen from Interwoven, Inc. dated February 12, 1999. 10.09** Offer Letter to Michael A. Backlund from Interwoven, Inc. dated May 1, 1998. 10.10** Offer Letter to John Chang from Interwoven, Inc. dated January 20, 1997. 10.11** Offer Letter to Jeffrey E. Engelmann from Interwoven, Inc. dated December 11, 1998. 10.12** Offer Letter to Steven Farber from Interwoven, Inc. dated June 14, 1997. 10.13** Offer Letter to Jack S. Jia from Interwoven, Inc. dated January 3, 1997. 10.14** Offer Letter to Peng T. Ong from Interwoven, Inc. dated February 29, 1996. 10.15** Offer Letter to Jozef Ruck from Interwoven, Inc. dated February 18, 1999. 10.16** Confidential Separation Agreement and Release, between Interwoven, Inc. and John Chang dated November 25, 1998. 10.17** Confidential Separation Agreement and Release, between Interwoven, Inc. and Steven Farber dated February 12, 1998. 10.18** Secured Promissory Notes between Interwoven, Inc. and Jeffrey E. Engelmann, dated as of April 19, 1999. 10.19** Secured Promissory Notes between Interwoven, Inc. and Jozef Ruck, dated as of April 21, 1999. 10.20** Build-To-Suit Lease Agreement dated March 18, 1997 between Sunnyvale Partners Limited Partnership and First Data Merchant Services Corporation. 10.21** Sublease dated April 24, 1998 between First Data Merchant Services Corporation and Interwoven, Inc. 10.22** Loan and Security Agreement, dated October 1997, as amended, between Interwoven, Inc. and Silicon Valley Bank. 10.23** Agreement and Plan of Reorganization, dated June 30, 1999, by and among Interwoven, Inc., Lexington Software Associates, Inc. and certain stockholders of Lexington Software Associates, Inc. 10.24+** Standard Sales Agreement effective as of July 28, 1999 between Registrant and General Electric Company. 10.25+** Preferred Stock Warrant to Purchase Shares of Series E Preferred Stock of Registrant. 10.26+** Amended and Restated Loan and Security Agreement dated June 24, 1999, between Silicon Valley Bank and Registrant. 10.27** Intellectual Property Security Agreement dated June 24, 1999, between Silicon Valley Bank and Registrant. 10.28** Amendment to Secured Promissory Note between Interwoven, Inc. and Jeffrey E. Engelmann, dated as of October 5, 1999.
II-4
Number Exhibit Title ------ ------------- 10.29** Amendment to Secured Promissory Note between Interwoven, Inc. and Jozef Ruck, dated as of October 5, 1999. 10.30 Offer Letter to John Van Siclen from Interwoven, Inc. dated December 17, 1999. 10.31 Assignment of Lease between beyond.com and Interwoven, Inc. 21.01** Subsidiaries of the Registrant 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of PricewaterhouseCoopers LLP, independent accountants. 24.01*** Power of Attorney. 27.01*** Financial Data Schedule
- --------------------- * To be filed by amendment ** Incorporated by reference to the exhibit of the same number to the Registration Statement on Form S-1 (file No. 333-83779) filed July 27, 1999, and all amendments thereto. *** Previously filed. + Portions of this exhibit have been omitted pursuant to an order granting confidential treatment (b) The financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto. Item 17. Undertakings. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on this 10th day of January, 2000. INTERWOVEN, INC. /s/ David M. Allen By: _________________________________ David M. Allen Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Name Title Date ---- ----- ---- * President, Chief Executive January 10, 2000 ______________________________________ Officer (principal Martin W. Brauns executive officer) and a director /s/ David M. Allen Vice President and Chief January 10, 2000 ______________________________________ Financial Officer David M. Allen (principal financial officer and principal accounting officer) Additional Directors: Chairman of the Board January , 2000 ______________________________________ Peng T. Ong * Director January 10, 2000 ______________________________________ Kathryn C. Gould * Director January 10, 2000 ______________________________________ Mark W. Saul * Director January 10, 2000 ______________________________________ Mark C. Thompson * Director January 10, 2000 ______________________________________ Ronald E.F. Codd
/s/ David M. Allen *By:____________________________ David M. Allen, Attorney-in-fact II-6 EXHIBIT INDEX
Number Exhibit Title ------ ------------- 5.01 Opinion of Fenwich & West LLP regarding legality of the securities being registered. 10.30 Offer Letter to John Van Siclen from Interwoven, Inc. dated December 17, 1999. 10.31 Assignment of Lease between beyond.com and Interwoven, Inc. 23.01 Consent of Fenwich & West LLP (included in Exhibit 5.01). 23.02 Consent of PricewaterhouseCoopers LLP, independent accountants.
EX-5.1 2 OPINION OF FENWICK & WEST [FENWICK & WEST LLP LETTERHEAD] EXHIBIT 5.01 January 10, 2000 Interwoven, Inc. 1195 West Fremont Avenue, Suite 2000 Sunnyvale, CA 94087 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-1 (Registration Number 333-92943) (the "Registration Statement") filed by you with the Securities and Exchange Commission (the "Commission") on December 17, 1999, as subsequently amended, in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of up to 3,450,000 shares of your Common Stock (the "Shares"), 2,000,000 outstanding and will be sold by certain selling stockholders (the "Selling Stockholders") and the balance of which will be issued and sold by you. In rendering this opinion, we have examined the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) the prospectus that constitutes a part of the Registration Statement; (3) your registration statement on Form S-1 (Registration No. 333-83779), originally filed with the Commission on July 27, 1999, as amended, together with the Exhibits as a part thereof; (4) the prospectus prepared in connection with the registration statement on Form S-1 (Registration No. 333-83779); (5) your registration statement on Form 8-A (File Number 000-27389) filed with the Commission on September 20, 1999; (6) the minutes of meetings and actions by written consent of the stockholders and boards of directors that are contained in your minute books and the minute books of your predecessor, Interwoven, Inc., a California corporation ("Interwoven California"), that are in our possession; (7) the stock records for you and Interwoven California that you have provided to us (consisting of a certificate from your transfer agent of even date herewith verifying the number of your issued and outstanding shares of capital stock as of January 10, 2000 Page 2 the date hereof, and a list prepared by you of holders of options and warrants for your capital stock and of any rights to purchase your capital stock; (8) a Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual and other representations; (9) The agreements under which the Selling Stockholders acquired the Stock to be sold by them as described in the Registration Statement; and (10) The Custody Agreement, Transmittal Letter and Powers of Attorney signed by the Selling Stockholders in connection with the sale of Stock described in the Registration Statement. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all natural persons executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due authorization, execution and delivery of all documents where due authorization, execution and delivery are prerequisites to the effectiveness thereof. For the purposes of this opinion, we have relied as to matters of fact solely upon our examination of the documents referred to above and have assumed their current accuracy and completeness. We are admitted to practice law in the State of California, and we express no opinion herein with respect to the effect of the laws of any jurisdiction other than the existing laws of the United States of America, the State of California and the State of Delaware. In connection with our opinion expressed below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act of 1933, as amended, and will not have been modified or rescinded, that the offer and sale of the Shares will be registered under the Registration Statement and that there will not have occurred any change in law affecting the validity or enforceability of the Shares. Based upon the foregoing, it is our opinion that the Shares to be sold by the Selling Stockholders pursuant to the Registration Statement are validly issued, fully paid and nonassessable and that the Shares to be issued and sold by you, when issued and sold in accordance in the manner referred to in the prospectus constituting a part of the Registration Statement, will be validly issued, fully paid and nonassessable. January 10, 2000 Page 3 We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and we assume no obligation to update this opinion should circumstances change after the date hereof. Very truly yours, /s/ Fenwick & West LLP EX-10.30 3 OFFER LETTER TO JOHN VAN SICLEN FROM INTERWOVEN EXHIBIT 10.30 December 17, 1999 John van Siclen 35 Bryan Court Alamo, CA 94507 Re: Employment Agreement Dear John: On behalf of Interwoven, Inc. (the "Company"), I am pleased to offer you employment in the position of Vice President, Business Development reporting to Martin Brauns, President and CEO. This letter sets out the terms of your employment with Interwoven which will start on December 20, 1999. You will be paid a base salary of $6,250.00 semi monthly (which equals $150,000 per year), less applicable tax and other withholdings. Compensation will include an incentive bonus of up to $90,000. This bonus will be earned based on MBOs mutually agreed upon between your manager and yourself. You are eligible to receive a quarterly draw equivalent to eighty (80%) of your incentive bonus. You will also be eligible to participate in various Interwoven fringe benefit plans, including group health insurance, the Interwoven 401(k) plan, flex spending accounts, Employee Stock Purchase Plan, and paid time off (PTO) programs. You will be granted an option to purchase 70,000 shares of Interwoven common stock under Interwoven's 1999 stock option plan at an exercise price equal to the fair market value of that stock on your option grant date. Your option will vest over a period of four years (25% at the end of one year, and then 1/48 per month thereafter), and will be subject to the terms and conditions of Interwoven's stock option plan and standard form of stock option agreement, which you will be required to sign as a condition of receiving the option. You will receive: .60,000 total options to be granted at the rate of 5,000 options per month or sooner at your option, .34,000 options granted on start date at 85% of the fair market value on the grant date. We hope that you and the Company will find mutual satisfaction with your employment. We are very excited about your joining our team, and we look forward to a beneficial and fruitful relationship. Nevertheless, your employment with Interwoven is "at will"; it is for no specified term, and may be terminated by you or Interwoven at any time, with or without cause or advance notice. As a condition of your employment, you will be required to sign Interwoven's standard form of employee confidentiality and assignment of inventions agreement, and to provide Interwoven with documents establishing your identity and right to work in the United States. Those documents must be provided to Interwoven within three days after your employment start date. In the event of any dispute or claim relating to or arising out of your employment relationship with Interwoven, this agreement, or the termination of your employment with Interwoven for any reason (including, but not limited to, any claims of breach of contract, wrongful termination or age, sex, race, national origin, disability or other discrimination or harassment), you and Interwoven agree that all such disputes shall be fully, finally and exclusively resolved by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. You and Interwoven hereby waive your respective rights to have any such disputes or claims tried to a judge or jury. Provided, however, that this arbitration provision shall not apply to any claims for injunctive relief by either you or the Company. This agreement and the confidentiality and stock option agreements referred to above constitute the entire agreement between you and Interwoven regarding the terms and conditions of your employment, and they supersede all prior negotiations, representations or agreements between you and Interwoven. The provisions of this agreement regarding "at will" employment and arbitration may only be modified by a document signed by you and the President of Interwoven. We look forward to working with you at Interwoven. Please sign and date this letter on the spaces provided below no later than December 20, 1999 to acknowledge your acceptance of the terms of this agreement. Sincerely, Interwoven, Inc. By /s/ David M. Allen ---------------------------------- I agree to and accept employment with Interwoven, Inc. on the terms and conditions set forth in this agreement. Date: December 20, 1999 /s/ John Van Siclen ----------------------- EX-10.31 4 ASSIGNMENT OF LEASE BETWEEN BEYOND.COM EXHIBIT 10.31 ASSIGNMENT OF LEASE -------------------
Recitals - -------- Section 1. Effective Date of Assignment Section 2. Assignment Section 3. Assumption of Lease Obligations/Indemnity Section 4. Covenants Section 5. Sublease Cash Security Deposit/Letter of Credit Section 6. Brokers Section 7. Condition of Premises Section 8. Successors and Assigns Section 9. Governing Law Section 10. Attorneys' Fees Section 11. Counterparts Exhibit A. Master Lease Exhibit B. Sublease
This Assignment of Lease ("Assignment") is made to be effective as of the Effective Date (as defined below) between beyond.com, a Delaware corporation ("Assignor"), and Interwoven, Inc., a California corporation ("Assignee"). Recitals -------- A. SUNNYVALE PARTNERS LIMITED PARTNERSHIP, an Illinois limited partnership, as landlord ("Landlord"), and FIRST DATA MERCHANT SERVICES CORPORATION as tenant ("Tenant"), entered into a lease, made as of March 18, 1997 ("Master Lease"), with respect to premises described in the Master Lease and commonly known as 1195 West Fremont Boulevard, Sunnyvale, California ("Master Premises"). B. A copy of the Master Lease (with certain confidential economic details deleted) is attached to this Assignment as Exhibit A. C. Tenant, as sublessor ("Sublessor"), subleased a portion of the Premises (the "Subleased Premises") to Software.Net Corporation (whose name was changed to beyond.com), as sublessee, by means of a an undated Sublease, (the "Sublease"). D. A copy of the Sublease is attached to this Assignment as Exhibit B. E. Interwoven occupies the balance of the Master Premises pursuant to a Sub-Sublease with Tenant. Interwoven is familiar with the Landlord, Sublessor, the building in which the Subleased Premises are located and the operation of the Master Premises. F. beyond.com desires to assign to Interwoven, and Interwoven desires to receive an assignment from beyond.com, all of the Subleased Premises which is identified in the Sublease ("Subleased Premises"). From and after the Effective Date, Interwoven shall be responsible for and shall assume all obligations of beyond.com under the Sublease accruing on or after the Effective Date. G. The assignment of the Subleased Premises is conditioned upon Landlord and Sublessor both consenting to the terms and conditions of this Assignment. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereto agree as follows: Section 1. Effective Date of Assignment ---------------------------------------- This Assignment shall become effective upon the first day ("Effective Date") on which each of the following have occurred: (i) this Assignment has been executed by Assignor and by Assignee, and each has received a copy executed by the other party; (ii) Assignee has delivered to Assignor $297,454.50 in cash in the form of a certified bank check as described in clause 5(a); (iii) Assignee's letter of credit in the amount of $297,454.50 as called for in Section 5 has been issued with Sublessor as beneficiary; (iv) Sublessor has released Assignor's letter of credit, as described in clause 5(b); (v) Sublessor and Master Landlord have consented in writing to this Assignment with no additions, deletions or amendments; (vi) Assignee has executed the Bill of Sale for certain personal property and delivered to Assignor the sum of $288,000, by certified bank check, pursuant to the Bill of Sale; (vii) Assignee has delivered to Sublessor insurance certificates evidencing all insurance required under the Sublease, in form acceptable to Sublessor, and (viii) Assignor has tendered possession of the Subleased Premises to Assignee. If all of the above have not occurred on or before November 22, 1999, this Assignment shall automatically terminate and be of no further force and effect. Assignor and Assignee shall execute a certificate certifying the date that all conditions have been met. Section 2. Assignment ---------------------- As of the Effective Date, Assignor hereby assigns and transfers to Assignee all of Assignor's right, title, and interest in the Sublease and Assignee hereby accepts from Assignor all of Assignor's right, title, and interest, subject to the terms and conditions set forth in this Assignment. As of the Effective Date. Assignor releases all right, title and interest it has or may have with respect to the cash security deposit provided for in Section 30 of the Sublease. Section 3. Assumption of Lease Obligations/Indemnity ----------------------------------------------------- Effective as of the Effective Date, Assignee assumes and agrees to perform and fulfill all the terms, covenants, conditions, and obligations accruing on or after the Effective Date and required to be performed and fulfilled by Assignor as sublessee under the Sublease, including the making of all payments due to Sublessor under the Sublease or payable by Assignor as Sublessee under the Sublease, all as they become due and payable. Assignee shall indemnify, defend and hold harmless Assignor from and against any and all claims, costs, 2 expenses, liabilities, obligations and damages of any nature whatsoever arising from Assignee's default under the Sublease (collectively "Claims"). Without limiting the foregoing, if any Claim is made against Assignor, Assignee shall defend Assignor with counsel reasonably acceptable to Assignor. Section 4. Covenants --------------------- (a) Assignor covenants as follows: (i) that the copy of the Sublease attached as Exhibit B is a true and accurate copy of the Sublease as of the Effective Date and that there exists no other agreement affecting Assignor's tenancy under the Sublease; (ii) the copy of the Master Lease attached as Exhibit A, to the best of Assignor's knowledge, is a true and accurate copy of the Master Lease as of the Effective Date; and (iii) the Sublease is in full effect and, to the best of Assignor's knowledge, no defaults exist under the Sublease, nor any acts or events which, with the passage of time or the giving of notice or both, could become defaults. (b) Assignee covenants as follows: (i) that it has read the Master Lease attached hereto and the Sublease; and (ii) that as of the Effective Date it shall have made such investigations of the Subleased Premises as it deems necessary to determine that the Subleased Premises are acceptable to it. Section 5. Sublease Cash Security Deposit/Letter of Credit ----------------------------------------------------------- (a) On or before the Effective Date, Assignee shall pay Assignor $297,454.50 in cash in the form of a certified bank check in exchange for Assignor's assignment to Assignee of all of Assignor's right, title and interest in the $297,454.50 cash security deposit provided for in Section 30 of the Sublease ("Sublease Security Deposit"). (b) On or before the Effective Date, Assignee shall deliver to Sublessor $297,454.50 in the form of an irrevocable letter of credit (the "Letter of Credit Security Deposit") issued by a bank acceptable to Sublessor and in form and substance acceptable to Sublessor (the "Letter of Credit") and otherwise in full compliance with Section 30 of the Sublease. Concurrently with the delivery to Sublessor of Assignee's Letter of Credit Security Deposit, Sublessor shall cause Assignor's letter of credit (which Sublessor currently holds as security under Section 30 of the Sublease) to be released provided, however, no such release shall occur unless and until Sublessor has received and approved Assignee's Letter of Credit Security Deposit. The release by Sublessor of beyond.com's letter of credit on or before November 22, 1999 shall be a condition to the effectiveness of Assignor's assignment hereunder. If Assignor's letter of credit is not released on or before such date, on twenty-four hours written notice Assignor may rescind this Assignment at any time until its letter of credit is released. Section 6. Brokers ------------------- Assignor and Assignee acknowledge that no real estate broker brought about this assignment transaction. Each party hereby agrees to indemnify the other party against claims of any person claiming by, through or under the first party in connection with this assignment transaction. 3 Section 7. Condition of Premises --------------------------------- Assignor makes no representations or warranties with regard to the conditions of the Subleased Premises. Assignee is in occupancy of the building in which the Subleased Premises are located and is familiar with the building systems that service the building and with the custom and practice of Sublessor. Assignee may investigate the Subleased Premises and all parts thereof prior to signing this Assignment. To the best of beyond.com's knowledge, without investigation, beyond.com has received no notice that the Subleased Premises are in violation of any ordinance, rule, code or regulation of any governmental agency. Section 8. Successors and Assigns ---------------------------------- This Assignment shall be binding on and inure to the benefit of the parties to it, their successors-in-interest, and assigns. Section 9. Governing Law ------------------------- This Assignment shall be governed by and construed in accordance with California law. Section 10. Attorneys' Fees ---------------------------- If either party commences an action against the other in connection with this Assignment, the Sublease, for indemnity or any matter related thereto, the prevailing party will be entitled to recover costs of suit and reasonable attorneys' fees. Section 11. Counterparts ------------------------- This Assignment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties have executed this Assignment as of the date first above written. Assignor: beyond.com, a Delaware corporation By: /s/ Garry Stuib ------------------------- Title: Director of HR ------------------------- Assignee: Interwoven, Inc., a Delaware corporation By: David M. Allen ------------------------- Title: V.P. & CFO ------------------------- 4 Consent of Master Landlord -------------------------- First Data Merchant Services Corporation ("First Data"), Tenant under the Master Lease and Sublandlord under the Sublease and Sunnyvale Partners Limited Partnership ("Sunnyvale Partners"), Landlord under the Master Lease, hereby consent to this Assignment of the Sublease to Assignee and Sunnyvale Partners confirms that the consent given hereby satisfies the requirements for giving consent as set forth in the Master Lease regarding this Assignment and First Data confirms that the consent given hereby satisfies the requirements for giving consent as set forth in the Sublease regarding this Assignment. However, Assignor and Assignee remain otherwise subject to all terms and conditions of Section 18 of the Sublease as set forth in the Master Lease. By so consenting to the Assignment of the Sublease, Sunnyvale Partners and First Data do not hereby consent to become a party to the Assignment. If the Master Lease is terminated prior to the termination of the Sublease, the Sublease shall terminate simultaneously therewith and Assignee's rights to possess to any portion of the Subleased Premises arise solely from the provisions of the Sublease and neither the Sublease nor this consent shall be deemed as granting Assignee any greater tenancy rights than Subtenant under the Sublease. Nothing in this Consent or the Assignment shall be deemed to be either (i) a modification of or an amendment to the Sublease or Master Lease; or (ii) a release of beyond.com from its obligations under the Sublease or a modification of any of beyond.com's obligations under the Sublease. First Data hereby consents to the right of beyond.com to cure any defaults by Assignee under the Sublease provided such defaults are cured within the time periods set forth in the Sublease. Notwithstanding any provision to the contrary in this Consent, nothing contained herein shall operate as a consent to or approval or ratification by First Data or Sunnyvale Partners of any of the provisions of the Assignment or as a representation or warranty by First Data or Sunnyvale Partners, and neither First Data nor Sunnyvale Partners shall be bound or estopped in any way by the provisions of the Assignment. In addition, nothing herein shall be construed to waive any future or present breach or default on the part of beyond.com under the Sublease. Sunnyvale Partners Sunnyvale Partners Limited Partnership, a California limited partnership By: /s/ James Small -------------------------------- Title: General Partner First Data Merchant Services Corporation, a Florida corporation By: /s/ David Schlapbach -------------------------------- Title: -------------------------------- EXHIBIT A BUILD-TO-SUIT LEASE AGREEMENT ----------------------------- Landlord: SUNNYVALE PARTNERS LIMITED PARTNERSHIP Tenant: FIRST DATA MERCHANT SERVICES CORPORATION March 18, 1997 EXHIBIT A TABLE OF CONTENTS
1. Description........................................................... 1 2. Term and Occupancy.................................................... 1 3. Rent.................................................................. 2 4. Construction.......................................................... 3 5. Use................................................................... 7 6. Condition of demised Premises......................................... 8 7. Maintenance and Repairs............................................... 8 8. Alterations........................................................... 9 9. Signs................................................................. 11 10. Services.............................................................. 11 11. Compliance with Law................................................... 12 12. Landlord's Title, Authority, and Quiet Enjoyment; Tenant's Authority.. 13 13. Subordination......................................................... 13 14. Assignment and Sublease............................................... 14 15. Lease Extension....................................................... 15 16. Impositions........................................................... 16 17. Insurance............................................................. 18 18. Destruction and Restoration........................................... 20 19. Condemnation.......................................................... 22 20. Default by Tenant..................................................... 26 21. Landlord's Remedies................................................... 27 22. Default by Landlord................................................... 28 23. Tenant's Remedies..................................................... 28
i EXHIBIT A 24. Delivery of Executed Lease............................................ 29 25. Termination........................................................... 29 26. Notices............................................................... 29 27. Brokerage............................................................. 30 28. Estoppel.............................................................. 30 29. Hazardous Substances.................................................. 30 30. Holdover.............................................................. 32 31. Surrender............................................................. 32 32. Liens................................................................. 33 33. Interest; Late Charge................................................. 34 34. Inspections........................................................... 34 35. Transfer of Landlord's Interest....................................... 34 36. Indemnity............................................................. 35 37. Modifications of Lease................................................ 35 38. Memorandum of Lease................................................... 36 39. Paragraph Captions.................................................... 36 40 Entire Agreement...................................................... 36 41. Choice of Law and Interpretation...................................... 36 42. Prevailing Party...................................................... 36 43. Exhibits.............................................................. 36 44. Guarantee............................................................. 37 45. Independent Covenants................................................. 37 46. Entry by Landlord..................................................... 37 47. [Deleted by intent of parties.]....................................... 37 48. Survival of Obligations............................................... 37
