-----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, JgWTSk2CX7+yKL6295pQcfkqBu2JbqCdEZr5CzcqgpCsaRUuqY5Lc26/juT/SwUp JFYigFIPHy1wgExv847ZaA== 0001072993-99-000081.txt : 19990406 0001072993-99-000081.hdr.sgml : 19990406 ACCESSION NUMBER: 0001072993-99-000081 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990405 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPS COM INC CENTRAL INDEX KEY: 0001080232 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-72901 FILM NUMBER: 99586996 BUSINESS ADDRESS: STREET 1: 9888 CARROLL CENTRE ROAD STREET 2: SUITE 100 CITY: SAN DIEGO STATE: CA ZIP: 92126 BUSINESS PHONE: 6195783000 MAIL ADDRESS: STREET 1: 9888 CARROLL CENTRE ROAD STREET 2: SUITE 100 CITY: SAN DIEGO STATE: CA ZIP: 92126 S-1/A 1 AMENDMENT NO. 1 As filed with the Securities and Exchange Commission on April 2, 1999 Registration No. 333-72901 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- Amendment No. 1 To FORM S-1 REGISTRATION STATEMENT Under the Securities Act of 1933 ---------------- COMPS.COM, INC. (Exact Name of Registrant as Specified in its Charter)
Delaware 7375 33-0645337 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
---------------- 9888 Carroll Centre Road, Suite 100 San Diego, California 92126-4581 (619) 578-3000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ---------------- Mr. Christopher A. Crane President and Chief Executive Officer COMPS.COM, INC. 9888 Carroll Centre Road, Suite 100 San Diego, California 92126-4581 (619) 578-3000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ---------------- Copies to: Craig S. Andrews, Esq. Lawrence D. Levin, Esq. Faye H. Russell, Esq. Katten Muchin & Zavis Brobeck, Phleger & Harrison LLP 525 West Monroe Street, Suite 1600 550 West C Street, Suite 1300 Chicago, Illinois 60661 San Diego, California 92101 (312) 902-5200 (619) 234-1966
---------------- 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, 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, check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed Title of Each Class of Maximum Proposed Maximum Amount of Securities to be Amount to be Offering Price Aggregate Registration Registered Registered(1) Per Share(2) Offering Price(2) Fee - -------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share........ 4,370,000 $13.00 $56,810,000 $13,900(3) $ 1,894(4)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Includes 570,000 shares of common stock that the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated pursuant to Rule 457 solely for the purpose of calculating the amount of the registration fee. (3) Previously paid in connection with the February 24, 1999 filing of this S-1 registration statement. (4) Paid in connection with this filing of Amendment No. 1 to the Form S-1 registration statement. ---------------- 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, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this preliminary prospectus is not complete and may + +change. We and the selling stockholders may not sell these securities until + +the registration statement filed with the SEC is effective. This preliminary + +prospectus is not an offer to sell these securities, and it is not soliciting + +an offer to buy these securities in any state where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED APRIL 2, 1999 3,800,000 Shares [LOGO] Common Stock ------------ COMPS.COM, INC. is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $11.00 and $13.00 per share. ------------ We intend to list our common stock on the Nasdaq National Market under the symbol "CDOT." ------------ Please see "Risk Factors" beginning on page 7 to read about certain risks that you should consider before buying shares of our common stock. ------------ PRICE $ PER SHARE ------------
Per Share Total --------- ----------- Public offering price.................................... $ $ Underwriting discounts and commissions................... $ $ Proceeds, before expenses, to COMPS.COM.................. $ $
The Securities and Exchange Commission and state securities commissions have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters have an option to purchase 570,000 additional shares from us and the selling stockholders to cover over-allotments of shares. We will not receive any of the proceeds from the sale of shares by the selling stockholders. ------------ Volpe Brown Whelan & Company EVEREN Securities, Inc. Needham & Company, Inc , 1999 Front Cover: [The front cover will have a dark background and the text will be printed in white. [LOGO] Inside Front Cover: COMPREHENSIVE CONTENT VIA THE INTERNET [The following text is placed in varying fonts and font sizes throughout the recurring database wheel: buyers & sellers, phone numbers, square footage, contact name, capitalization rates, comments on condition, confirmed sales price, financing information, income and expense, unit mix, color photos, lenders, capitalization rates and contact name. Three screen shots of different pages from our Web site showing some of our products are placed on parts of the database wheel. Text in a box describes our database by stating: Contained in COMPS.COM's Commercial Transaction database: . $508 billion in sales transactions .$143 billion in loan volume .5.9 billion square feet of building space .105 billion in square feet of land .2.6 million apartment units .829,000 buyer and seller records .7 major property types. [LOGO]] Inside Spread: BUSINESS TO BUSINESS E-COMMERCE [A two page spread of a city skyline. Our market segments are listed in a bar down the left side of the screen under the heading "our customers." Each market segment is underlined. In the main frame of the screen is (1) a picture of a hand with a mouse, (2) the database wheel laid on top of a group of commercial real estate buildings, (3) above the city skyline the following text appears: COMPS.COM, conveniently accessed via the Internet, allows commercial real estate professionals to respond quickly to client driven needs and (4) the following text appears in uppercase letters on the database wheel: buyer, brokers, lenders, insurers and transaction facilitation via the internet.] 2 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. Table of Contents
Page ---- Prospectus Summary....................................................... 4 Risk Factors............................................................. 8 Forward-looking statements............................................... 16 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 29
Page ---- Management................................................................. 40 Certain Relationships and Related Transactions............................. 52 Principal and Selling Stockholders......................................... 54 Description of Securities.................................................. 55 Shares Eligible For Future Sale............................................ 59 Underwriting............................................................... 61 Legal Matters.............................................................. 63 Experts.................................................................... 63 Where You Can Find More Information........................................ 63 Index to Financial Statements.............................................. F-1
--------------- Until , 1999, all dealers selling shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 3 Prospectus Summary This summary highlights some of the information in this prospectus. It may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements. About COMPS Our Business We are a leading national provider of comprehensive commercial real estate sales information both offline and on the Internet. We have also recently begun using our extensive database to facilitate commercial real estate transactions on the Internet for a fixed fee by matching buyers to brokers' property listings. Over the last 17 years, we have developed a highly evolved data collection and confirmation system to provide information on commercial real estate properties. This information is verified by our researchers and includes sale prices, income and expenses, capitalization rates, loan data, property photographs and buyers, sellers, brokers, and other key details. We believe we have established the foundation to be the trusted online resource linking commercial real estate brokers, lenders, appraisers, insurers and other professionals by efficiently distributing market information on the Internet. Our Market The Internet has rapidly become a significant global medium for communications, information and commerce. It has emerged as a primary business channel alongside the telephone, paper-based communication and face-to-face interaction. The Internet allows online providers to efficiently distribute information with the potential for less infrastructure and overhead and greater economies of scale. It also offers customers diverse options and unparalleled convenience. The commercial real estate market is large and fragmented. Prior to the availability of comprehensive sales information from a centralized source, commercial real estate professionals either maintained their own research departments to catalog comparable sales, market statistics and other property- specific information, or aggregated such information, to the limited extent available, from multiple third parties. These methods resulted in high internal costs and nonstandard data with varying degrees of comprehensiveness and accuracy. In addition, there are currently no comprehensive, standardized transaction support services that efficiently identify properties and bring together brokers, buyers, lenders and insurers in commercial real estate transactions. Our Solution The vast information sharing and communications power of the Internet creates an opportunity to improve upon the inefficiencies in conducting commercial real estate transactions. We provide comprehensive and reliable information services, and transaction support products that save industry professionals both time and money. We generate revenue from our information services by licensing on a subscription or per use basis, and from our transaction support products on a fixed fee basis. Our expenses are primarily incurred as a result of building our database and developing and implementing new Internet-related products. To date, we have: . developed a comprehensive and standardized proprietary database of approximately 400,000 commercial real estate transactions; . migrated our database to the Internet, allowing our customers to receive updated commercial real estate transaction information more frequently and analyze the data more quickly and easily; . established an Internet-based matching service, allowing us to identify and refer potential buyers of properties for sale to brokers and electronically market these properties for brokers using our Internet-based contact system; and 4 . introduced an Internet-based commercial real estate listing service, enabling brokers to advertise their properties on the Internet and increase a property's exposure to prospective buyers and their brokers. Our Business Strategy Our objective is to be the trusted online resource linking commercial real estate professionals by efficiently distributing market information on the Internet. Our business strategy to achieve this objective includes the following key elements: . continue to enhance our comprehensive historical database of commercial real estate transactions; . expand our online listing-broker/buyer matching service; . create a comprehensive online national listing service for commercial real estate to compliment our database of sold properties; . enhance our services and products to facilitate the online exchange of commercial real estate market information; . expand into new geographic markets; and . continue to build our brand name. Corporate Information COMPS Incorporated was incorporated in California in January 1982. It was purchased by Business Real Estate Information Corp. in 1992 and reincorporated in Delaware in 1994 as COMPS InfoSystems, Inc. In January 1999, we changed our name to COMPS.COM, INC. Our principal executive offices are located at 9888 Carroll Centre Road, Suite 100, San Diego, California 92126. Our telephone number at that location is (619) 578-3000. Our Web site address is www.comps.com. Information contained on our Web site does not constitute part of this prospectus. The Offering Common stock offered by us.............. 3,800,000 shares Common stock outstanding after this offering............................... 11,464,181 shares Use of proceeds......................... For working capital and other general corporate purposes, including expansion of our proprietary database, enhancement and development of existing and new information services and transaction support products, geographic expansion, and repayment of debt. We may also use a portion of the proceeds for strategic alliances and acquisitions. Please see "Use of Proceeds." Proposed Nasdaq National Market symbol.. CDOT
The information on our common stock outstanding after this offering is as of December 31, 1998. In addition to the 11,464,181 shares of common stock to be outstanding after this offering, we may issue the following additional shares of common stock: . 1,749,727 shares upon the exercise of options outstanding at a weighted average exercise price of $1.17 per share; . 156,285 shares upon the exercise of warrants outstanding at a weighted average exercise price of $2.40 per share; and . 376,219 shares upon exercise of options available for issuance under our stock plans. For a description of our stock option plans, please see "Management--Benefit Plans." 5 This offering is for 3,800,000 shares; however, the underwriters have a 30- day option to purchase up to 570,000 additional shares from us and the selling stockholders to cover over-allotments. Some of the disclosures in this prospectus would be different if the underwriters exercise the option. Unless we tell you otherwise, the information in this prospectus assumes that the underwriters will not exercise the option. Unless we tell you otherwise, all information in this prospectus relating to our outstanding common stock: . reflects the automatic conversion of each share of our Class B common stock into shares of our Class A common stock and the renaming of Class A common stock as "common stock" upon the closing of this offering, . reflects the automatic conversion of each share of our preferred stock into 0.7335 shares of our common stock upon the closing of this offering; . reflects the exercise of warrants outstanding to purchase 530,537 shares at a weighted average exercise price of $0.0136 per share and . reflects a 0.7335 for 1 stock split of our common stock to be effected prior to the closing of this offering. COMPS, COMPSLink, CallCOMPS, WinCOMPS, COMPS NET, REALBID and our logo are our registered trademarks. Each other trademark, trade name or service mark appearing in this prospectus belongs to its holder. 6 Summary Financial And Operating Data (dollars in thousands, except per share and other operating data) The following table summarizes the financial data for our business. The pro forma statement of operations data gives effect to our acquisition of REALBID, LLC as if it had occurred on January 1, 1998.
Year Ended December 31, ----------------------------------------------------------- Pro Forma 1994 1995 1996 1997 1998 1998 -------- -------- -------- -------- -------- --------- Statement of Operations Data: Net revenues............ $ 6,030 $ 6,716 $ 8,141 $ 10,450 $ 12,806 $13,029 Cost of revenues........ 2,674 3,488 4,357 5,054 5,746 5,791 -------- -------- -------- -------- -------- ------- Gross profit............ 3,356 3,228 3,784 5,396 7,060 7,238 Operating expenses: Selling and marketing.. 2,306 2,072 2,813 3,408 4,182 4,182 Product development and engineering........... -- -- 376 768 1,230 1,230 General and administrative........ 1,743 2,527 2,835 2,525 2,936 3,637 -------- -------- -------- -------- -------- ------- Total operating expenses............ 4,049 4,599 6,024 6,701 8,348 9,049 -------- -------- -------- -------- -------- ------- Loss from operations.... (693) (1,371) (2,240) (1,305) (1,288) (1,811) Other income (expense), net.................... (9) 12 (67) (252) (260) (260) -------- -------- -------- -------- -------- ------- Net loss................ (702) (1,359) (2,307) (1,557) (1,548) (2,071) Dividend accretion on preferred stock........ 63 299 299 299 454 454 -------- -------- -------- -------- -------- ------- Net loss attributable to common stockholders.... $ (765) $ (1,658) $ (2,606) $ (1,856) $ (2,002) $(2,525) ======== ======== ======== ======== ======== ======= Net loss per share attributable to common stockholders, basic and diluted................ $ (0.16) $ (0.47) $ (0.74) $ (0.53) $ (0.57) $ (0.72) ======== ======== ======== ======== ======== ======= Shares used in computing net loss per share attributable to common stockholders, basic and diluted................ 4,700 3,502 3,502 3,502 3,517 3,517 ======== ======== ======== ======== ======== ======= Pro forma net loss per share, basic and diluted................ $ (0.22) $ (0.29) ======== ======= Shares used in computing pro forma net loss per share, basic and diluted................ 7,067 7,067 ======== ======= Other Operating Data: Markets covered by database.............. 16 24 24 25 34 Transactions in database.............. 245,951 270,945 302,684 341,670 387,427 Value of transactions in database (dollars in millions).......... $ 191 $ 222 $ 272 $ 355 $ 460 Value of transactions supported by REALBID (dollars in millions)............. -- -- -- $ 300 $ 3,800
At December 31, 1998 ------------------------ Actual As Adjusted ---------- ------------ Balance Sheet Data: Cash and cash equivalents............................. $ 378 $ 40,088 Working capital (deficit)............................. (4,354) 36,336 Total assets.......................................... 7,397 47,108 Deferred subscription revenue......................... 5,503 5,503 Long-term obligations, less current portion........... 1,123 23 Redeemable convertible preferred stock................ 7,009 -- Total stockholders' equity (deficit) (8,888) 39,911
- -------- Please see Note 1 to our financial statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share. The as adjusted balance sheet data listed above reflects the sale of 3,800,000 shares of common stock offered at an assumed initial public offering price of $12.00 per share after deducting the estimated underwriting discount, estimated offering expenses payable by us and the application of proceeds from this offering. Please see "Use of Proceeds" and "Capitalization" for a discussion about how we intend to use the proceeds from this offering and about our capitalization. 7 Risk Factors Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occur, our business would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. Risks Related to Our Business We may not achieve future profitability due to continued operating losses and negative cash flows. We have incurred significant net losses since our inception. As of December 31, 1998, we had an accumulated deficit of $11.4 million. We have incurred substantial costs to expand into new markets, develop new products and create, introduce and enhance our Web site. We expect operating losses and negative cash flows to continue for the foreseeable future as we continue to incur significant expenses. As a result, we will need to generate significant revenues to achieve profitability. Even if we do become profitable, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted in response to slower revenue growth, our business will be materially adversely affected. Please see "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements for detailed information related to our uncertain profitability. We have only been operating on the Internet since 1998 and cannot assure you that our Internet products will achieve market acceptance. We only recently began offering our services on the Internet. During 1998, over 90% of our revenue was a result of our information services products delivered on CD-ROM and other non-Internet media. Less than 10% of our revenues in 1998 were a result of our services and products delivered on the Internet. We intend to continue to increase our reliance on the Internet for delivery of our services and products. As a result, our future profitability will increasingly rely upon the use of our information services and transaction support products on the Internet. Our ability to obtain market acceptance for our Internet products will depend on the following factors: . our ability to transition our customers from the use of our services and products on CD-ROM to the use of these services and products on the Internet in a timely and efficient manner; . our customers' acceptance of, and their ability to adapt to the use of, our existing and future services and products on the Internet; and . our ability to anticipate and adapt to the changing Internet market. If our Internet-based information services or transaction support products are not received favorably by our current customers, it may negatively affect their use of our other products or cause new customers to choose a competitive service over ours. If we do not successfully develop new and enhanced services and products, our revenues could decrease. We will not be financially successful if we are unable to meet the increasingly sophisticated needs of our customers through timely developments and new and enhanced versions of our services and products. Our planned development and enhancement efforts have inherent risks. We may experience financial or technical difficulties that could prevent us from introducing new or enhanced information services or transaction support products. Furthermore, these new or enhanced services and products may contain problems that are discovered after the products are introduced. We may need to significantly modify the design of these products to correct problems. Our business could be materially adversely affected if we experience difficulties in introducing new 8 or enhanced services and products or if these services or products are not received favorably by our customers. Finally, development and enhancement of our services and products will require significant additional expenses and could strain our management, financial and operational resources. The lack of market acceptance of our services or products or our inability to generate satisfactory revenues from such development or enhancements to offset their costs could have a material adverse effect on our business. Fluctuations in our operating results may negatively affect our stock price. Our quarterly operating results have fluctuated significantly and are expected to continue to fluctuate in the future due to a variety of factors, many of which are outside of our control. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. In this event, the price of our common stock is likely to fall. You should not rely on our results of operations during any particular quarter as an indication of our results for a full year or any other quarter. In addition to factors discussed elsewhere in this risk factors section, other factors contributing to fluctuations include: . the demand for and acceptance of real estate information services and transaction support products on the Internet in general or on our Web site; . changes in rates paid for information services or transaction support products in the commercial real estate industry or related industries resulting from competition or other factors; . changes in customer budgets; . the amount and timing of our costs related to our product development, marketing efforts and other initiatives; . fees we may pay for distribution or content or other costs we may incur as we expand our operations or geographic coverage; . our costs related to acquisitions of businesses, technologies, services and products; . changes in the privacy laws that may hinder our ability to gather information necessary for our information services or transaction support products; or . the seasonality of our revenues. Due to all of these factors and the other risks discussed in this section, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. Because we expect to be substantially dependent on revenues from our information services and transaction support products offered on the Internet, the demand for and acceptance of which is uncertain, our quarterly revenues are difficult to forecast accurately. In addition, our operating expenses are based on our expectations of our future revenues and are relatively fixed in the short-term. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues in relation to our expenses, or if our expenses increase before our revenues do, then our business for a particular quarter would be materially adversely affected. This could affect the market price of our common stock. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for detailed information on our quarterly operating results. We may need additional capital by the end of 2000. We currently anticipate that the net proceeds of this offering, together with available funds, will be sufficient to meet our anticipated needs until at least the end of 2000. We may need to raise additional funds in 9 the future in order to: .fund more rapid expansion, .develop new or enhanced services or products, .respond to competitive pressures, .acquire complementary businesses, technologies or services or . conduct more aggressive brand promotions. Additional financing may not be available on terms favorable to us, if at all. If adequate funds are not available or not available on acceptable terms, we may be unable to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, respond to competitive pressures or successfully promote our brand name. Any such inability could have a material adverse effect on our business. If we do not expand our geographic coverage, our services and products could become less desirable. We believe our success is highly dependent on our ability to increase the geographic coverage of our database. Currently our proprietary database contains comprehensive sales comparable records in 35 of the 74 largest markets in the U.S. If we are not able to expand the geographic coverage of our database into other markets, our business could be materially adversely affected. We also plan to expand into selected international markets. We expect this geographic expansion effort to impose additional burdens on our research, sales and administrative resources. Please see "Business--Our Business Strategy" for a discussion of our geographic expansion strategy. If we cannot maintain the integrity and reliability of our proprietary database, we may not be successful. We cannot assure you that the information in our database will be comprehensive, accurate or timely, particularly as we grow. Our success is highly dependent on our customers' confidence in the comprehensiveness, accuracy and timeliness of our proprietary database of commercial real estate transactions and the software used to access our database. We expect the task of establishing and maintaining such comprehensiveness, accuracy and timeliness during the growth of our business to require substantial effort and expense. Please see "Business--Our Proprietary Database" for a discussion of how we maintain our proprietary database. Cyclical economic swings in the real estate market could decrease demand for our services and products. The real estate industry traditionally has been subject to cyclical economic swings which could materially adversely affect our business. Our business is dependent on the real estate industry and related industries that supply goods or services to, or invest in, the real estate industry. Changes in the real estate market may affect demand for our services and products. These cyclical economic swings may be caused by various factors, such as changes in interest rates and changes in economic conditions. When interest rates are high or general economic conditions are weak, there may be less sales activity in commercial real estate and on the part of mortgage brokers and lenders. These cyclical economic swings could materially adversely affect our business. Consolidation of the real estate industry could negatively impact our business. The real estate industry is undergoing a period of consolidation, motivated in part by a desire to reduce expenses. Such consolidation poses a number of risks and could materially adversely affect our business. These risks include: . a decrease in our client base; . reduction in the size of our target market; . creation of competitors with sufficiently greater bargaining power which could cause price erosion; . creation of competitors with access or rights to, or ownership of, sources that provide the data we need for our proprietary database; and . reduction in the number of sources from whom we obtain data for our proprietary database. 10 We may not be able to successfully develop our "COMPS.COM" brand name. To be successful, we must strengthen awareness of our brand name. In order to build our brand name, we must succeed in our marketing efforts, provide high- quality services and products and increase the number of visitors to our Web site. If our marketing efforts are not successful or if we cannot increase awareness of our brand name, our business would be materially adversely affected. If we are unable to continue to develop our direct sales force, it could materially adversely affect our business. In order to support our growth, we need to substantially increase the size of our direct sales force. Our ability to increase our direct sales force involves a number of risks, including: . the competition we face from other companies in hiring and retaining sales personnel; . our ability to integrate and motivate additional sales and sales support personnel; . our ability to manage a multi-location sales organization; and . the length of time it takes new sales personnel to become productive. There would be a material adverse effect on our business if we do not continue to develop and maintain an effective direct sales force. Intense competition may render our services and products uncompetitive or obsolete. The market for our Internet-related and non-Internet-related information services and transaction support products is competitive. We cannot assure you that our competitors will not develop services or products that are equal or superior to ours or that achieve greater market acceptance. We anticipate that the number of direct and indirect competitors will increase in the future and could result in price reductions, reduced margins, greater operating losses or loss of market share, any of which would materially adversely affect our business. Please see "Business--Competition" for further detail and risks regarding our competitive market. If we fail to be year 2000 compliant, it could harm our business. We have not fully completed tests to assure that our information technology systems will function properly in the year 2000. Our computer systems and software programs may need to be upgraded in order to comply with year 2000 requirements, or we risk system failure or miscalculations causing disruptions of normal business activities. We estimate expenses to achieve year 2000 readiness will be $300,000, $150,000 of which was expended prior to December 31, 1998. Until our testing is complete and such vendors and providers are contacted, we will not be able to completely evaluate whether our information technology systems or non- information technology systems will need to be revised or replaced. If our efforts to address year 2000 risks are not successful, or if suppliers or other third parties with whom we conduct business do not successfully address such risks, it could have a material adverse effect on our business. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of the year 2000" for detailed information on our state of readiness, potential risks and contingency plans regarding the year 2000 issue. If we do not effectively manage our growth, it could have a material adverse effect on our business. We have experienced growth in our business, which we expect to continue. Such growth has placed, and will continue to place, a significant strain on our management systems and resources. We will also need to continue to improve our operational and financial systems and managerial controls and procedures. We will need to continue to expand, train and manage our workforce. We expect that our workforce will continue to increase for the foreseeable future. We will have to maintain close coordination among our technical, accounting, finance, marketing, sales and research departments. If we fail to effectively manage our growth and address the above concerns, it could have a material adverse effect on our business. 11 If we do not successfully integrate acquired businesses with our business, it could have a material adverse effect on our business. Since October 1993, we have acquired six businesses and three product lines. We may not be able to integrate our recent or any future acquisitions successfully with our existing operations without substantial costs, delays or other problems. As we integrate acquired businesses or product lines, we could have difficulty in assimilating personnel and operations. In addition, the key personnel of acquired companies may decide not to work for us. We could also have difficulty in assimilating the acquired products, services or technologies into our operations. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and materially adversely affect our results of operations due to accounting requirements such as amortization of goodwill or other purchased intangibles. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our stockholders. If we are unable to retain key personnel or attract new personnel, it could have a material adverse effect on our business. The loss of the services of any of our key personnel or our inability to successfully attract and retain qualified personnel in the future would have a material adverse effect on our business. Our future success depends on the continued service of our key personnel including Christopher A. Crane, our President and Chief Executive Officer, Emmett R. DeMoss, our Vice President and the Chairman of our REALBID division, Karen Goodrum, our Vice President of Finance and Administration, Chief Financial Officer and Secretary, Walter W. Papciak, our Executive Vice President of Sales, Marketing and Product Development, and Michael Arabe, our Senior Vice President of Sales. Mr. Crane is the only key person for whom we maintain life insurance; the policy on Mr. Crane has a face amount of $2,000,000. Our future success also depends on our ability to attract, retain, integrate and motivate highly skilled researchers and other employees. Competition for researchers and other employees in our industry is intense, particularly in the San Diego area, where our headquarters are located. Please see "Management" for detailed information on our key personnel. Increased usage could strain our systems and cause systems malfunctions which could materially adversely affect our business. The performance of our Web site is critical to our reputation, our ability to attract customers and market acceptance of our Web site. All of our communications and network infrastructure is hosted at our headquarters in San Diego. We have, in the past, experienced system failures, including network, software and hardware failures, that have interrupted or increased the response time of our online services. In the future, the capacity of our software and hardware could be strained by an increase in the use of our products on the Internet as we migrate our customers to the Internet. Our ability to provide uninterrupted, secure online services depends on our ability to protect our facilities and equipment against damage from fire, earthquakes, power loss, water damage, telecommunications failures, vandalism, computer viruses, hacker attacks and other malicious acts, and similar unexpected material adverse events. Customers may become dissatisfied if a system failure interrupts our ability to provide access to our Web site. Because our insurance policies have low coverage limits, our insurance may not adequately compensate us for any losses that may occur due to system failures or interruptions. Any problems with the integrity of the internet's infrastructure or with third party service providers could have a materially adverse effect on our business. Our customers also depend on Internet service providers, online service providers and other Web site operators for access to our Web site. Each of them has experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Moreover, the Internet infrastructure may not be able to support continued growth in its use. Any of these problems could materially adversely affect our business. 12 We may not be able to adequately protect our proprietary rights. It may be difficult to protect our proprietary rights. We regard our database of commercial real estate transactions and the software used to operate our Web site, as well as our various trademarks and copyrights, as proprietary. We will continue to attempt to protect them under a combination of copyright, trade secret and trademark laws, as well as by contractual restrictions on employees and third parties. Despite these precautions, it may be possible for unauthorized parties to copy our services or otherwise obtain and use information that we regard as proprietary. Existing trade secrets and copyright laws provide only limited protection. Other license and distribution agreements that we intend to use include provisions protecting against unauthorized use, copying, transfer and disclosure, which may be unenforceable under the laws of some jurisdictions. Furthermore, we may be required to negotiate limits on these provisions from time to time. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the U.S. The steps we take may not be adequate to deter misappropriation of proprietary information. We also may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Significant and protracted litigation may be necessary to protect our intellectual property rights, to determine the scope of the proprietary rights of others or to defend against claims of infringement. Various parties may accuse us of infringing on their intellectual property rights; such claims could harm our business regardless of their merit. Third parties may assert claims against us alleging infringement, misappropriations or other violations of proprietary rights, whether or not such claims have merit. Such claims can be time consuming and expensive to defend and could require us to cease the use and sale of allegedly infringing services and products, incur significant litigation costs and expenses, develop or acquire non-infringing technology and obtain licenses to the alleged infringing technology. We may not be able to develop or acquire alternative technologies or obtain such licenses on commercially acceptable terms. We could be held liable for providing inaccurate or incomplete information. If our services or products yield inaccurate or incomplete information which has a material adverse impact on a customer, the customer might bring a claim for damages against us, even if we are not responsible for such failure. The limitations of liability set forth in customer contracts may not be enforceable and may not otherwise protect us from liability for damages. The successful assertion of one or more large claims against us that exceed available insurance coverages, or changes in our insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements could materially adversely affect our business. Risks Related To Our Industry If Internet usage does not continue to grow, it could materially adversely affect our business. The Internet is relatively new and is rapidly evolving. Our business would be materially adversely affected if Internet usage does not continue to grow. We may not be able to adapt to the rapid technological changes to the Internet and Internet products. To be successful, we must adapt to the rapid technological changes to the Internet and Internet products by continually enhancing our Web site and introducing and integrating new services and products to capitalize on the technological advances in the Internet. This process is costly and we cannot assure you that we will be able to successfully integrate our services and products with the Internet's technological advances. The collection, storage, management and dissemination of commercial real estate information from a centralized database on the Internet is a recent and evolving development. Our market is characterized by rapidly changing technologies, evolving industry standards, increasingly sophisticated customer needs and frequent new product introductions. These factors are exacerbated by the rapid technological change experienced by the computer and software industries. We could incur substantial costs if we need to modify our services or infrastructure in order to adapt to these changes. If we incurred significant costs without adequate results or we were unable to adapt to rapid technological changes, it could have a material adverse effect on our business. 13 Adoption of new laws and government regulations relating to the Internet could harm our business. Our business could be materially adversely affected by the adoption or modification of laws or regulations in the U.S. or abroad relating to the Internet. Laws and regulations directly applicable to Internet communications and commerce are becoming more prevalent. Such legislation could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications and commercial medium. The governments of states or foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. The laws governing the Internet, however, remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet and Internet commerce. In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad, that may impose additional burdens on companies conducting business over the Internet. The growth and development of the market for Internet commerce may also prompt calls for widening access on the Internet to public records, including records concerning the commercial real estate industry. Internet security concerns could hinder Internet commerce and materially adversely affect our business. We may be required to expend significant capital and other resources to protect against security breaches on our Web site or to alleviate problems caused by such breaches. If any compromise of our security were to occur, it could damage our reputation and expose us to a risk of loss, litigation and possible liability. A significant barrier to online commerce and communications is the need for secure transmission of confidential information over public networks. Concerns over the security of transactions conducted on the Internet and other online services, as well as user's desires for privacy, may also inhibit the growth of the Internet and other online services, especially as a means of conducting commercial transactions. Our services involve the storage and transmission of proprietary information, such as credit card numbers and other confidential information. We cannot assure you that our security measures will prevent security breaches or that our failure to prevent such security breaches will not have a material adverse effect on our business. Credit card companies and others are in the process of developing anti-theft and anti-fraud protections, and we are continually monitoring this problem. However, at the present time the real or perceived risk from theft and fraud could have a material adverse effect on us. We cannot assure you that advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the algorithms used by us to protect customer transaction data. A party who is able to circumvent our security measures could misappropriate confidential information or cause interruptions in our operations. We may be subject to legal liability for displaying or distributing information on the Internet. Because content on our Web site is distributed to others, we may be subject to claims for defamation, negligence or copyright or trademark infringement or claims based on other theories. These types of claims have been brought, sometimes successfully, against Internet services in the past. We could also be subject to claims based upon the content that is accessible from our Web site through links to other web sites or information on our Web site supplied by third parties. Our insurance may not adequately protect us against these types of claims. Even to the extent such claims do not result in liability to us, we could incur significant costs in investigating and defending against such claims. Our potential liability for information carried on or disseminated through our Web site could require us to implement measures to reduce our exposure to such liability, which may require the expenditure of substantial resources and limit the attractiveness of our service to users. We may incur additional liabilities as a result of our fee arrangements. We also enter into agreements with customers under which we are entitled to receive a flat fee related to the support of purchase of commercial properties through our Web site using REALBID or other transaction support products that we offer. Such arrangements may expose us to additional legal risks and uncertainties, including regulation by local, state, federal and foreign authorities and potential liabilities to property buyers, even if we are not selling such properties. The indemnification provided to us in our agreements with these parties, if available, may not be adequate. 14 Risks Related To This Offering The number of shares eligible for public sale after this offering could cause our stock price to decline. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering or the perception that such sales could occur. Such sales also might make it more difficult for us to sell equity securities in the future at a price that we deem appropriate. Please see "Shares Eligible for Future Sale" for further details and risks regarding the number of shares eligible for public sale after this offering. The liquidity of our stock is uncertain, because it has never been publicly traded. Prior to this offering, there has been no public market for our common stock. We cannot predict if an active trading market in our common stock will develop or how liquid that market might become. The market price of our common stock may decline below the initial public offering price. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Please see "Underwriting" for more information regarding how the initial public offering price was determined. The market price of our stock may be materially adversely affected by market volatility. The stock market has experienced extreme price and volume fluctuations. The market prices of the securities of Internet-related companies have been especially volatile. The trading price of our common stock could be subject to wide fluctuations in response to a number of factors, including: . our quarterly results of operations; . changes in earnings estimates by analysts and whether our earnings meet or exceed such estimates; . announcements of technological innovations by us or our competitors; . additions or departures of key personnel; . other matters discussed elsewhere in this prospectus; and . other events or factors, which may be beyond our control. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. The interests of our controlling stockholders may conflict with your interests. We anticipate that the executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately 67.08% of our outstanding common stock following the completion of this offering. These stockholders will be able to exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of us. Please see "Management" and "Principal and Selling Stockholders" for detailed information on the beneficial ownership of our executive officers, directors and affiliates. Anti-takeover provisions in our charter documents and Delaware law could delay, defer or prevent a tender offer or takeover attempt that is in the stockholder's best interest. Certain anti-takeover provisions of our restated certificate of incorporation, our restated bylaws and Delaware law could make it more difficult for a third party to acquire us. As a result we could delay, defer or prevent a takeover attempt or third party acquisition that the stockholders consider in their best interest, including an attempt that might result in a premium over the market price for the shares held by the stockholders. Please see "Description of Securities" for detailed information on these provisions. 15 You will suffer dilution in the value of your shares. Investors purchasing shares in this offering will incur immediate and substantial dilution in net tangible book value per share. To the extent outstanding options to purchase common stock are exercised, there will be further dilution. Please see "Dilution" for detailed information on dilution resulting from this offering. Forward-Looking Statements. Many statements made in this prospectus under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business" and elsewhere may be forward- looking statements that are not based on historical facts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under "Risk Factors." We are not obligated to update or revise these forward-looking statements to reflect new events or circumstances. 16 Use of Proceeds We estimate that the net proceeds from the sale of the 3,800,000 shares offered by us will be approximately $41.8 million, assuming an initial public offering price of $12.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If our portion of the underwriters' over-allotment is exercised in full, we estimate that such net proceeds will be approximately $48.1 million. We intend to use approximately $39.7 million of the net proceeds of this offering for working capital and other general corporate purposes, including expansion of our proprietary database, enhancement and development of existing and new information services and transaction support products and geographic expansion. We may also use a portion of the proceeds for strategic alliances and acquisitions. We intend to use the remaining $2.1 million of the net proceeds of this offering for repayment of debt with various maturity dates between April 1999 and January 2002. Approximately $1.5 million of this debt bears interest at an annual rate of 8.75% during the term of the loan and a one-time 15% interest balloon payment is due upon completion of the term. The loan proceeds from $300,000 of this $1.5 million in debt loaned to us in October 1998 were used to acquire REALBID, LLC. Of the remaining approximately $600,000 of debt will bear interest at 8% beginning December 1, 1999, net of repayments. We have not yet determined the amount of net proceeds to be used specifically for each of the foregoing purposes other than the repayment of debt. Accordingly, management will have significant flexibility in applying the net proceeds of this offering. Pending any such use, as described above, we intend to invest the net proceeds in interest-bearing instruments. We will not receive any proceeds from the sale of shares by the selling stockholders. Please see "Principal and Selling Stockholders" for a description of shares to be sold by selling stockholders. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently intend to retain future earnings to support operations and to finance the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent on financial condition, operating results, capital requirements and other factors that our board deems relevant. 17 Capitalization The following table sets forth our capitalization as of December 31, 1998 on an actual basis and as adjusted to give effect to the receipt by us of the estimated net proceeds from the sale of 3,800,000 shares offered hereby at an assumed initial public offering price of $12.00 per share. This information should be read in conjunction with our financial statements and the notes relating to such statements appearing elsewhere in this prospectus. This information is based on the number of shares of common stock outstanding on December 31, 1998. It excludes the following shares that we may issue: . 1,749,727 shares upon the exercise of options outstanding at a weighted average exercise price of $1.17 per share and . 156,285 shares upon the exercise of warrants outstanding at a weighted average exercise price of $2.40 per share. Please see "Management--Benefit Plans," "Description of Securities" and the more detailed financial statements and notes appearing elsewhere in this prospectus.