ii 49. Lease Subject to Landlord's Acquisition of Demised Premises........... 38 50. Americans With Disabilities Act....................................... 38 51. Reports by Tenant..................................................... 39 52. Option to Purchase.................................................... 39 53. No Third Party Beneficiaries.......................................... 41 54. Counterparts.......................................................... 41 55. Consents and Approvals................................................ 41 56. Limitation on Damages................................................. 41 57. Tenant's Property..................................................... 41
Exhibit A - Legal Description Exhibit B - Site Plan Exhibit C - Plans Exhibit C-1 - Construction Schedule Exhibit D - Schedule of Rents Exhibit E - Lease Term Agreement Exhibit F - Memorandum of Lease Exhibit G - Landlord's Development Costs Exhibit H - Permitted Exceptions Exhibit I - Escrow Agreement
iii THIS BUILD-TO-SUIT LEASE AGREEMENT (this "Lease") is made as of the 18th day of March, 1997 (the "date hereof") between SUNNYVALE PARTNERS LIMITED PARTNERSHIP, an Illinois limited partnership, having its principal office at c/o Ridge Sunnyvale, Inc., c/o Ridge Capital Corporation, 257 East Main Street, Barrington, Illinois 60010 (hereinafter referred to as "Landlord"), and FIRST DATA MERCHANT SERVICES CORPORATION, having its principal office at 5660 New Northside Drive, Suite 1400, Atlanta, Georgia 30328 (hereinafter referred to as "Tenant"). W I T N E S S E T H: - - - - - - - - - - Landlord, for and in consideration of the rents, covenants and agreements hereinafter set forth on the part of Tenant to be paid, kept, observed and performed does hereby lease unto Tenant, and Tenant does hereby take subject to the conditions herein expressed, all that parcel of land situated in the City of Sunnyvale, County of Santa Clara, State of California and legally described on Exhibit A attached hereto and made a part hereof (the "Land"), together with all improvements located and to be constructed thereon by Landlord, which are hereinafter called "Landlord's Improvements." Landlord's Improvements and all improvements, machinery, building equipment, fixtures and other property of Landlord, real, personal or mixed (except Tenant's trade fixtures and any other property of Tenant), installed or located thereon, together with all additions, alterations and replacements thereof are collectively referred to herein as the "Improvements." The Land and the Improvements are sometimes hereinafter collectively referred to as the "Demised Premises". The structure located upon and being a part of the Demised Premises which is constructed to be used as a two story office building containing approximately 80,000 "useable square feet" (as defined in Paragraph 4 below) is hereinafter referred to as the "Building". 1. Description. Landlord will cause Landlord's Improvements (including the Building and other site improvements depicted on the Site Plan attached hereto and made a part hereof as Exhibit B) to be constructed in substantial accordance with the plans and specifications enumerate on Exhibit C (the "Plans"). Landlord agrees that Landlord shall not make any modifications or changes to the Plans without Tenant's prior written consent. Landlord further agrees to make any changes to the Plans requested by Tenant in writing and if the change requested by Tenant increases or decreases the cost of the Demised Premises, the Base Rent provided for herein shall be adjusted in accordance with the provisions of the formula provided on Exhibit D. 2. Terms and Occupancy. A. The term of this Lease shall commence on the Construction Completion Date, as provided in Paragraph 4 below (hereinafter referred to as the "Commencement Date"), and shall end on the date which is the last day of the month that includes the twelfth (12th) anniversary of the Commencement Date (hereinafter referred to as the "Expiration Date"), unless the term be extended or earlier terminated as provided herein. Landlord shall notify Tenant of the anticipated Construction Completion Date. Landlord agrees to notify Tenant promptly from time to time of any changes in the anticipated Construction Completion Date. Tenant shall have the right to enter the Demised Premises during the approximately ninety (90) day period preceding the Construction Completion Date for the purpose of installing its equipment and Tenant does hereby agree to assume all risk of loss or damage to such equipment, and to indemnify, defend, and hold harmless Landlord from and against any loss or damage to such equipment and all liability, loss or damage arising from any injury to the property of Landlord, or its contractors, subcontractors or materialmen, and any death or personal injury to any person or persons arising out of such installation. Landlord agrees to cooperate with Tenant so that Tenant's contractors and tradespeople will be permitted to reasonably perform their work without material interference. Tenant agrees to cooperate with Landlord so that Landlord's contractors and tradespeople will be permitted to reasonably perform their work without material interference. B. Notwithstanding anything else in this Lease to the contrary, Tenant shall have the right to terminate this Lease as of the end of the eighth (8th) Lease Year (the "Early Termination Date") provided that Tenant shall (a) notify Landlord in writing of its election to terminate at least one (1) year prior to the Early Termination Date, and (b) pay to the Landlord, concurrently with the notification to Landlord hereunder, a termination fee by certified or cashier's check or wire transfer of available funds ("Termination Amount") equal to the discounted present value (using Landlord's financing interest rate) amount needed to reduce the remaining unamortized principal balance due on the indebtedness originally incurred by Landlord to finance the Landlord's Development Costs (as defined in Paragraph 19F) to [deleted text]. If Tenant gives such notice as required hereunder and pays the Termination Amount concurrently therewith, this Lease shall be deemed terminated as to all rights or obligations hereunder (except such rights and obligations as Landlord and Tenant would otherwise have upon normal expiration of the term of this Lease). Any such notice hereunder, not accompanied by the Termination Amount as provided hereinabove, shall be deemed invalid and of no force or effect. Upon Landlord's closing on the permanent loan for the financing of the Landlord's Development Costs, Landlord shall provide to Tenant a copy of the twenty (20) year permanent loan amortization (the "Loan Amortization"), which shall include the principal amount that will be due at the end of the eighth (8th) Lease Year. Tenant shall have the right to pay the Termination Amount to any mortgagee of the Demised Premises or other person with a lien on the Demised Premises or the rents derived therefrom, but Tenant shall have no such obligation to do so unless such obligation is specifically set forth in a non-disturbance or other agreement between Tenant and such mortgagee or other lienholder. Notwithstanding the foregoing, Tenant acknowledges and agrees that any payment to any such mortgagee or other lienholder shall only be effectuated by a two-party or two- payee certified or cashier's check, made payable to both Landlord and any such mortgagee or other lienholder. 3. Rent. The annual base rental ("Base Rent") shall be calculated in accordance with the provisions set forth on the Schedule of Rents attached hereto and made a part hereof as Exhibit D. Base Rent shall be paid monthly, in advance, in equal installments, without offset or deduction by wire transfer in accordance with separate instruction given by Landlord to Tenant, on the Commencement Date and on the first day of each month thereafter during the term hereof; provided however, that if the term of this Lease shall commence on a date other than the first day of a calendar month or end on a date other than the last day of a calendar month (i) the first and last month's Base Rent shall be prorated based upon the ratio that the number of days in the term within such month bears to the total number of days in such month, and (ii) Base Rent reserved for the calendar month of any scheduled rent escalation shall be equitably adjusted upon due 2 consideration of the number of days in such month falling within the preceding Lease Year (as herein defined) and the number of days in such month falling within the current Lease Year. For purposes of this Lease, the term "Lease Year" shall mean the 12-month period commencing on the Commencement Date and each 12- month period thereafter during the term of this Lease (and any renewal or extension thereof), provided that, if the Commencement Date is not the first day of a calendar month, the first "Lease Year" shall be the period commencing on the Commencement Date and ending on the last day of the twelfth (12th) full calendar month following the Commencement Date and all Base Rent payable for the month in which the Commencement Date occurs shall be paid on the first day of the following calendar month. Notwithstanding the foregoing, on or prior to the date of closing under the Sale Agreement (as defined herein), Tenant shall also deposit into escrow with First American Title Guaranty Company the sum of Two Million Dollars ($2,000,000.00) to cover a portion of the Landlord's Development Costs which shall be disbursed in accordance with the Escrow Agreement attached hereto as Exhibit I. 4. Construction. A. Landlord agrees, at Landlord's sole cost and expense, to cause construction of Landlord's Improvements in accordance with the following schedule: (a) Landlord shall use all reasonable efforts to commence the Site Preparation Phase (as defined in that certain Real Estate Purchase and Sale Agreement and Joint Escrow Instructions dated March 18, 1997 (the "Sale Agreement") between Regis Homes of Northern California, Inc. and Landlord) as soon as possible following the date Landlord acquires the Land and in any event on or before the date four (4) business days following the date Landlord acquires the Land (the "Estimated Construction Commencement Date"), in accordance with the Plans and in accordance with the construction schedule attached hereto as Exhibit C-1 (the "Construction Schedule") and shall diligently pursue construction in an effort to complete Landlord's Improvements on or before the Estimated Construction Completion Date (as herein defined); provided, however, if delay is caused or contributed to by act or neglect of Tenant, or those acting for or under Tenant including, without limitation, changes ordered by Tenant, or delays caused by labor disputes, casualties, acts of God or the public enemy, governmental embargo restrictions, shortages of fuel, labor, or building materials, action or non-action of public utilities, or of local, State or Federal governments affecting the work, or other similar causes beyond the Landlord's reasonable control, then the time of commencement of said construction shall be extended for the additional time caused by such delay (such delays are each hereinafter referred to as an "excused delay"). The date on which Landlord actually commences construction of Landlord's Improvements shall be referred to as the "Construction Commencement Date." (b) Landlord shall use all reasonable efforts to substantially complete construction of Landlord's Improvements as soon as possible following the Construction Completion Date in accordance with the Construction Schedule attached hereto as Exhibit C-1, as may be extended by excused delays (the 3 "Estimated Construction Completion Date"). The date on which Landlord substantially completes construction of Landlord's Improvements (except for work to be performed by Tenant) shall be referred to as the "Construction Completion Date." Landlord acknowledges that Tenant will suffer significant damages if Landlord fails to deliver the Demised Premises on or before the Estimated Construction Completion Date and that time is of the essence with respect to Landlord's completion of the Landlord's Improvements as required herein. If Landlord fails to cause the Landlord's Improvements to be substantially completed on or before the Estimated Construction Completion Date, as said date may be extended from time to time due to excused delays, Landlord shall be obligated to pay to Tenant the following sums for each day after the Estimated Construction Completion Date until the Construction Completion Date up to the maximum of sixty-five (65) days of delay and thereafter, Landlord shall be liable for Tenant's actual damages for the delay (which shall include Tenant's actual costs incurred in connection with holding over at its present location and/or renting reasonably acceptable substitute space): (a) for the first thirty (30) days of delay, the sum of One Thousand Dollars ($1,000.00) per day for each calendar day of delay; (b) for the thirty-first (31st) day through the sixtieth (60th) day of delay, the sum of Two Thousand Five Hundred Dollars ($2,500.00) per day for each calendar day of delay; and (c) for the sixty-first (61st) day through the sixty-fifth (65th) day of delay, the sum of Seven Thousand Five Hundred Dollars ($7,500.00) per day for each calendar day of delay. Notwithstanding the foregoing, in no event shall Landlord be liable to Tenant for any punitive, special, incidental, indirect or consequential damages of any kind whatsoever, each of which is hereby excluded by agreement of the parties regardless of whether or not any party has been advised of the possibility of such damages. Landlord shall pay the sums calculated above (other than actual damages accrued after the 95th day of delay) within thirty (30) days after the Commencement Date. In connection with the foregoing, Landlord agrees to deposit into escrow for the benefit of Tenant all damages received from Regis Contractors of Northern California, L.P. pursuant to Section 1.7 of that certain Construction Management Agreement dated March 18, 1997. Tenant agrees to deliver to Landlord an accounting of Tenant's actual damages upon request. B. Tenant or its architect will from time to time upon written request of Landlord or Landlord's construction lender certify that the construction of Landlord's Improvements has been completed to that point to the reasonable satisfaction of Tenant. Notwithstanding the foregoing, nothing contained herein shall be deemed to abrogate, waive or compromise any of Tenant's rights hereunder with respect to the construction and completion of Landlord's Improvements. C. In the event this Lease has not been terminated pursuant to Paragraph 49 of the Lease, Landlord and Tenant promptly shall execute a document substantially in the form attached hereto as Exhibit E and made a part hereof, to establish the Commencement Date and the Expiration Date. 4 D. The following phrases have the meanings set forth below: (a) The phrase "commence[d][s] construction of Landlord's Improvements" as used herein means issuance of all necessary permits needed to commence construction, a building permit, execution of a construction contract or contracts for the completion of Landlord's Improvements in accordance with the Plans, execution of this Lease, and excavation work has commenced. (b) The phrase "substantial[ly] complete[ed] [ion] [of] construction of Landlord's Improvements as used in this Lease shall mean the municipality having jurisdiction thereof issues a certificate of occupancy permitting Tenant to occupy Landlord's Improvements or takes such other action as may be customary to permit occupancy or use thereof for the purposes provided herein and Landlord's Improvements are otherwise ready for beneficial use and occupancy by Tenant subject to completion of any punchlist items (as defined herein) by Landlord and Landlord's architect certified to Tenant in writing that Landlord's Improvements have been constructed and completed in a good and workmanlike manner in substantial accordance with the Plans and that to the best of its knowledge the Plans comply with applicable laws, including without limitation all building codes, zoning ordinances and regulations and the Act (as defined herein) and Landlord's Improvements are otherwise ready for beneficial use and occupancy by Tenant subject to completion of any punchlist items by Landlord; provided, however, the issuance of a certificate of occupancy or such other action as may be customary to permit occupancy or use thereof and the issuance of the architect's certificate shall not be a condition to payment of rent or commencement of the term if failure to secure such certificate of occupancy or action or architect's certificate is caused by the act or neglect of Tenant or if matters required for issuance are the responsibility of Tenant. (c) The phrase "usable square feet" means the square feet contained within the inside of the exterior walls of the Building. E. Within fifteen (15) days after the Construction Completion Date, Tenant, Landlord and Landlord's Architect shall prepare and execute a punchlist (the "punchlist") of incomplete and incorrect items which shall include details of construction and mechanical and electrical adjustments which are minor in character and do not materially interfere with Tenant's use or enjoyment of the Demised Premises in accordance with the provisions of this Lease, and may also include landscaping and other items which do not materially affect Tenant's use of the Demised Premises but which cannot be immediately completed because of weather, or any items listed on the Plans or the Construction Schedule as items to be completed after substantial completion of the Landlord's Improvements, if any (such items are sometimes hereinafter referred to as "punchlist items"). Landlord shall use all reasonable efforts to complete the punchlist items as soon as possible after its receipt of the punchlist, and to minimize disruption of Tenant's business and other inconveniences to Tenant, subject to excused delays. If Landlord fails to complete the punchlist items within ninety (90) days after the receipt by Landlord of the completed punchlist by Tenant, subject to excused delays, then Tenant shall have the right, but not the obligation, to complete the punchlist items and the Landlord shall reimburse Tenant for its 5 reasonable out-of-pocket expenditures in connection therewith upon presentation of invoices in sufficient detail and upon waivers covering performance of the work. Nothing herein contained shall be deemed or construed to permit Tenant to offset against Base Rent or other charges payable by Tenant hereunder. Landlord shall deliver to Tenant "as built" working drawings of the Landlord's Improvements within sixty (60) days after completion of the punchlist items. Landlord shall maintain a retainage of a minimum of ten percent (10%) of the cost of the so-called tenant improvement portion of the Landlord Improvements (the "TI Work") or, based on an estimated approximate cost of for the TI Work. The aforementioned retainage shall not be released until the punchlist items for TI Work have been completed to Tenant's reasonable satisfaction. F. Landlord shall at its own expense correct or repair any parts of Landlord's Improvements that fail to conform with the requirements of the Plans during the period of construction of Landlord's Improvements (unless Tenant is willing to accept such non-conforming work and so notifies Landlord thereof in writing). Landlord shall correct any defects in the construction of Landlord's Improvements not caused by Tenant which appear within a period of one (1) year from the Construction Completion Date, but not otherwise. Landlord shall obtain for the joint benefit of Landlord and Tenant, a joint, non-exclusive assignment of all contractor, subcontractor, equipment, material and manufacturers' warranties relating to the Landlord's Improvements which shall contain a minimum of a one (1) year warranty period commencing with the contractors' or subcontractors' completion of the work included in Landlord's Improvements (the "Warranties"). Furthermore, on the Construction Completion Date, Landlord shall assign to Tenant the non-exclusive right to enforce any and all Warranties and Landlord agrees to reasonably cooperate with Tenant's pursuit of any and all claims under the Warranties. G. Tenant shall have the right to request that changes be made to the Plans. Within ten (10) days after Tenant's requests, Landlord shall provide an estimate of the amount that the change will increase or decrease the cost of completing the Landlord's Improvements and the time adjustment to the Construction Schedule, if any. If Tenant approves the change following receipt of the estimates, Landlord shall submit a change order to its contractors to implement the change requested by Tenant. The estimated increase or decrease in the time required to complete the Landlord's Improvements resulting from Tenant's change shall be reflected as an adjustment to the Construction Schedule and shall be deemed an "excused delay" and any net increase or decrease in Landlord's construction costs due to Tenant's change order, shall be borne by or credited to Tenant, as the case may be, by means of an adjustment to the Schedule of Rents in accordance with the formula established on Exhibit D. H. If due to change orders initiated by Tenant, Landlord's Development Costs exceed the amount of [deleted text] then concurrent with any such change order, Tenant agrees to deposit into the escrow created by the Escrow Agreement (as defined in Paragraph 3 hereof) the total amount of any such increase in Landlord's Development Costs in excess of [deleted text]. Notwithstanding the foregoing, upon the closing of the permanent financing for the Demised Premises occurring on or after the Commencement Date, Landlord shall reimburse Tenant for all such increased costs and the Base Rent shall be adjusted in accordance with the formula 6 established on Exhibit D; provided, however, Base Rent shall not be adjusted until such time as Tenant is reimbursed hereunder. 5. Use. A. The Demised Premises shall be used and occupied for general office purposes and for any other purpose which does not violate any applicable law, rule, ordinance or regulation of any applicable government authority having jurisdiction ("Tenant's Use"). Landlord represents that, to its actual knowledge, the Demised Premises are currently zoned "O," Administrative- Professional District and R1.7/PD, low medium density residential district under the zoning ordinance of the City of Sunnyvale, California, which zoning classification, to Landlord's actual knowledge, will not restrict or limit Tenant's Use; provided, however, Landlord makes no representation as to whether a special use permit, zoning variance or comparable relief from the local zoning ordinance is required to conduct Tenant's Use, and if such special use, variance or comparable relief is required, Tenant shall obtain the same (at its sole cost and expense). Landlord further represents, to its actual knowledge without independent investigation or inquiry and subject to the foregoing proviso, that there are no other zoning ordinances or any other prohibitions restricting or limiting Tenant's Use in any material respect. In addition, Tenant may use all or any part of the Demised Premises for any lawful purpose then permitted by local zoning ordinances and the certificate of occupancy, if available; provided, however, Tenant may not use or occupy the Demised Premises, or knowingly permit the Demised Premises to be used or occupied (including without limitation subleasing the Demised Premises or any part thereof or assigning this Lease to any other party conducting a business other than Tenant's Use) or in such a manner as to cause the value or usefulness of the Demised Premises, or any part thereof, substantially to diminish (reasonable wear and tear excepted). Tenant shall have the exclusive right to use of and shall have full access to the Demised Premises twenty-four (24) hours per day, seven (7) days per week, three hundred sixty-five (365) days per year during the term. B. Tenant may, if Tenant so elects, and for Tenant's sole use, install and operate within the Building microwave ovens and install and operate within the Building vending machines to dispense hot and cold beverages, ice cream, candy, food and cigarettes; such machines shall be maintained in a neat and sanitary condition and shall comply with all applicable laws and ordinances. Tenant shall also have the right to use, install and operate within the Building, all telecommunication lines and other telecommunication and electronic facilities relating to services to be provided to Tenant and its subtenants and Landlord agrees to provide all necessary easements upon the Demised Premises reasonably required by said service provider. Upon termination of the Lease, and if so requested by Landlord, Tenant shall, at its sole cost and expense, in a good and workmanlike manner and in as expeditious a manner as possible, remove any or all such items from the Demised Premises, to the extent required by Landlord. Tenant further agrees to repair any damage to the Demised Premises caused by the removal of such items. In connection with any easements granted hereunder to service providers, Landlord reserves the right to condition any such grant upon receipt of acknowledgment from the relevant service provider(s) that such service provider agrees to vacate the easement, and relinquish all of its rights in the Demised Premises, effective upon the termination of the Lease. Notwithstanding anything contained herein to the contrary, if the Lease is in full force and effect as of the thirteenth (13th) anniversary of the Commencement Date and Tenant is not then in default 7 hereunder, Landlord waives its rights hereunder to require Tenant to remove from the Demised Premises any or all of the items referred to above, upon termination of this Lease. 6. Condition of Demised Premises. Landlord shall construct and Tenant shall reasonably accept Landlord's Improvements in accordance with the Plans. As of the Commencement Date, Landlord's Improvements shall be in good working order and condition and, subject to the items on or to be inserted on the punchlist, constructed in substantial accordance with the Plans. 7. Maintenance and Repairs. A. Except as otherwise provided herein, during the term of this Lease, Tenant shall, at Tenant's sole expense, keep the Demised Premises in good working order, condition and repair and in compliance with all applicable laws and shall perform all routine maintenance thereof and all necessary repairs thereto, interior and exterior, structural and nonstructural ordinary and extraordinary, foreseen or unforeseen, of every nature, kind and description. When used in this Paragraph 7, "repairs" shall include all necessary replacements, renewals, alterations, additions and betterments. If Tenant cannot keep the Demised Premises or any portion thereof in good working order, condition and repair, then Tenant shall replace the same in a first-class manner. Tenant shall comply with manufacturers' recommended schedules for warranty work. Tenant shall furnish its own cleaning services. All repairs and replacements made by Tenant shall be at least equal in quality to the original work and shall be made by Tenant in accordance with all applicable laws. The necessity for or adequacy of maintenance, repairs and replacements shall be measured by the standards which are appropriate for improvements of similar construction and class, provided that Tenant shall in any event make all repairs and replacements necessary to avoid any structural damage or other damage or injury to the Demised Premises. B. Notwithstanding the provisions of Paragraph 7.A., and Tenant's obligations to pay for all repairs, in the event that at any time during the term of this Lease after the expiration of the twentieth (20th) Lease Year (commencing with the Third Extension Term), Tenant reasonably determines that capital expenditures are required to be expended by Tenant in connection with maintaining,, repairing or replacing the roof or structural components of the Building, or replacing the parking areas, Building plumbing, electrical heating, ventilation, or cooling equipment, sprinkler systems, or making any other capital expenditure required by subsequent law (any such capital expenditure being herein referred to as a "Specified Capital Item"), then the Tenant shall submit to Landlord a proposed budget for such capital expenses for the Specified Capital Items and obtain Landlord's prior written approval thereof, which approval shall not be unreasonably withheld or delayed. Upon Tenant's obtaining Landlord's prior written approval of such Specified Capital Items and Tenant completing such work in accordance with the requirements set forth in this Lease then and in that event, the Landlord agrees that it shall reimburse Tenant for an amount ("Reimbursement Amount") equal to the actual costs incurred in connection with the Specified Capital Item previously approved by Landlord and multiplied by a fraction, the numerator of which is the portion of the useful life of such Specified Capital Items remaining after the then existing term and the denominator of which is the useful life of such Specified Capital Item (i.e., by way of example, in the event that the approved cost for an approved Specified Capital Item was One Thousand Dollars ($1,000) and the useful life of such Specified Capital Item was eight (8) years and such work was commenced at the end of the 8 twentieth (20th) Lease Year, then in such event, Landlord should reimburse Tenant for Five Hundred Dollars ($500) as the Reimbursement Amount. The "useful life" of a Specified Capital Item shall be determined using the United States Internal Revenue Service standard depreciation schedule in effect on the date that the applicable capital expenditure is made. Notwithstanding anything contained herein to the contrary, in the event that the Tenant exercises its option to extend the term of the Lease, then simultaneous with the exercise of such renewal option, the Tenant shall pay to Landlord an amount equal to the difference between the Reimbursement Amount and the amount Landlord would have paid as a Reimbursement Amount had the term been extended by the Extension Term at the time such Specified Capital Item was commenced (i.e., by way of example, in the event that the Specified Capital Item was One Thousand Dollars ($1,000) and that the useful life of the Specified Capital Item was eight (8) years, with such work having been commenced at the end of the twentieth (20th) Lease Year, whereby Landlord reimbursed Tenant a Reimbursement Amount of Five Hundred Dollars ($500), then simultaneous with the exercise of its option to extend the Term for the Fourth Extension Term, the Tenant would pay to Landlord an amount equal to Five Hundred Dollars ($500)). The allocation of the costs of Specified Capital Items as set forth in this Paragraph 7.B. shall not relieve Tenant of Tenant's maintenance and repair obligation sunder this Lease. 8. Alterations. Tenant may install tenant finishes in the Demised Premises and make interior alterations, additional installations, modifications, substitutions, improvements and decorations (collectively, "Alterations") in and to the Demised Premises, subject only to the following conditions: (i) any Alterations shall be made at Tenant's sole cost and expense so that the Demised Premises shall at all times be free of liens for labor and materials supplied to the Demised Premises; (ii) without the prior written approval of Landlord, Tenant shall make no Alterations (x) which are structural in nature or adversely affect in any way the structure of the Demised Premises; or (y) which adversely affect or could render void or invalidate any Warranties under this Lease. In addition, without the prior written approval of Landlord, Tenant shall make no Alterations to any portion of the exterior or elevation of the Building. (iii) any Alterations shall be performed in a good and workmanlike manner and in compliance with all applicable laws and requirements of governmental authorities having jurisdiction and applicable insurance requirements and shall not violate any term of any agreement or restriction to which the Demised Premises are subject; (iv) Tenant, at its sole cost and expense, shall cause its contractors to maintain builder's risk insurance and such other insurance (including, without limitation, workers compensation insurance) as is then customarily maintained for such work, all with insurers licensed by the State of California; (v) At least fifteen (15) days prior to Tenant's commencement of any Alterations costing in excess of One Million Dollars ($1,000,000.00), the plans and specifications therefor shall be submitted to Landlord for Landlord's review and 9 approval, which approval shall not be unreasonably withheld or delayed provided that the provisions of this subparagraph (v) shall not apply to initial tenant improvements needed to locate a subtenant in the Demised Premises; and (vi) To the extent not inconsistent with the requirement set forth above, ten shall not be required to obtain Landlord's consent to Alterations which are a subtenant's initial tenant improvements. Any Alteration shall, when completed, be of such character as not to reduce the value or utility of the Demised Premises or the Building to which such Alteration is made below its value or utility to Landlord immediately before such Alteration, nor shall such Alteration alter the exterior of the Improvements or reduce the area or cubic content of the Building, nor change the character of the Demised Premises or the Building as to use without Landlord's express written consent. No change, alteration, restoration or new construction shall be in or connect the Improvements with any property, building or other improvement located outside the boundaries of the Land, nor shall the same obstruct or interfere with any existing easement. Tenant shall notify Landlord in writing 30 days prior to commencing any alterations, additions or improvements to the Demised Premises so that Landlord shall have the right to record and post notices of nonresponsibility on the Demised Premises. Within a reasonable time period prior to commencing the alterations, additions or improvements, ten shall provide Landlord with copies of all plans and specifications prepared in connection with any such alteration, addition or improvement, as well as copies of each material amendment and change thereto, if and when applicable. All of Tenant's generators and uninterruptible power supply equipment (but in no event including the primary HVAC system serving the Building), trade fixtures, movable partitions, furniture, machinery and furnishings installed by Tenant or assignees, subtenants or licensees of Tenant shall remain the property of the owner thereof with the right of removal, whether or not affixed and or attached to the real estate and the owner thereof shall be entitled to remove the same or any part thereof during the term or at the end of the term provided herein, provided that such owner shall repair any damage caused by such removal. Except as otherwise provided herein, all Alterations made or installed by Tenant shall remain the Property of Tenant and Tenant shall have the right to remove the Alterations at any time during the term hereof provided Tenant shall repair any damage resulting therefrom and leave the Demised Premises in a commercially reasonable condition. Notwithstanding the foregoing, any Alterations remaining on the Demised Premises at the end of the term shall become the property of the Landlord without payment therefor by Landlord, and shall be surrendered to Landlord at the expiration of the term of this Lease; provided however, if the Lease term ends prior to the thirteenth (13th) anniversary of the Lease Commencement Date, if so requested by Landlord, Tenant shall, at its sole cost and expense and in as expeditious a manner as possible remove any or all of such Alterations from the Demised Premises, to the extent required by Landlord. Tenant further agrees to repair any damage resulting therefrom and leave the Demised Premises in a commercially reasonable condition. 10 9. Signs. A. Tenant may install, at its expense and pursuant to the Plans, a monument identification sign containing Tenant's name at a location depicted on Exhibit B unless such location would cause a violation of applicable laws in which event said monument identification sign shall be moved to a location mutually acceptable to the parties. Tenant shall also have the right to place any additional signs at the Demised Premises without the prior consent of Landlord, provided that such sign or signs (a) do not cause any structural damage or other damage to the Building; (b) do not violate applicable governmental laws, ordinances, rules or regulations; (c) do not violate any existing restrictions affecting the Demised Premises; and (d) are compatible with the architecture of the Building and the landscaped area adjacent thereto. Tenant shall remove all signage from the Demised Premises at the end of the term. B. Landlord may place signs on the Demised Premises identifying Tenant prior to the Construction Completion Date, provided Tenant has approved each sign, such approval not to be unreasonably withheld. 10. Services. A. Landlord shall provide all utility equipment, distribution systems, fixtures and parts to the Demised Premises in accordance with the Plans, and shall in all other respects prepare the Demised Premises to accept all utilities to be used by Tenant during the term of the Lease as contemplated by the Plans including all connection, tap-in and impact fees, any charges for the underground installation of electric, gas or other utilities or services, and other charges relating to the extension of or change in the facilities necessary to provide the Demised Premises with adequate utilities services. Tenant shall contract for and pay directly or the cost of usage of all utilities including all charges for water, heat, gas, light, garbage, electricity, telephone, sewage, steam, power or other public or private utility services. If after Landlord's installation of the utility systems required to be provided herein, any bond, charge or fee is required by the state in which the Demised Premises are located, or any city or other agency, subdivision, or instrumentality thereof, or by any utility company furnishing services or utilities to the Demised Premises, as a condition precedent to continuing to furnish utilities or services to the Demised Premises, such bond, charge or fee shall be deemed to be a utility charge payable by Tenant. To the extent existing utility easements on the Demised Premises are not sufficient to provide utility and communication services to the Demised Premises for Tenant's use, Landlord agrees to grant additional easements to utility providers, including telecommunication and electronic service providers, if reasonably required by Tenant. B. The Demised Premises shall include all of the improvements shown on the Site Plan, including, without limitation, exclusive use of the paved parking as set forth on the Site Plan. C. Tenant acknowledges that any one or more of the services provided for in Paragraph 10 hereof may be interrupted or suspended by reason of accident, repair, alterations or improvements necessary to be made, strike, lockout, misuse or neglect by Tenant or Tenant's agents, employees or invitees, or by shortages of fuel or other energy supplies to be provided by public or private utilities or supplies or by other matters, and Landlord shall not be liable to 11 Tenant therefore, nor shall Tenant have any right to terminate the Lease or other rights against Landlord in the event of a failure, interruption or suspension of any of the aforesaid services. 11. Compliance with Law. A. Landlord covenants that the Demised Premises (except trade fixtures, equipment, machinery or any other item constructed or installed by Tenant) will materially conform as of the Commencement Date to any applicable laws, orders, statutes, ordinances, rules, regulations and requirements of federal, state and municipal governments, including, without limitation, all applicable rules and regulations of the Board of Fire Underwriters and any requirements of the certificate of occupancy or any permit with respect to the Demised Premises and the sidewalks, curbs, roadways, alleys, entrances or other facilities adjacent or appurtenant thereto. Landlord shall be responsible for procuring building and other permits and licenses necessary for construction of Landlord's Improvements. B. Tenant shall throughout the term of this Lease, at ten's sole cost, materially comply with or remove or cure any violation of any applicable laws, orders, statutes, ordinances, rules, regulations and requirements of federal, state and municipal governments, including, without limitation, any applicable laws, orders, statutes, ordinances, rules, regulations and requirements of any federal, state or local government relating to occupational safety and health (collectively, the "OSHA Regulations"), all applicable rules and regulations of the Board of Fire Underwriters and any requirements of the certificate of occupancy or any permit with respect to the Demised Premises and the sidewalks, curbs, roadways, alleys, entrances or railroad track facilities adjacent or appurtenant thereto, and whether the compliance, curing or removal of any such violation and the costs and expenses necessitated thereby shall have been foreseen or unforeseen, ordinary or extraordinary, and whether or not the same shall be presently within the contemplation of Landlord or Tenant or shall involve any change of governmental policy, or require structural or extraordinary repairs, alterations or additions by Tenant and irrespective of the costs thereof; provided, however, that Landlord shall be responsible, at Landlord's sole cost, to make all repairs needed for the Demised Premises to comply with all laws if said repair is required within one (1) years after the Commencement Date and is necessary due to a defect in the construction of the Landlord's Improvements including without limitation, a failure to construct the Landlord's Improvements so that the Demised Premises are in compliance with all laws as of the Commencement Date. Tenant, at its sole cost and expense, shall comply with all agreements, contracts, easements, restrictions, reservations or covenants, if any, affecting the Demised Premises or hereafter created by Tenant and consented to, in writing, by Tenant or requested, in writing, by Tenant. Tenant shall also comply with, observe and perform all provisions and requirements of all policies of insurance at any time in force with respect to the Demised Premises and shall comply with all development permits issued by governmental authorities issued in connection with development of the Demised Premises. Tenant shall procure and maintain all permits and licenses required for the transaction of Tenant's business at the Demised Premises, including with limitation, any special use permit, zoning variance or comparable zoning relief necessary for Tenant's Use. 12 12. Landlord's Title, Authority, and Quiet Enjoyment: Tenant's Authority. A. Landlord represents that it will have, as of the Commencement Date, marketable fee simple title to the Demised Premises, subject to the exceptions to title currently encumbering the Demised Premises as described in Exhibit H, and any additional exceptions to title created in connection with Landlord's acquisition or development of the Demised Premises, or financing of such acquisition or development (collectively referred to herein as the "Permitted Exceptions"). Landlord represents that any such additional exceptions to title created in connection with Landlord's acquisition or development of the Demised Premises or financing of such acquisition or development shall not materially interfere with Tenant's intended use of the Demised Premises. Any lien claims properly bonded over or insured over by title insurance shall be deemed to be Permitted Exceptions hereunder. B. Landlord represents and warrants that it has full and complete authority to enter into this Lease under all of the terms, conditions and provisions set forth herein, and so long as Tenant keeps and substantially performs each and every term, provision and condition herein contained on the part of Tenant to be kept and performed, Tenant shall peacefully and quietly enjoy the Demised Premises without hindrance or molestation by Landlord or by any other person claiming by, through or under Landlord, subject to the terms of the Lease. Without limiting the foregoing, Landlord covenants to perform all obligations to be performed by Landlord and to pay as and when due all amounts to be paid by Landlord under any mortgage, deed of trust, ground lease or other instrument encumbering the Demised Premises. Each individual executing this Lease on behalf of Landlord represents and warrants to Tenant that he or she is duly authorized to do so. C. Tenant represents and warrants that it has full and complete authority to enter into this Lease under all of the terms, conditions and provisions set forth herein. D. Tenant hereby approves the condition of Landlord's title to the Demised Premises. This Lease shall be subject to the Permitted Exception sand Landlord shall not permit or cause any easements, covenants, restrictions, conditions or other changes in Landlord's title which would materially and adversely impact Tenant's Use. Landlord shall notify Tenant in writing prior to permitting or causing any easements, covenants, restrictions, or conditions to be placed of record. 13. Subordination. The priority of this Lease and the leasehold estate of Tenant created hereunder are and shall be subject and subordinate to the lien of any mortgage, deed of trust, sale-leaseback, ground lease or similar encumbrance, whether such encumbrance is placed against the fee or leasehold estate, affecting the Demised Premises and to all renewals, modifications, consolidations, replacements and extensions thereof, and advances thereunder; provided, however, with respect to any mortgage, deed of trust, sale-leaseback, ground lease or similar encumbrance such subordination shall be subject to receipt by Tenant of a nondisturbance agreement in form reasonably required by any such lienholder or ground Lessor (collectively, a "Mortgagee") and reasonably acceptable to Tenant. Tenant agrees at any time hereafter, upon twenty (20) days prior written notice, to execute and deliver any instruments, releases or other documents that may reasonably be required for the purpose of subjecting and subordinating this Lease, as above provided, to the lien of any such mortgage, deed of trust, ground lease, sale- 13 leaseback or similar encumbrance in a form reasonably acceptable to Tenant and the holder of such mortgage, provided said subordination provides that all insurance proceeds and condemnation awards will be made available for the restoration of the Demised Premises, as provided herein, and that Tenant's rights hereunder will not be disturbed unless Tenant is in default beyond all applicable cure periods. Any fee which Landlord's lender or ground lessor may charge for such agreement shall be paid by Landlord. In the event of any act or omission of Landlord constituting a default by Landlord, Tenant shall not exercise any remedy until Tenant has given Landlord and any mortgagee, ground lessor or sale-leaseback lessor of the Demised Premises that has provided Tenant with written notice of its interest in the Demised Premises and a notice address for each such party a prior thirty (30) day written notice of such act or omission and until a reasonable period of time to allow Landlord or the mortgagee, ground lessor or sale-leaseback lessor to remedy such act or omission shall have elapsed following the giving of such notice; provided, however, if such act or omission cannot, with due diligence and in good faith, be remedied within such thirty (30) day period, then Landlord or any such mortgagee, ground lessor or sale-leaseback lessor shall be allowed such further period of time as may be reasonably necessary provided that it commence remedying the same with due diligence and in good faith within said thirty (30) day period. If any Mortgagee shall succeed to the rights of Landlord under this Lease or to ownership of the Demised Premises, whether through possession or foreclosure or the delivery of a deed to the Demised Premises, then, upon written request of such mortgagee so succeeding to Landlord's rights hereunder, Tenant shall attorn to and recognize such mortgagee, ground lessor or sale- leaseback lessor as Tenant's landlord under this Lease, and shall promptly execute and deliver any instrument that such mortgagee may reasonably request to evidence such attornment (whether before or after making of the mortgage, ground lease or sale-leaseback lease). In the event of any other transfer of Landlord's interest hereunder, upon the written request of the transferee and Landlord, Tenant shall attorn to and recognize such transferee as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such transferee and Landlord may reasonably request to evidence such attornment. 14. Assignment and Sublease. Tenant, if there is no Material Breach (as herein defined) by Tenant hereunder, shall have the right to assign this Lease or to sublease all or any portion of the Demised Premises, without Landlord's written consent in accordance with the terms of this Paragraph 14. Tenant may assign this Lease or sublet the Demised Premises to an affiliate or subsidiary more than fifty percent (50%) of the voting stock of which is owned directly or indirectly by the direct or remote parent of Tenant (without Landlord's consent, upon prior written notice to Landlord) and further Tenant' interest in this Lease may be assigned to and assumed by a successor to Tenant pursuant to a purchase of all or substantially all of the assets of Tenant in connection with the sale of such assets or to any entity which acquires all of Tenant's capital stock (without Landlord's consent upon prior written notice to Landlord). Any assignment or sublease shall require the assignee or subtenant to comply with all terms of this Lease except for any sublease term, which shall be at Tenant's discretion (but in no event extend beyond the term of this Lease), and a copy of such sublease or assignment shall be 14 delivered to Landlord at least ten (10) days prior to the commencement of such sublease or assignment. Any assignee shall assume, by instrument in form and content satisfactory to Landlord, the due performance of all of Tenant's obligation sunder this Lease, including any accrued obligations at the time of the effective date of the assignment, and such assumption agreement shall state that the same is made by the assignee for the express benefit of Landlord as a third party beneficiary thereof. Each sublease permitted by this Paragraph 14 shall be subject and subordinate to all of the terms, covenants and conditions of this Lease and to all of the rights of Landlord hereunder; and in the event this Lease shall terminate before the expiration of such sublease, the sublessee thereunder will, at Landlord's option, attorn to Landlord and waive any rights the sublessee may have to terminate the sublease or to surrender possession thereunder, as a result of the termination of this Lease. Tenant agrees to pay on behalf of Landlord any and all costs of Landlord or otherwise occasioned by such assignment or subletting, including without limitation, the cost of any alteration, addition, improvement or other renovation or refurbishment to the Demised Premises made in connection with such assignment or subletting and any cost imposed by any governmental authority in connection with any of the foregoing. Any assignment or subletting under this Paragraph 14 shall not relieve Tenant (or any guarantor of Tenant's obligations under the Lease or any assignee) of its obligations hereunder. Any assignment or subletting of this Lease which is not in compliance with the provisions of this Paragraph 14 shall be of no effect and void. Except as permitted in this Paragraph 14, Tenant shall not transfer, sublet, assign or otherwise encumber its interest in the Lease or the Demised Premises, unless consented to by Landlord. No assignment or subleasing hereunder shall relieve Tenant from any of Tenant's obligation sin this Lease contained. All profits from any such assignment or subletting shall be the property of Tenant and not Landlord. 15. Lease Extension. If this Lease shall not have been terminated pursuant to any provisions hereof and there is no Material Breach (as defined herein) by Tenant hereunder at the time set for exercise of the Extension Terms (as herein defined) and at the time set for commencement thereof, then Tenant may, at Tenant's option, extend the term of this Lease for five (5) successive additional terms of four (4) years each (each an "Extension Term," collectively the "Extension Terms") commencing on the expiration of the original term, or the immediately preceding Extension Term, as the case may be. Tenant may exercise such option by giving Landlord written notice at least ten (10) months prior to the expiration of the original or the immediately preceding Extension Term, as the case may be. Upon the giving by Tenant to Landlord of such written notice and the compliance by Tenant with the foregoing provisions of this Paragraph 15, this Lease shall be deemed to be automatically extended upon all the 15 Covenants, agreements, terms, provisions and conditions set forth in this Lease, except that Rent for each such Extension Term shall be as provided on Exhibit D. If Tenant fails or omits to so give to Landlord the written notice referred to above, Landlord shall provide Tenant with written notice of Tenant's failure to exercise the Extension Term, and upon receipt of such notice, Tenant shall be allowed fifteen (15) days to exercise the extension option allowed for herein. If Landlord fails to provide such notice, Tenant's renewal option shall expire upon the expiration of the then current term. Failure to respond to Landlord's notice within such fifteen (15) days shall be deemed to be a waiver by Tenant of its extension option hereunder. 16. Impositions. A. Tenant covenants and agrees to pay during the term of this Lease, as Additional Rent, before any fine, penalty, interest or cost may be added thereto for the nonpayment thereof, all impositions described herein that accrue on or after the Commencement Date, which include without limitation, all real estate taxes, special assessments, water rates and charges, sewer rates and charges, including any sum or sums payable for future sewer or water capacity increases, charges for public utilities, street lighting, excise levies, licenses, permits, inspection fees, other governmental charges, and all other charges or burdens of whatsoever kind and nature (including costs, fees, and expenses of complying with any restrictive covenants or similar agreements to which the Demised Premises are subject), incurred in the use, occupancy, ownership, operation, leasing or possession of the Demised Premises, without particularizing by any known name or by whatever name hereafter called, and whether any of the foregoing be general or special, ordinary or extraordinary, foreseen or unforeseen (all of which are sometimes herein referred to as "Impositions"), which at any time during the term may have been or may be assessed, levied, confirmed, imposed upon, or become a lien on the Demised Premises, or any portion thereof, or any appurtenance thereto, rents or income therefrom, and such easements or rights as may now or hereafter by appurtenant to appertain to the use of the Demised Premises. B. If, at any time during the term of this Lease, any method of taxation shall be such that there shall be levied, assessed or imposed on Landlord, or on the Basic Rent or Additional Rent, or on the Demised Premises or on the value of the Demised Premises, or any portion thereof, a capital levy, sales or use tax, gross receipts tax or other tax on the rents received therefrom, or a franchise tax, or an assessment, levy or charge measured by or based in whole or in part upon such rents or value, Tenant covenants to pay and discharge the same, it being the intention of the parties hereto that the rent to be paid hereunder shall be paid to Landlord absolutely net without deduction or charge of any nature whatsoever foreseeable or unforeseeable, ordinary or extraordinary, or of any nature, kind or description, except as in this Lease otherwise expressly provided. Nothing in this Lease contained shall require Tenant to pay any municipal, state or federal net income or excess profits taxes assessed against Landlord, or any municipal, state or federal net income or excess profits taxes assessed against Landlord, or any municipal, state or federal capital levy, estate succession, inheritance or transfer taxes of Landlord, or corporation franchise taxes imposed upon any corporate owner of the fee of the Demised Premises. C. Tenant covenants to furnish Landlord, within 30 days after the date upon which an Imposition or other tax, assessment, levy or charge is payable by Tenant, official receipts of 16 the appropriate taxing authority, or other appropriate proof satisfactory to Landlord, evidencing the payment of the same. The certificate, advice or bill of the appropriate official designated by law to make or issue the same or to receive payment of any imposition or other tax, assessment, levy or charge may be relied upon by Landlord as sufficient evidence that such Imposition or other tax, assessment, levy or charge is due and unpaid at the time of the making or issuance of such certificate, advice or bill, unless Tenant provides Landlord with evidence to the contrary. D. At Landlord's written demand after any Event of Default (as defined in Section 20 hereinafter) and for as long as such Event of Default is uncured, or upon the request of any Mortgagee of the Demised Premises, (but only after an Event of Default and for as long as such Event of Default is uncured) Tenant shall pay to Landlord the known or estimated yearly real estate taxes and assessments payable with respect to the Demised Premises in monthly payments equal to one-twelfth of the known or estimated yearly real estate taxes and assessments next payable with respect to the Demised Premises. From time to time Landlord may re-estimate the amount of real estate taxes and assessments, and in such event Landlord shall notify Tenant, in writing, of such re-estimate and fix future monthly installments for the remaining period prior to the next tax and assessment due date in an amount sufficient to pay the re-estimated amount over the balance of such period after giving credit for payments made by Tenant on the previous estimate. If the total monthly payments made by Tenant pursuant to this Paragraph 16D shall exceed the amount of payments necessary for said taxes and assessments, such excess shall be credited on subsequent monthly payments of the same nature; but if the total of such monthly payments so made under this paragraph shall be insufficient to pay such taxes and assessments when due, then Tenant shall pay to Landlord such amount as may be necessary to make up the deficiency. E. Tenant shall have the right at its own expense to contest the amount or validity, in whole or in part, of any Imposition by appropriate proceedings diligently conducted in good faith, but only after Tenant provides Landlord or the Mortgagee reasonable security, or Tenant makes payment of such Imposition, unless such payment, or a payment thereof under protest, would operate as a bar to such contest or interfere materially with the prosecution thereof, in which event, notwithstanding the provisions of Paragraph 16A hereof Tenant may postpone or defer payment of such Imposition if neither the Demised Premises nor any portion thereof would, by reason of such postponement or deferment, be in danger of being forfeited or lost, and (b) Tenant is not then in Material Breach of this Lease. Upon the termination of any such proceedings, Tenant shall pay the amount of such Imposition or part thereof, if any, as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, including attorney's fees, interest, penalties, fines and other liability in connection therewith, and upon such payment Landlord shall return all amounts or certificates deposited with it in respect to the contest of such Imposition, as aforesaid, or, at the written direction of Tenant, Landlord shall make such payment out of the funds on deposit with Landlord and the balance, if any, shall be returned to Tenant. Tenant shall be entitled to the refund of any Imposition, penalty, find and interest thereon received by Landlord which have been paid by Tenant or which have been paid by Landlord but for which Landlord has been previously reimbursed in full by Tenant. Landlord shall not be required to join in any proceedings referred to in this Paragraph 16E unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord, in which event Landlord shall join in such proceedings 17 or permit the same to be brought in Landlord's name upon compliance with such conditions as Landlord may reasonably require. Landlord shall not ultimately be subject to any liability or the payment of any fees, including attorney's fees, costs and expenses in connection with such proceedings. Tenant agrees to pay all such fees (including reasonable attorney's fees), costs and expenses or, on demand, or make reimbursement to Landlord for such payment, Of Landlord is provided a certificate of deposit or other interest bearing instrument as security for the payment of the contested Imposition, during the time when any such certificate of deposit or other interest bearing instrument is on deposit with Landlord, and prior to the time when the same is returned to Tenant or applied against the payment, removal or discharge of Impositions, as above provided, Tenant shall be entitled to receive all interest paid thereon, if any. Cash deposits shall not bear interest. 