December 31, 1998 ------------------------- Actual As Adjusted ----------- ------------ (dollars in thousands) Current portion of long-term obligations............. $ 1,029 $ 49 =========== =========== Long-term obligations, less current portion.......... 1,123 23 Redeemable convertible preferred stock:.............. Preferred stock, $0.01 par value, 5,000,000 shares authorized on an actual basis; shares authorized on an as adjusted basis; 4,908,126 shares issued and outstanding on an actual basis; and no shares issued and outstanding on an as adjusted basis.... 7,009 -- Stockholders' equity (deficit): Common stock, $0.01 par value, 16,503,750 shares of Class A common stock and 1,833,750 shares of Class B common stock authorized on an actual basis; 3,501,626 shares of Class A common stock and 31,907 shares of Class B common stock issued and outstanding on an actual basis; 11,464,181 shares issued and outstanding on an as adjusted basis.... 30 109 Additional paid-in capital......................... 4,669 53,787 Warrants........................................... 398 -- Deferred compensation.............................. (2,539) (2,539) Accumulated deficit................................ (11,446) (11,446) ----------- ----------- Total stockholders' equity (deficit)................. (8,888) 39,911 ----------- ----------- Total capitalization............................. $ (756) $ 39,934 =========== ===========
18 Dilution Our pro forma net tangible book value as of December 31, 1998 was a deficit of $(4,034,194), or $(0.57) per share of common stock. Pro forma net tangible book value per share is equal to the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of December 31, 1998. Assuming the sale by us of the 3,800,000 shares offered hereby at an assumed initial public offering price of $12.00 per share and after deducting underwriting discounts and estimated offering expenses and the application of the estimated net proceeds therefrom, the pro forma net tangible book value as of December 31, 1998 would have been $37,748,806, or $3.29 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $3.86 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $8.71 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................. $12.00 Pro forma net tangible book value (deficit) per share as of December 31, 1998............................................ $(0.57) Increase attributable to new investors........................ 3.86 ------ Pro forma net tangible book value per share after this offering....................................................... 3.29 ------ Pro forma dilution per share to new investors................... $ 8.71 ======
The following table summarizes, on a pro forma basis as of December 31, 1998, after giving effect to the automatic conversion of all outstanding shares of preferred stock into common stock, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders...... 7,664,181 66.9% $ 6,197,574 12.0% $ 0.81 New investors.............. 3,800,000 33.1 45,600,000 88.0 12.00 ---------- ----- ----------- ----- Total................... 11,464,181 100.0% $51,797,574 100.0% ========== ===== =========== =====
The tables and calculations above assume no exercise of outstanding options or warrants, other than those warrants exercisable for $0.01 per share. At December 31, 1998, there were: . 1,749,727 shares issuable upon the exercise of options outstanding at a weighted average exercise price of $1.17 per share, . 156,285 shares issuable upon the exercise of warrants outstanding at a weighted average exercise price of $2.40 per share and . 376,219 shares available for issuance under our stock option plans. To the extent that these options or warrants are exercised, there will be further dilution to new investors. Please see "Management--Benefit Plans." 19 Selected Financial Data The following selected financial data should be read in conjunction with the financial statements and the notes to such statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the three years ended December 31, 1998, and the consolidated balance sheet data at December 31, 1997 and 1998, are derived from our financial statements which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this prospectus. The statement of operations data for the two years ended December 31, 1995, and the consolidated balance sheet data at December 31, 1994, 1995 and 1996 are derived from audited financial statements not included in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future. The pro forma statement of operations data gives effect to our acquisition of REALBID, LLC as if it had occurred on January 1, 1998.
Year Ended December 31, ----------------------------------------------------- Pro Forma 1994 1995 1996 1997 1998 1998 ------ ------- ------- ------- ------- --------- (in thousands, except per share data) Statement of Operations Data: Net revenues............. $6,030 $ 6,716 $ 8,141 $10,450 $12,806 $13,029 Cost of revenues......... 2,674 3,488 4,357 5,054 5,746 5,791 ------ ------- ------- ------- ------- ------- Gross profit............. 3,356 3,228 3,784 5,396 7,060 7,238 Operating expenses: Selling and marketing.. 2,306 2,072 2,813 3,408 4,182 4,182 Product development and engineering........... -- -- 376 768 1,230 1,230 General and administrative........ 1,743 2,527 2,835 2,525 2,936 3,637 ------ ------- ------- ------- ------- ------- Total operating expenses............ 4,049 4,599 6,024 6,701 8,348 9,049 ------ ------- ------- ------- ------- ------- Loss from operations..... (693) (1,371) (2,240) (1,305) (1,288) (1,811) Other income (expense), net..................... (9) 12 (67) (252) (260) (260) ------ ------- ------- ------- ------- ------- Net loss................. (702) (1,359) (2,307) (1,557) (1,548) (2,071) Dividend accretion on preferred stock 63 299 299 299 454 454 ------ ------- ------- ------- ------- ------- Net loss attributable to common stockholders..... $ (765) $(1,658) $(2,606) $(1,856) $(2,002) $(2,525) ====== ======= ======= ======= ======= ======= Net loss per share attributable to common stockholders, basic and diluted................. $(0.16) $ (0.47) $ (0.74) $ (0.53) $ (0.57) $ (0.72) ====== ======= ======= ======= ======= ======= Shares used in computing net loss per share attributable to common stockholders, basic and diluted................. 4,700 3,502 3,502 3,502 3,517 3,517 ====== ======= ======= ======= ======= ======= Pro forma net loss per share, basic and diluted................. $ (0.22) $ (0.29) ======= ======= Shares used in computing pro forma net loss per share, basic and diluted................. 7,067 7,067 ======= =======
At December 31, -------------------------------------- 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ (in thousands, except per share data) Balance Sheet Data: Cash and cash equivalents............. $2,866 $ 260 $ 578 $ 352 $ 378 Working capital (deficit)............. 1,225 (1,119) (2,056) (3,053) (4,354) Total assets.......................... 4,687 4,714 4,224 4,091 7,397 Deferred subscription revenue......... 2,152 2,670 3,197 4,023 5,503 Long-term obligations, less current portion.............................. 230 777 1,533 1,822 1,123 Redeemable convertible preferred stock................................ 4,919 5,218 5,517 5,816 7,009 Total stockholders' (deficit) equity ..................................... (3,414) (5,072) (7,678) (9,505) (8,888)
Please see Note 1 to the financial statements appearing elsewhere in this prospectus for the determination of number of shares used in computing basic and diluted loss per share. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. Overview In January 1982, we first began providing sales information on commercial properties in San Diego County. From 1982 through 1985, we expanded our coverage throughout Southern California to Orange, Riverside, San Bernardino and Los Angeles counties and to Phoenix and Tucson, Arizona. We continued our geographic expansion from 1987 through 1992 with coverage of Northern California, Las Vegas and Seattle. During the period from June 1994 through December 1998, we further broadened our geographic reach to cover additional key markets including Washington D.C., New York, Chicago, Boston, Atlanta, Denver, Baltimore, Dallas/Fort Worth and Miami. This expansion was driven by both internal growth and acquisitions. We originally offered paper-based commercial real estate transaction information. In 1986, we introduced our CallCOMPS service, which permitted customers to call in and obtain sales transaction information, and, in 1990, we introduced a DOS-based subscription product. Through 1996, the majority of our revenues continued to come from print subscriptions. In October 1996, we began to offer our services on CD-ROM, allowing for the computerized manipulation of data to provide more customized reports. Most recently, in January 1998, we began to offer our information services on the Internet. This has allowed our customers to receive updated commercial real estate transaction information more frequently and analyze the data more quickly and easily. Delivery of our information on the Internet and other electronic media has provided additional value to customers, resulting in increased revenues from subscriptions and one- time, fee-based transactions. Less than 10% of our 1998 revenues were derived from delivery of our services and products on the Internet. We expect this percentage to increase as more of our customers transition to using our services and products on the Internet. In November 1998, we acquired the assets of REALBID, LLC, a real estate marketing services company which supports commercial real estate transactions on the Internet. As a result of this acquisition, our 1998 pro forma net revenues were $13.0 million and our pro forma operating expenses were $9.0 million, compared to our 1998 actual net revenues of $12.8 million and our actual operating expenses of $8.3 million. The purchase price of the acquisition totaled $2.3 million, which consisted of $163,000 in cash, stock options granted to the principals valued at approximately $2.1 million and acquisition costs of $54,000. Intangible assets of $2.2 million were recorded as a result of this acquisition. These intangible assets will be amortized over their estimated useful lives, ranging from three to five years, and will be primarily allocated to general and administrative expenses. In 1998, we amortized $82,000 relating to the intangible assets of REALBID, LLC. We currently expect to amortize the following amounts relating to the intangible assets of REALBID, LLC in the future: 1999--$489,000; 2000--$489,000; 2001-- $475,000; 2002--$396,000; and 2003--$313,000. Substantially all of our revenues have been derived from licensing our sales comparable information, either on a subscription or a per use basis, both offline and, to a lesser extent, on the Internet. In 1998, approximately 75% of our information licensing revenue was derived from subscription contracts and approximately 25% was derived from fees paid on a per use basis. The subscription licenses range from one to three years and generally renew automatically for successive one-year terms. Many of the license rates increase at the time of renewal. Subscribers pay contract license fees on an annual, semi-annual, quarterly or monthly basis in advance of their license term. We recognize this revenue on a straight line basis over the life of the contract. Accordingly, contract license fees which are invoiced from a new contract or upon contract renewal result in deferred revenue. Since our November 1998 acquisition of REALBID, LLC, we have also begun to derive revenues from our transaction support services. For the period of November 6, 1998 through December 31, 1998, these revenues 21 totaled approximately $17,000. The 1998 pro forma transaction support products revenues totaled approximately $240,000. We derive all of our transaction support product revenues from the delivery of products on the Internet. We recognize these revenues as services are provided. In order to expand our operations, we anticipate incurring additional expenses to: .implement new Internet-related products; .develop new databases; .continue the integration of our REALBID services with our database; .further automate our data collection process; .acquire other companies; and .integrate acquired databases into our standardized format. We also intend to hire additional programmers and research employees as needed to implement our product development efforts and to continue to expand our database of commercial real estate. In addition, we intend to further expand our sales force and marketing team to develop new and existing strategic relationships and strengthen our brand name as we enter new markets. Lastly, we anticipate incurring additional costs related to being a public company, including director's and officer's liability insurance, investor relation programs and professional service fees. As a result of these expenditures and other related factors, we expect to continue to incur losses for the forseeable future. We have incurred significant net losses since our inception. As of December 31, 1998, we had an accumulated deficit of $11.4 million. Also, in connection with the grant of 744,200 stock options to employees from February through November, 1998, we recorded deferred compensation of approximately $2.7 million for the year ended December 31, 1998, representing the difference between the fair value of our common stock for accounting purposes and the exercise price of such options at the date of grant. Such amount is presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable options, which is generally five years. In 1998, we recorded $118,000 in compensation expense and expect to record the following amounts in the future: 1999--$606,000; 2000--$606,000; 2001--$606,000; 2002--$544,000; and 2003-- $176,000. Results of Operations The following table sets forth certain statement of operations data expressed as a percentage of net revenues for the periods indicated:
Year Ended December 31, ----------------------------- 1996 1997 1998 ------- ------- ------- Statement of Operations Data: Net revenues................................... 100 % 100 % 100 % Cost of revenues............................... 54 48 45 ------- ------- ------- Gross profit................................... 46 52 55 Operating expenses: Selling and marketing........................ 34 33 32 Product development and engineering.......... 5 7 10 General and administrative................... 35 24 23 ------- ------- ------- Total operating expenses................... 74 64 65 ------- ------- ------- Loss from operations........................... (28) (12) (10) Other expense, net............................. (0) (3) (2) ------- ------- ------- Net loss....................................... (28)% (15)% (12)%
22 Comparison of Years Ended December 31, 1998, 1997 and 1996 Net Revenues Our net revenues for 1998 were $12.8 million, an increase of $2.4 million or 22.5% from 1997. Our net revenues for 1997 were $10.4 million, an increase of $2.3 million or 28.4% from $8.1 million in 1996. In both years, the increase was primarily due to an increase in subscriptions as a result of geographic expansion and further penetration of our existing markets. We had no customer that accounted for more than 10% of our net revenues in 1998, 1997 or 1996. Cost of Revenues Cost of revenues consists of compensation and benefits for research personnel and research supplies. Our cost of revenues for 1998 was $5.7 million, an increase of $700,000 or 13.7% from 1997. Cost of revenues for 1997 was $5.1 million, an increase of $700,000 or 16.0% from $4.4 million in 1996. Payroll and related costs contributed to approximately 65% of the dollar increase in 1997 and to approximately 80% of the dollar increase in 1998. In both years, the increase in dollar amount was due to an increase in sales transaction volume, and geographic expansion and the hiring of additional research employees. In addition, cost of revenues increased in 1997 due to the conversion of print subscriptions to CD-ROM format, as well as the write-off of the entire unamortized balance of a prepayment for assessors information relating to a 1995 purchase agreement which was amended in November 1997. Cost of revenues as a percentage of net revenues decreased to 45% for the year ended December 31, 1998 from 48% for the year ended December 31, 1997 and from 54% for the year ended December 31, 1996. In each year, the percentage decrease was due to increased revenues during periods when costs remained relatively fixed. Selling and Marketing Expenses Selling and marketing expenses consist of compensation and benefits for sales and marketing personnel, as well as sales commissions to our direct sales force. Our selling and marketing expenses for 1998 were $4.2 million, an increase of $800,000 or 22.7% from 1997. Our selling and marketing expenses for 1997 were $3.4 million, an increase of $600,000 or 21.2% from $2.8 million in 1996. In 1997, approximately 75% of the dollar increase was attributable to salaries and commission expense relating to new business generated from the conversion of our subscriber base. In 1998, approximately 60% of the dollar increase was attributable to salaries and wages for additional telesales and marketing employees, approximately 5% of the increase was attributable to sales-related travel expenses, and approximately 10% resulted from increases in marketing and promotional expenses, including training and technical support costs pertaining to the promotion of our COMPSLink/Windows product. As a percentage of net revenues, such expenses decreased to 32% for the year ended December 31, 1998 from 33% for the year ended December 31, 1997 and 34% for the year ended December 31, 1996. The percentage decreases were primarily due to increased revenues during periods when costs remained relatively fixed. Product Development and Engineering Expenses Product development and engineering expenses consist primarily of compensation and benefits for software engineers and quality assurance personnel and expenses for contract programmers and developers. Our product development and engineering expenses for 1998 were $1.2 million, an increase of $500,000 or 60.2% from 1997. Our product development and engineering expenses for 1997 were $800,000, an increase of $400,000 or 104% from $400,000 in 1996. As a percentage of net revenues, product development and engineering expenses increased to 10% for the year ended December 31, 1998 from 7% for the year ended December 31, 1997 and 5% for the year ended December 31, 1996. The dollar and percentage increases were primarily due to the hiring of additional software engineers and quality assurance personnel for development of new Internet-related products. General and Administrative Expenses General and administrative expenses consist primarily of compensation and benefits for finance and administrative personnel, professional fees, amortization expense, insurance expenses and charges relating to 23 merchant credit card fees and bad debts. Our general and administrative expenses for 1998 were $2.9 million, an increase of $400,000 or 16.3% from 1997. This dollar increase in general and administrative expenses was due to efforts in connection with our acquisition strategy, increases in professional fees, increased expenses incurred in connection with increase in our work force and related payroll expenses and increases in bad debt. Professional fees accounted for 26% of the increase in expenses over the prior year, while payroll and related expenses attributed 45% to the increase. In 1998 we began to charge bad debt expense for subscriptions, rather than netting them against revenues. This method of recording bad debt expenses resulted in an increase of general and administrative expenses of $128,367. Our general and administrative expenses for 1997 were $2.5 million, a decrease of $300,000 or 10.9% from $2.8 million in 1996. As a percentage of net revenues, such expenses decreased to 23% for the year ended December 31, 1998 from 24% for the year ended December 31, 1997 and 35% for the year ended December 31, 1996. The dollar decrease in 1997 and the decreases in such expenses as a percentage of net revenues in both years were primarily due to decreases in payroll expense and professional fees. Other Expense, Net Other expense, net consists primarily of interest expense on our debt less the amount of interest we earn on our cash and short-term investments. Total other expense, net for 1998 was $260,000, an increase of $8,000 or 3.2% from 1997. Total other expense, net for 1997 was $252,000, an increase of $185,000 or 276% from $67,000 in 1996. In both years, the increase in other expense was primarily due to interest expense under a loan agreement. Quarterly Results Of Operations The following table sets forth certain unaudited quarterly statement of operations data for each of the eight quarters in the two year period ended December 31, 1998. In the opinion of management, this information has been prepared substantially on the same basis as the audited financial statements appearing elsewhere in this prospectus, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations data.
Three Months Ended ------------------------------------------------------------------------ March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31, 1997 1997 1997 1997 1998 1998 1998 1998 --------- -------- -------- ------- --------- -------- -------- ------- (dollars in thousands) Statement of Operations Data: Net revenues............ $2,181 $2,562 $2,632 $3,075 $2,947 $3,226 $3,316 $ 3,317 Cost of revenues........ 1,163 1,191 1,264 1,436 1,287 1,306 1,468 1,685 ------ ------ ------ ------ ------ ------ ------ ------- Gross profit............ 1,018 1,371 1,368 1,639 1,660 1,920 1,848 1,632 Operating expenses: Selling and marketing............. 775 848 866 919 909 917 979 1,377 Product development and engineering....... 156 179 190 243 212 318 395 305 General and administrative........ 502 560 569 894 672 665 679 920 ------ ------ ------ ------ ------ ------ ------ ------- Total operating expenses............ 1,433 1,587 1,625 2,056 1,793 1,900 2,053 2,602 ------ ------ ------ ------ ------ ------ ------ ------- Loss from operations... (415) (216) (257) (417) (133) 20 (205) (970) Other expense, net..... (83) (85) (57) (27) (82) (73) (38) (67) ------ ------ ------ ------ ------ ------ ------ ------- Net loss................ $ (498) $ (301) $ (314) $ (444) $ (215) $ (53) $ (243) $(1,037) ====== ====== ====== ====== ====== ====== ====== =======
24 The following table sets forth, for the periods indicated, the percentage of net revenues represented by each item in our statement of operations.