17. Insurance. A. During the term of this Lease, during any extension thereof, and during any holdover period, Tenant shall at its cost and expense procure and keep in force a policy of comprehensive public liability insurance, with limits of not less than $1,000,000 for injury to any one person, $2,000,000 as to any one accident, and $100,000 as to property damage, all on a per occurrence basis which policy shall name Landlord and its managing agent as additional insureds. A certificate of such insurance shall be delivered to Landlord prior to the Commencement Date and shall provide that same may not be cancelled or lowered in amounts without prior written notice of not less than thirty (30) days to Landlord and Landlord's mortgagee. Notwithstanding the foregoing, Tenant may insure the foregoing risks under its blanket policy or elect to self-insure such risks as provided in Paragraph 17E below. Any such liability insurance shall contain a contractual liability endorsement covering Tenant's indemnification obligations under this Lease. B. During the term of this Lease and any extension thereof, Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force and effect, policies of insurance covering the Improvements constructed, installed or located on the Demised Premises naming the Landlord, as loss payee as its interest may appear, against (a) loss or damage by fire; (b) loss or damage from such other risks or hazards now or hereafter embraced by an "Extended Coverage Endorsement,) including, but not limited to, windstorm, hail, explosion, vandalism, riot and civil commotion, damage from vehicles, smoke damage, water damage and debris removal; (c) loss for flood if the Demised Premises are in a designated flood or flood insurance area; (d) loss for damage by earthquake if the Demised Premises are located in an earthquake-prone area; (e) loss from so- called explosion, collapse and underground hazards; and (f) loss or damage from such other risks or hazards of a similar or dissimilar nature which are now or may hereafter be customarily insured against with respect to improvements similar in construction, design, general location, use and occupancy to the Improvements. At all times, such insurance coverage shall be in an amount equal to 100% of the then "full replacement cost" of the Improvements. "Full Replacement Cost" shall be interpreted to mean the cost of replacing the improvements without deduction for depreciation or wear and tear, and it shall include a reasonable sum for architectural, engineering, legal, administrative and supervisory fees connected with the restoration or replacement of the Improvements in the event of damage thereto or destruction thereof. If a sprinkler system shall be located in the Improvements, sprinkler leakage insurance shall be procured and continuously maintained by Tenant and Tenant's 18 sole cost and expense. Tenant shall cause to be inserted in the policy of insurance required by this Paragraph 17B the so-called "waiver of subrogation" clause as to Landlord and Landlord's insurer. C. During the term of this Lease and any extension thereof, TENANT shall maintain Workman's Compensation Insurance in accordance with the laws of the State of California. D. Tenant shall maintain insurance coverage (including loss of use and business interruption coverage) upon Tenant's business and upon all personal property of Tenant or the personal property of others kept, stored or maintained on the Demised Premises against loss or damage by fire, windstorm or other casualties or causes for such amount as Tenant may desire, and Tenant agrees that such policies shall contain a waiver of subrogation clause as to Landlord and Landlord's insurer. E. Tenant's right to self-insure with respect to liability insurance is conditioned upon Tenant or Tenant's guarantor maintaining a net work of at least $100,000,000.00. Tenant shall furnish Landlord written confirmation that Tenant has elected to self-insure with respect to liability insurance (if that is the case), and if so, that Tenant's or Tenant's guarantor's net worth is at least $100,000,000.00 as evidenced by audited financial statements of Tenant or Tenant's guarantor or an affidavit from Tenant's or Tenant's guarantor's chief financial officer. If Tenant self-insures with respect to liability insurance, then Tenant agrees to indemnify, defend, and hold Landlord harmless from and against any loss, damage, costs, fees (including attorneys, fees), claims, demands, actions, causes of action, judgements, suits and liability that was or would have been covered by the insurance policy or policies replaced by self- insurance and such self-insurance shall not affect the nonliability of Landlord under Paragraph 17F as to any loss or damage caused by the period described therein. The indemnification contained in this Paragraph 17E is in addition to, and not in lieu of, any covenants or obligations of Tenant contained in the other Paragraphs of this Lease. If Tenant so elects to become a self-insurer with respect to liability insurance, Tenant shall deliver to Landlord notice in writing of the required coverages which it is self-insuring setting forth the amount, limits, and scope of the self-insurance in respect to each type of coverage self-insured. Tenant, at Landlord's request, shall provide to Landlord's mortgagee or assignee a certificate satisfactory to such mortgagee or assignee setting forth the self-insured coverages, if any, and stating that all losses shall be payable to such mortgagee and/or assignee as its interests may appear. Nothing in this Paragraph shall prevent Tenant from taking out insurance of the kind and in the amount provided for under the preceding paragraphs of this Paragraph under a blanked insurance policy or policies (certificates thereof reasonably satisfactory to Landlord shall be delivered to Landlord) which may cover other properties owned or operated by Tenant as well as the Demised Premises; provided, however, that any such policy of blanket insurance of the kind provided for shall specify therein the amounts thereof exclusively allocated to the Demised Premises or Tenant shall furnish Landlord and the holder of any fee mortgage with a written statement from the insurers under such policies specifying the amounts of the total insurance exclusively allocated to the Demised Premises; and provided, further, however, that such policies of blanket insurance shall, as respects the Demised Premises, contain the various provisions required of such an insurance policy by the foregoing provisions of this Paragraph 17. 19 F. Tenant hereby releases Landlord (and Landlord's assignees, employees, agents and servants) and waives any claims it may have against Landlord from any liability for damage to or destruction of Tenant's trade fixtures, personal property (including also property under the care, custody, or control of Tenant), machinery, equipment, furniture, fixtures and business interests on the Demised Premises, except arising from Landlord's or Landlord's assignees', employees', agents' or servants' negligence. This Paragraph shall apply especially, but not exclusively, to damage or destruction caused by the flooding of basements or other subsurface areas, or by refrigerators, sprinkling devices, air conditioning apparatus, water, snow, frost, steam, excessive heat or cold, falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or plumbing fixtures, and shall apply equally, whether any such damage results from the act or omission of other tenants or occupants in the Demised Premises or any other persons, and whether such damage be caused by or result from any of the aforesaid, or shall be caused by or result from other, circumstances of a similar or dissimilar nature. G. Tenant shall require each of its contractors and tradespeople to carry contractors liability/completed operations insurance, in the amounts specified in Paragraph 17A above, from companies licensed to do business in the State of California. H. Upon expiration of the term of this Lease, the unearned premiums upon any insurance policies or certificates thereof lodged with Landlord by Tenant shall be payable to Tenant, provided that Tenant shall not then be in default in keeping, observing or performing the terms and conditions of this Lease. 18. Destruction and Restoration. A Tenant covenants and agrees that in case of damage to or destruction of the Improvements after the Commencement Date of the term of this Lease, by fire or otherwise, Tenant, at its sole cost and expense, shall promptly restore, repair, replace and rebuild the same as nearly as possible to the condition that the same were in immediately prior to such damage or destruction with such changes and alterations (made in conformity with Paragraph 8 hereof) as may be reasonably acceptable to Landlord or required by law. Tenant shall forthwith give Landlord such written notice of such damage or destruction upon the occurrence thereof and specify in such notice, in reasonable detail, the extent thereof. Such restoration, repairs, replacements, rebuilding, changes and alterations, including the cost of temporary repairs for the protection of the Demised Premises, or any portion thereof, pending completion thereof are sometimes hereinafter referred to as the "Restoration." The Restoration shall be carried on and completed in accordance with the provisions and conditions of Paragraphs 8 and 18B hereof. If the net amount of the insurance proceeds (after deduction of all costs, expenses and fees related to recovery of the insurance proceeds) recovered by Landlord and held by Landlord and Tenant as co-trustees is reasonably deemed insufficient by Landlord to complete the Restoration of such improvements (exclusive of Tenant's personal property and trade fixtures which shall be restored, repaired or rebuilt out of Tenant' separate funds), Tenant shall, upon request of Landlord, deposit with Landlord and Tenant, as co- trustees, a cash deposit equal to the reasonable estimate of the amount necessary to complete the Restoration of such improvements less the amount of such insurance proceeds available. 20 B. All insurance moneys recovered by Landlord and held by Landlord and Tenant as co-trustees on account of such damage or destruction, less Landlord's reasonable out-of-pocket costs, if any, to Landlord of such recovery, shall be applied to the payment of the costs of the Restoration and shall be paid out from time to time as the Restoration progresses upon the written request of Tenant, accompanied by a certificate of the architect or a qualified professional engineer in charge of the Restoration stating that as of the date of such certificate (a) the sum requested is justly due to the contractors, subcontractors, materialmen, laborers, engineers, architects, or persons, firms or corporations furnishing or supplying work, labor, services or materials for such Restoration, or is justly required to reimburse Tenant or any expenditures made by Tenant in connection with such Restoration, and when added to all sums previously paid out by Landlord does not exceed the value of the Restoration performed to the date of such certificate by all of said parties; (b) except for the amount, if any, stated in such certificates to be due for work, labor, services or materials, there is no outstanding indebtedness known to the person signing such certificate, after due inquiry, which is then due for work, labor, services or materials in connection with such Restoration, which, if unpaid, might become the basis of a mechanic's lien or similar lien with respect to the Restoration or a lien upon the Demised Premises, or any portion thereof; and (c) the costs, as estimated by the person signing such certificate, of the completion of the Restoration required to be done subsequent to the date of such certificate in order to complete the Restoration do not exceed the sum of the remaining insurance moneys, plus the amount deposited by Tenant, if any, remaining in the hands of Landlord after payment of the sum requested in such certificate. Tenant shall furnish Landlord within thirty (30) days after Tenant's receipt of each progress payment with evidence reasonably satisfactory to Landlord that Tenant has paid all bills in respect to any work, labor, services or materials performed, furnished or supplied in connection with such Restoration which was covered by the previous progress payment. Landlord shall not be required to pay out or consent to any additional insurance moneys where Tenant fails to supply satisfactory evidence of the payment of work, labor, services or materials performed, furnished or supplied, as aforesaid. If the insurance moneys in the hands of Landlord and Tenant as co-trustees, and such other sums, if any, deposited with Landlord and Tenant as co-trustees pursuant to this Paragraph 18, shall be insufficient to pay the entire costs of the Restoration, Tenant agrees to pay any deficiency promptly insurer, and provided further that notwithstanding that the insurance moneys are insufficient to pay the cost of the Restoration, Tenant shall continue to be liable for full payment of Base Rent, Additional Rent and any other amounts due and payable hereunder. Upon completion of the Restoration and payment in full thereof by Tenant, Landlord shall within a reasonable period of time thereafter, turn over to Tenant all insurance moneys or other moneys then remaining upon submission of proof reasonably satisfactory to Landlord that the Restoration has been paid for in full and the damaged or destroyed Building and other improvements repaired, restored or rebuilt as nearly as possible to the condition they were in immediately prior to such damage or destruction, or with such changes or alterations as may be made in conformity with Paragraphs 8 and 18A hereof. C. No destruction of or damage to the Demised Premises, or any portion thereof, by fire, casualty or otherwise shall permit Tenant to surrender this Lease or shall relieve Tenant form its liability to pay to Landlord the Base Rent and Additional Rent payable under this Lease 21 or from any other such obligations under the Lease, and Tenant waives any rights now or hereafter conferred upon Tenant by present or future law or otherwise to quit or surrender this Lease or the Demised Premises, or any portion thereof, to Landlord or to any suspension, diminution, abatement or reduction or rent on account of any such damage or destruction. D. Landlord agrees, subject to the provisions of Paragraph 8 and 18 hereof, to in all instances turn over and make available to Tenant all insurance moneys contemplated by Paragraph 18B hereof. 19. Condemnation. A. If, during the term of this Lease, the entire Demised Premises shall be taken as the result of the exercise of the power of eminent domain (hereinafter referred to as the "Proceedings"), this Lease and all right, title and interest of Tenant hereunder shall cease and come to an end on the date of vesting of title pursuant to such Proceedings and Landlord shall be entitled to and shall receive the total award made in such Proceedings; provided that Tenant shall have the right to state a claim separate from Landlord's claim against the condemning authority for Tenant's moving costs and the loss of the bargain of this Lease, to the extent that such a claim by Tenant does not otherwise reduce Landlord's award. In any taking of the Demised Premises, or any portion thereof, whether or not this Lease is terminated as in this paragraph provided, Tenant shall not be entitled to any portion of the award for the taking of the Demised Premises or damage to the Improvements, except as otherwise provided for in Paragraph 19C with respect to the restoration of the Improvements, or for the estate or interest of Tenant therein, all such award, damages, consequential damages and compensation being hereby assigned to Landlord, and Tenant hereby waives any right it now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises, or any portion thereof, or its interest in this Lease, expect that Tenant shall have, nevertheless, the limited right to prove in the Proceedings and to receive any award which may be made for damages to or condemnation for Tenant's movable trade fixtures and equipment, and for Tenant's relocation costs in connection therewith. B. If, during the initial term of this Lease, or any extension or renewal thereof, less that the entire Demised Premises, but more than 15% of the floor area of the Building, or more than 25% of the land area of the Demised Premises, or more than 20% of the parking spaces, shall be taken in any such Proceeding, this Lease shall, upon vesting of title in the Proceedings, terminate as to the portion of the Demised Premises so taken, and Tenant may, at its option, terminate this Lease as to the remainder of the Demised Premises, Tenant shall not have the right to terminate this Lease pursuant to the preceding sentence unless (a) the business of Tenant conducted in the portion of the Demised Premises taken cannot reasonably be carried on with substantially the same utility and efficiency in the remainder of the Demised Premises (or any substitute space securable by Tenant pursuant to clause (b) hereof ) and (b) Tenant cannot construct or secure or Landlord cannot provide substantially similar space to the space so taken, on the remainder of the Demised Premises, or Landlord cannot provide replacement parking spaces on additional property located in close proximity to the Demised Premises that are reasonably acceptable to Tenant. Such termination as to the remainder of the Demised Premises shall be effected by notice in writing given not more than 60 days after the date of vesting of title 22 in such Proceedings, and shall specify a date not more than 60 days after the giving of such notice as the date for such termination. Upon the date specified in such notice, the term of this Lease, and all right, title and interest of Tenant hereunder, shall cease and come to an end. If this Lease is terminated as in this Paragraph 19B provided, Landlord shall be entitled to and shall receive the total award made in such Proceedings, Tenant hereby assigning any interest in such award, damages, consequential damages and compensation to Landlord, and Tenant hereby waiving any right Tenant has now or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises, or any portion thereof, or its interest in this Lease except as otherwise provided in Paragraph 19A. The right of Tenant to terminate this Lease, as in this Paragraph 19B provided, shall be exercisable only upon condition that Tenant is not then in default in the performance of any of the terms, covenants or conditions of this Lease on its part to be performed, and such termination upon Tenant's part shall become effective only upon compliance by Tenant with all such terms, covenants and conditions to the date of such termination. In the event that Tenant elects not to terminate this Lease as to the remainder of the Demised Premises, the rights and obligations of Landlord and Tenant shall be governed by the provisions of Paragraph 19C hereof. C. If 15%, or less, of the floor area of the Building, or 25%, or less, of the land area of the Demised Premises or 20% or less, of the parking spaces shall be taken in such Proceedings, or if more than 15% of the floor area of the Building or more than 25% or the land area of the Demised Premises or more than 20% of the parking spaces is taken (but less than the entire Demised Premises), and this Lease is not terminated as in Paragraph 19B hereof provided, this Lease shall, upon vesting of title in the Proceedings, terminate as to the parts so taken, and Tenant shall have no claim or interest in the award, damages, consequential damages and compensation, or any part thereof except as otherwise provided in Paragraph 19A. Landlord shall be entitled to and shall receive the total award made in such Proceedings, Tenant hereby assigning any interest in such award, damages, consequential damages and compensation to Landlord, and Tenant hereby waiving any right Tenant, has now or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises, or any portion thereof, or its interest in this Lease except as otherwise provided in Paragraph 19A. The net amount of the award (after deduction of all costs and expenses, including attorney's fees), shall be held by Landlord as trustee and applied as hereinafter provided. Tenant, in such case, covenants and agrees, at Tenant's sole cost and expense (subject to reimbursement to the extent hereinafter provided), promptly to restore that portion of the Improvements on the Demised Premises not so taken to a complete architectural and mechanical unit for the use and occupancy of Tenant as in this Lease provided. In the event that the net amount of the award (after deduction of all costs and expenses, including attorney's fees) that may be received by Landlord and held by Landlord as trustee in any such Proceedings as a result of such taking is insufficient to pay all costs of such restoration work, Tenant shall deposit with Landlord as trustee such additional sum as may be required upon the written request of Landlord so long as Tenant has participated in the Proceedings or otherwise provided reasonably adequate assurances to Landlord that Tenant has the financial resources to fund such additional sum; provided, however, Landlord shall retain ultimate control over any final settlement or litigation with the condemning authority, and provided further that notwithstanding that the net amount of the award may be insufficient to pay all costs of the restoration work, Tenant shall continue to be liable for payment of Base Rent, Additional Rent and any other amount due and payable hereunder, which amounts shall not be abated except as provided in Paragraph 19E below. The 23 provisions and conditions in Paragraph 8 applicable to changes and alterations shall apply to Tenant's obligations to restore that portion of the Improvements to a complete architectural and mechanical unit. Landlord agrees in connection with such restoration work to apply so much of the net amount of any award (after deduction of all costs and expenses, including attorney's fees) that may be received by Landlord and held by Landlord as trustee in any such Proceedings as a result of such taking to the costs of such restoration work thereof and the said net award as a result of such taking shall be paid out from time to time to Tenant, or on behalf of Tenant, as such restoration work progresses upon the written request of Tenant, which shall be accompanied by a certificate of the architect or the registered professional engineer in charge of the restoration by a certificate of the architect of the registered professional engineer in charge of the restoration work stating that (a) the sum requested is justly due to the contractors, subcontractors, materialmen, laborers, engineers, architects or other persons, firms or corporations furnishing or supplying work, labor, services or materials for such restoration work or as is justly required to reimburse Tenant for expenditures made by Tenant in connection with such restoration work, and when added to all sums previously paid out by Landlord as trustee does not exceed the value of the restoration work performed to the date of such certificate; and (b) the net amount of any such award as a result of such taking remaining in the hands of Landlord, together with the sums, if any, deposited by Tenant with Landlord as trustee pursuant to the provisions hereof, will be sufficient upon the completion of such restoration work to pay for the same in full. If payment of the award as a result of such taking, as aforesaid, shall not be received by Landlord in time to permit payments as the restoration work progresses (except in the event of an appeal of the award by Landlord), Tenant shall not be required to proceed with any restoration work until payment of such award is received by Landlord; provided, however, delay in payment of such amount shall not release Tenant of its obligation to pay Base Rent, Additional Rent and other amounts due and payable hereunder during any such delay and there shall be no abatement of Base Rent, Additional Rent or any other amounts except as provided in Paragraph 19E below. If Landlord appeals an award and payment of the award is delayed pending appeal Tenant shall, nevertheless, perform and fully pay for such work without delay, and payment of the amount to which Tenant would have been entitled had Landlord how appealed the award (in an amount not to exceed the net award prior to such appeal) shall be made by Landlord to Tenant as restoration progresses pursuant to this Paragraph 19C, in which event Landlord shall be entitled to retain an amount equal to the sum disbursed to Tenant pursuant to the preceding sentence out of the net award as and when payment of such award is received by Landlord. Tenant shall also furnish Landlord as trustee with each certificate hereinabove referred to, together with evidence reasonably satisfactory to Landlord that there are no unpaid bills in respect to any work, labor, services or materials performed, furnished or supplied, or claimed to have been performed, furnished or supplied, in connection with such restoration work [relating to prior payments made by Landlord to Tenant], and that no liens have been filed against the Demised Premises, or any portion thereof. Landlord as trustee shall not be required to pay out any funds when there are unpaid bills for work, labor, services or materials performed, furnished or supplied in connection with such restoration work relating to prior payments made by Landlord to Tenant, or where a lien for work, labor, services or materials performed, furnished or supplied has been placed against the Demised Premises, or any portion thereof. Upon completion of the restoration work and payment in full therefor by Tenant, and upon submission of proof reasonably satisfactory to Landlord that the restoration work has been paid for in full and that the Improvements have been restored or rebuilt to a complete architectural and mechanical unit for the use and occupancy of Tenant as provided in this Lease, Landlord as trustee shall pay over to Tenant any portion of the cash deposit furnished by Tenant then