Three Months Ended ----------------------------------------------------------------------- March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31 1997 1997 1997 1997 1998 1998 1998 1998 --------- -------- -------- ------- --------- -------- -------- ------ Statement of Operations Data: Net revenues............ 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenues........ 53 46 48 47 44 40 44 51 ---- ---- ---- ---- ---- ---- ---- ---- Gross profit............ 47 54 52 53 56 60 56 49 Operating expenses: Selling and marketing............. 36 33 33 30 31 28 30 41 Product development and engineering....... 7 7 7 8 7 10 12 9 General and administrative........ 23 22 22 29 23 21 20 28 ---- ---- ---- ---- ---- ---- ---- ---- Total operating expenses............ 66 62 62 67 61 59 62 78 ---- ---- ---- ---- ---- ---- ---- ---- Loss from operations... (19) (8) (10) (14) (5) 0 (6) (29) Other expense, net..... (4) (4) (2) (0) (2) (2) (1) (2) ---- ---- ---- ---- ---- ---- ---- ---- Net loss................ (23)% (12)% (12)% (14)% (7)% (2)% (7)% (31)% ==== ==== ==== ==== ==== ==== ==== ====
In the first quarter of 1997, gross profits were lower when compared to the successive three quarters because revenues resulting from the conversion of our subscriber base to higher margin electronic delivery was slower than expected. In the remaining three quarters of the year, revenues from licensing of our information through the higher margin electronic delivery were recognized from the sale of annual subscriptions in previous quarters. During the second quarter of 1997, sales and marketing expense increased over the previous quarter by $73,000 or 9%, but decreased as a percentage of sales. The dollar increase was due to commission expense incurred as the result of new and revised subscription contracts for the electronic delivery of our information. General and administrative expenses increased 57% or $325,000 in the fourth quarter of 1997 due to an impairment loss of $183,000 for intangibles assets acquired in 1995, and $132,000 relating to the November 1997 acquisition of a customer base. The increase in gross profit for the second quarter of 1998 resulted from an increased demand for our per use services compared to the first quarter. Also in the second quarter of 1998, we continued to realize increased revenues from the license of our higher margin electronic delivery information. In the fourth quarter of 1998, gross profit declined due to increased expenses incurred in connection with our geographic expansion, including travel expenses of our researchers necessary to accumulate and verify historical commercial sales activity in new markets, as well as related personnel and benefit costs. In addition, during the fourth quarter of 1998, sales and marketing and general and administrative expenses increased as a result of our acquisition of REALBID, LLC and the amortization of intangibles and deferred compensation. The quarterly data should be read in conjunction with the financial statements and the notes to such statements appearing elsewhere in this prospectus. The operating results for any quarter are not necessarily indicative of the operating results for any future period and are subject to significant fluctuation. Liquidity And Capital Resources Since our inception, we have financed our operations primarily through the private placement of equity securities, borrowing arrangements and cash flow from operations. As of December 31, 1998, we had approximately $378,000 in cash and cash equivalents. 25 Our capital requirements depend on numerous factors, including our geographic and product expansions, investments in our Web site and other factors. We have experienced a substantial increase in our capital expenditures and operating expenses since our inception consistent with our growth in operations and staffing, and anticipate that this trend will continue for the foreseeable future. As of December 31, 1998, our capital commitments, included $513,505 for operating leases, $49,343 in capital leases and $979,208 for current debt. We do not expect our capital commitments to exceed $2.5 million in the next 12 months. We expect our expenses to continue to increase as we continue to evaluate possible strategic acquisitions, products and technologies, expand our sales and marketing programs and conduct aggressive brand promotions. Following the completion of the offering, selling and marketing expenses and research and development are expected to increase by % as a percentage of sales. In September 1996, we entered into a $3.0 million loan agreement with Venture Lending & Leasing, Inc. This agreement provides $1.5 million for fixed asset acquisition and $1.5 million for working capital. Borrowings for fixed asset acquisition are due 48 months from the date of disbursement. Borrowings for working capital are due 36 months from the date of disbursement. This loan agreement requires payment of 8.75% interest during the term and a one-time 15% interest balloon payment is due upon completion of the term. The notes issued under this loan agreement are secured by either all of our fixed assets or all of our business assets. In connection with this loan agreement, we issued to Venture Lending & Leasing, Inc. a warrant to purchase 156,285 shares of our common stock at an exercise price of $2.40 per share, subject to antidilutive adjustments. The warrant may be exercised in whole or in part at any time. The warrant expires on September 24, 2003. At March 31, 1999, $141,750 was available for working capital and none is available for fixed asset acquisition. The loan agreement originally was set to expire on June 30, 1998, but was extended during 1998 to June 30, 1999. In February 1999, we entered into an additional $1.8 million loan agreement with Venture Lending & Leasing, Inc. This agreement permits the use of funds for either fixed asset acquisition or working capital. Under this loan agreement, borrowings for fixed assets acquisition are due 48 months from the date of disbursement and borrowings for working capital are due 36 months from the date of disbursement. This loan agreement requires payment of 8.75% interest during the term and a one-time 15% interest balloon payment upon completion of the term. The notes issued under this loan agreement are secured by either all of our fixed assets or all of our business assets. In connection with this loan agreement, we issued a warrant to Venture Lending & Leasing, Inc. This warrant is exercisable for a number of shares determined by a formula based on whether or not we close a new equity financing prior to August 2000. The number of warrant shares will be equal to $225,000 divided by the exercise price, which will be the average of $2.46 and the per share price of the new equity financing. If no equity financing occurs by August 2000, the warrant will be exercisable for 61,125 shares at $3.68 per share. The warrant may be exercised in whole or in part at any time. The warrant expires on February 14, 2008. At March 31, 1999, $1.8 million was available under this loan agreement. This loan agreement expires on March 31, 2000. In February 1999, we also entered into a letter of commitment with Silicon Valley Bank for a $3.0 million senior secured subordinated loan facility. Proceeds for this facility may be used for any legal corporate purpose. Interest accrues at a rate of 13.0% and is payable on a monthly basis. Principal is payable at the sooner of the maturity of the facility, not to exceed April 15, 2001 or a liquidity event which yields at least $3.0 million in net cash proceeds to us. In consideration for the facility we may issue to Silicon Valley Bank up to 98,000 warrants to purchase our preferred stock, with varying exercise prices ranging from $5.00 to $0.75 per share depending upon when we repay the facility. All of the warrants have a term of five years. While no assurances can be given with respect to the consummation of the transaction we expect the funding to close in April 1999. We currently anticipate that the net proceeds of this offering, together with available funds, will be sufficient to meet our anticipated needs and strategy until at least the end of 2000. At such time, we may need to raise additional funds in the future in order to fund more aggressive brand name promotions or more rapid expansion, to develop new or enhanced services and products, to respond to competitive pressures or to acquire complementary businesses, technologies or services. Additional financing may not be available on terms 26 favorable to us, if at all. If adequate funds are not available or not available on acceptable terms, we may be unable to fund our expansion, successfully promote our brand name, take advantage of unanticipated acquisition opportunities, develop or enhance services and products or respond to competitive pressures. Any such inability could have a material adverse effect on our business. Impact of the Year 2000 We have not fully completed tests to assure that our information technology systems will function properly in the year 2000. The computer systems and software programs of many companies and governmental agencies are currently coded to accept or recognize only two digit entries in the date code field. These systems may recognize a date using "00" as the year 1900 rather than the year 2000. As a result, these computer systems and/or software programs may need to be upgraded to comply with such year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. State of Readiness. We have made an assessment of the year 2000 readiness of our information technology systems, including the hardware and software that operate our Web site and our non-information technology systems. We are in the process of a year 2000 simulation to test our information technology systems' readiness which we expect to complete by the end of June 1999. Based on the results of our year 2000 simulation test, we intend to revise our proprietary software as necessary to improve our year 2000 compliance. We believe that substantially all of our applications, databases and infrastructure are year 2000 compliant. We have been informed by many of our vendors of material hardware and software components of our information technology systems that substantially all of the products we use are currently year 2000 compliant. We will request vendors of the material hardware and software components of our information technology systems to provide assurances of their year 2000 compliance. We plan to complete this process during the first half of 1999. We are currently assessing our material non-information technology systems and will seek assurances of year 2000 compliance from providers of these systems. Until such testing is complete and such vendors and providers are contacted, we will not be able to completely evaluate whether our information technology systems or non-information technology systems will need to be revised or replaced. If our efforts to address year 2000 risks are not successful, or if suppliers or other third parties with whom we conduct business do not successfully address such risks, it could have a material adverse effect on our business. Costs. We have identified approximately $300,000 in capital equipment and software that required upgrading or replacement for year 2000 compliance. We expended $150,000 prior to December 31, 1998 and still have an outstanding balance of $150,000 in capital equipment and software to replace. These costs have been included in our operating capital budget. Risks. We are not currently aware of any year 2000 compliance problems relating to our proprietary software or our information technology or non- information technology systems that would have a material adverse effect on our business. We cannot assure that we will not discover year 2000 compliance problems in our proprietary software that will require substantial revisions. In addition, we cannot assure you that third-party software, hardware or services incorporated into our material information technology and non- information technology systems will not need to be revised or replaced, all of which could be time consuming and expensive. Our failure to fix our proprietary software or to fix or replace third-party software, hardware or services on a timely basis could result in lost revenues, increased operating costs, the loss of customers and other business interruptions, any of which could have a material adverse effect on our business. Moreover, the failure to adequately address year 2000 compliance issues in our proprietary software and our information technology and non-information technology systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. In addition, we cannot assure you that governmental agencies, utility companies, Internet access companies, third-party service providers and others outside our control will be year 2000 compliant. The failure by such entities to be year 2000 compliant could result in a systemic failure beyond our control, such as a 27 prolonged Internet, telecommunications or electrical failure, which could prevent us from delivering our Web site, could decrease the use of the Internet or prevent users from accessing our Web site, which could have a material adverse effect on our business. Contingency Plan. In the event that year 2000-related problems materialize, we have the ability to revert to a set of manual methods previously utilized in the collection and distribution of data if necessary. We also maintain relationships with several suppliers of services and products to mitigate the risks associated with suppliers who are not year 2000 compliant. Effects of Inflation Due to relatively low levels of inflation in 1996, 1997 and 1998, inflation has not had a significant effect on our results of operations since our inception. Impact of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that all components of comprehensive income, including net income, be reported in financial statements in the period in which they are recognized. SFAS 130 is effective for fiscal years beginning after December 15, 1997. There was no difference between our net loss and our total comprehensive loss for the years ended December 31, 1996, 1997 and 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 replaces SFAS 14, Financial Reporting for Segments of a Business Enterprise and changes the way the public companies report segment information. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and has been adopted by us for the year ending December 31, 1998. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. We are currently evaluating the impact of SOP 98-1 on our financial statements and related disclosures. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 Reporting for the Costs of Start-Up Activities (SOP 98-5). This standard requires companies to expense the cost of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. We believe the adoption of SOP 98-5 will not have a material impact on our results of operations. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The statement is not expected to affect us because we currently do not hold any derivative instruments or conduct any hedging activities. 28 Business Overview We are a leading national provider of comprehensive information on commercial real estate properties to commercial real estate professionals both off line and on the Internet. We have also begun facilitating commercial real estate transactions on the Internet. Over the last 17 years, we have developed a highly evolved data collection and confirmation system to provide information on commercial real estate properties. This information is verified by our researchers and includes sales price, income and expenses, capitalization rates, loan data, property photographs and buyers, sellers, brokers, and other key details. We believe that we are well-positioned to use our extensive database of information to support brokers, lenders and insurers in their sales, finance and insurance transactions involving commercial real estate on the Internet. Industry Background Growth of the Internet International Data Corporation estimates that the number of Internet users worldwide exceeded 95 million by the end of 1998, will exceed 170 million by the end of 2000 and will grow to over 319 million by the end of 2002. Growth in Internet usage has been fueled by a number of factors, including: . a large and growing base of personal computers in the workplace and home; . advances in the performance of personal computers and modems; . improvements in network systems and infrastructure; . more readily available and lower cost access to the Internet; . increased awareness of the Internet among businesses and consumers; . increased volume of information and services offered on the Internet; and . reduced security risks involved in conducting transactions on the Internet. Growth in Internet usage is expected to continue as new technologies, such as multimedia capabilities, are developed and adopted, as Internet access and bandwidth increases, and as Internet content improves and becomes more dynamic. The Internet as a New Medium for Business-to-Business Commerce As the Internet has become more accessible and widely used, it has emerged as a primary business channel alongside the telephone, paper-based communication and face-to-face interaction. Forrester Research estimates that businesses bought and sold $43 billion in goods over the Internet last year, as opposed to $8 billion bought by consumers. In addition, they predict that by the year 2003, more than 90% of the projected $1.4 trillion of Internet commerce will be business-to-business related. The Internet allows online providers to efficiently distribute information with the potential for less infrastructure and overhead and greater economies of scale. It also offers customers diverse options and unparalleled convenience. The Commercial Real Estate Industry The commercial real estate industry is large and fragmented. The Federal Reserve has estimated the value of commercial real estate property in the United States to be approximately $3.3 trillion. We estimate that property valued at approximately $285 billion changed ownership in 1998. However, we estimate that no commercial real estate brokerage firm was involved in more than 5% of the value of these transactions. In addition, approximately $200 billion of loans covering commercial real estate properties were written in 1998, approximately half of which were refinancing transactions. 29 Comprehensive and reliable information is a critical component of virtually all commercial real estate transactions. Prior to the availability of commercial real estate sales information which had been independently verified and which was available from a centralized source, industry professionals either maintained their own research departments to catalog comparable sales, market statistics and other property-specific information or aggregated such information, to the limited extent available, from multiple third parties. These firms have also traditionally spent significant resources adapting or developing software to analyze such information. These methods have resulted in high internal costs and nonstandard data with varying degrees of comprehensiveness and accuracy. In addition, there are currently no comprehensive, standardized transaction support services that efficiently identify properties and bring together brokers, lenders and insurers in commercial real estate transactions. The lack of such services results in higher internal costs and lost opportunities for brokers, buyers, lenders and insurers. The COMPS.COM Solution The vast information sharing and communications power of the Internet creates an opportunity to improve upon the inefficiencies in conducting commercial real estate transactions. We provide comprehensive and reliable information services, and transaction support products that save industry professionals both time and money. We generate revenue from our information services by licensing on a subscription or per use basis and from our transaction support products on a fixed fee basis. Our expenses are primarily incurred as a result of building our database and developing and implementing new Internet-related products. We believe we have established the foundation to be the trusted online resource linking commercial real estate brokers, lenders, appraisers, insurers and other professionals. To date, we have: . Developed a comprehensive and standardized proprietary database. Over the last 17 years, we have developed a highly evolved data collection and confirmation system to provide information on commercial real estate properties. This system is based on a unique combination of our highly trained research staff of over 155 researchers, management practices, proprietary software systems, and computer and communications hardware. To build each of our transaction records, our researchers conduct from 25 to 30 collection and confirmation procedures. We generally confirm property sales over $250,000 within the markets that we cover. Since our inception, we have created a historical database of approximately 400,000 commercial real estate transactions. As a result, we believe that the cost, time and effort involved in replicating our commercial real estate property database should deter competitors from entering into this market and create a significant barrier to entry. . Migrated our database to the Internet. We started out as a paper-based commercial real estate transaction information service in January 1982. In October 1996, we began to offer our customers the service on CD-ROM, allowing for the computerized manipulation of data to provide more customized reports. In January 1998, we began to offer this service on the Internet. This allows our customers to receive updated commercial real estate transaction information more frequently and analyze the data more quickly and easily. On the date of this prospectus, approximately 35% of our customers use the Internet along with traditional methods when obtaining our services, and approximately 15% use our Internet services exclusively. . Established an Internet-based listing-broker/buyer matching service. We acquired REALBID, LLC in November 1998 in order to offer a listing-broker/buyer matching service to commercial listing-brokers for properties with values exceeding $5 million. As part of the REALBID service, we develop a specific Web site for each listed property using the listing-brokers' summary description. This summary generally includes property information, maps, site plans, pictures, summary financials and broker contact information and also includes a confidentiality agreement. Our comprehensive database allows us to identify and refer potential buyers of listed properties to brokers on REALBID and electronically market these properties for brokers using our Internet-based contact system. Our database includes the specific investment criteria of pension fund managers, real estate investment trusts, opportunistic funds, private investors, insurance companies and other potential buyers. In 1998, REALBID was used to support approximately $3.8 billion in commercial real estate transactions. . Introduced a commercial real estate listing service. In January 1999, we introduced our proprietary commercial real estate property listing service, DealPoint, for San Diego County. DealPoint is our 30 Internet-based, commercial listing service enabling brokers to market their properties on the Internet. This form of marketing provides the commercial property broker with an opportunity to increase a property's exposure to prospective buyers and their brokers. Posting may be accomplished by the broker's remote entry or by sending the property information to us for manual entry. During January 1999, more than 500 for-sale commercial properties were posted on the system by brokers in San Diego. Our Business Strategy Our objective is to be the trusted online resource linking commercial real estate brokers, lenders, appraisers, insurers and other professionals by efficiently distributing market information on the Internet. As a resource of commercial real estate market information, we expect to have brokers, lenders, insurers, appraisers and others come to our Web site to transact their business because we can save them time and money. We generate revenue from our information services by licensing on a subscription or per use basis and from our transaction support services on a fixed fee basis. Our expenses are primarily incurred as a result of building our database and developing and implementing new Internet-related products. Our business strategy includes the following key elements: . Continue to enhance our comprehensive historical database of commercial real estate transactions. We intend to maintain our position as a leading provider of comprehensive, reliable commercial real estate transaction information. We expect to do this by: . expanding our information gathering processes across multiple services and products; . using technology to further automate the data collection process; . integrating acquired databases into our standardized format; and . continually improving our data collection and error detection methods. We believe that these efforts will permit us to build upon our current comprehensive historical database of commercial real estate transactions and maintain the competitive advantages it affords us in our industry. . Expand our online listing-broker/buyer matching network. We intend to ex- pand and enhance the listing-broker/buyer matching services of REALBID by fur- ther integrating our REALBID service into our proprietary database. In addi- tion, we plan to increase the number of commercial properties serviced through the REALBID database by including commercial properties with sale prices as low as $1 million. Our comprehensive investor database will allow brokers to more easily identify prospective buyers and our Internet-based new listing notifica- tion system allows brokers to more efficiently market commercial properties to such buyers. . Create a comprehensive online national listing service for commercial real estate. We intend to expand the geographic coverage of our online listing service, DealPoint, by soliciting commercial real estate listings throughout the United States. We expect these efforts to result in a comprehensive online national listing service for commercial real estate which will enhance our role in the commercial real estate transaction process. . Enhance our services and products to facilitate online exchange of key commercial real estate market information. We believe that our Web site has the potential to be an online forum for commercial real estate transactions. We believe that commercial real estate industry professionals will be drawn to our Web site because we provide the information necessary to complete transactions. We initially plan to expand our existing services to match lenders, mortgage bankers and brokers with borrowers, followed by matching insurers and agents with property owners and lenders. Combined with our REALBID service, these expanded services will allow buyers and, where applicable, existing property owners, to find the appropriate broker-listed property and arrange financing and insurance coverage for that property from a single source. . Expand into new geographic markets. Since 1995, we have expanded our geographic coverage by establishing commercial real estate information services in 19 new markets through internal expansion and three additional markets through acquisitions. We will continue to establish footholds in new geographic markets by incorporating the commercial real estate sales information obtained through internal development or 31 acquisitions into our database. We plan to expand into new geographic markets using