remaining; provided, however, any other amounts awarded 24 in such Proceedings (and made available for restoration) which remain following restoration. The Demised Premises shall be the property of Tenant and Landlord shall have not claim thereto. D. In the event of any partial termination of this Lease as a result of any such proceedings, Tenant shall pay to Landlord all Base Rent and all Additional Rent and other charges payable hereunder with respect tot hat portion of the Demised Premises so taken in such Proceedings with respect to which this Lease shall have terminated justly apportioned to the date of such termination. From and after the date of vesting of title in such Proceedings, Tenant shall continue to pay the Base Rent and Additional Rent and other charges payable hereunder, as in this Lease provided, to be paid by Tenant, subject to abatement, if any, as provided for in Paragraph 19E hereof. E. In the event of a partial taking of the Demised Premises under Paragraph 19C hereof, or a partial taking of the Demised Premises under Paragraph 19B hereof, followed by Tenant's election not to terminate this Lease, the fixed Base Rent payable hereunder during the period from and after the date of vesting of title in such Proceedings to the termination of this Lease shall not be reduced unless Tenant shall have completed the restoration work with its own funds in accordance with the provisions of the Lease and Landlord shall have applied the net amount of any award to reduce the indebtedness secured by any financing encumbering the Demised Premises or otherwise to reduce the amount of Landlord's Development Costs (as herein defined), in which event fixed Base Rent payable hereunder shall be reduced to a sum equal to the product of the Base Rent provided for herein multiplied by a fraction, the numerator of which shall be Landlord's Development Costs less any amounts so paid to and applied by Landlord less Tenant's $2,000,000 contribution, and the denominator of which shall be Landlord's Development Costs less Tenant's $2,000,000 without regard to any amounts so paid to and applied by Landlord. F. Anything herein to the contrary notwithstanding, upon the occurrence of any Proceedings which would otherwise result in a termination of this Lease, Tenant shall, as a condition precedent to such termination so long as Tenant has participated in such proceedings, (provided, however, Landlord shall retain ultimate control over any final settlement or litigation with the condemning authority), pay to Landlord an amount, reasonably estimated by Landlord, equal to the excess, if any, of the unamortized portion of Landlord's Development Costs, less the $2,000,000 referred to below, over the net award to be received by Landlord after deduction of all costs of the Proceedings. In making the foregoing calculation, Landlord shall use an interest rate equal to the interest rate associated with the project financing from time to time during the term of this Lease. "Landlord's Development Costs" Shall mean and include any and all amounts incurred by Landlord in connection with the acquisition and development of the Demised Premises, including, without limitation, consideration paid for acquisition of the Demised Premises, costs for required off-site improvements, including relocating electric lines underground, all architectural, engineering, environmental, land planning and other consulting fees, all title and survey expenses, any and all fees and expenses associated with procuring construction and/or other financing for the project, any other costs or expenses that would not have been incurred by Landlord had Landlord not been involved in the acquisition of the Demised Premises, and all attorneys' fees associated with any of the foregoing. A preliminary estimate of Landlord's Development Costs (which includes Tenant's initial contribution of $2,000,000 as deposited into escrow under Paragraph 3) is attached hereto and made a part 25 hereof as Exhibit G; provided, however, the parties agree and acknowledge that the amounts and categories of costs and expenses set forth on Exhibit G represent an estimate of such items only and that Landlord anticipates changes in, additions to and modifications of such items, including, without limitation, changes, additions and modifications of such items as development of the project and construction of the Demised Premises progresses including, without limitation, changes, additions and modifications relating to actual design and construction costs, and in securing construction and permanent financing for the project from time to time. The parties agree to update the estimate provided for in Exhibit G within sixty (60) days after the Commencement Date and attach the updated Exhibit G initialed and dated by the parties in place of the Exhibit G attached as of the date hereof. 20. Default by Tenant. The occurrence of any one or more of the following events shall constitute an "Event of Default" by Tenant: A. The failure by Tenant to make any payment of rental or any other payment required to be made by Tenant hereunder, and any interest for late payment thereof, as and when due, where such failure shall continue for a period of five (5) days after receipt by Tenant of a written notice thereof from Landlord. B. The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease (other than the failure by Tenant described in subparagraph E below) where such failure shall continue for a period of thirty (30) days after receipt by Tenant of written notice thereof from Landlord; provided, however, that if the nature of Tenant's default is such that it cannot be cured solely by payment of money (and in the reasonable judgement of Landlord said default is susceptible to cure) and that more than thirty (30) days may be reasonably required for such cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within such thirty (30) day period and shall thereafter diligently prosecute such cure to completion. C. (a) the making of any general arrangement or any assignment by Tenant for the benefit of creditors; (b) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition of reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the petition is dismissed within ninety (90) days of the date filed); (c) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets; and (d) the attachment, execution or other judicial seizure of substantially all of Tenant's assets. D. An assignment or subletting by Tenant in violation of Paragraph 14 hereof. E. The failure by Tenant in keeping, observing or performing any of the terms contained in this Lease, other than those referred to in Subparagraphs 14 A, B, C and D above, and which exposes Landlord to criminal liability, and such default shall continue after written. 26 notice thereof given from Landlord to Tenant, and Tenant fails to proceed timely and promptly with all due diligence and in good faith to cure the same and thereafter to prosecute the curing of such default with all due diligence, it being intended that in connection with a default which exposes Landlord to criminal liability that Tenant shall proceed immediately to cure or correct such condition with continuity and with all due diligence and in good faith. 21. Landlord's Remedies. In the event of any Material Breach of this Lease by Tenant, then Landlord, in addition to other rights or remedies it may have, shall have the right to terminate this Lease, or without terminating this Lease, terminate Tenant's right to possession of the Demised Premises, and in either event Tenant shall immediately surrender possession of the Demised Premises to Landlord and if Tenant fails to do so, Landlord may, without prejudice to any other remedy it may have for possession or arrearage of rentals, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part thereof, with or without legal proceedings, by force if necessary, without being liable for prosecution or any claim or damage therefor. In such event, Landlord shall be entitled to recover from Tenant all reasonable damages incurred by Landlord by reason of Tenant's default, including without limitation, the cost of recovering possession of the Demised Premises, expenses of reletting including reasonable renovation and alteration of the Demised Premises, reasonable attorney's, fees, real estate commissions, and any other sum of money, late charges and damages caused by Tenant to Landlord. As used herein, "Material Breach" shall mean any breach by Tenant in any of the terms and conditions of this Lease which upon an Event of Default would have a material and adverse impact of any kind upon Landlord and/or the Demised Premises, as opposed to a technical breach by Tenant which is de minimis in nature. If Tenant's right to possession of the Demised Premises is terminated without termination of the Lease, Landlord shall be entitled to enforce all of Landlord's rights and remedies under the Lease, including the right to recover the rent as it becomes due hereunder. Should Landlord elect to relet the Demised Premises or any part thereof, Landlord may do so for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord may deem appropriate. Rental and other amounts received by Landlord in connection with such reletting shall be applied against the amounts due from Tenant hereunder after deducting any expenses insured by Landlord with respect to such reletting as provided above. Tenant shall pay any deficiency to Landlord. Such deficiency shall be calculated on a cumulative basis with all excess payments received by Landlord from such reletting to be applied against future amounts due from Tenant and any deficiencies to be paid monthly. No such reentry or taking possession of the Demised Premises by Landlord shall be construed as an election on its part to terminate this Lease, unless a written notice of such intention by given to Tenant, in which event Tenant's obligations to Landlord shall forthwith cease, or unless the termination thereof be decreed by a court of competent jurisdiction. In the event Landlord terminates this Lease in accordance with this Paragraph, then, Tenant shall be liable and shall pay to Landlord, the sum of all rent and other payments owed to date to Landlord, all sums owed to date to third parties (including without limitation, all Impositions) hereunder accrued to the date of such termination, all reasonable amounts required to be spent by Landlord to fulfill any of Tenant's obligations which Tenant did not fulfill prior to termination by Landlord, plus, as damages, an amount equal to the present value discounted at 27 ten percent (10%) of (i) the total rental payments hereunder for the remaining portion of the term of the Lease, calculated as if such term expires on the date set forth in paragraph 2, unless Tenant has extended this Lease, in which case such calculation shall be as if the term expires on the final day of the extension term then in effect, less (ii) the fair market rental value of the Demised Premises for such remaining period. Nothing herein contained shall limit or prejudice the right of Landlord to prove for and obtain, as damages by reason of such expiration or termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to or less than the amount of the difference referred to above. Landlord shall have the obligation to mitigate its damages to the extent required by state law. In addition to the aforesaid remedies, Landlord shall be entitled to pursue any other remedy now or hereafter available to Landlord at equity or under the laws or judicial decisions of the state where the demised Premises is located or by statute or otherwise. All rights and remedies of Landlord herein enumerated shall be cumulative, and the exercise or the commencement of the exercise by Landlord of any one or more of such rights or remedies should not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies. Tenant shall pay, upon demand, all of Landlord's costs, including reasonable attorneys' fees and court costs, incident to the enforcement of Tenant's obligations hereunder. A receipt by Landlord of rent with knowledge of the breach of any covenant hereof (other than breach of the obligation to pay the portion of such rent paid) shall not be deemed a waiver of such breach, and no waiver by Landlord of any provisions of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. Without limiting the generality of the foregoing, no failure by Landlord to insist upon the performance of any of the terms of this Lease or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of such breach or any of the terms of this Lease, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. One or more waivers by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant, term or condition. In addition to other remedies in this Lease provided, Landlord shall be entitled to seek a restraint by injunction of the violation or attempted or threatened violation of the covenants, conditions and provisions of this Lease. 22. Default by Landlord. The following shall constitute a "Material Breach" by Landlord: The failure by Landlord to observe or perform any of the covenants, conditions or provisions of this Lease where such failure shall continue for a period of thirty (30) days after receipt by Landlord of written notice thereof from Tenant; provided , however, that if the nature of Landlord's default is such that it cannot be cured solely by payment of money and that more than thirty (30) days may be reasonably required for such cure, then Landlord shall not be deemed to be in default if Landlord shall commence such cure within such thirty (30) day period and shall thereafter diligently prosecute such cure to completion. 23. Tenant's Remedies. In the event of any Material Breach of this Lease by Landlord, then Tenant in addition to other rights or remedies it may have at law or in equity 28 subject to the terms of this Lease), at Tenant's sole option, may perform such obligations of Landlord provided that Tenant has furnished to any party having a recorded mortgage, deed of trust, ground lease or similar lien against the Demised Premises (for which Tenant has received written notice) with written notice of such default and such party has failed to cure the same within the limits prescribed herein for Landlord to cure such default, and Tenant may invoice Landlord for the costs and expenses thereof, which invoice Landlord shall promptly pay. Notwithstanding the foregoing, despite such notice and expiration of such sure period, no rent or other payments due from Tenant may be offset by Tenant, and Tenant shall have no right to perform any obligation of Landlord unless such performance by Tenant is necessary to prevent imminent injury or damage to persons or Tenant's property. 24. Delivery of Executed Lease. Deleted by intent of parties. 25. Termination. Deleted by intent of parties. 26. Notices. All notices shall be sent by registered mail, return receipt requested, or by recognized overnight courier providing proof of delivery, to the following addresses; To Landlord: To Tenant: Sunnyvale Limited Partnership First Data Merchant Services Ridge Sunnyvale, Inc., Corporation c/o Ridge Capital Corporation Attention: David L. Schlapbach, Attention: James G. Martell Director of Real Estate 257 East Main Street and Counsel Barrington, Illinois 60010 5660 New Northside Drive Suite 1400 Atlanta, Georgia 30328 With a copy to: With a copy to: Gardner, Carton & Douglas First Data Merchant Services Attention: Glen W. Reed Corporation 321 North Clark Street Attention: Roger L. Pierce, President Suite 3400 700 Hansen way Chicago, Illinois 60610-4795 Palo Alto, CA 94303
Any notice shall be deemed to have been given three (3) days after the date deposited in the United States mail, or on the first business day after sending when delivery by recognized overnight courier providing proof of delivery, in the manner aforesaid. Either party, by written notice to the other, shall have the right to change the addresses for notice(s) to be sent to such party, and to add or substitute entities to which a copy of any notice shall be sent by the other party. 29 27. Brokerage. Landlord and Tenant acknowledge that no real estate broker brought about this lease transaction. Landlord hereby indemnifies Tenant against the claims of any party claiming by, through or under Landlord in connection with this Lease transaction, and Tenant hereby indemnifies Landlord against the claims of any party claiming by, through or under Tenant in connection with this Lease transaction. 28. Estoppel. Landlord and Tenant shall, at any time upon not less than twenty (20) days prior written notice, execute and deliver to a prospective new landlord, lender, or assignee or subtenant of Tenant, as the case may be, a statement in writing (i) certifying that this Lease in 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, and (ii) acknowledging that there are not, to the party's knowledge, any uncured defaults on the part of the other party hereunder, or so specifying such defaults if any are claimed, and (iii) other reasonable requests that relate to the Lease. 29. Hazardous Substances. A. For purposes of this Paragraph 29, "Hazardous Substance" means: (i) "Hazardous Substances" as defined by the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. (S)9601 et. seq., as amended, and all regulations promulgated thereunder, the Federal Clean Air Act, as amended (42 U.S.C. (S)7401 et seq.) and the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. (S)1317 et seq. as amended and all regulation promulgated thereunder; (ii) "Hazardous Waste" as defined by the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S)6602 et. seq. as amended and all regulations promulgated thereunder; (iii) Any pollutant or contaminant or hazardous, dangerous or toxic chemicals materials or substances within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended; (iv) More than 100 gallons of crude oil which is liquid at standard conditions of temperature and pressure (80 degrees Fahrenheit and 14.7 pounds per square inch absolute); (v) Any radioactive material, including any source, special nuclear or by-product material as defined in 42 U.S.C. (S)2011 et. seq. as amended or hereafter amended, and all regulations promulgated thereunder; 30 (vi) Friable asbestos or any asbestos which becomes friable during the term of this Lease; and (vii) Anything defined as a hazardous, toxic or radioactive material, waste or substance or the use, transportation or disposal of which is regulated under applicable California laws or rules and regulations issued pursuant thereof; (all of the foregoing statutes, laws, ordinance, rules, regulations, and common law theories being sometimes hereinafter collectively referred to as "Envlaws"). B. Landlord and Tenant acknowledge the environment condition of the Land as described in that certain Site Management Plan prepared by Geomatrix Consultants dated September 5 , 1996, a copy of which Landlord has provided to Tenant. Prior to the Construction Completion Date, Landlord shall cause to be performed all asbestos and soil removal and disposal or other remediation provided for under and in compliance with Section 4.4.7 of the Sale Agreement, as well as all additional environmental clean-up of Hazardous Substances as required by Section 4.4.7 of the Sale Agreement. Landlord shall indemnify, defend and hold Tenant harmless from all damages, costs, losses, expenses (including but not limited to reasonable attorney's fees and engineering fees) arising from any breach by Landlord of the preceding covenant; provided however, the foregoing indemnification shall terminate upon the expiration of one (1) year from the Construction Completion Date. Notwithstanding the foregoing, in no event shall Tenant have the right to terminate this Lease or have any right of set-off arising out of any breach or claimed breach by Landlord in its obligations hereunder; it being expressly acknowledged and agreed that the Base Rent and Additional Rent, and all other charges and sums payable by Tenant hereunder, shall commence at the times provided herein and shall continue to be payable as provided under this Lease. C. Tenant shall not allow any Hazardous Substance to be brought on to the Demised Premises and shall not conduct or authorize the generation, transportation, storage, treatment or disposal at the Demised Premises, of any Hazardous Substance other than in quantities incidental to the conduct of Tenant's Use and in compliance with Envlaws; provided, however, nothing herein contained shall permit Tenant to allow any so-called "acutely hazardous", "ultra-hazardous", "imminently hazardous chemical substance or mixture" or comparable Hazardous Substance to be located on or about the Demised Premises. D. If the presence, release, threat of release, placement on or in the Demised Premises, or the generation, transportation, storage, treatment, or disposal at the Demised Premises of any hazardous substances as a result of Tenant's operations at the Demised Premises (i) gives rise to liability (including, but not limited to, a responses action, remedial action, or removal action) under Envlaws, (ii) causes a significant public health effect, or (iii) pollutes or threatens to pollute the environment, Tenant shall promptly take any and all remedial and removal action necessary to clean up the Demised Premises and mitigate exposure to liability arising from the hazardous substance, whether or not required by law. E. Tenant shall indemnify, defend and hold Landlord harmless from all damages costs, losses, expenses (including, but not limited to, actual attorneys', fees and engineering fees) arising from or attributable to the existence of any hazardous substances at the Demised Premises 31 as a result of Tenant's operations at the Demised Premises, and (ii) any breach by Tenant of any of its covenants contained in this Paragraph 29. F. Upon request by Landlord during the term of this Lease, prior to the exercise of any Extension Term, Tenant shall undertake and submit to Landlord an environmental audit from an environmental consulting firm reasonably acceptable to Landlord which audit shall evidence Tenant's compliance with this Paragraph 29. Tenant shall bear the cost of such environmental audit unless such audit discloses that Tenant has complied with the provisions of this Paragraph 29 in which event Landlord shall pay for such audit. G. Landlord or Tenant shall give the other prompt written notice upon discovery of any Hazardous Substance at or adjacent to the Demised Premises. Landlord and Tenant's obligations under this Paragraph 29 shall survive termination of the Lease. 30. Holdover. Should Tenant continue to occupy the Demised Premises after expiration of the term or any renewal thereof and provided Landlord has notified Tenant thirty (30) days prior to the expiration of the term or any renewal term that Landlord is negotiating or has executed a lease with a third party for the Demised Premises or any portion thereof, Tenant shall be deemed to be occupying the Demised Premises without claim or right and Tenant shall pay Landlord all costs arising out of loss or liability resulting from delay by Tenant in so surrendering the Demised Premises as above provided and shall pay a charge for each day of occupancy an amount equal to 150 % the Base Rent (on a per diem basis) then reserved hereunder. In the event Landlord has failed to notify Tenant in writing within thirty (3) days prior to the expiration of the term or any renewal term that Landlord is negotiating or has executed a lease with a third party or the Demised Premises or any portion thereof, Tenant shall be entitled to occupy the Demised Premises for a period of sixty (60) days following expiration of the term for any renewal term on the same terms and conditions as such term or renewal term (including Base Rental and additional rental). Should Tenant continue to occupy the Demised Premises following such sixty (60) day period, Tenant shall be deemed to be occupying the Demised Premises without claim or right and Tenant shall pay Landlord as a full measure of all loss or liability resulting from delay b Tenant in so surrendering the Demised Premises as above provided a charge for each day of occupancy on amount equal to 200% of the Base Rent and Additional Rent ( on a per diem bases then reserved hereunder. 31. Surrender. A. Under any termination or expiration of this Lease, Tenant shall surrender the Demised Premises in the same condition as existed at the Commencement Date, except for normal wear and tear and damage caused by the fire or other casualty; provided, however, that nothing in this Paragraph 31 is intended to change or diminish Tenant's obligations under any other part of this Lease. Tenant shall remove the Alterations it is required to remove pursuant to the terms of Paragraph 8 hereof. Any damage to the Demised Premises resulting from the removal of such Alterations shall be required by Tenant at Tenant's expense. If the Demised Premises be no surrendered as above set forth, Tenant shall indemnify, defend and hold Landlord harmless against loss or liability resulting from the delay by Tenant in so surrendering the Demised Premises, including, without limitation any claim made by any succeeding occupant founded on such delay. 32 All property of Tenant not removed on or before the last day of the term of this Lease (subject to Tenant's right to occupy the Demised Premises following expiration of the term of this Lease as set forth in Paragraph 30 hereof or within fifteen (15) days thereafter shall be deemed abandoned. Tenant hereby appoints Landlord its agent t remove all property of Tenant from the Demised Premises upon termination of this Lease and to cause its transportation and storage for Tenant's benefit, all at the sole cost and risk of Tenant and Landlord shall not be liable for damage, theft, misappropriation or loss thereof and Landlord shall not be liable in any manner in respect thereto. Tenant shall pay all costs and expenses of such removal transportation and storage. Tenant shall reimburse Landlord upon demand of or any expenses incurred by Landlord with respect to removal or storage of abandoned property and with respect to restoring said Demised Premises to good order, condition and repair. 32. Liens. Landlord shall deliver the Demised Premises to the Tenant free of all mechanic's and materialmen's liens or bond over all such mechanic's and materialmen's liens. Tenant has no authority, express or implied to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind the interest of Landlord or Tenant in the Demised Premises, or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who furnish material or perform labor for any construction or repairs, and Tenant covenants and agrees that it shall not mortgage, encumber or pledge this Lease or any interest therein. The preceding sentence shall not be construed as prohibiting Tenant from making Alterations as provided in Paragraph 8 above or from permitting any other mechanics or materialmen's lienable work to be performed as long as such work is not prohibited by this Lease. Tenant agrees to indemnify and hold Landlord harmless from any lien filed against the Demised Premises on account of work performed by or on behalf of Tenant and from any and all losses, costs, damages, expenses, liabilities, suites, penalties, claims and damages (including reasonable attorney fees) arising from or relating to such lien. After Tenant's receipt of notice or actual knowledge of the placing of any lien or encumbrance against the Demised Premises, Tenant shall immediately give Landlord written notice thereof. Tenant shall within ten (10) days therefrom remove such lien by payment or bond. If Tenant shall fail to discharge such mechanic's lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same by paying to the claimant the amount claimed to be due by procuring the discharge of such lien as to the Demised Premises by deposit in the court having jurisdiction of such lien, a cash sum sufficient to secure the discharge of the same, or by the deposit of a bond or other security with such court sufficient in form, content and amount to procure the discharge of such lien, or in such other manner as is now or may in the future be provide by present or future law for the discharge of such lien as a lien against the Demised Premises. Any amount paid by Landlord, or the value of any deposit so made by Landlord, together with all costs, fees and expenses in connection therewith (including reasonable attorneys' fees of Landlord), together with interest thereon at the rate se forth in Paragraph 33 hereof, shall be repaid by Tenant to Landlord on demand by Landlord and if unpaid my be treated as Additional Rent. All materialmen, contractors, artisans, mechanics, laborers and any other person now or hereafter furnishing any labor, services, material, supplies or equipment to Tenant with respect to the Demised Premises, or any portion thereof, are hereby charged with notice that they must 33 look exclusively to Tenant to obtain payment for the same. Notice is hereby given that Landlord shall; not be liable for any labor, services, materials, supplies, skill, machinery, fixtures or equipment furnished or to be furnished to Tenant upon credit, and that no mechanic's lien or other lien for any such labor, services, materials, supplies, machinery, fixtures or equipment shall attach to or affect the estate or interest of Landlord in and to the Demised Premises, or any portion thereof. 