our existing relationships with national customers to gain market acceptance. This strategy will allow us to add new customers and to more effectively service our existing customers, particularly those with national or regional focus. . Continue to build our brand name. We believe that commercial real estate professionals in the markets we serve associate the COMPS brand name with comprehensive, accurate and standardized commercial real estate sales information. We intend to continue building and strengthening our brand name by: .maintaining a strong commitment to quality, accuracy and timeliness; .increasing our marketing and advertising activities; and . continuing to expand our presence on the Internet. We expect these efforts to maintain and build upon the COMPS brand name for quality commercial real estate sales information. Our Proprietary Database Our proprietary database of commercial real estate sales transactions is the result of 17 years of research. We believe it to be the largest and most sophisticated sales database covering all categories of commercial real estate properties available today. In 1998, we researched nearly 46,000 transactions totaling approximately $105 billion. Our database is an online information system offering full-color building photographs as well as more than 200 inter-related data fields of information. These data fields include the following current information and key value indicators: . buyers . income and expense information . sellers . building characteristics and . brokerage companies condition . agents . prices per square foot . lenders and mortgages . prices per unit . sales prices . capitalization rates . seller financing . gross income multipliers . property uses or property descriptions Our database covers approximately 400,000 transactions totaling over $466 billion, including 1.8 million acres of land transactions, over 780,000 buyer and seller records and over 300,000 brokerage and agent records. We have developed a highly evolved data collection and confirmation system. This system is based on a unique combination of our highly trained research staff of over 155 researchers supported by management, computer and communications hardware and software systems. Many of our researchers have prior experience in the commercial real estate industry. Our research process includes from 25 to 30 collection and confirmation procedures on every property. We currently cover nine property types: office, industrial, retail, specialty, multi-family, mobile home, residential land, commercial land and industrial land. These property types are further categorized by nearly 150 specific use codes. We also research properties to see if they have one of over 45 detrimental conditions, such as asbestos or earthquake damage. Our proprietary software utilizes over 38 search categories to allow users to search the database efficiently and quickly. This software enables us to provide commercial real estate professionals with specific detailed and comprehensive coverage of virtually every commercial property sale in excess of $250,000 in most of our covered markets. We research real property transfers throughout the country to identify recent commercial property transactions. Typically, we review multiple sources of commercial real estate property information to identify transactions. Once a potential transaction is identified, in order to increase accuracy, our researchers inspect county courthouse records and extract pertinent information directly from the recorded deed into our database. Our researchers match the legal description of the deed with a tax or plat map and then proceed to perform a 32 site inspection on the commercial properties, including land. Our site inspections consist of photographing the building, measuring the building, if necessary, counting parking spaces, assessing property condition and construction and gathering tenant information. Our researchers then continue to ensure the accuracy of our sales data by interviewing buyers, sellers and brokers to confirm that the information we have collected is accurate and to gather additional data pertinent to the property and transaction. Through the telephone confirmation process, we are able to obtain additional property specific details including conditions of the sale, income and expense data and other information not readily available through public records or other traditional data sources. Our Services and Products We have developed advanced information services and products utilizing our proprietary database. In addition, we have acquired and further developed Internet transaction support products. These products use sophisticated Windows-based programs with Internet connectivity to access our database and present information in a variety of formats. Our services are used by brokers, lenders, appraisers, property owners, international accounting firms, tax appeal professionals, public sector agencies, investment banks and many others interested in the valuation of commercial real estate. Internet-Related Information Services Our information services allow our customers to use the Internet to access, view and report information in our proprietary database of commercial real estate sales transactions. The database contains over 400,000 sales comparable records in 35 of the top 74 markets in the U.S. . E-COMPS. E-COMPS, introduced in January 1998, provides a comprehensive search engine to access and search our proprietary database. Typically, commercial real estate professionals require the review of between four and seven sales comparable transactions to support a valuation decision. E-COMPS allows the customer to enter multiple search parameters, including location, property type, square footage, price range and number of units. Customers receive a summary report of all relevant properties in our database, including photographs. Customers may also choose to receive more detailed reports. . Pipeline. Pipeline, introduced in September 1998, allows registered customers to search, retrieve, view and print reports of properties in our work-in-process research database which includes unconfirmed and non-arms-length market sales transactions. Customers interested in knowing what the total market consists of, in addition to the confirmed data, use this product. . Spectrum. Spectrum, introduced in August 1998, allows our customers to integrate their data with our proprietary database information, including our sales comparables and for-sale listings. The customer may use the system as an extranet with all of their user locations linked through the Internet to our databases and their internal data housed at our facilities. Spectrum includes easy-to-use query and report writing functions including trend reporting and export features. Spectrum also provides its subscribers access to PRO/FILES property reports. These customized property reports can include confirmed sales and lease comparables, property inspection, demographics and photographs. Transaction Support Products Our Internet-based transaction support products enhance the productivity of industry professionals by deploying information and tools necessary to support the sale, financing and insuring of commercial real estate. . REALBID. REALBID, introduced in 1997 and acquired by us in November 1998, allows our customers to view properties using a listing-broker's summary description. We then identify investors and match them with the property using REALBID's buyer profile database. Commercial listing- 33 brokers can use REALBID as a marketing tool to quickly identify, contact, inform and capture potential investors by notifying them of new listings by e-mail or facsimile. These brokers can also use REALBID to help organize competitive, efficient and orderly sales by leveraging the real-time nature of the Internet. We offer REALBID posting and broadcasting at a fixed fee per property. In 1998, REALBID supported approximately $3.0 billion in commercial real estate transactions. . DealPoint. DealPoint, introduced in January 1999, is our free commercial listing service whereby brokers can effectively market properties on the Internet. This service is currently only available in San Diego County, and we expect to roll it out nationally by the end of 1999 with extensive in-depth listings by the end of 2000. Brokers and prospective buyers use DealPoint to identify the properties for sale that meet their investment needs by selecting relevant search criteria and then viewing selected property information. Products in Development We are currently developing a product that will facilitate the financing of commercial properties by efficiently matching prospective borrowers' loan requirements with lenders' loan products. Prospective borrowers will be able to complete and submit comprehensive applications online to those lenders of choice. The prototype and product design work on this product is nearing completion; and the coding is scheduled to be completed on the software this year. We currently do not expect the remaining development costs relating to this product to be material. Non-Internet Related We also offer services that do not rely on the Internet as a means of delivery. While these services accounted for more than 90% of our revenue in 1998, we expect the percentage of our revenues represented by these products to diminish as more of our customers transition to using our services and products on the Internet. . COMPS Reports. COMPS Reports, introduced in 1982, is a paper-based service allowing customers to receive sales comparable reports. . CallCOMPS. CallCOMPS, introduced in 1986, is our phone service allowing customers to license sales comparable reports on a per use basis. . COMPSLink Windows. COMPSLink Windows, introduced in 1996, is a desktop product which provides access to our proprietary database through data diskette or CD-ROM. COMPSLink Windows allowed us to migrate the customer base from paper to electronic media during 1997 and 1998. Our Customers As of the end of 1998, we had over 4,000 customers, none of which accounted for more than 10% of our revenue. In 1998, our customers included: Arthur Andersen, LLP Grubb & Ellis Bank of America KPMG Peat Marwick, LLP Bankers Trust Co. Los Angeles County Assessor CB Richard Ellis Marcus & Millichap Cushman & Wakefield PricewaterhouseCoopers Deloitte & Touche, LLP Trammell Crow Co. Fannie Mae Union Pacific Corporation Federal Deposit Insurance Corporation Washington Mutual First Nationwide Bank Wells Fargo Bank GMAC World Savings and Loan
34 Our Sales and Marketing Efforts Sales Our sales efforts have been designed to address the specific market needs of our customers and prospective customers. We use a variety of tools and techniques including: . face-to-face sales calls; . telesales; . direct mail; . seminar marketing; and . contact management software to build a centralized database which is regularly synchronized. Our sales force focuses on subscription services for all products. There are three teams involved in our sales efforts: . Major Account Team. Our major account team is responsible for managing our relationships with a select number of customers and prospects meeting our pre- defined criteria. Major account representatives are strategically located in key cities across the country in order to serve the needs of our largest and most strategic accounts. Account assignments for this group include many of the country's key brokers, lenders, fee appraisers, tax appeal professionals and governmental entities. . Field Sales Team. We deploy our field sales team in strategic locations across the country in order to meet the specific needs of a local market. Field sales representatives are responsible for managing accounts and prospects in a specific geographic area. . Telesales Team. Our telesales team is located in San Diego and assumes the field sales role in our established western markets. In this capacity, they are also responsible for building and maintaining relationships with a wide variety of subscription customers within a specific geographic area. Additionally, this team provides telephone prospecting and sales support for all markets nationally. When we enter a new market we build a database of key prospects and then execute a market opening campaign. Expansion into new markets is coordinated among all sales teams. Prospects are notified via direct mail and fax followed by a telesales blitz designed to qualify and invite prospects to a seminar launching sales in the market. The seminar is followed by face-to-face sales calls. This local activity is leveraged by agreements with national customers which have been put in place by the major accounts team. The process of opening new markets has been refined as we have expanded and is designed to achieve the fastest possible sales growth. Marketing We use a multi-faceted marketing strategy, leveraging our own research to effectively target both individual professionals and organizations. We employ a combination of personal selling, telesales, online and off-line advertising, direct mail, fax and e-mail programs, public relations and industry trade shows to promote product sales. Off-line advertising is focused on print media specifically concerned with commercial real estate. Print advertising is used to build corporate image, promote new products and announce new geographic coverage. Some vehicles include Commercial Property News, National Real Estate Investor and Real Estate Forum. We use regional real estate and business journals to introduce products and new markets. We also use direct mail, fax and e-mail programs to support new products and market expansion. Through our prospect and customer database, we deliver a highly tailored message directly to those most likely to buy. Mail is used when the message is detailed and color can be used to effectively illustrate the marketing message. 35 E-mail and fax are used when communication needs to be swift and when the message will not suffer because of the lack of resolution or graphics. We augment our database by licensing or purchasing lists and other sources to achieve the most comprehensive database of all users of commercial real estate information and services. In all direct marketing efforts, the Web site is utilized as a marketing tool, to help explain our services. In order to market our Web site, www.comps.com, we: . market to industry associations; . establish relationships with commercial real estate Web sites; . use online advertising to drive traffic to our Web site; and . provide discounts and limited free information to entice potential customers to our Web site. Public relations efforts are both national and regional. We use traditional releases to communicate news regarding our company and to maintain brand awareness. We also use public relations as a tool to educate editors on the type of data we offer and are regarded as an information source by editors. Speaking engagements are also used to communicate the expertise of our staff and quality of our data. Attendance at industry tradeshows and seminars reinforces relationships with our core user groups. We also host our own seminars to promote good use of our products and provide valuable customer service. These venues allow for the in- depth demonstration of our products to highly motivated, captive audiences. Our Markets Our database currently covers the following 35 markets, which represent 102 counties and 48 of the 100 largest U.S. cities: Atlanta San Francisco Austin Fresno Oakland [/R] Jacksonville Orange County, CA San Jose Baltimore Las Vegas Orlando Seattle Boston Los Angeles Palm Beach County Stockton/Modesto, Chicago Marin-North SF Philadelphia CA Colorado Bay Area Phoenix Tampa/Saint Springs Miami Portland Petersburg Dallas/Fort New York City- Tucson Worth Manhattan Riverside/San Ventura, CA Denver Bernardino, CA Washington, Fort Lauderdale Newark [/R] D.C./ Sacramento (Broward San Diego No. Virginia County) Infrastructure, Operations and Technology Our Web site is hosted by servers located at our facilities in San Diego, California, and is also hosted by UUNET and RealPage. All data and applications are stored and executed from the facilities in San Diego, California. We maintain multiple Internet servers, which run Microsoft Windows NT operating systems and use Microsoft Internet Information Server. We maintain high-speed Internet access through both UUNET and VERIO and we maintain back-up connections with both of them to ensure our systems continue to work in case of breakdowns or other problems. Compaq multi-processor servers are used to host our Web site. We configure our servers to minimize downtime associated with hardware failures. Additionally, all Internet and database servers have backup components to ensure reliability. Backups of all servers are run daily and sent weekly to an off-site data storage facility. All servers maintained in our San Diego, California offices are kept in a secured facility with central air conditioning and a centralized UPS system. All Internet traffic is 36 logged and filtered by dedicated servers whose purpose is to protect our computer systems from unauthorized access. An anti-virus scanning solution is used on all computer systems and servers to protect against computer viruses and monitor inbound and outbound e-mail. Nonetheless, our operations are dependent on our ability to protect our facilities and equipment against damage from fire, earthquakes, power loss, water damage, telecommunications failures, vandalism, computer viruses, hacker attacks and other malicious acts, and similar unexpected material adverse events. For further information regarding these issues, please see "Risk Factors--Increased users straining our systems and other systems malfunctions could materially adversely affect our business." We have developed a proprietary accounting system used to capture the revenue generated by our transaction and subscription-based business. The system maintains our list of customers and products and includes an installment- billing module to provide the billing flexibility required by our customers. The resulting revenue transaction details are summarized and fed into our accounting system. Rapidly changing technology, evolving standards, frequent new and upgraded products, and rapid expansion characterize our business. To be successful, we must adapt to our market by continually improving the performance, features, and reliability of our services. Management Systems As we enter new markets, we must integrate new and existing data into our databases. Additionally, we must integrate automated and non-automated controls to manage our data collection process to ensure data integrity. Automated data validation controls are used in both the initial research worksheet application and the final data collection application. These data validation controls ensure data integrity by checking against a valid range of values as soon as data is entered into input screens. These controls eliminate erroneous data in critical fields, such as recorded date, sale price and appraisal values. The controls also ensure the use of industry standard terminology. A final edit check feature ensures the information entered is logically related. Computer and Communications Hardware We maintain 24 Novell and/or Windows NT servers to support our corporate databases, internal applications and Internet services. We also maintain a national network that allows high speed access which gives remote researchers up to the minute access to our databases, internal applications and Internet services. All servers are protected by secured firewalls. We also maintain backup drive arrays and inventories of spare parts to minimize potential system downtime. Finally, we store full data backups of servers off-site. We currently keep our main property inventory related databases on Compaq enterprise servers running Microsoft Windows NT. The database management software is Microsoft Server. Databases are replicated on to additional Compaq enterprise servers that are located outside the network firewall. This configuration allows users of our applications to access relevant data without gaining access to internal network systems. We maintain up-to-date copies of primary databases for backup. Software Systems Our software systems have kept pace with the evolution of technology. These systems currently use client server architecture to optimize management of our internal data collection. The custom client server applications facilitate the data collection process. The custom client server applications span the entire data collection process, from initial research to identification of potential records through the collection of verified and value-added information. Our software enables us to continuously enhance the process through: productivity, attaining superior data quality and maintaining data integrity. Additionally, these custom applications allow publication of finalized transactions meeting quality and editing controls. 37 Competition The market for information systems and services is generally competitive and rapidly changing. The market for Internet services and providers is relatively new, intensely competitive and rapidly changing. In the commercial real estate industry, the principal competitive factors are: . quality and depth of the underlying databases; . the proprietary nature of methodologies, databases and technical resources; . the usefulness of the data and reports generated by the software; . effectiveness of marketing and sales efforts; . customer service and support; . compatibility with the customer's existing information systems; . vendor reputation; . price; . timeliness; and . brand loyalty among customers and individual users. We compete directly and indirectly for customers and content providers with the following categories of companies: . publishers and distributors of traditional information services, such as national provider, Realty Information Group, regional providers such as Realty Information Tracking Services, Inc., Databank, Dressco, Inc., Revac, Baca Landata and several smaller local providers, many of which have or may establish Web sites; . online services or Web sites targeted to commercial real estate brokers, buyers and sellers of commercial real estate properties, insurance companies, mortgage brokers and lenders, such as LoopNet, Inc., Commrex, Commercial Search, American Real Estate Exchange, Association of Industrial Realtors, Property Line, CLOAN, Datamerge, A Big Deal.com, Property First, First Realty Advisors, and numerous small regional and local sites; and . public record providers such as Experian, Acxiom DataQuick and TransAmerica, though many of our customers view these public record providers as complementary to our services and often subscribe to one of these services as well as our service. We believe our proprietary database and content compete favorably with our competitors. However, many of our existing competitors, as well as a number of potential new competitors, have longer operating histories in the Internet market, greater name recognition, larger customer bases, greater user traffic and significantly greater financial, technical and marketing resources. In order to gain market acceptance, we may elect to provide products at reduced prices or at no cost. Our competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, subscribers, distribution partners and content providers and may be able to respond more quickly to new or emerging technologies and changes in Internet user requirements. Intellectual Property We rely primarily on a combination of copyrights, trademarks, trade secret laws, our subscriber agreements and restrictions on disclosure to protect our intellectual property, such as our proprietary database, software, trademarks, trade names and trade secrets. We enter into agreements with our customers that grant our customers revocable, non-transferable, non-exclusive licenses to use the information and the software on our Web site. These agreements also contain confidentiality provisions and other provisions prohibiting our 38 customers from reproducing the information or software they access on our Web site. We also enter into confidentiality agreements with our employees and consultants, and seek to control access to and distribution of our other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the content of our Web site or our other intellectual property without authorization. There can be no assurance that these precautions will prevent misappropriation, infringement or other violations of our intellectual property. A failure to protect our intellectual property in a meaningful manner could have a material adverse effect on our business. In addition, we may need to engage in litigation in order to enforce our intellectual property rights in the future or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management and other resources, either of which could have a material adverse effect on our business. We also license data and content from public record providers such as Experian, Acxiom DataQuick and TransAmerica. Experian has agreed to publish a subset of our data as a stand-alone product and to make such data available through its online services. Acxiom DataQuick has granted us a non-exclusive, non-transferable license to their real property ownership data conveyed on magnetic tape or by electronic transmission through any online system. TransAmerica granted us a limited non-exclusive, non-transferable license to use its Metroscan CD-Rom database for certain localities, together with its Metroscan software. We believe that factors such as technical and creative skills of our personnel and ongoing reliable product maintenance and support are critical factors in establishing and maintaining our leadership position in the commercial real estate industry due to the rapid pace of innovation within the software and Internet industries. Employees As of March 31, 1999, we had approximately 265 employees of whom approximately 45 were part-time employees. We have never had a work stoppage and, as of the date of this prospectus, no personnel are represented under collective bargaining agreements. We consider our employee relations to be good. However, for further information regarding employees, please see "Risk Factors--If we are unable to retain key personnel or attract new personnel, it could have a material adverse effect on our business." Facilities Our principal administrative, sales, marketing, research and product development facilities are located in approximately 37,352 square feet of office space in San Diego, California. We lease our facility from a limited partnership whose general partner is a company owned by Mr. Crane, our President, Chief Executive Officer and Chairman of the Board. In addition, Mr. Beasley, one of our directors, is a limited partner of the limited partnership from which we lease our facilities. Our lease is for a five-year term commencing in February 1999 with five two-year extension options. For further information regarding this transaction, please see "Certain Relationships and Related Transactions." We also rent office space in Burlingame, California, Phoenix, Arizona, and Vienna, Virginia. We believe our current facilities will be adequate to meet our needs for the foreseeable future. However, please see "Risk Factors--Increased users straining our systems and other systems malfunctions could materially adversely affect our business," for further information regarding our facilities. Legal Proceedings As of the date of this prospectus, we are not a party to any material legal proceedings. 39 Management Executive Officers and Directors Set forth below is the name, age, position and a brief account of the business experience of each of our executive officers and directors.
Name Age Position ---------------------------- --- -------------------------------------------- Christopher A. Crane........ 47 Chairman of the Board, Chief Executive Officer and President Emmett R. DeMoss, Jr. ...... 63 Vice President and Chairman of REALBID Division Walter W. Papciak........... 60 Executive Vice President of Sales, Marketing and Product Development Michael Arabe............... 52 Senior Vice President of Sales Craig S. Farrington......... 40 Vice President of Product Marketing and Development Karen Goodrum............... 41 Vice President of Finance and Administration and Chief Financial Officer and Secretary Joseph A. Mannina........... 34 Vice President of Operations Robert C. Beasley (2)....... 61 Director Gregory M. Avis (1)(2)...... 40 Director Kenneth F. Potashner 41 Director (1)(2).....................
- -------- (1) Member of the compensation committee. (2) Member of the audit committee. Christopher A. Crane has served as our President, Chief Executive Officer and Chairman of the Board since August 1992. Prior to joining us, Mr. Crane served as Group President and a director of Nitches, Inc., an apparel company, and as Vice President of Corporate Development for Oster Communications, Inc., an international financial database publishing company. Mr. Crane received his B.S. in finance summa cum laude from Boston College and his M.B.A. from Harvard University. Emmett R. DeMoss, Jr. has served as our Vice President and Chairman of our REALBID division since November 1998. In October 1994, Mr. DeMoss co-founded REALBID, LLC, an Internet marketing services company specializing in transactional support of high-end commercial property sales, and from June 1997 until November 1998, Mr. DeMoss served as a Manager of REALBID, LLC. From October 1993 until September 1994, Mr. DeMoss served as President of Ironstone Company, a real estate tax appeal service. Mr. DeMoss previously served for over 10 years in a number of senior executive positions with Grubb & Ellis, a real estate brokerage and property management firm, including Executive Vice President, Chief Operating Officer, Senior Vice President, Chief Financial Officer and as a director. Mr. DeMoss received his B.S. in engineering from Princeton University and his M.B.A. from Stanford Business School. Walter W. Papciak has served as our Executive Vice President of Sales, Marketing and Product Development since August 1995. From October 1994 until July 1995 Mr. Papciak served as Executive Vice President of QED, Inc., an education database company. From May 1994 until September 1994, Mr. Papciak worked as a consultant on various internet and database projects. From January 1985 until April 1994, Mr. Papciak was Senior Vice President of Computer Intelligence, the computer and communications industry research and market information division of Ziff-Davis. Mr. Papciak received his B.S. in physics and his M.B.A. in information systems from Wayne State University. Michael Arabe has been one of our senior executives since 1989 and has served as our Senior Vice President of Sales since January 1996. Prior to joining us, Mr. Arabe was a sales executive with Celluland, Inc. Mr. Arabe received his B.S. in economics from Louisiana State University. Craig S. Farrington has served as our Vice President of Product Marketing and Development since September 1996 . Mr. Farrington previously served as Vice President of our CallCOMPS division from January 1993 until August 1996 and has held various other positions with us since 1983. Mr. Farrington received his B.A. in business and economics from Westmont College. 40 Karen Goodrum has served as our Vice President of Finance and Administration since September 1993 and our Chief Financial Officer since January 1997 and our Secretary since February 1999. Ms. Goodrum previously served as our Vice President and Controller from October 1988 until August 1993. Ms. Goodrum received her B.A. in education from the University of Maryland and her M.B.A. from San Diego State University. Joseph A. Mannina has served as our Vice President of Operations since August 1998. Mr. Mannina previously served as our Director of East Coast Operations from January 1994 until July 1998 and has served in various other positions at COMPS since 1988. Mr. Mannina received his B.S. in economics from the University of California, Berkeley. Robert C. Beasley is our founder and has served as as one of our directors since August 1992. Mr. Beasley previously served as our Secretary from October 1984 until February 1989. Mr. Beasley founded COMPS, Inc., our predecessor, in December 1981 and served as its President from December 1981 until March 1992. Mr. Beasley has over 34 years of experience in commercial real estate as a broker, researcher, lender and developer. Mr. Beasley received his B.A. in Business Administration from Claremont McKenna College. He also graduated from Westminster Theological Seminary. Gregory M. Avis has served as one of our directors since October 1994. Mr. Avis is currently a Managing General Partner of Summit Partners, a private venture capital firm, and has held various positions at Summit Partners since 1984. Mr. Avis is a member of the board of directors of six other publicly traded companies: Powerwave Technologies, Inc.; Splash Technology Holdings, Inc.; ClonTech Laboratories, Inc; Nxtrend Technology, Inc.; Ditech Corp.; and Extended Systems, Inc. Mr. Avis received his B.A. in political economics cum laude from Williams College and his M.B.A. with distinction from Harvard Business School. Kenneth F. Potashner has served as one of our directors since February 1999. Since November 1998, Mr. Potashner has served as the Chief Executive Officer of S3 Incorporated, a manufacturer of embedded graphics accelerator chips. Since April 1996, Mr. Potashner has served as the Chairman of the Board of Directors of Maxwell Technologies, Inc., a developer of pulse power technologies. From April 1996 until November 1998, Mr. Potashner served as the President, Chief Executive Officer and Chief Operating Officer of Maxwell Technologies. From November 1994 to April 1996, Mr. Potashner served as Executive Vice President of Operations of Conner Peripherals, a designer and manufacturer of information storage solution products for computer applications. From March 1991 to October 1994, Mr. Potashner was Vice President of Product Engineering for Quantum Corporation, a designer and manufacturer of hard drives for computer systems. Mr. Potashner received his B.S.E.E. from Lafayette College and his M.S.E.E. from Southern Methodist University. Other Key Employees Set forth below is the name, age, position and a brief account of the business experience of certain of our other key employees.
Name Age Position --------------------------------- --- --------------------------------------- Christopher T. Fenton............ 43 Vice President of Corporate Development Vice President of Commercial Listing Herbert D. Steele................ 55 Services Lori Reisinger................... 37 Regional Vice President Vicki Ridley..................... 35 Regional Vice President Assistant Vice President of Product Bob Evatt........................ 42 Development Assistant Vice President of Information Donald Ward...................... 37 Technology Robert A. Potter, Jr. ........... 44 President of REALBID Division
Christopher T. Fenton has served as our Vice President of Corporate Development since August 1998. Mr. Fenton also served as our Vice President of Operations from June 1990 until July 1998 and held various other positions with us since 1985. Mr. Fenton received his B.S. in finance magna cum laude from San Diego State University. 41 Herbert D. Steele has served as our Vice President of Commercial Listing Services since June 1998. From April 1996 until May 1998, Mr. Steele was Executive Vice President of REAL USA, LLC, an online, subscription-based national listing service for commercial real estate. From November 1991 until March 1996, Mr. Steele served as Executive Vice President of The Carlson Company, an asset and property management company. Prior to that Mr. Steele founded The Cornerstone Corporation, a commercial mortgage brokerage company, and served as its President. Mr. Steele received his B.A. in english literature from Duke University and his M.B.A. from the University of Connecticut. Lori Reisinger has served as our Regional Vice President in Burlingame, California since July 1994. Ms. Reisinger has held various positions with us since 1986. Ms. Reisinger received her B.A. in political science from Southern Oregon State College. Vicki Ridley has served as our Regional Vice President in Phoenix, Arizona since April 1997. Ms. Ridley has held various positions with us since 1987. Ms. Ridley received her B.A. in finance from Arizona State University. Bob Evatt has served as our Assistant Vice President of Product Development since May 1996. From August 1986 until May 1996, Mr. Evatt was Assistant Vice President of Product Development for Equifax National Decision Systems, an information company. Mr. Evatt received his B.A. in geography from the University of Arizona and his M.S. in urban planning from the University of Washington. Donald Ward has served as our Assistant Vice President of Information Technology since March 1997. From October 1993 until March 1997, Mr. Ward was the director of Technical Services for Equifax National Decision Systems, an information company. Mr. Ward attended New Mexico State University and the University of Texas. Robert A. Potter, Jr. has served as President of our REALBID Division since we acquired REALBID in November 1998. In June 1992, Mr. Potter co-founded REALBID, LLC and from June 1992 until November 1998, Mr. Potter served as a Manager of REALBID, LLC. From January 1990 until December 1996, Mr. Potter served as Vice President, Pacific Rim Country Manager and Western Regional Manager for MBIA, a credit enhancement company. Mr. Potter received his B.A. in history from Santa Clara University and his M.B.A. from the University of California, Berkeley. Classes of the Board Our board currently has four members. Under our bylaws, beginning at our next annual meeting of stockholders, our board will be divided into two classes of directors serving staggered two-year terms, with one class of directors to be elected at each annual meeting of stockholders. Board Committees The audit committee of the board of directors was established in November 1997 and reviews, acts on and reports to the board of directors with respect to various auditing and accounting matters, including the recommendation of our auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of our independent auditors and our accounting practices. The members of the audit committee are Messrs. Avis, Beasley and Potashner. The compensation committee of the board of directors was established in November 1994 and recommends, reviews and oversees the salaries, benefits and stock option plans for our employees, consultants, directors and other individuals compensated by us. The compensation committee also administers our compensation plans. The members of the compensation committee are Messrs. Avis and Potashner. 42 Director Compensation We reimburse our directors for the reasonable expenses of attending the meetings of the board of directors or committees. Under our 1999 stock incentive plan, each individual who first becomes a non-employee member of the board of directors at any time after the completion of this offering will receive an option to purchase 12,000 shares of common stock on the date such individual joins the board of directors, provided such individual has not previously been employed by us or any parent or subsidiary corporation. In addition, on the date of each annual stockholders' meeting, beginning in 2000, each non-employee member of the board of directors will automatically be granted an option to purchase 2,000 shares of common stock, provided such individual has served as a non-employee member of the board of directors for at least six months. Please see "--Benefit Plans." Upon Mr. Potashner's election to the board in February 1999, our board granted Mr. Potashner options to purchase 23,839 shares of our common stock at an exercise price of $11.18 per share. The options vest on a yearly basis in equal installments over a four-year period and are exercisable for a 10 year term following the grant date. Mr. Potashner is paid $15,000 annually in director's fees. Compensation Committee Interlocks and Insider Participation Our compensation committee currently consists of Messrs. Avis and Potashner. Neither member of the compensation committee has been an officer or employee of us at any time. None of our executive officers serves as a member of the board of directors or compensation committee of any other company that has one or more executive officers serving as a member of our board of directors or compensation committee. Prior to the formation of the compensation committee in November 1994, the board of directors as a whole made decisions relating to compensation of our executive officers. Mr. Crane participated in all such discussions and decisions, except those regarding his own compensation. Employment and Severance Arrangements Most of our current employees have entered into agreements with us which contain certain restrictions and covenants. These provisions include covenants relating to the protection of our confidential information, the assignment of inventions, and restrictions on competition and soliciting our clients, employees, or independent contractors. In November 1994, we entered into employment agreements with each of Messrs. Arabe and Farrington, and in August 1995, we entered into an employment agreement with Mr. Papciak. Under these agreements, each of these employee's base salary may be increased or decreased from time-to-time, in the sole discretion of our management. Each such employee is also eligible to receive an incentive bonus determined by our compensation committee. If any of these employees is terminated for reasons other than good cause, he will be entitled to receive six months' salary and a pro-rata portion of his incentive bonus. In October 1994, we entered into an employment agreement with Mr. Crane. Under this agreement, Mr. Crane's base salary may be increased or decreased from time-to-time, in the sole discretion of our compensation committee. Mr. Crane is also eligible to receive an incentive bonus determined by our compensation committee. If Mr. Crane's employment is terminated for reasons other than good cause, he will be entitled to receive eight months' salary and a pro-rata portion of his incentive bonus. In November 1994, we entered into an employment with Ms. Goodrum. Under this agreement, Ms. Goodrum's base salary may be increased or decreased from time- to-time, at our sole discretion. Ms. Goodrum is also eligible to receive an incentive bonus. If Ms. Goodrum is terminated for reasons other than good cause, then she will be entitled to receive six months' salary and a pro-rata portion of her incentive bonus. We may terminate any of these employees at any time. For specific salary information in connection with our employment arrangements with the above individuals, please see "Management--Executive Compensation." 43 In addition, the compensation committee as plan administrator of our 1999 stock incentive plan will have the authority to grant options and to structure repurchase rights under that plan so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in control of us, whether by merger, asset sale, successful tender offer for more than 50% of the outstanding voting stock or by a change in the majority of the board by reason of one or more contested elections for board membership; with such vesting shall occur either at the time of such change in control or upon the subsequent involuntary termination of the individual's service within a designated period, not to exceed 18 months, following such change in control. Executive Compensation The following table sets forth all compensation received during the year ended December 31, 1998 by our Chief Executive Officer and our other four executive officers whose salary and bonus exceeded $100,000 in 1998 for services rendered in all capacities to us during 1998. "All other compensation" represents matching payments under our 401(k) plan. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ---------------- ------------ Shares Underlying All Other Name and Principal Position Salary Bonus Options/SARs Compensation - --------------------------- -------- ------- ------------ ------------ Christopher A. Crane................ $150,000 $65,000 -- $1,500 Chairman of the Board, Chief Executive Officer and President Walter W. Papciak................... 150,000 22,653 6,602 -- Executive Vice President of Sales, Marketing and Product Development Michael Arabe....................... 129,887 5,764 13,203 974 Senior Vice President of Sales Craig S. Farrington................. 102,240 9,790 -- 850 Vice President of Product Marketing and Development Karen Goodrum....................... 81,167 21,500 -- 615 Vice President of Finance and Administration and Chief Financial Officer
44 Option Grants in Last Fiscal Year The following table sets forth certain information regarding options granted to our executive officers listed in the Summary Compensation Table during the fiscal year ended December 31, 1998. We have not granted any stock appreciation rights. Each option represents the right to purchase one share of common stock. The options shown in this table are all incentive stock options granted pursuant to our stock option plans. The options become exercisable at a rate of 20% per year. To the extent not already exercisable, of these options may also accelerate and become exercisable in the event of a merger in which we are not the surviving corporation or upon the sale of substantially all of our assets. Please see "--Benefit Plans" for more details regarding these options. In the year ended December 31, 1998, we granted options to purchase an aggregate of 1,143,672 shares of common stock. Option Grants In Last Fiscal Year
Potential Realizable Individual Grants Value at Assumed --------------------------------------------- Annual Rates Of Number of % of Total Stock Price Securities Options/SARs Appreciation Underlying Granted to For Option Term Options/SARs Employees In Exercise Expiration --------------------- Name Granted 1998 Price Date 5% 10% - ---- ------------ ------------ -------- ---------- ---------- ---------- Christopher A. Crane.... -- -- -- -- -- -- Walter W. Papciak....... 6,602 * $0.61 02/11/08 $ 2,547 $ 6,455 Michael Arabe........... 13,203 1.15% 1.36 06/29/08 11,320 28,687 Craig S. Farrington..... -- -- -- -- -- -- Karen Goodrum........... -- -- -- -- -- --
- -------- * Less than 1% of total The potential realizable value, at assumed annual rates of stock price appreciation for the option term, represents hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock prices. These amounts represent assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock and overall stock market conditions. The amounts reflected in the table may not necessarily be achieved. 45 Aggregated Option Exercises in the Year Ended December 31, 1998 and Year-End Option Values The following table sets forth information concerning the number and value of unexercised options held by each of the executive officers listed in the Summary Compensation Table at December 31, 1998. These option share numbers reflect the full acceleration of the vesting schedule of 96,822 options upon completion of this offering. None of these executive officers exercised options to purchase common stock during the year ended December 31, 1998.