33. Interest; Late Charge. Base Rent payable pursuant to Paragraph 3 hereof by Tenant to Landlord under this Lease, if not paid when due, and any other charges payable by Tenant hereunder not paid when due, including any charges, expenses, liabilities or fees in connection with a default by Tenant, shall accrue interest at the rate of prime (as announced from time to time by the First National Bank of Chicago) plus one percent (1%) per annum from the due date until paid, said interest to be in addition to Base Rent and other charges under this Lease and to be paid to Landlord by Tenant upon demand. In addition, if any installment of Base Rent and other charges payable pursuant to this Lease by Tenant to Landlord is not paid within five (5) days after receipt by Tenant of a written notice thereof from Landlord, Tenant shall pay Landlord a late charge in an amount equal to two percent (2%) of the amount then due to defray the increased cost of collecting late payments. 34. Inspections. Landlord, its agents or employees may, after providing Tenant with at least twenty-four (24) hours prior notice except in an emergency situation, to (a) exhibit the Demised Premises to prospective purchasers or lenders; (b) inspect the Demised Premises to see that Tenant is complying with its obligations hereunder; and (c) exhibit the Demised Premises during the last six (6) months of the term to prospective tenants; provided that Landlord shall comply at all times with Tenant's reasonable security requirements. 35. Transfer of Landlord's Interest. Tenant acknowledges that Landlord has the right to transfer its interest in the Demised Premises and in this Lease at any time after the date which is eighteen (18) months after the Commencement Date and subject to the provisions of Paragraph 52 hereof, and Tenant agrees that in the event of any such transfer Landlord shall automatically be released from all liability under this Lease except of any liabilities accruing prior to the date of transfer for which Tenant has identified in an estoppel certificate or by written notice to Landlord, and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder; provided, however, any such transferee shall be deemed to have assumed the obligations of Landlord hereunder subject to the conditions and limitations herein contained. Tenant agrees to look solely to Landlord's interest in the Demised Premises for the recovery of any judgment from Landlord, it being agreed that Landlord, or if Landlord is a partnership, its partners whether general or limited, or if Landlord is a corporation, its directors, officers or shareholders, or if Landlord is a limited liability company, its members or manners, shall never be personally liable for such judgement. Without limiting the generality of the foregoing, Tenant agrees that Landlord may transfer its interest in this Lease to any entity controlled by, controlling or under common control with Landlord, that acquires the Demised Premises and from and after such transfer Landlord shall be released from liability, as aforesaid. 34 36. Indemnity. (a) To the fullest extent allowed by law, Tenant shall at all times Indemnify, defend and hold Landlord harmless against and from any and all claims by or on behalf of any person or persons, firm or firms, corporation or corporations, arising from the conduct or management, or from any work or things whatsoever done in or about the Demised Premises, and will further indemnify, defend and hold Landlord harmless against and from any and all claims arising during the term of this Lease, or arising from any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of Tenant to be performed, pursuant to the terms of this Lease, or arising from, any act or negligence of Tenant, its agents, servants, employees or licensees, or arising from any accident, injury or damage whatsoever caused to any person, firm or corporation occurring during the term of this Lease, in or about the Demised Premises or upon the sidewalk and the land adjacent thereto, and from and against all costs, attorneys' fees, expenses and liabilities incurred in or about any such claim or action or proceeding by counsel reasonably satisfactory to Landlord. Tenant's obligations under this Paragraph 36 shall be insured by contractual liability endorsement on Tenant's policies of insurance required under the provision of Paragraph 17 hereof. (b) Landlord shall protect, indemnify and hold Tenant harmless from and against any and all loss, claims, liability or costs (including court costs and attorneys' fees) incurred by reason of: (a) any damage to any property or any injury (including but not limited to death) to any person occurring in, or on or about the Demised Premises or the Building to the extent that such injury or damage shall be proximately caused by the Landlord's affirmative acts of negligence or willful misconduct of Landlord or its agents, servants or employees; provided, however, that such indemnification shall be limited to the extent of the sum of: (i) amounts of insurance proceeds recovered by Landlord under insurance policies carried by Landlord for such injury or damage, after deductibles, or insurance process that would have been received in the event Landlord had not elected to self-insure, and (ii) the deductible amounts for such claims under such insurance policies. The provisions of this Article shall survive the termination of the Lease with respect to any claims or liability occurring prior to such termination. (c) Notwithstanding the foregoing indemnification obligations, Landlord and Tenant both hereby release the other and the other's officers directors, partners, employees and agents from any claim with the indemnified party might have to the extent that the cost of any such claim is reimbursed by insurance proceeds recovered by the releasing party, and both landlord and Tenant shall confirm that their insurance providers shall similarly waive all such claims. 37. Modification of Lease. The terms, covenants and conditions of this Lease may not be changed orally but only by an instrument in writing signed by the party against whom enforcement of the change is sought. The failure of either party hereto to insist in any one or more cases upon the strict performance of any term, covenant or condition of this Lease to be 35 performed or observed by the other party hereto shall not constitute a waiver of relinquishment for the future of any such term, covenant or condition. 38. Memorandum of Lease. Neither party shall record this Lease or any of the exhibits and/or riders attached hereto, but shall enter into a "short form" or Memorandum of Lease in recordable form attached hereto as Exhibit F and made a part hereof, which shall set forth the parties, the legal description of the land, a description of the Demised Premises, the Commencement Date and Expiration Date of the term of the Lease, and any options to renew, options to purchase or rights of first refusal granted hereunder. 39. Paragraph Captions. Paragraph captions herein are for Landlord's and Tenant's convenience only, and neither limit no amplify the provisions of this Lease. 40. Entire Agreement. This Lease represents the entire agreement between Landlord and Tenant and supersedes all prior agreements, both written and oral. The terms, covenants and conditions of this Lease shall be binding upon and shall inure to the benefit of Landlord and Tenant and therein respective executors, administrators, heirs, distributees, legal representatives successors and assignees. 41. Choice of Law and Interpretation. This Lease shall be governed by the internal law of the State in which the Demised Premises is situated, without considering such state's choice of law rules. Should any provision of this Lease require judicial interpretation, it is agreed that the court interpreting or construing the same shall not apply a presumption that the terms of any such provision shall be more strictly construed against one party or the other by reason of the rule of construction that a document is to be construed most strictly against the party who itself or through its agent prepared the same, it being agreed that the agents of all parties hereto have participated in the preparation of this Lease. 42. Prevailing Party. If either party hereto files a lawsuit against the other party relating to performance or non-performance under this Lease, and the court has entered a judgment in favor of one party on one or more counts and no judgment in favor of the other party on any counts, then the non-prevailing party shall pay the prevailing party's reasonable attorney's fees and costs in connection with the lawsuit. 43. Exhibits. Attached hereto and made a par thereof are the following: Exhibit A - Legal Description Exhibit B - Site Plan Exhibit C - Plans Exhibit C-1 Construction Schedule Exhibit D - Schedule of Rents Exhibit E - Lease Term Agreement Exhibit F - Memorandum of Lease Exhibit G - Landlord's Development Costs Exhibit H - Permitted Exceptions Exhibit I - Escrow Agreement 36 44. Guarantee. All obligations on the part of Tenant to be paid, performed and complied with are unconditionally guaranteed by First Data Corporation (the "Guarantor") according to the provisions of the Guarantee executed by Guarantor in a form prepared by Landlord. 45. Independent Covenants. It is the express intent of Landlord and Tenant that (a) the obligations of Landlord and Tenant hereunder shall be separate and independent covenants and agreements and that the Base Rent and Additional Rent, and all other charges and sums payable by Tenant hereunder, shall commence at the times provided herein and shall continue to be payable in all events; (b) all cost or expenses of whatsoever character or kind, general or special, ordinary or extraordinary, foreseen or unforeseen, and of ever kind and nature whatsoever that may be necessary or required in and about the Demised Premises, or any portion thereof, and Tenant's possession or authorized use thereof during the term of this Lease, shall be paid by Tenant and all provisions of this Lease are to be interpreted and construed in light of the intention expressed in this Paragraph 45; (c) the Base Rent specified in Paragraph 3 shall be absolutely net to Landlord so that this Lease shall yield net to Landlord the Base Rent specified in Paragraph 3 in each year during the term of this Lease (unless extended or renewed at a different Base Rent; (d) all Impositions, insurance premiums, utility expenses, repair and maintenance expenses, and all other costs, fees, interest, charges, expenses, reimbursements and obligations of every kind and nature whatsoever relating to the Demised Premises, or any portion thereof, which may arise or become due during the term of this Lease, or any extension or renewal thereof, shall be paid or discharged by Tenant as Additional Rent. 46. Entry by Landlord. Subject to the provisions of Section 34 hereof, Tenant agrees to permit Landlord or Landlord's mortgagee and authorized representative of Landlord or Landlord's mortgagee to enter upon the Demised Premises at all reasonable times during ordinary business hours for the purpose of inspecting the same and making any necessary repairs to comply with any laws, ordinances, rules, regulations or requirements of any public body, or the Board of Fire Underwriters, or any similar body; provided that Landlord shall comply at all times with Tenant's reasonable security requirements. Nothing herein contained shall imply any duty upon the part of Landlord to do any such work which, under any provision of this Lease, Tenant may be required to perform and the performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Landlord may, during the progress of any work, keep and store upon the Demised Premises all necessary material, tools and equipment. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making repairs or the performance of any work in or about the Demised Premises, or on account of bringing material, supplies and equipment into, upon or through the Demised Premises during the course thereof, and the obligations of Tenant under this Lease shall not be thereby affected in any manner whatsoever; provided, however, Landlord shall use all reasonable efforts to conduct any entry into the Demised Premises so as to interfere with the Business of Tenant as little as reasonably practical under the circumstances. 47. [Deleted by intent of parties.] 48. Survival of Obligations. Except as otherwise provided herein to the contrary, all obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of 37 the term of this Lease shall survive the expiration of earlier termination of the term hereof for a period of one (1) YEAR. 49. Lease Subject to Landlord's Acquisition of Demised Premises. Anything herein to the contrary notwithstanding, it is agreed and acknowledged by the parties hereto that as of the date hereof, Landlord does not own the Demised Premises. Therefore, anteing herein to the contrary notwithstanding, the rights, duties and obligations of Landlord and Tenant hereunder are expressly subject to and contingent upon acquisition by Landlord of the Demised Premises by December 31 , 1997 ("Contingency Date"), upon terms and conditions acceptable to Landlord, in its sole and absolute discretion, including, without limitation, procuring project financing on terms and conditions acceptable to Landlord. In the event Landlord has not acquired the Demised Premises by the Contingency Date on term and conditions acceptable to Landlord, as aforesaid, Landlord shall notify Tenant, and either party may terminate this Lease at any time thereafter (but prior to the date Landlord acquires the Demised Premises) by delivering written notice of such termination to the other party, whereupon the parties shall be released and discharged from any and all obligations and liabilities not therefore accrued under this Lease provided, however, in the event the Lease is so terminated, Tenant shall pay to Landlord, within ten (10) days from the date Landlord has submitted a written statement to Tenant requesting such payment, all amounts incurred by Landlord has submitted a written statement to Tenant requesting such payment all amounts incurred by Landlord in connection with the proposed acquisition and development of the Land, including, without limitation, any earnest money deposit, any costs for required off-site improvements, including sewer and road improvements, all architectural, engineering, environmental, land planning and other consulting fees, all title and survey expenses, all costs associated with the proposed subdivision of Land, any and all fees and expenses associated with procuring construction and/or other financing for the project, any other costs or expenses that would not have been incurred by Landlord had Landlord not been involved in the acquisition and proposed development of the Land and all attorneys, fees associated with any of the foregoing. Landlord agrees to use all reasonable efforts to acquire the Demised Premises on terms and conditions acceptable to Landlord, as aforesaid. 50. Americans With Disabilities Act. A. In the event that any alteration or repair to the Demised Premises is undertaken by Tenant with or without Landlord's consent, or is undertaken by Landlord at Tenant's request during the term of this Lease (including any renewal or extension thereof) such alteration or repair (i) shall be designed and constructed in full compliance with the Americans With Disabilities Act, as amended from time to time (the "Act") if such alteration or repair is undertaken by Tenant, and (II) shall be designed by Tenant in full compliance with the Act in such alteration or repair is undertaken by Landlord at Tenant's request, and the cost of any such design, alteration or repair to the Demised Premises shall be borne by Tenant, including without limitation (a) the cost of any such design, alteration or repair required as a result of (i) Tenant or an assignee or subtenant being deemed a "Public Accommodation" or the Demised Premises being deemed a "Place of Public Accommodation" or (ii) such alteration or repair being deemed to affect an "Area of Primary Function" (as such terms are defined in the Act); and (b) the cost of the installation or implementation of any "Auxiliary Aid" required under the Act as a result of the operation of any business within the Demised Premises. In addition, Tenant shall be responsible for all costs and expenses incurred or to be incurred in order to cause the Demised Premises and the operation of any business within the Demised Premises to comply with the Act, and, if 38 Tenant fails to keep and maintain the Demised Premises in compliance with the Act, Landlord shall have the right but not the obligation, at Tenant's sole cost and expense, to enter the Demised Premises and cause the Demised Premises to be put into compliance with the Act; and Tenant shall indemnify, defend and hold Landlord harmless from and against any and all costs, claims and liabilities, including without limitation, attorneys' fees arising from or related to Tenant's failure to maintain and keep the Demised Premises in compliance with the Act. B. In connection with its construction of the Landlord's Improvements pursuant to Paragraph 4 hereof, Landlord represents and warrants that the Landlord's Improvements to be constructed in accordance with the Plans will comply in all material respects with all applicable laws, including without limitation, the Act, and Landlord covenants that the Demised Premises delivered to Tenant as of the Construction Completion Date shall comply in all material respects with all applicable laws, including without limitation, the Act. Landlord shall indemnify, defend and hold Tenant harmless from all damages, costs, losses, expenses (including but not limited to reasonable attorneys' fees) arising from any breach by Landlord of the preceding covenant; provided however the foregoing indemnification shall terminate upon the expiration of one (1) year from the Construction Completion Date. Notwithstanding the foregoing, in no event shall Tenant have the right to terminate this Lease or have any right of set-off arising out of any breach or claimed breach by Landlord in its obligations hereunder; it being expressly acknowledged and agreed that the Base Rent and Additional Rent, and all other charges and sums payable by Tenant hereunder, shall commence at the times provided herein and shall continue to be payable as provided herein. 51. Reports by Tenant. Upon request by Landlord at any item after 135 days after the end of the applicable fiscal year of Tenant, Tenant shall deliver to Landlord (within 15 days after receipt of written request) a copy of the audited financial statement of any guarantor of Tenant's obligations under this Lease. If such audited statements are not available, Tenant may provide such statements certified by such guarantor's chief financial officer as being true and correct, in accordance with generally accepted principals of accounting consistently applied over the applicable periods. Said financial statements shall only be required in connection with a proposed sale or mortgaging of the Demised Premises and shall be held in confidence by Landlord and any such proposed purchases or lender or their respective successors or assigns. Notwithstanding the foregoing, Tenant shall cause First Data Corporation to submit annual audited financial statements to Landlord and Landlord's mortgagee in the manner set forth herein if First Data Corporation ceases to be a publicly traded company. 52. Option to Purchase. Subject to the provisions hereinafter set forth, and provided that Tenant is not then in default hereunder, Landlord hereby grants to Tenant the option to purchase the Demised Premises upon the following terms and conditions: A. Landlord shall notify Tenant thirty (30) days prior to the date that it intends to make the Demised Premises available for sale to third parties. Included with such notice shall be the proposes purchase price for the Demised Premises,, as well s any other relevant economic terms being offered by Landlord. In no event shall Landlord have the right to convey the Demised Premises or otherwise make the Demised Premises available for sale to third parties until eighteen (18) months after the Commencement Date. 39 B. If, at any time after notice is delivered to Tenant as set forth above, Landlord enters into a serious negotiation with a prospective purchaser to purchase the Demised Premises, then Landlord shall notify Tenant in writing of (i) the fact of such negotiation, (ii) the purchase price agreed to between Landlord and such prospective purchaser, and (iii) the other relevant agreed upon economic terms upon which such purchaser would acquire the Demised Premises, and Tenant must within ten (10) business days thereafter, by written notice to Landlord, elect to exercise the option to purchase the Demised Premises upon all of the same terms and conditions as are contained in Landlord's notice to Tenant in which event the parties shall enter into a definitive agreement incorporation said terms and conditions. If Tenant does not elect to purchase, Landlord shall have the right to sell to a third party on the same terms and conditions provided to Tenant or shall submit any modified terms to Tenant in accordance with the above. In no event shall Tenant be afforded more than three (3) opportunities to exercise its option hereunder, in connection with more than three (3) different offers from three (3) different third parties. C. If Tenant exercises its option to purchase hereunder, the closing of such purchase shall occur on the date set forth in the definitive agreement entered into between Landlord and Tenant. At the closing, Tenant shall pay the purchase price via cash or wire transfer of immediately available funds to Landlord, and Landlord shall deliver to Tenant a general warranty deed (or equivalent) to the Demised Premises conveying good and marketable fee simple title in Tenant to the Demised Premises, subject to no liens, encumbrances or other exceptions to title other than the Permitted Exceptions and taxes for the current year, and any exceptions to title that have been caused by Tenant or that Tenant has accepted in writing ( other than any mortgages or other liens, which must be discharged by Landlord at or prior to such closing). On the closing date, Landlord and Tenant shall also execute and deliver such other documents and instruments as are customary in similar transactions and/or reasonably necessary to implement the terms and conditions of this Lease, and to allow Tenant to obtain an extended coverage ALTA owner's title policy insuring Tenant's fee simple ownership of the Demised Premises in accordance with the above. D. Landlord covenants and agrees that if any exceptions to title other than the Permitted Exceptions shall be revealed by the deed or title policy, Landlord will at its sole cost and expense clear the title of such exceptions as soon as reasonably practical but, in any event, within six (6) months after the intended closing date (unless Tenant shall in writing extend such period), and the actual closing (including the payment of the purchase price) of such purchase of the Demised Premises shall be delayed until the title thereto has been cleared. Until such time as Tenant's purchase of the Demised Premises is closed as hereinabove provided, Tenant shall continue to occupy and possess the Demised Premises under the terms and conditions of this Lease. If for any reason such purchase is not closed, this Lease shall continue in full force and effect as if Tenant had not exercised the aforesaid option to purchase, and Tenant shall be entitled to retroactively exercise any option for any Extension Term to the extent the normal option election date occurred after Tenant exercised its option to purchase the Demised Premises. E. Upon Tenant`s notice to Landlord of the exercise of Tenant's option to purchase, Landlord shall provide Tenant with copies of all surveys, title insurance policies, title instruments and other such documents in Landlord's possession pertaining to the Demised Premises. Tenant shall pay for the cost of the title insurance policy, the cost to prepare any 40 survey required by Tenant and the cost of any escrow or closing services, and any cost or expense in connection with any endorsements to the title policy requested by Tenant. Landlord shall be responsible for the cost of compliance with any subdivision, lot split or similar regulations which are applicable to or in connection with the conveyance of the Demised Premises to Tenant. All rents shall be pro-rated between the parties as of the date of closing. Tenant shall pay the cost of any documentary stamp taxes required for recording the deed, as well as any transfer taxes. Any other maters at closing not specifically provided for herein shall be handled and the cost hereof charged to one or the other or both of the parties as shall be the ordinary custom and practice for the handling of such matters or the apportioning of the cost hereof then prevalent in the City of Sunnyvale, Santa Clara County, California. F. The option hereunder may only be exercised by Tenant or a subsidiary, affiliate or related entity of Tenant. If neither Tenant or a subsidiary, affiliate or related entity is then occupying all or a portion of the Demised Premises, Tenant shall have no rights hereunder. 53. No Third Party Beneficiaries. The obligations of Tenant set forth hereunder (including, without limitation, the obligations set forth in Sections 5A, 7A, 11B and 50), are covenants from Tenant to Landlord only and do not create any third party beneficiaries of such obligations. 54. Counterparts. This Lease may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute but one and the same instrument. 55. Consents and Approvals. Landlord and Tenant agree that any consents or approvals to be provided by either party will not be unreasonably withheld or delayed unless specifically provided otherwise herein. 56. Limitation on Damages. In no event shall Landlord or Tenant be liable under any theory of tort, contract, strict liability or other legal or equitable theory for any punitive, special, incidental, indirect or consequential damages, each of which is hereby excluded by agreement of the parties regardless of whether or not any party has been advised of the possibility of such damages. 57. Tenant's Property. All fixtures, equipment, improvements and appurtenances attached to, or built into, the Demised Premises that are installed by Tenant at Tenant's expense shall be Tenant's property until the termination of this Lease. All of the foregoing items installed at Tenant's expense as well as all paneling, partitions and business and trade fixtures and communication and office equipment which are installed in the Demised Premises by Tenant, and all furniture, furnishing and other articles of movable personal property owned by Tenant and located in the Demised Premises or the Building (all of which are hereinafter referred to as "Tenant's Property") shall belong to TENANT, may be removed by Tenant at any time during the term hereof, and may be removed by Tenant at the end of the term hereof or within fifteen (15) days thereafter, whether as a result of the normal expiration of the term of this Lease or of the early termination of this Lease pursuant to the terms hereof (as a result of Tenant's default hereunder or otherwise). Tenant shall repair any damage resulting from the removal of Tenant's Property and leave the Demised Premises in a commercially reasonable condition. Any items of 41 Tenant's Property not so removed shall, if not required to be so removed by Tenant pursuant to Paragraph 8 hereof, be deemed abandoned and retained by Landlord as its property thereafter. Landlord waives any landlord or other lien it may have on Tenant's Property and shall not seek to enforce same, whether upon Tenant's default or otherwise. 