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options December 31, 1998 at December 31, 1998 ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Christopher A. Crane........ -- -- -- -- Walter W. Papciak........... 49,291 23,325 $571,334 $269,014 Michael Arabe............... 49,291 29,927 571,334 334,282 Craig S. Farrington......... 49,291 16,724 571,334 193,846 Karen Goodrum............... 49,291 16,724 571,334 193,846
There was no public trading market for the common stock as of December 31, 1998. Accordingly, the value of unexercised in-the-money options listed above has been calculated on the basis of the assumed initial public offering price of $12.00 per share, less the applicable exercise price per share, multiplied by the number of shares underlying such options. Benefit Plans 1999 Stock Incentive Plan Our 1999 stock incentive plan is intended to serve as the successor equity incentive program to our amended and restated stock option plan, 1998 supplemental option plan, and 1998 equity participation plan. Our 1999 stock incentive plan was adopted by the board and stockholders in February 1999. Our 1999 stock incentive plan will become effective on the date the underwriting agreement is signed in connection with this offering of our common stock. All outstanding options under the predecessor plans will be incorporated into our 1999 stock incentive plan on the date this plan is effective, and no further option grants will be made under the predecessor plans after such date. The incorporated options will continue to be governed by their existing terms, unless the plan administrator elects to extend one or more features of our 1999 stock incentive plan to those options. Except as otherwise noted below, the incorporated options will have substantially the same terms as in effect for grants made under the discretionary option grant program of our 1999 stock incentive plan. An initial reserve of 2,800,000 shares of common stock has been authorized for issuance under our 1999 stock incentive plan. Such share reserve consists of: . approximately the number of shares which will remain available for issuance under the predecessor plans on the date our 1999 stock incentive plan becomes effective, including the shares subject to outstanding options thereunder, plus . an additional increase of approximately 752,007 shares. The number of shares of common stock reserved for issuance under our 1999 stock incentive plan will automatically increase on the first trading day in January each calendar year, beginning in calendar year 2000, by an amount equal to 2.5% of the total number of shares of common stock outstanding on the last trading day in December of the preceding calendar year, but in no event will any such annual increase exceed 500,000 shares. In addition, no participant in our 1999 stock incentive plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances for more than 700,000 shares of common stock in the aggregate per calendar year. 46 Our 1999 stock incentive plan is divided into five separate components: . the discretionary option grant program under which eligible individuals in our employ or service, including officers, non-employee board members and consultants, may, at the discretion of the plan administrator, be granted options to purchase shares of common stock at an exercise price not less than 100% of the fair market value of those shares on the grant date, . the stock issuance program under which such individuals may, in the plan administrator's discretion, be issued shares of common stock directly, through the purchase of such shares at a price not less than 100% of their fair market value at the time of issuance or as a bonus tied to the performance of services, . the salary investment option grant program which may, at the plan administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow executive officers and other highly compensated employees the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants, . the automatic option grant program under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of common stock at an exercise price equal to 100% of the fair market value of those shares on the grant date and . the director fee option grant program which may, in the plan administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow non-employee board members the opportunity to apply a portion of the annual retainer fee otherwise payable to them in cash each year to the acquisition of special below-market option grants. The discretionary option grant program and the stock issuance program will be administered by the compensation committee. The compensation committee as plan administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non- statutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. However, the board acting by disinterested majority will have the exclusive authority to make any discretionary option grants or stock issuances to members of the compensation committee. The compensation committee will also have the exclusive authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program in the event that program is activated for one or more calendar years. Neither the compensation committee nor the board will exercise any administrative discretion with respect to option grants under the salary investment option grant program or under the automatic option grant or director fee option grant program for the non-employee board members. All grants under those latter three programs will be made in strict compliance with the express provisions of each such program. The exercise price for the shares of common stock subject to option grants made under our 1999 stock incentive plan may be paid in cash or in shares of common stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the plan administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. The plan administrator will have the authority to effect the cancellation of outstanding options under the discretionary option grant program, including options incorporated from the predecessor plans, in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. Stock appreciation rights are authorized 47 for issuance under the discretionary option grant program. Such rights will provide the holders with the election to surrender their outstanding options for an appreciation distribution from us equal to the excess of: . the fair market value of the vested shares of common stock subject to the surrendered option over . the aggregate exercise price payable for those shares. Such appreciation distribution may be made in cash or in shares of common stock. None of the incorporated options from the predecessor plans contain any stock appreciation rights. In the event that we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation will automatically accelerate in full, and all unvested shares under the discretionary option grant and stock issuance programs will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. The plan administrator will have complete discretion to grant one or more options under the discretionary option grant program which will become fully exercisable for all the option shares in the event those options are assumed in the acquisition and the optionee's service with us or the acquiring entity involuntarily terminates within a designated period not exceeding 18 months following such acquisition. The vesting of outstanding shares under the stock issuance program may be accelerated upon similar terms and conditions. The plan administrator will also have the authority to grant options which will immediately vest upon an acquisition of us, whether or not those options are assumed by the successor corporation. The plan administrator is also authorized under the discretionary option grant and stock issuance programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in ownership or control of us, whether this change in ownership or control is by a successful tender offer for more than 50% of the outstanding voting stock or by a change in the majority of the board by reason of one or more contested elections for board membership. Such accelerated vesting may occur either at the time of such change or upon the subsequent involuntary termination of the individual's service within a designated period, not to exceed 18 months, following such change in control. The options incorporated from the predecessor plans may, in the plan administrator's discretion, immediately vest in the event of: . our merger or consolidation, or . the acquisition by another corporation or person of all or substantially all of our assets or 80% or more of our then outstanding voting stock, unless those options are assumed or substituted in the acquisition of us. The plan administrator will have the discretion to extend the acceleration provisions of our 1999 stock incentive plan to any or all of the options outstanding under the predecessor plans. In the event the plan administrator elects to activate the salary investment option grant program for one or more calendar years, each of our executive officers and other highly compensated employees selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. Each selected individual who files such a timely election will automatically be granted, on the first trading day in January of the calendar year for which that salary reduction is to be in effect, a non- statutory option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of common stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the total spread on the option shares at the time of grant, which is the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares, will be equal to the amount of salary invested in that option. The option 48 will vest and become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect and will be subject to full and immediate vesting upon the changes in the ownership or control of us described in the preceding paragraph. Under the automatic option grant program, each individual who first becomes a non-employee board member at any time after the completion of this offering will automatically receive an option grant for 12,000 shares on the date such individual joins the board, provided such individual has not been in our prior employ. In addition, on the date of each annual stockholders meeting held after the completion of this offering, each non-employee board member who is to continue to serve as a non-employee board member will automatically be granted an option to purchase 2,000 shares of common stock, provided such individual has served on our board for at least six months. Each automatic grant will have a term of 10 years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, any unvested shares purchased under the option will be subject to repurchase by us, at the exercise price paid per share, should the optionee cease board service prior to vesting in those shares. The shares subject to each 12,000-share automatic option grant will vest in a series of eight successive equal semi- annual installments upon the individual's completion of each six-month period of board service over the four-year period measured from the option grant date. Each 2,000-share automatic option grant will vest in two successive equal semi- annual installments upon the individual's completion of each six month period of board service over the one year period measured from the option grant date. However, the shares subject to each automatic grant will immediately vest in full upon the changes in control or ownership of us described above or upon the optionee's death or disability while a board member. Should the director fee option grant program be activated in the future, each non-employee board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of common stock on the grant date. As a result, the total spread on the option, which is the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares will be equal to the portion of the retainer fee invested in that option. The option will vest and become exercisable for the option shares in a series of 12 equal monthly installments over the calendar year for which the election is to be in effect. However, the option will become immediately exercisable and vested for all the option shares upon: . changes in the ownership or control of us described above or . the death or disability of the optionee while serving as a board member. The shares subject to each option under the salary investment option grant, automatic option grant and director fee option grant programs will immediately vest upon: . an acquisition of us by merger or asset sale or . the successful completion of a tender offer for more than 50% of our outstanding voting stock or a change in the majority of the board effected through one or more contested elections for board membership. Limited stock appreciation rights will automatically be included as part of each grant made under the automatic option grant, salary investment option grant and director fee option grant programs and may be granted to one or more of our officers as part of their option grants under the discretionary option grant program. Options with such a limited stock appreciation right may be surrendered to us upon the successful 49 completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share equal to the excess of: . the highest price per share of common stock paid in connection with the tender offer over . the exercise price payable for such share. The board may amend or modify our 1999 stock incentive plan at any time, subject to any required stockholder approval. Our 1999 stock incentive plan will terminate on the earliest of: . February 18, 2009, . the date on which all shares available for issuance under our 1999 stock incentive plan have been issued as fully-vested shares or . the termination of all outstanding options in connection with changes in control or ownership of us described above. 1999 Employee Stock Purchase Plan Our 1999 employee stock purchase plan was adopted by the board and stockholders in February 1999 and will become effective immediately upon the execution of the underwriting agreement for this offering. Our employee stock purchase plan is designed to allow our eligible employees to purchase shares of common stock, at semi-annual intervals, through their periodic payroll deductions under our employee stock purchase plan. An initial reserve of 300,000 shares of common stock has been authorized for issuance under our employee stock purchase plan. The number of shares of common stock reserved for issuance under our employee stock purchase plan will automatically increase on the first trading day in January each calendar year, beginning in calendar year 2000, by an amount equal to 2% of the total number of shares of common stock outstanding on the last trading day in December of the preceding calendar year, but in no event will any such annual increase exceed 300,000 shares. Our employee stock purchase plan will be implemented in a series of successive offering periods, each with a maximum duration for 24 months. However, the initial offering period will begin on the execution date of the underwriting agreement and will end on the last business day in July 2001. The next offering period will commence on the first business day in August 2001, and subsequent offering periods will commence as designated by the plan administrator. Individual employees who are scheduled to work more than 20 hours per week for more than 5 calendar months per year on the start date of any offering period may enter our employee stock purchase plan on that start date or on the first business day of February or August after that start date. Individuals who become eligible employees after the start date of the offering period may join our employee stock purchase plan on any subsequent semi-annual entry date within that offering period. Payroll deductions may not exceed 10% of the participant's cash earnings, and the accumulated payroll deductions of each participant will be applied to the purchase of shares on his or her behalf on the last business day in January and July each year at a purchase price per share equal to 85% of the lower of: . the fair market value of the common stock on the participant's entry date into the offering period or . the fair market value on the semi-annual purchase date. In no event, however, may any participant purchase more than 1,500 shares on any semi-annual purchase date nor may all participants in the aggregate purchase more than 75,000 shares on any such semi-annual purchase date. Should the fair market value per share of common stock on any purchase date be less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day, with all participants in the terminated offering to be automatically transferred to the new offering period. 50 In the event we are acquired by merger or asset sale, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such acquisition. The purchase price will be equal to 85% of the lower of: . the fair market value per share of common stock on the participant's entry date into the offering period in which such acquisition occurs or . the fair market value per share of common stock immediately prior to such acquisition. Our employee stock purchase plan will terminate on the earlier of: . the last business day of July 2009 . the date on which all shares available for issuance under our employee stock purchase plan shall have been sold pursuant to purchase rights exercised thereunder or . the date on which all purchase rights are exercised in connection with an acquisition of us by merger or asset sale. The board may at any time alter, suspend or discontinue our employee stock purchase plan. However, amendments to our employee stock purchase plan may require stockholder approval. 51 Certain Relationships and Related Transactions Certain Sales of Securities We have issued the following securities in private placement transactions: 4,270,336 shares of Series A preferred stock and Class B common stock warrants exercisable for 379,869 shares for an aggregate price of $5,000,000 in October 1994; and 637,790 shares of Series B preferred stock, Class A common stock warrants exercisable for 37,329 shares and Class B common stock warrants exercisable for 306,097 shares for an aggregate price of $1,150,000 in February 1998. These numbers do not reflect the 0.7335 for 1 stock split. The purchasers of such securities include, among others, the following executive officers, directors and holders of more than 5% of our outstanding stock and their affiliates:
Preferred Stock Warrants Executive Officer, Directors ------------------ --------------- Total and 5% Stockholders Series A Series B Class A Class B Consideration ---------------------------- --------- -------- ------- ------- ------------- Christopher A. Crane......... -- 69,325 37,329 -- $ 125,000 Funds Affiliated with Summit Partners(1)................. 4,270,336 554,600 -- 678,500 $6,000,000
- -------- (1) Includes Summit Ventures III, L.P. and Summit Investors II, L.P. Mr. Avis, one of our directors, is a general partner of Stamps, Woodsum & Co. III, a general partner of Summit Partners III, L.P. Summit Partners III, L.P. is the general partner of Summit Ventures III, L.P. Mr. Avis is also a general partner of Summit Investors II, L.P. For additional information regarding the sale of securities to executive officers, directors and stockholders of more than 5% of our outstanding common stock, please see "Principal and Selling Stockholders." Holders of outstanding preferred stock and common stock issuable upon exercise of warrants are entitled to registration rights with respect to the common stock issued or issuable upon conversion or exercise of such preferred stock or warrants. Please see "Description of Securities--Registration Rights." Employment Agreements We have entered into employment agreements with each of Messrs. Crane, Arabe, Farrington and Papciak and Ms. Goodrum. Please see "Management--Employment and Severance Arrangements" for more details regarding these agreements. In November 1994, we entered into an employment agreement with Mr. Fenton. Under this agreement, Mr. Fenton's base salary may be increased or decreased from time-to-time, at our sole discretion. Mr. Fenton is also eligible to receive an incentive bonus. If Mr. Fenton's employment is terminated for reasons other than good cause, then he will be entitled to receive six months' salary and a pro-rata portion of his incentive bonus. We may terminate Mr. Fenton at any time. Mr. Fenton's current salary under the employment agreement is $96,996 per year. In addition, Mr. Fenton's current potential quarterly incentive bonuses, to be determined pursuant to the terms of the employment agreement, are based upon 1.25% of Mr. Fenton's annual salary. In November 1998, we entered into employment agreements with each of Messrs. DeMoss and Potter. Under these agreements, both employees receive a base salary of at least $225,000 per year and a bonus of up to $50,000 per year. In addition, pursuant to the agreement, each employee was granted a fully vested option to purchase 5,076 shares of our common stock and an additional option to purchase 305,625 shares of our common stock 20% of which vested immediately and 80% of which vest over 48 months commencing on January 1, 1999. The term of each agreement expires on January 1, 2003. If either employee is terminated without cause prior to November 5, 2000, then he shall be entitled to receive twelve months' salary in exchange for consulting services. If either employee is terminated after November 5, 2000, then he shall receive his base salary for a period equal to the shorter of six months or the remaining term of his employment agreement in exchange for consulting services. During any period in which the terminated employee provides consulting services to us, his options will continue to vest. In any event, at least 75% of such terminated employee's options will vest if he is terminated without cause prior to January 1, 2003. 52 Corporate Headquarters Lease We lease our corporate headquarters in San Diego, California from a limited partnership whose general partner is a company owned by Mr. Crane, our President, Chief Executive Officer and Chairman of the Board. In addition, Mr. Beasley, one of our directors, is a limited partner of the limited partnership from which we lease our facilities. Our lease is for a five-year term commencing in February 1999 with five two-year extension options. We believe that the terms of the lease are no less favorable to us than those that could have been obtained from an independent third party lessor at the time the lease was executed. For additional information regarding our facility leases, please see "Business--Facilities." 53 Principal and Selling Stockholders The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 1999 on a pre-split basis and assuming the exercise of all warrants, and as adjusted to reflect the sale of the shares of common stock offered hereby, by: . each person (or group of affiliated persons) who we know owns beneficially 5% or more of our common stock, . each of our directors, . our executive officers listed in the Summary Compensation Table, and . all of our directors and executive officers as a group. Percentage of ownership is calculated as required by Commission Rule 13d- 3(d)(1). Except as indicated below, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The number of shares underlying options includes shares which are exercisable within 60 days from the date of this offering. The address for those individuals for which an address is not otherwise indicated is: 9888 Carroll Centre Road, Suite 100, San Diego, California 92126-4581. Mr. Crane, Mr. Beasley and Summit Partners may sell shares in connection with the exercise of the over-allotment option. Mr. Crane may sell up to 85,500 shares, Mr. Beasley may sell up to 85,500 shares and Summit Partners may sell up to 114,000 shares. Any shares that may be sold by selling stockholders if the underwriters exercise their over-allotment option have not been reflected in this table. For further information regarding the selling stockholders' relationship with us during the last three years, please see, "Management-- Executive Officers and Directors" and "Certain Relationships and Related Transactions."