42 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. LANDLORD: SUNNYVALE PARTNERS LIMITED PARTNERSHIP, an Illinois limited partnership By: Ridge Sunnyvale, Inc. Its: General Partner By: /s/ James Small ------------------------------- Its: President ------------------------------- TENANT: FIRST DATA MERCHANT SERVICES CORPORATION, a Florida corporation By: /s/ David Schlapbach ----------------------------------- Its: Assistant Secretary ----------------------------------- XXX Legal Description ----------------- Real Property in the City of Sunnyvale, County of Santa Clara, State of California described as follows: Beginning at the Southeasterly corner of that certain 5.58 acre parcel of land described in the Deed to Stauffer Chemical Company, a California Corporation as said Deed is filed for record in Book 1331 Official Records, Page 256 in the Office of the Recorder of said County said Point of Beginning being in the centerline of Fremont Avenue; Thence from said Point of Beginning, south 89 degrees 48' West along said centerline of Fremont Avenue 409.86 feet to the Easterly line of the land described in the Deed to said Stauffer Chemical Company, filed for record in Book 2891 Official Records, Page 325 in the Office of the Recorder of Said County; Thence continuing South 89 degrees 48' West along said centerline 143.22 feet to the centerline of Stevens Creek as shown on the Map of the I.J. Truman Subdivision No. 2 filed for record October 3, 1904 in Vol. "F-3" of Maps, Page 99 in the Office of the Recorder of said County last said point being also the Southwesterly corner of Lot 24 of said subdivision; Thence leaving Fremont Avenue and running along the centerline of Stevens Creek and the Westerly boundary of Lot 24 as shown on said Subdivision Map the following courses: North 50 degrees West 46.20 feet; thence North 15 degrees 45' West (North 16 degrees 45' West Truman Sub.) 118.80 feet; thence North 1 degree East 135.30 feet; thence North 37 degrees 30' East 264.00 feet; thence North 74 degrees East 178.20 feet; thence North 35 degrees 15' East 126.72 feet; thence North 23 degrees 30' East 96.66 feet; thence North 61 degrees 45' East to the point of intersection of said centerline of Stevens Creek with the Northerly prolongation of the Easterly line of said 5.58 acre parcel; thence South 0 degrees 01' West leaving said boundary of Lot 24, along said prolongation and Easterly line, 823.39 feet to the Point of Beginning. Excepting therefrom the lands described in the Deed from said Stauffer Chemical Company to the State of California recorded in Book 5541 Official Records, Page 263 in the Office of the Recorder of said County: Commencing at the Southeasterly corner of that certain 5.58 acre parcel of land conveyed to Stauffer Chemical Company, a Corporation, by Deed recorded February 16, 1946 in Book 1331 at Page 256, official Records of Santa Clara County; Thence along the Easterly line of said parcel and the Northerly prolongation thereof North 1 degree 00' 41" East 823.39 feet to the general Westerly line of the parcel of land conveyed to Stauffer Chemical Company, a Corporation, by Deed recorded June 10, 1954 in Book 2891 at Page 325, Official Records of Santa Clara County; thence along last said line South 62 degrees 40' 37" West, 197.03 feet to a line parallel with and distant 48.00 feet Westerly, at right angles, from the "ME" line of the Department of Public Works' Survey for the State Freeway in Santa Clara County, Road V-SC1-114-A; thence along said parallel line South 16 degrees 01' 13" East, 479.62 feet; thence, South 9 degrees 06' 48" East, 167.07 feet; thence along a tangent curve to the right with a radius of 40.00 feet, through an angle of 99 degrees 50' 37", an arc length of 69.70 feet to a line parallel with and distant 60.00 feet, Northerly, at right angles, from the centerline of Fremont Avenue (60.00 feet wide); thence along last said parallel line, North 89 degrees 16; 11: West, 115.00 feet; thence south 76 degrees 50' 32" West, 124.99 feet; thence South 0 degrees 43' 49" West 30.00 feet to said centerline; thence along last said line South 89 degrees 16' 11" East 278.00 feet to the point of commencement. 2 EXHIBIT B THE PREMISES ------------ 18 EXHIBIT B SUBLEASE BY AND BETWEEN FIRST DATA MERCHANT SERVICES CORPORATION, A SUBSIDIARY OF FIRST DATA CORPORATION SUBLESSOR AND SOFTWARE.NET CORPORATION SUBTENANT EXHIBIT B TABLE OF CONTENTS Incorporation of Recitals........................................... 1 Demise and Term..................................................... 1 Subtenant Improvements Allowance.................................... 2 Subtenant Alterations............................................... 3 Use................................................................. 3 Subordinate to Main Lease........................................... 4 Compliance with Main Lease.......................................... 4 Performance by Sublessor............................................ 5 No Breach of Main Lease............................................. 5 No Privity of Estate................................................ 5 Indemnity........................................................... 5 Rent................................................................ 6 Condition of Premises............................................... 7 Consents and Approvals.............................................. 7 Notice.............................................................. 7 Termination of Main Lease........................................... 8 i EXHIBIT B Maintenance and Repair.............................................. 8 Assignment and Sublettings.......................................... 8 Insurance........................................................... 9 Right to Cure Subtenant's Defaults and Damages...................... 9 Remedies of Sublessor............................................... 10 Brokerage........................................................... 11 Waiver of Jury Trial and Right to Counterclaim...................... 11 No Waiver........................................................... 11 Complete Agreement.................................................. 11 Successors and Assigns.............................................. 11 Interpretation...................................................... 12 Consent of Landlord Under Main Lease................................ 12 Holding Over........................................................ 12 Security Deposit.................................................... 12 Counterparts........................................................ 13 No Offer............................................................ 13 Hazardous Materials................................................. 13 ii EXHIBIT B Signage.............................................................. 13 Parking.............................................................. 14 iii SUBLEASE -------- THIS SUBLEASE ("Sublease") is made and dated as of the ___ day of, _______ 1998, by and between FIRST DATA MERCHANT SERVICES CORPORATION, a Florida corporation, having an address of 5660 New Northside Drive, Suite 1400, Atlanta, Georgia 30328 ("Sublessor") and SOFTWARE.NET CORPORATION, a California corporation having an address of 1195 West Fremont Avenue, Sunnyvale, California ("Subtenant"). WITNESSETH: ----------- WHEREAS, Sublessor is tenant under that certain Build-To-Suit Lease Agreement dated as of March 18, 1997 (the "Main Lease") with Sunnyvale Partners Limited Partnership, an Illinois limited partnership ("Overlandlord") as landlord, whereby Overlandlord leased to Sublessor land and improvements consisting of a to-be constructed two-story office building containing approximately 75,197 rentable square feet of office space located at 1195 West Fremont Avenue, Sunnyvale; California (the "Building"); WHEREAS, the Building has since been constructed; and WHEREAS, Sublessor desires to sublet a portion of the Building comprised of approximately 52,185 rentable square feet located on the first and second floors of the Building as more particularly shown and described on Exhibit B attached hereto and incorporated herein by this reference (the "Premises") to Subtenant, and Subtenant desires to sublet the Premises from Sublessor, WHEREAS, the parties are agreeable to entering into a sublease of the Premises on the terms and conditions set forth below; and WHEREAS, unless otherwise defined in this Sublease, all capitalized terms used herein have the meanings set out for them in the Main Lease. AGREEMENT --------- NOW, THEREFORE, for and in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby, acknowledged, Sublessor and Subtenant hereby agree as follows: 1. Incorporation of Recitals. The foregoing recitals are incorporated into and made a part of this Sublease as if each were specifically recited herein. 2. Demise and Term. Sublessor hereby subleases the Premises to Subtenant, and Subtenant hereby hires and accepts the Premises from Sublessor. The Premises shall include the non-exclusive appurtenant right to the use, in common with others, of the lobbies, entrances, stairs, corridors, elevators and other public portions of the Building. The term of this Sublease (the "Term") shall be the period commencing July 1, 1998 (the "Commencement Date"), and ending at 12:01 a.m. on the date which is sixty-two (62) months after the Commencement Date (the "Expiration Date"), unless sooner terminated as herein provided. Subtenant shall have no option to renew or extend the term of this Sublease or to expand the Premises. 3. Subtenant Improvements and Allowance. Sublessor agrees to contribute a maximum amount of One Dollar and no/100 ($1.00) per square foot of rentable area of the Premises for the completion of the Subtenant Improvements (as hereinafter defined) ("Allowance") as more specifically set forth in this Section 3. a. Subtenant Improvements shall mean such items of general applicability to office space that Subtenant desires to be installed in the interior of the Premises. Subtenant shall deliver to Sublessor a space plan for the Premises (the "Space Plan"), which Space Plan shall be subject to the approval of Sublessor, which approval shall not be unreasonably withheld. Upon Sublessor's approval of the Space Plan, Subtenant shall engage and pay for the services of a licensed architect to prepare complete and detailed working drawings and specifications for the construction of the Subtenant Improvements, showing thereon all Subtenant Improvements (the "Drawings"). The Drawings shall be subject to the approval of Sublessor, which approval shall not be unreasonably withheld. If Sublessor should disapprove such Drawings, Sublessor shall specify to Subtenant the reasons for its disapproval and Subtenant shall cause the same to be revised to meet the Sublessor and Subtenant's mutual reasonable satisfaction and Subtenant shall resubmit the same to Sublessor, as so revised. It is understood by the parties that Subtenant has elected to retain a general contractor and arrange for the construction and installation of the Subtenant Improvements itself in a good and workmanlike manner [ by labor union contractors and subcontractors?] (the "Work"). Subtenant shall submit to Sublessor the name of the general contractor and major subcontractors for Sublessor's approval, which shall not be unreasonably withheld, or, at Sublessor's option, Subtenant shall select its general contractor and major subcontractors from a list pre-approved by Sublessor. If Sublessor shall reject the general contractor or any major subcontractor, Sublessor shall advise Subtenant of the reasons in writing and Subtenant shall choose another contractor. Along with Subtenant's notice of its general contractor and major subcontractors, Subtenant shall notify Sublessor of it estimate of the total costs of the Work and, at Sublessor's option, Subtenant must provide to Sublessor adequate assurance that Subtenant has the financial resources to pay for such costs. Subtenant's contractors shall be duly licensed and shall obtain and provide to Sublessor with certificates evidencing worker's compensation, public liability and property damage insurance in amounts and forms and with companies satisfactory to Sublessor. Subtenant's agreement with its contractors shall require such contractors to provide daily cleanup of the work area to the extent such clean up is necessitated by the Work, and to take reasonable steps to minimize interference with other tenants' use and occupancy of the Building. Subtenant and Subtenant's contractors shall comply with any other reasonable rules, regulations or requirements that Sublessor or Overlandlord shall impose. Subtenant may request reasonable changes in the Drawings provided that no change shall be made to the Drawings without Sublessor's prior written approval, which shall not be unreasonably withheld or delayed; (b) no such request shall effect any structural change in the Building or otherwise render the Premises or Building in violation of applicable laws; (c) Subtenant shall be responsible for all costs of same; and (d) such requests shall constitute agreement by Subtenant to any delay in completion caused by Sublessor's reviewing and processing such change. Subtenant shall promptly pay any and all costs and expenses in connection with or arising out of the performance of the Work and shall furnish to Sublessor evidence of such payment upon request. Subtenant agrees not to suffer or permit any mechanic, materialman, architect, broker or other lien to be placed or filed against the Premises or the Building. In case any such lien shall be filed, Subtenant shall immediately file and release such lien of record. If Subtenant shall fail to have such lien immediately satisfied and released, Sublessor may, on Subtenant's behalf, without being responsible for any investigation as to the validity of such lien and without limiting any other remedies Sublessor may have, pay the same and Subtenant shall upon demand pay Sublessor the amount so paid. 2 b. Upon completion of the Work, Subtenant may submit to Sublessor a request in writing for the Allowance which request shall include: (i) as-built drawings showing all of the Subtenant Improvements; (ii) a detailed breakdown of final and total costs, together with receipted invoices showing payment thereof; (iii) a certified written statement from the architect that the Subtenant Improvements have been completed in compliance with the Drawings; (iv) final lien waivers and releases from the architect, general contractor and all subcontractors and suppliers; and (iv) a copy of a certificate of occupancy for the Premises. Provided the request includes all of the foregoing, Sublessor shall pay the Allowance to Subtenant within 30 days of Sublessor's receipt of such request and all supporting documentation. c. Subtenant hereby acknowledges and agrees that it is Subtenant's sole and exclusive responsibility to cause the Premises and Drawings to comply with all applicable laws, including the Americans with Disabilities Act and other ordinances, orders, roles, regulations and requirements of all governmental authorities having jurisdiction thereof. Notwithstanding anything to the contrary contained in the Sublease or herein, Sublessor's participation in the preparation of the Space Plan, the Drawings and/or the Subtenant Improvements shall not constitute any representation or warranty, express or implied, that the (i) Drawings are in conformity with applicable codes, regulations or roles or (ii) the Subtenant Improvements, if built in accordance with the Drawings will be suitable for Subtenant's intended purposes. Subtenant acknowledges and agrees that the Subtenant Improvements are intended for use by Subtenant and the requirements for such improvements are not within the special knowledge of Sublessor. d. Subtenant shall repair or replace (or at Sublessor's election, reimburse Sublessor for the cost of repairing or replacing) any portion of the Building or Premises or Sublessor's property damage, lost or destroyed in connection with the Work and shall indemnify, defend and hold Sublessor harmless from and against any and all losses, costs, damages, expenses and liabilities, including without limitation reasonable attorneys fees, incurred by Sublessor in connection with the Work, including but not limited claims based on personal injury or property damage, contract claims and/or lien claims. e. There shall be no delay in the Commencement Date or the payment of rent due to any delay in the Work. 4. Subtenant Alterations. Subtenant shall not make any alterations, additions, or improvements to the Sublet Premises without the prior consent of Sublessor. Sublessor's approval of the Drawings in accordance with Section 3 hereof shall be considered "prior consent" to the Work for proposes of this section. All alterations, installations, removals and restoration shall be performed in a good and workmanlike manner so as not to damage or alter the primary structure or structural qualities of the Building and other improvements situated on the Sublet Premises or of which the Sublet Premises are a part. All alterations, installations, removals and restoration shall in addition be subject to the requirements of Section 3 hereof (with the exception of the payment of the Allowance, which is a one-time Allowance payable only in connection .with the Work). All alterations, additions or improvements to the Sublet Premises, including the Work, shall, at Sublessor's sole discretion, either be removed by Subtenant prior to the end of the Term or earlier termination thereof, or shall remain on the Premises at the end of the Term. 5. Use. Subtenant shall occupy and use the Premises only for research and development and general office purposes and otherwise in strict compliance with the allowable uses set forth in Section 5 of the Main Lease. Subtenant shall not commit or suffer to be 3 committed any annoyance waste, nuisance or any act or thing which is against public policy, or which may disturb the quiet enjoyment of Sublessor or any other tenant or occupancy of the Building. Subtenant agrees not to deface or damage the Building in any manner. Subtenant shall not use the Premises for any unlawful purposes. 6. Subordinate to Main Lease. This Sublease is and shall be subject and subordinate to the Main Lease. A copy of the Main Lease (from which certain economic terms have been excised) is attached hereto as Exhibit A and made a part hereof. Sublessor agrees that it will not voluntarily enter into any agreement with Overlandlord which would result in the termination of the Main Lease prior to the Expiration Date or which would negatively affect the rights or obligations of Subtenant under this Sublease. Sublessor shall notify Subtenant of any involuntary change. 7. Compliance with Main Lease. Except as set forth in the immediately succeeding sentence, the terms, covenants and conditions of the Main Lease (the "Incorporated Provisions") are incorporated herein by reference. Sections 1,2,3,4,6, 7(B), 8, 9, 15, 16(E), 17(E), 22, 23, 44 and 52 and Exhibits B, C, D, E, F, G and I of the Main Lease are specifically excluded from the Incorporated Provisions. Except to the extent that the Incorporated Provisions are inapplicable or are modified by the provisions of this Sublease, the Incorporated Provisions binding or inuring to the benefit of the landlord thereunder shall, in respect of this Sublease, bind or inure to the benefit of Sublessor, and the Incorporated Provisions, binding or inuring to the benefit of the tenant thereunder shall, in respect of this Sublease, bind or inure to the benefit of Subtenant with the same force and effect as if such Incorporated Provisions were completely set forth in this Sublease, and as if the words "Landlord" and "Tenant" or words of similar import, wherever the same appear in the Incorporated Provisions, were construed to mean, respectively, "Sublessor and "Subtenant" in this Sublease, and as if the words "Premises," or words of similar import, wherever the same appear in the Incorporated Provisions, were construed to mean "Premises" in this Sublease, and as if the word "Lease," or words of similar import, wherever the same appear in the Incorporated Provisions, were construed to mean this "Sublease." (a) The time limits contained in the Main Lease for the giving of notices, making of demands or performing of any act, condition or covenant on the part of the tenant thereunder, or for the exercise by the tenant thereunder of any right, remedy or option, are changed for the purposes of incorporation herein by reference by shortening the same in each instance by 5 days, so that in each instance Subtenant shall have 5 days less time to observe or perform hereunder than Sublessor has as the tenant under the, Main Lease, except that: (i) any such time limits which are 7 days or less shall instead be shortened in each instance by 3 business days, and (ii) any such time limits which are 3 days or less shall instead be shortened in each instance so that such time limits shall expire 1 business day prior to the expiration of such time limits under the Main lease. (b) If any of the express provisions of this Sublease shall conflict with any of the Incorporated Provisions, such conflict shall be resolved in every instance in favor of the express provisions of this Sublease. If Subtenant receives any notice or demand from Overlandlord under the Main Lease, Subtenant shall deliver a copy thereof to Sublessor by overnight courier the next business day or as soon thereafter as is reasonably possible but in no event later than two business days after Subtenant's receipt of such notice. If 4 Sublessor receives any notice of default from Overlandlord under the Main Lease, Sublessor shall deliver a copy thereof to Subtenant by overnight courier the next business day or as soon thereafter as is reasonably possible but in no event later than two business days after Sublessor's receipt of such notice. 8. Performance by Sublessor. Sublessor shall not be required to furnish, supply or install anything required under any article of the Main Lease. Sublessor shall have no liability or responsibility whatsoever for Overlandlord's failure or refusal to perform under the Incorporated Provisions. Subtenant shall have the right to instruct Overlandlord with respect to the performance by Overlandlord of Overlandlord's obligations as landlord under the Main Lease. Upon Sublessor's receipt of a written notice from Subtenant that Sublessor has failed to perform an obligation under the Incorporated Provisions, (because of a failure of Overlandlord to perform its obligation under the Main Lease) then Sublessor may, at its sole and exclusive option either (a) use its reasonable efforts to cause Overlandlord to observe and perform the same, provided, however, that Sublessor does not guarantee Overlandlord's compliance with the Incorporated Provisions, or (b) direct Subtenant to pursue its claim directly against Overlandlord which shall be done at Subtenant's sole cost and expense. Subtenant shall not in any event have any rights in respect of the Premises greater than Sublessor's rights under the Main Lease. Notwithstanding any provision to the contrary contained herein, as to Incorporated Provisions, Sublessor shall not be required to make any payment or perform any obligation, and Sublessor shall have no liability to Subtenant for any matter whatsoever, except for (i) Sublessor's obligation to pay the rent due under the Main Lease, and (ii) Sublessor's obligation to use reasonable efforts, upon the written request of Subtenant, to cause Overlandlord to observe and/or perform its obligations under Main Lease (or, in the alternative, to direct Subtenant to pursue its claim against Overlandlord). Sublessor shall not be responsible for any failure or interruption, for any reason whatsoever, of the services or facilities that may be appurtenant to or supplied at the Building, by Overlandlord or otherwise, including, without limitation, heat, air conditioning, water, elevator service and cleaning service, if any; and no failure to furnish, or interruption of, any such services or facilities shall give rise to any: (i) abatement, diminution or reduction of Subtenant's obligations under this Sublease; (ii) constructive eviction, whether in whole or in part; or (iii) liability on the part of Sublessor. 9. No Breach of Main Lease. Subtenant shall not do or permit to be done any act or thing which may constitute a breach or violation of any term, covenant or condition of the Main Lease. 10. No Privity of Estate. Nothing contained in this Sublease shall be construed to create privity of estate or privity of contract between Subtenant and Overlandlord. 11. Indemnity. Subtenant hereby does and shall indemnify, defend and hold harmless Sublessor from and against all losses, costs, damages, expenses and liabilities, including, without limitation, reasonable attorneys' fees, which Sublessor may incur or pay by reason of: (i) Subtenant's use, occupancy or management of the Premises; (ii) any accidents, damages or injuries to persons or property occurring in, on or about the Premises; (iii) any breach or default hereunder on Subtenants part; (iv) any work done by or on behalf of Subtenant in or to the Premises, (v) the breach or inaccuracy of any representation or warranty made by Subtenant hereunder, or (vi) any act, omission or negligence occurring in, on or about the Premises on the part of Subtenant and/or its officers, employees, agents, customers, invitees or any person claiming through or under Subtenant. 5 12. Rent. (a) Subtenant shall pay to Sublessor base rent (the "Base Rent") as follows:
Period Monthly Rent Per Square Foot Monthly Rent Annual Rent ------- ---------------------------- ------------ ------------- July 1, 1998 - June 30, 1999 $2.85 $148,727.25 $l,784,727.00 July 1, 1999 - June 30, 2000 $2.96 $154,467.60 $1,853,611.20 July 1, 2000 - June 30, 2001 $3.08 $160,729.80 $1,928,757.60 July 1, 2001 - June 30, 2002 $3.20 $166,992.00 $2,003,904.00 July 1, 2002 - June 30, 2003 $3.33 $173,776.05 $2,085,312.60
(b) Subtenant shall pay the Monthly Base Rent to Sublessor in advance of the first day of each month during the Term at the offices of Sublessor identified at the beginning of this Sublease or elsewhere as Sublessor shall direct. Subtenant shall pay to Sublessor the first installment of Monthly Base Rent upon Subtenant's execution of this Sublease. In addition to the Monthly Base Rent, Subtenant shall also be responsible for and pay the applicable material or service provider (including as the ease may be, Sublessor Or Overlandlord) directly for any and all other amounts payable with respect to providing: (i) gas, heat, air conditioning, electricity, telephone, water, sewer, security services and janitorial services to the Premises; and (ii) Subtenant's Proportionate Share (as defined in the following sentence) of all costs with respect to the Building's common area and systems, and the Building structure, including without limitation costs of maintenance, repair and replacement of the Building structure common area and systems, costs of utilities and security for the common areas and a property management fee to the property manager selected by Sublessor or Overlandlord; and (iii) Subtenant's Proportionate Share of any other operating expenses to be paid by Sublessor under the Main Lease, including without limitation, the Impositions and insurance costs. Subtenant's Proportionate Share shall be Sixty-Five and one-half percent (65.5%). All of the foregoing amounts shall be hereinafter collectively referred to as the "Additional Charges". (c) "Rent" (which term shall include the Base Rent and my Additional Charges) shall be paid promptly when due, without notice or demand therefor and without deduction, abatement, counterclaim or setoff of any amount for any reason whatsoever. Base Rent and Additional Charges shall be paid to Sublessor by good unendorsed check of Subtenant at the address of Sublessor set forth at the beginning of this Sublease or to such other person and/or at such other address as Sublessor may from time to time designate by notice to Subtenant. No payment by Subtenant or receipt by Sublessor of any lesser amount than the amount stipulated to be paid hereunder shall be deemed other than on account of the earliest stipulated Base Rent or Additional Charges due under this Sublease; nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction, and Sublessor may accept any check or payment without prejudice to Sublessor's right to recover the balance due or to pursue any other remedy available to Sublessor. 6 (d) Upon the execution of (i) this Sublease by both Sublessor and Subtenant and (ii) consent to this Sublease by Overlandlord as provided herein, Subtenant shall be authorized to take possession of the Premises seven (7) days prior to the Commencement Date for the limited purpose of installing its equipment. Subtenant hereby agrees that if Subtenant takes possession of the Premises prior to the Commencement Date, then from and after the date Subtenant takes possession of the Premises (the "Possession Date"), all of Subtenant's obligations and duties under this Sublease shall be effective. Notwithstanding anything in this Sublease to the contrary, with the exception of the Allowance, Subtenant shall pay all charges incurred by Subtenant (including but not limited to fees, if any, charged by Overlandlord) in connection with Subtenant's relocation to the Premises, the installation of all equipment and utility services for the Premises which axe required by Subtenant, including, but not limited to, telephones, computers, and additional electric service. 13. Condition of Premises. Sublessor shall deliver the Premises to Subtenant on the Commencement Date in "as is/where is" condition. Sublessor shall have no obligations under this Sublease or otherwise to perform any work, alterations, installations or to remove any asbestos or asbestos containing material (collectively, "ACM"), if any, from the Premises or elsewhere. Sublessor makes no representations or warranties whatsoever with respect to the presence of ACM in the Premises. In making and executing this Sublease, Subtenant has relied solely on such investigations, examinations and inspections as Subtenant has chosen to make. Subtenant acknowledges that Sublessor has afforded Subtenant the opportunity for full and complete investigations, examinations, and inspections of the Premises. 14. Consents and Approvals. In any instance when Sublessor's consent or approval is required under this Sublease, Sublessor's refusal to consent to or approve any matter or thing shall be deemed reasonable and in good faith if such consent or approval has not been obtained from Overlandlord; provided however, Sublessor covenants to use reasonable efforts, at the sole cost and expense of Subtenant (including, without limitation, reasonable attorneys' fees and expenses), to obtain the consent or approval of Overlandlord and will indicate to Overlandlord in those cases where its approval is conditioned upon Overlandlord's approval that it has no objection thereto and agrees that if such consent of Overlandlord shall not be required, Sublessor shall not unreasonably withhold or delay its consent to such matter. In the event that Subtenant shall seek the approval by or consent of Sublessor and Sublessor shall fail or refuse to give such consent or approval, Subtenant shall not be entitled to any damages from Sublessor for any withholding or delay of such approval or consent by Sublessor. 15. Notice. All notices, consents, approvals, demands and requests which are required or desired to be given by either party to the other hereunder shall be in writing and shall be personally delivered, sent by telefax or by reputable overnight courier delivery service or sent by United States registered or certified mail and deposited in a United States post office, return receipt requested and postage prepaid. Notices, consents, approvals, demands and requests which are served upon Sublessor or Subtenant in the manner provided herein shall be deemed to have been given or served for all purposes hereunder on the day personally delivered or refused, the next business day after sending by overnight courier as aforesaid, on the third business day after mailing as aforesaid, or, if via telefax, on the date of transmission. All notices, consents, approvals, demands, and requests given to Sublessor or Subtenant shall be addressed to the address set forth at the beginning of this Sublease with notices to Sublessor being addressed to the attention of Vice President - Real Estate with a copy at the same time and in the same manner to Property Administration, First Data Card Services Group, 11204 Chicago Circle, Omaha, NE 68154, Attention: Eileen Murdoch. Either party may from time to time change the names and/or 7 addresses to which notices, consents, approvals, demands and request shall be addressed by a notice given in accordance with the provisions of this Paragraph. 16. Termination of Main Lease. If for any reason the term of the Main Lease shall terminate prior to the Expiration Date, this Sublease shall thereupon be terminated and Sublessor shall not be liable to Subtenant by reason thereof unless both (a) Subtenant shall not then be in default hereunder, and (b) said termination shall have been effected because of the breach or default of Sublessor as tenant under the Main Lease. 17. Maintenance and Repairs. Subtenant shall, at Subtenant's sole cost and expense, keep and maintain the Premises in good condition and repair, including without limitation, all necessary maintenance and repairs to all portions of the Premises and all exterior entrances, all glass, window casements, show window moldings, all partitions, doors, doorjambs, door closers and hardware fixtures exclusive of normal maintenance services. All damage or injury to the Building and/or common areas in which the same are located, caused by the negligence of Subtenant, its employees, agents or visitors, shall be repaired by Subtenant at Subtenant's sole cost and expense. Subtenant shall promptly replace any portion of the Premises which cannot be fully repaired, regardless of whether the benefit of such replacement extends, beyond the Term. It is the intention of Sublessor and Subtenant that, at all times during the Term, Subtenant shall, at its cost, maintain the Premises in compliance with all applicable laws and in the same condition as existed upon the Commencement Date of the Sublease, reasonable wear and tear excepted. Notwithstanding the foregoing, Sublessor hereby agrees to perform the repair obligations for the Building as described in Section 7(A) of the Main Lease and Subtenant agrees to reimburse Sublessor for its Proportionate Share of such repair costs after the opportunity to review Sublessor's receipts for such repair costs. The cost of any repair which is capital in nature shall be amortized on a straight line basis over its useful life ("Useful Life") at an interest rate not to exceed ten percent (10%) and Subtenant shall reimburse Sublessor the amount equal to Subtenant's Proportionate Share of the annualized amortization during the Term of this Sublease. The Useful Life of a capital item shall be determined using the United States Internal Revenue Service standard depreciation schedule in effect on the date that the applicable capital expenditure is made. Subtenant shall also reimburse Subtenant's Proportionate Share of the annualized amortization of any improvement or replacement which is capital in nature, provided that the item is intended to result in a cast savings, then only to the extent of saving actually realized. Subtenant shall not be required to reimburse Sublessor for any changes, alterations or improvements to any portion of the Building first required by any law or regulation prior to the Term Commencement Date, to the extent not attributable to Subtenant's use and occupancy of the Premises. 18. Assignment and Subletting. Subtenant shall not, by operation of law, merger, consolidation or otherwise, assign, sell, mortgage, pledge or in any manner transfer this Sublease or any interest therein, or sublet the Premises or any part or parts thereof, or grant any concession or license or otherwise permit occupancy of all or any part of the Premises by any person, except with the prior written consent of Sublessor. Sublessor shall not unreasonably withhold its consent to an assignment of this Sublease by Subtenant (which assignment may nevertheless require the consent of Overlandlord), provided that the assignee proposed by Subtenant shall demonstrate to the reasonable satisfaction of Sublessor that such proposed assignee has a net worth and financial capacity equal to or greater than the net worth and financial capacity of Subtenant. Neither the consent of Sublessor to an assignment, subletting, concession or license, nor the references in this Sublease to assignees, subtenants, concessionaires or licensees, shall in any way be construed to relieve Subtenant of the requirement of obtaining the consent of 8 Sublessor to any further assignment, subletting, concession or license for all or any part of the Premises. In the event Sublessor consents to any assignment of this Sublease, the assignee shall execute and deliver to Sublessor an agreement in form and substance satisfactory to Sublessor whereby the assignee shall assume all of Subtenant's obligations under this Sublease from and after the date of the assignment. Notwithstanding any assignment or subletting, including, without limitation, any assignment or subletting permitted or consented to, the original Subtenant named herein and any other person(s) who at any time was or were Subtenant shall remain fully liable on this Sublease, and if this Sublease shall be amended, modified, extended or renewed, the original Subtenant named herein and any other person(s) who at any time was or were Subtenant shall remain fully liable on this Sublease as so amended, modified, extended or renewed. Any violation of any provision of this Sublease by any assignee, subtenant or other occupant shall be deemed a violation by the original Subtenant named herein, the then Subtenant and any other person(s) who at any time was or were Subtenant, it being the intention and meaning that the original Subtenant named herein, the then Subtenant and any other person(s) who at any time was or were Subtenant shall all be liable to Sublessor for any and all acts or omissions of any and all assignees, subtenants and other occupants of the Premises claiming by, through or under Subtenant. If this Sublease shall be assigned or if the Premises or any part thereof shall be sublet or occupied by any person or persons other than the original Subtenant named herein, Sublessor may collect rent from any such assignee and/or any subtenants or occupants, and apply the net amounts collected to the Base Rent and Additional Charges, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of this Paragraph, or the acceptance of the assignee, subtenant or occupant as Subtenant, or a release of any person from the further performance by such person of the obligations of Subtenant under this Sublease. 19. Insurance. Subtenant shall provide and maintain throughout the term of this Sublease a policy or policies of comprehensive public liability insurance in standard form naming Sublessor and Overlandlord as additional insurance and otherwise complying with Section 17 of the Main Lease with limits of not less than $2,000,000.00 combined single limit for both bodily injury or death and for property damage, including water damage. A policy, binder or other reasonable satisfactory evidence of such insurance shall be delivered to Sublessor by Subtenant no less than ten (10) days before the Possession Date. Subtenant shall procure and pay for renewals or replacements of such insurance from time to time before the expiration thereof, and Subtenant shall deliver to Sublessor such renewal or replacement policy or binder or other reasonably satisfactory evidence of such insurance at least 30 days before the expiration of any existing policy. All such policies shall be issued by companies licensed to do business in the State of California and shall contain a provision whereby the same cannot be cancelled or modified unless Sublessor is given at least 30 days' prior written notice by certified or registered mail of such cancellation or modification. 20. Right to Cure Subtenant's Defaults and Damages. If Subtenant shall at any time fail to make any payment or perform any other obligation of Subtenant hereunder within the applicable cure period, if any, then Sublessor shall have the right, but not the obligation, after five days' notice to Subtenant, or without notice to Subtenant in the case of any emergency, and without waiving or releasing Subtenant from any obligations of Subtenant hereunder, to make such payment or perform such other obligation of Subtenant in such manner and to such extent as Sublessor shall deem necessary, and in exercising any such right, to pay any incidental costs and expenses, employ attorneys, and incur and pay reasonable attorneys' fees. Subtenant shall pay to Sublessor upon demand all sums so paid by Sublessor and all incidental costs and expenses of Sublessor in connection therewith, together with interest thereon at the rate of 2% per calendar month or any part thereof or the then maximum rate of interest which may lawfully 9 be collected from Subtenant, whichever shall be less, from the date of the making of such expenditures. 21. Remedies of Sublessor. (a) "Default" shall mean a default by Subtenant under any provision of this Sublease which default has not been cured within any applicable grace or cure period. (b) If a Default occurs, Sublessor shall have, in addition to all its rights and remedies contained in the Incorporated Provisions pursuant to Section 4 hereof, the following rights and remedies; all of Sublessor's rights and remedies under this Sublease are distinct, separate and cumulative, and none will exclude any other right or remedy allowed by law: (i) Sublessor may, with or without notice of such election and with or without entry or other action by Sublessor, immediately terminate this Sublease, in Which event the Term of this Sublease shall end and all right, rifle, and interest of Subtenant hereunder shall expire; or (ii) Sublessor may enforce the provisions of this Sublease and may enforce and protect the rights of the Sublessor hereunder by a suit or suits in equity or at law for the specific performance of any covenant or agreement herein or for the enforcement of any other appropriate legal or equitable remedy, including the recovery of all moneys due or to become due under any of the provisions of this Sublease. (c) If Sublessor elects to terminate Subtenants right to possession only without terminating this Sublease, Sublessor, at Sublessor's option, may enter into the Premises, remove Subtenant's signs and other evidences of tenancy, and take and hold possession thereof without such entry and possession terminating this Sublease or releasing Subtenant, in whole or in part, from Subtenant's obligation to pay Rent under this Sublease for the full Term, and in the case Sublessor elects to terminate the Sublease or to terminate possession only, Subtenant will immediately pay to Sublessor, if Sublessor so elects, a sum equal to the then present value (as defined in the following sentence) of the entire amount of the Rent specified in Section 9 of this Sublease for the remainder of the Term, plus any other sums then due under this Sublease, less the fair rental value of the Premises for such period. In calculating this sum, present value shall be computed on the basis of a discount rate of six percent per annum. In the alternative, upon and after entry into possession without termination of the Sublease, Sublessor will use its best efforts to relet all or any part of the Premises for Subtenant's account for such rent and for such time and upon such terms as Sublessor in Sublessor's sole discretion may determine. Sublessor will not be required to observe any instruction given by Subtenant about such reletting. Subtenant will, upon demand, pay the cost of Sublessor's expenses of the reletting. If the consideration collected by Sublessor upon any such reletting for Subtenant's account is not sufficient to pay monthly the full amount of the Rent due under this Sublease, together with the costs of Sublessor's expenses, Subtenant will pay to Sublessor the amount of each monthly deficiency upon demand. (d) Subtenant will pay upon demand all of Sublessor's costs, charges, and expenses, including reasonable attorneys' fees, and fees and expenses of agents and 10 others retained by sublessor in any litigation, negotiation or transaction in which Sublessor seeks to enforce the terms or provisions of this sublease. 22. Brokerage. Sublessor and Subtenant each represents to the other that except for the Staubach Company ("Sublessor's Broker") and Colliers Parrish International, Inc ("Subtenant's Broker")(collectively, the "Sublease Brokers"), no broker or other person had any part, or was instrumental in any way, in bringing about this Sublease. Sublessor agrees to pay the Sublessor's Broker for services rendered in connection with this Sublease pursuant to the Agreement (the "Broker Agreement") between Sublessor and the Sublessor's Broker. By its execution hereof Sublessor's Broker agrees to pay Subtenant's Broker one-half of Sublessor's Broker's commission. Sublessor and Subtenant each agree to indemnify, defend and hold harmless the other from and against, any claims made by any broker or any person, other than the Sublease Brokers, for a brokerage commission, finder's fee, or similar compensation, by reason of or in connection with this Sublease, and any loss, liability, damage, cost and expense (including, without limitation, reasonable attorneys' fees) in connection with such claims if such broker or other person had, or claimed to have, dealings with such party in bringing about this Sublease. The provisions of this Paragraph 22 shall survive the expiration or termination of this Sublease. 23. Waiver of Jury Trial and Right to Counterclaim. Subtenant hereby waives all right to trial by jury in any summary or other action, proceeding or counterclaim arising out of or in any way connected with this Sublease. With the exception of any compulsory counterclaims, Subtenant also hereby waives all right to assert or interpose a counterclaim in any summary proceeding or other action or proceeding to recover or obtain possession of the Premises unless legally required to do so to preserve the claim. 24. No Waiver. The failure of Sublessor to insist in any one or more cases upon the strict performance or observance of any obligation of Subtenant hereunder or to exercise any right or option contained herein shall not be construed as a waiver or relinquishment for the future of any such obligation of Subtenant or any right or option of Sublessor. Sublessor's receipt and acceptance of Base Rent or Additional Charges, or Sublessor's acceptance of performance of any other obligation by Subtenant, with knowledge of Subtenant's breach of any provision of this Sublease, shall not be deemed a waiver of such breach. No waiver by Sublessor of any term, covenant or condition of this Sublease shall be deemed to have been made unless expressed in writing and signed by Sublessor. 25. Complete Agreement. There are no representations, agreements, arrangements or understandings, oral or written, between the parties relating to the subject matter of this Sublease which are not fully expressed in this Sublease. This Sublease cannot be changed or terminated orally or in any other manner other than by a written agreement executed by both parties. 26. Successors and Assigns. The provisions of this Sublease, except as herein otherwise specifically provided, shall extend to, bind and inure to the benefit of the parties hereto and their respective personal representatives, heirs, successors and permitted assigns. In the event of any assignment or transfer of the leasehold estate under the Main Lease, the transferor or assignor, as the case may be, shall be and hereby is entirely relieved and freed of all obligations under this Sublease arising after the date of any such assignment or transfer, except that Sublessor shall not be relieved and freed of its payment obligations to Overlandlord under the Main Lease which payment obligations are greater than the payment obligations of Subtenant to Sublessor hereunder unless Overlandlord and Sublessor otherwise agree. 11 27. Interpretation. Irrespective of the place of execution or performance, this Sublease shall be governed by and construed in accordance with the laws of the state where the Premises is located. If any provision of this Sublease or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Sublease and the application of that provision to other persons or circumstances shall not be affected but rather shall be enforced to the extent permitted by law. The table of contents, captions, headings and titles, if any, in this Sublease are solely for convenience of reference and shall not affect its interpretation. This Sublease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Sublease to be drafted. Each covenant, agreement, obligation or other provision of this Sublease shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making same, not dependent on any other provision of this Sublease unless otherwise expressly provided. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the parties may require. The word "person" as used in this Sublease shall mean a natural person or persons, a partnership, a corporation or any other form of business or legal association or. entity. This Sublease may be executed in counterparts or with counterpart signature pages. 28. Consent of Landlord Under Main Lease. This Sublease shall not be operative or effective for any purpose whatsoever unless and until Overlandlord shall have given its written consent as provided hereto and any conditions precedent with respect to such consent have been satisfied or waived. Sublessor shall have no obligation to satisfy any such conditions precedent provided, however, that Subtenant may, but shall not be obligated to, satisfy any such conditions precedent and Sublessor shall reasonably cooperate with Subtenant (at no cost or expense to Sublessor) in this regard. 29. Holding Over. Subtenant shall pay Sublessor a sum for each day that Subtenant retains possession of the Premises or any part thereof after termination of this Sublease, by lapse of time or otherwise, equal to two (2) times the Rent payable hereunder, and Subtenant shall also pay damages consequential as well as direct, sustained by Sublessor by reason of such retention. Nothing in this Section contained, however, shall be construed or operate as a waiver of Sublessor's right of reentry or any other right of Sublessor under this Sublease or of Overlandlord under the Main Lease. 30. Security Deposit. Subtenant agrees to deposit with Sublessor, upon the execution of this Sublease, $297,454.50 in cash (the "Cash Security Deposit" and $594,909.00 in the form of an irrevocable letter of credit issued by a bank acceptable to Sublessor in form and substance satisfactory to Sublessor (the "Letter of Credit") (the "Cash Security Deposit" and the "Letter of Credit" are sometimes hereinafter collectively referred to as the "Security Deposit"), which Security Deposit is security for the full and faithful performance by Subtenant of every term, provision, covenant, and condition of this Sublease. The Cash Security Deposit will be held by Sublessor, provided however, that Sublessor will have no obligation to segregate the amount from Sublessor's other funds. Upon the occurrence of a Default by Subtenant in respect to any of the terms, provisions, covenants, or conditions of this Sublease, including, but not limited to, payment of Rent, Sublessor may use, apply, or retain the whole or any part of the Cash Security Deposit so deposited for the payment of any such Rent in default, or for any other sum which Sublessor may expend or be required to expend by reason of Subtenant's Default, including without limitation, any damage or deficiency in the reletting of the Premises, whether such damage or deficiency accrued before or after any reentry by Sublessor. If any of the Cash Security Deposit is so used, Subtenant, on written demand by Sublessor, will promptly pay to Sublessor such additional sum as may be necessary to restore the deposit to the original amount 12 set forth in this Section. In addition, upon the occurrence of a default by Subtenant in respect to any of the terms, provisions, covenants or conditions of this Sublease, including, but not limited to, payment of Rent, Sublessor may also draw on the Letter of Credit and apply such amount to the payment of any sum in default or any other sum which Sublessor may require or deem necessary to spend or incur by reason of Subtenant's default. In such event, Subtenant shall, upon demand, increase the Letter of Credit by the amount so applied to replenish the Letter of Credit. Notwithstanding the foregoing, in the event of a nonmonetary Default by Subtenant, Sublessor shall give Subtenant 48 hours advance written notice prior to using any portion of the Security Deposit. The Letter of Credit shall be payable to Sublessor or its successors and assigns and have an expiration date no earlier than the one-year anniversary of the Commencement Date and be automatically renewable for consecutive one year periods through and including the Expiration Date. If not renewed at least thirty (30) days prior to the end of each such one-year period, Sublessor shall be permitted to draw the full amount of the Letter of Credit. The Letter of Credit shall expressly provide, among other things, that Sublessor may draw under it by presentation of a sight draft and a written certification by Sublessor that Sublessor is then entitled to draw the amount of the draft. Sublessor's right to draw upon the Cash Security Deposit and/or the Letter of Credit shall be cumulative, and Sublessor shall be entitled to draw upon either or both, and shall not be required to deplete either portion of the Security Deposit before proceeding to draw on the other portion of the Security Deposit. Provided Subtenant is not in material default of this Sublease, the principal sum of the Letter of Credit shall be reduced by fifty (50%) on the first day of the thirteenth (13th ) month of the Sublease Term. If Subtenant fully and faithfully complies with all of the terms, provisions covenants, and conditions of this Sublease, the Cash Security Deposit, or any balance thereof will be returned to Subtenant after the last to occur of the following: (a) the time fixed as the expiration of the Term of this Sublease; (b) the surrender of the Premises by Subtenant to Sublessor in accordance with this Sublease; (c) the receipt of Sublessor of all sums due pursuant to the Sublease. Except as otherwise required by law, Subtenant will not be entitled to any interest on such Cash Security Deposit. 31. Counterparts. This Sublease may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute but one and the same instrument. 32. No Offer. The submission of this Sublease shall not be deemed to be an offer, an acceptance, or a reservation of the Premises; and Sublessor shall not be bound hereby until Sublessor has delivered to Subtenant a fully executed copy of this Sublease, signed by both of the parties on the last page of this Sublease in the spaces herein provided. Until such delivery, Sublessor reserves the right to exhibit and lease the Premises to other prospective tenants. 33. Hazardous Materials. Subtenant shall comply with any and all EnvLaws. Subtenant shall not (a) cause, permit or allow the presence of any Hazardous Substance on the Premises, or (b) conduct or authorize the use, generation, release, transportation, storage, treatment or disposal of Hazardous Substances at the Premises. 34. Signage. Subject to the prior consent of Sublessor and Overlandlord and provided all such signage complies with all applicable governmental laws, ordinances, rules or 13 regulations, does not cause any structural damage or other damage to the Building, does not violate any existing restrictions affecting the Building, and is compatible with the architecture of the Building and the landscaped are adjacent thereto, Subtenant shall have the right to install, as Subtenant's sole cost and expense: (a) door signage at the entrance to the Premises; and (b) a monument sign and directional signage. Subtenant shall remove all signage from the Premises at the end of the Term. 35. Parking. Subtenant shall have the non-exclusive right to the parking spaces allocated to the Premises at a ratio of approximately 4 parking space to 1,000 rentable square feet of Premises at no additional charge. Subtenant, its agents, employees, invitees and contractors shall comply with Building rules and regulations applicable to use of the parking areas. 37. Rules and Regulations; Common Areas. Subtenant shall comply with all reasonable rules and regulations and all subsequent amendments and modifications established by Sublessor or Overlandlord with respect to the Building and common areas thereof; and shall cause its employees, customers, contractors, agents and invitees to so comply. Without liability to Subtenant and without effecting an eviction or disturbance of Subtenant's use or possession or giving rise to any claim for set-offs or abatement of Rent, and without imposing any obligation on Sublessor or Overlandlord to undertake any of the same, Sublessor (or Overlandlord, as the case may be) shall have the right to: (a) make changes, repairs, additions or alterations to the common areas of the Building, including without limitation changes in the location, size, shape-and number of driveways, entrances, parking areas, loading areas, ingress/egress, direction of traffic, landscaped areas and walkways and changes in the arrangement or location of entrances or passageways, doors and doorways, corridors, stairs, toilets or other public parts of the Building; (b) close any of the common areas for maintenance purposes, including entrances, doors, corridors or other facilities; (c) perform any acts related to the safety, protection, preservation, reletting or improvement of the Building; (d) change the name or street address of the Building or suite number of the Premises; (e) to require all persons entering or leaving the Building to identify themselves to security personnel by registration or otherwise; and (f) to close the Building after-hours and on week-ends. 14 IN WITNESS WHEREOF, Sublessor and Subtenant have executed this Sublease as of the day and year first above written. SUBLESSOR: FIRST DATA MERCHANT SERVICES CORPORATION, a Florida corporation By: /s/ David Schlapbach --------------------------------------- Name: David Schlapbach ------------------------------------- Title: Assistant Secretary ------------------------------------ SUBTENANT: SOFTWARE.NET CORPORATION, a California corporation By: /s/ Michael J. Praisner --------------------------------------- Name: Michael J. Praisner ------------------------------------- Title: CFO ----------------------------------- The undersigned Sublease Brokers join in this Lease for purposes of agreeing to be bound by the provisions of Paragraph 22 hereof. THE STABAUCH COMPANY COLLIER'S PARISH INTERNATIONAL, INC. By: /s/ Anthony Lautmann By: /s/ Robert Shepherd --------------------------------- --------------------------------- Name: Anthony Lautmann Name: Robert Shepherd ------------------------------- ------------------------------- Title: President, NW Corp Svcs Title: Senior Vice President ------------------------------ ------------------------------ 15 ACKNOWLEDGED AND CONSENTED TO: Sunnyvale Partners Limited Partnership, landlord under the Main Lease, hereby consents to the sublease of the Premises described in the foregoing Sublease and confirms that the consent given hereby satisfies the requirements for landlord's consent of the subletting of the Premises set forth in the Main Lease. SUNNYVALE PARTNERS LIMITED PARTNERSHIP By: /s/ James G. Martell ----------------------------------- Name: James G. Martell --------------------------------- Title: President Ridge Sunnyvale Inc. -------------------------------- President 16 EXHIBIT A THE MAIN LEASE -------------- 17 EX-23.02 5 CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated December 10, 1999, relating to the consolidated financial statements of Interwoven, Inc., which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial Data" in such Registration Statement. /s/ PricewaterhouseCoopers LLP San Jose, California January 10, 2000 -----END PRIVACY-ENHANCED MESSAGE-----