Number of Percentage of Percentage of Number of Shares Shares Beneficially Shares Beneficially Shares Underlying Owned Prior Owned After Beneficial Owner Outstanding Options to this Offering this Offering - ---------------- ----------- ---------- ------------------- ------------------- Funds affiliated with Summit Partners........ 4,036,770 -- 52.67% 35.21% 499 Hamilton Avenue, Suite 200 Palo Alto, CA 94301 Christopher A. Crane.... 2,923,712 -- 38.15% 25.50% Gregory M. Avis......... 4,036,770 -- 52.67% 35.21% Robert C. Beasley....... 656,145 -- 8.56% 5.72% Kenneth F. Potashner.... -- -- * Walter W. Papciak....... -- 50,612 * 0.44% Michael Arabe........... -- 57,653 * 0.50% Craig S. Farrington..... -- 57,653 * 0.50% Karen Goodrum........... -- 57,653 * 0.50% All directors and executive officers as a group (8 persons)...... 7,616,627 223,571 99.41% 67.08%
- -------- * Less than 1% of total. The 5,322,616 shares listed above as outstanding for Summit Partners and Mr. Avis includes 4,728,437 shares beneficially owned by Summit Ventures III, L.P. and 96,499 shares beneficially owned by Summit Investors II, L.P. This number also includes 487,726 shares issuable upon exercise of warrants to purchase common stock beneficially owned by Summit Ventures III, L.P. and 10,086 shares issuable upon exercise of warrants to purchase common stock beneficially owned by Summit Investors II, L.P. Mr. Avis is a general partner of Stamps, Woodsum & Co. III, a general partner of Summit Partners III, L.P. Summit Partners III, L.P. is the general partner of Summit Ventures III, L.P. Mr. Avis is also a general partner of Summit Investors II, L.P. Mr. Avis disclaims beneficial ownership of all shares of common stock issued or issuable to Summit Ventures III, L.P. and Summit Investors II, L.P., except to the extent of his pecuniary interest, but exercises shared voting and investment power with respect to all such shares. 54 Description of Securities The following information describes our common stock and preferred stock and anti-takeover and indemnification provisions of our certificate of incorporation and our bylaws as will be in effect upon the closing of this offering. This description is only a summary. You should also refer to the certificate and bylaws which have been filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part. Where indicated below, the descriptions of our common stock and preferred stock reflect changes to our capital structure that will occur upon the approval of our board of directors and stockholders and upon the closing of this offering in accordance with the terms of the certificate. Upon the completion of the offering our authorized capital stock will consist of 70,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. Common Stock As of December 31, 1998, there were 3,533,534 shares of common stock outstanding and held of record by three stockholders. As of March 31, 1999, no additional shares of common stock were issued. Based upon the number of shares outstanding and giving effect to: . the automatic conversion of each share of our Class B common stock into shares of our Class A common stock and the renaming of Class A common stock as "common stock" upon the closing of this offering, . the automatic conversion of each share of our preferred stock into 0.7335 shares of our common stock upon the closing of this offering, . a 0.7335-for-1 stock split of our common stock to be effected prior to the closing of this offering and . the issuance of the 3,800,000 shares of common stock offered by us hereby, there will be 11,464,181 shares of common stock outstanding upon the closing of this offering. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available therefor, subject to any preferential dividend rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are, and the shares offered by us in this offering will be, when issued in consideration for payment thereof, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be materially adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future. Upon the closing of this offering, there will be no shares of preferred stock outstanding. Preferred Stock As of December 31, 1998, there were 4,908,126 shares of convertible preferred stock outstanding. As of March 31, 1999 no additional shares of convertible preferred stock were issued. Each outstanding share of convertible preferred stock will be converted into 0.7335 shares of common stock upon the closing of this offering and such shares of convertible preferred stock will no longer be authorized, issued or outstanding. Upon the closing of this offering, the board of directors will be authorized, without further stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock in one or more series and to fix or alter the designations, powers, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. We have no present plans to issue any shares of preferred stock. Please see "--Anti-Takeover Effects of Certain Provisions of Delaware Law and our Certificate of Incorporation and Bylaws." 55 Options As of December 31, 1998, options to purchase a total of 1,749,727 shares of common stock were outstanding, all of which are subject to lock-up arrangements under the terms of the option agreements. As of March 31, 1999 69,683 additional options were outstanding. Upon completion of this offering, options to purchase a total of 2,800,000 shares of common stock may be granted under the 1999 stock incentive plan. Please see "Management--Benefit Plans" and "Shares Eligible for Future Sale." Common Stock Warrants As of December 31, 1998, we have outstanding warrants to purchase a total of 530,537 shares of common stock, at an exercise price of $0.01 per share and warrants to purchase a total of 156,285 shares of common stock, at a weighted average exercise price of $2.40 per share. As of March 31, 1999, no additional warrants were issued. The warrants contain anti-dilution provisions providing for adjustments of the exercise price and the number of shares underlying the warrants upon the occurrence of dilutive events, including any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. The warrants grant their holders registration rights with respect to the common stock issuable upon their exercise, which are described below. All of these warrants will be exercisable immediately prior to this offering. Warrants to purchase 156,285 shares expire in September 2003, warrants to purchase 278,634 shares expire in October 2004, and warrants to purchase 251,903 in February 2008. Registration Rights As of December 31, 1998, pursuant to the terms of an agreement with preferred stock and warrantholders upon the closing of this offering, the holders of 4,286,933 shares of outstanding or issuable common stock will be entitled to demand registration rights with respect to the registration of their shares under the Securities Act of 1933. The holders of 50% of such shares are entitled to demand that we register their shares under the Securities Act of 1933, subject to limitations. We are not required to effect more than two such registrations for such holders pursuant to such demand registration rights. In addition, after the closing of this offering, these holders will be entitled to piggyback registration rights with respect to the registration of such shares of common stock under the Securities Act of 1933. In the event that we propose to register any shares of common stock under the Securities Act of 1933 either for our account or for the account of our other security holders, the holders of shares having piggyback rights are entitled to receive notice of such registration and are entitled to include their shares in any such registration, subject to limitations. Further, at any time after we become eligible to file a registration statement on Form S-3, the holders of 428,693 shares of common stock may require us to file registration statements under the Securities Act of 1933 on Form S-3 with respect to their shares of common stock. These registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock held by securityholders with registration rights to be included in such registration. We are generally required to bear all of the expenses of all such registrations, including the reasonable fees of a single counsel acting on behalf of all selling holders, except underwriting discounts and selling commissions. Registration of any of the shares of common stock held by securityholders with registration rights would result in such shares becoming freely tradable without restriction under the Securities Act of 1933 immediately upon effectiveness of such registration. Anti-Takeover Effects of Certain Provisions of Delaware Law and our Certificate of Incorporation and Bylaws We are subject to the provisions of Section 203 of the Delaware General Corporation Law. With limited exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained such status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A 56 "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. In addition, our certificate and bylaws, which will be in effect upon the closing of this offering, contain provisions which may be deemed to have an anti-takeover effect. These provisions, which are summarized in the following paragraphs, may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. Board of Directors Vacancies. Our bylaws authorize the board of directors to fill vacant directorships or increase the size of the board of directors. This may deter a stockholder from removing incumbent directors and simultaneously gaining control of the board of directors by filling the vacancies created by such removal with its own nominees. Staggered Board. Our bylaws provide that our board will be classified into two classes of directors beginning at the next annual meeting of stockholders. Please see "Management--Classes of the Board" for more information regarding the staggered board. Stockholder Action; Special Meeting of Stockholders. Our certificate provides that stockholders may not take action by written consent, but only at duly called annual or special meetings of stockholders. Our bylaws further provide that special meetings of our stockholders may be called only by the President, Chief Executive Officer or Chairman of the board of directors or a majority of the board of directors. Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, our principal executive offices not less than 120 days prior to the first anniversary of the date of our notice of annual meeting provided with respect to the previous year's annual meeting of stockholders; provided, that if no annual meeting of stockholders was held in the previous year or the date of the annual meeting of stockholders has been changed to be more than 30 calendar days earlier than such anniversary, notice by the stockholder, to be timely, must be so received a reasonable time before the solicitation is made. Our bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may preclude stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders. Authorized But Unissued Shares. Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to the limitations imposed by the Nasdaq National Market. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. Delaware law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. 57 Limitation of Liability and Indemnification Matters Our certificate provides that, except to the extent prohibited by Delaware law, our directors shall not be personally liable to us or our stockholders for monetary damages for any breach of their fiduciary duty as directors. Under Delaware law, the directors have a fiduciary duty to us which is not eliminated by this provision of our certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of their duty of loyalty to us for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involve intentional misconduct, or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the directors' responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Section 145 of the Delaware General Corporation Law allows a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that the indemnification does not eliminate or limit the liability of a director for the following: . any breach of the director's duty of loyalty to us or our stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock purchases or redemptions; and . any transaction from which the director derived an improper personal benefit. Delaware law further provides that the permitted indemnification shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under our bylaws, any agreement, a vote of stockholders or otherwise. Our certificate eliminates the personal liability of directors to the fullest extent permitted by Delaware law. In addition, our certificate provides that we may fully indemnify any person who was or is a party, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses, including attorney's fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. We have also entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our bylaws. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether Delaware law would permit indemnification. We have applied for liability insurance for our officers and directors. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under the certificate. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. Transfer Agent and Registrar The transfer agent and registrar for the common stock is American Stock Transfer & Trust Company. 58 Shares Eligible For Future Sale Prior to this offering, there has not been any public market for our common stock, and no prediction can be made as to the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities. After this offering, we will have outstanding 11,464,181 shares of common stock. Of these shares, the 3,800,000 shares being offered hereby are freely tradable. All of our directors and officers, stockholders, optionholders and warrantholders, who, as of March 31, 1999, held a total of 9,639,876 shares of our outstanding or issuable common stock have entered into lock-up agreements. Under these lock-up agreements, they have agreed that they will not sell, directly or indirectly, any shares of common stock without the prior written consent of Volpe Brown Whelan & Company, LLC, for a period of 180 days from the date of this prospectus. This leaves 7,664,181 shares eligible for sale in the public market as follows:
Number of Shares Date --------- ---- 0 After the date of this prospectus 7,664,881 180 days after the date of this prospectus (subject in some cases to volume limitations) (lockup and rule 144)
In general, under Rule 144, as currently in effect, a person or persons whose shares are required to be aggregated, including an affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of: . 1% of the then outstanding shares of common stock (approximately 115,000 shares immediately after this offering) or . the average weekly trading volume in the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to restrictions. In addition, a person who is not deemed to have been our affiliate 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 would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from one of our affiliates, such person's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. As of March 31, 1999, options to purchase a total of 1,819,409 shares of common stock were outstanding, of which options to purchase 482,547 shares were exercisable. Of the options to purchase 1,336,862 shares of common stock that were not exercisable, options to purchase 139,365 shares of common stock shall immediately vest and become exercisable upon the closing of this offering. Upon the closing of this offering, we intend to file a registration statement to register for resale the 2,800,000 shares of common stock reserved for issuance under our stock option plans. We expect such registration statement to become effective immediately upon filing. Shares issued upon the exercise of stock options granted under our stock option plans will be eligible for resale in the public market from time to time subject to vesting and the expiration of the 59 lock-up agreements referred to below. 109,860 shares of common stock are issuable upon exercise of options that were granted independent of any stock option plan. These shares will be freely tradable pursuant to Rule 701 and contractual obligations beginning 180 days after the date of this prospectus. As of March 31, 1998 preferred stock and warrantholders, holding approximately 4,286,933 shares of outstanding or issuable common stock had the right to include their shares in registration statements relating to our securities. By exercising their registration rights and causing a large number of shares to be registered and sold in the public market, these holders may cause the price of the common stock to fall. In addition, any demand to include such shares in our registration statements could have a material adverse effect on our ability to raise needed capital. Please see "Management--Benefit Plans," "Principal and Selling Stockholders," "Description of Securities--Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." 60 Underwriting Under the terms and conditions contained in an underwriting agreement among the underwriters and us, each of the underwriters, for whom Volpe Brown Whelan & Company, LLC, EVEREN Securities, Inc. and Needham & Company, Inc., are acting as representatives, have severally agreed to purchase from us the number of shares of common stock set forth opposite its name below:
Number of Underwriter Shares ----------- --------- Volpe Brown Whelan & Company, LLC.................................. EVEREN Securities, Inc. ........................................... Needham & Company, Inc. ........................................... --------- Total.......................................................... 3,800,000 =========
The underwriting agreement provides that the obligations of the several underwriters to purchase shares of common stock are subject to approval of certain legal matters by their counsel and to certain other conditions. Under the terms and conditions of the underwriting agreement, all of the underwriters are obligated to take and pay for all such shares of common stock if any are taken. The underwriters propose initially to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price, less a concession not in excess of $ per share. The underwriters may allow, and such dealers may reallow, concessions not in excess of $ per share of the common stock to certain other dealers. After the initial public offering of the common stock, the offering price of the common stock and other selling terms may be changed by the underwriters. The underwriters expect to deliver the shares against payment in San Francisco, California on , 1999. Pursuant to the underwriting agreement, we, together with the selling stockholders, have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 570,000 additional shares of common stock on the same terms and conditions as set forth on the cover page of this prospectus. The underwriters may exercise this option solely to cover over-allotments. To the extent such option is exercised, each underwriter will have a commitment subject to certain conditions, to purchase a number of additional shares of common stock proportionate to such underwriter's initial commitment pursuant to the underwriting agreement. From the date of this prospectus until 180 days after such date, we and all of our stockholders, officers and directors have agreed not to offer, sell, contract to sell, make any short sale, pledge or otherwise dispose of, directly or indirectly, any shares of common stock or any options to acquire shares of common stock or securities convertible into or exchangeable for any other rights to purchase or acquire common stock or enter into any swap or other agreements that transfers, in whole or in part, any of the economic consequences or ownership of common stock, without the prior consent of Volpe Brown Whelan & Company, LLC. The underwriters have reserved for sale, at the initial public offering price, 190,000 shares of common stock for certain of our directors, officers, employees, friends and family who have expressed an interest in purchasing shares of common stock in this offering. Such persons are expected to purchase, in the aggregate, not more than 5% of the common stock offered in this offering. The number of shares available for sale to the general public in this offering will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not purchased will be offered by the underwriters on the same basis as other shares offered hereby. We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, losses and expenses, including liabilities under the Securities Act of 1933, or to contribute to payments that the underwriters may be required to make in respect thereof. 61 Prior to this offering, there has been no public market for our common stock. The initial public offering price for the shares of common stock in this offering was determined by agreement between us and the underwriters. Among the factors considered in making such determination were the history of, and the prospects for, the industry in which we compete, an assessment of our management, our present operations, our historical results of operations and the trend of our revenues and earnings, our prospects for future earnings, the general condition of the securities markets at the time of this offering and the price of similar securities of generally comparable companies. We cannot assure you that an active trading market will develop for our common stock or that our common stock will trade in the public markets at or above the initial public offering price. In order to facilitate this offering, certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock during and after this offering. Specifically, the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than have been sold to them by us. The underwriters may elect to cover any such short position by purchasing shares of common stock in the open market or by exercising the over-allotment option granted to the underwriters. In addition, the underwriters may stabilize or maintain the price of the common stock by bidding for or purchasing shares of common stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed if shares of common stock previously distributed in this offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 62 Legal Matters The validity of the shares of common stock offered hereby will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Diego, California and for the underwriters by Katten Muchin & Zavis, Chicago, Illinois. Experts Ernst & Young LLP, independent auditors, have audited our financial statements and schedule included in this prospectus as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998, as set forth in their report, which is included in this prospectus. In addition, Ernst & Young LLP have audited the financial statements of REALBID, LLC included in this prospectus as of December 31, 1997 and for the period from its inception on June 19, 1997 to December 31, 1997, as set forth in their report, which is also included in this prospectus. Our financial statements and the financial statements of REALBID, LLC are included in this prospectus in reliance on Ernst & Young LLP's reports, given on their authority as experts in accounting and auditing. Where You Can Find More Information We have filed with the SEC a registration statement on Form S-1 including the exhibits, schedules and amendments to the registration statement under the Securities Act of 1933 with respect to the shares of common stock to be sold in this offering. This prospectus does not contain all the information set forth in the registration statement. For further information with respect to COMPS and the shares of common stock to be sold in this offering, please refer to the registration statement. All material terms of each contract, agreement or other document are described in this prospectus. However, statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the registration statement, each such statement being qualified by such reference. You may read and copy all or any portion of the registration statement or any other information we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings, including the registration statement, are also available to you on the Commission's Web site: http://www.sec.gov. As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Upon approval of the common stock for the quotation on the Nasdaq National Market, such reports, proxy and information statements and other information may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. We intend to furnish our stockholders with annual reports containing audited financial statements and with quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial information. 63 Index to Financial Statements
Page ---- COMPS.COM, Inc. Report of Ernst & Young LLP, Independent Auditors......................... F-2 Balance Sheets as of December 31, 1997 and 1998........................... F-3 Statements of Operations for the years ended December 31, 1996, 1997 and 1998..................................................................... F-4 Statements of Stockholders' Deficit for the years ended December 31, 1996, 1997 and 1998............................................................ F-5 Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998..................................................................... F-6 Notes to Financial Statements............................................. F-7 REALBID, LLC Report of Ernst & Young LLP, Independent Auditors......................... F-22 Statements of Operations for the period from June 19, 1997 (inception) to December 31, 1997 and the nine-month period ended September 30, 1998 (unaudited).............................................................. F-23 Statements of Members' Equity for the period from June 19, 1997 (inception) to December 31, 1997 and the nine-month period ended September 30, 1998 (unaudited)........................................... F-24 Statements of Cash Flows for the period from June 19, 1997 (inception) to December 31, 1997 and the nine-month period ended September 30, 1998 (unaudited).............................................................. F-25 Notes to Financial Statements............................................. F-26 Unaudited Pro Forma Condensed Statements of Operations Unaudited Pro Forma Condensed Statement of Operations..................... F-28 Notes to Unaudited Pro Forma Condensed Statement of Operations............ F-29
F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors COMPS.COM, Inc. We have audited the accompanying balance sheets of COMPS.COM, Inc. as of December 31, 1997 and 1998, and the related statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of COMPS.COM, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Ernst & Young LLP San Diego, California February 5, 1999, except for Note 15, as to which the date is April 1, 1999 F-2 COMPS.COM, Inc. Balance Sheets
Pro Forma December 31, Stockholders' ----------------------- Deficit at 1997 1998 December 31, 1998 ---------- ----------- ----------------- (Unaudited) Assets Current assets: Cash and cash equivalents.......... $ 351,621 $ 377,803 Accounts receivable, less allowance for bad debts and cancellations of $1,384,242 and $1,464,922 at December 31, 1997 and 1998, respectively...................... 2,298,167 3,165,817 Prepaid expenses................... 146,363 184,520 ---------- ----------- Total current assets................ 2,796,151 3,728,140 Furniture and equipment, net........ 1,203,750 1,470,538 Intangible assets, net.............. 53,485 2,162,350 Deposits and other assets........... 37,450 36,249 ---------- ----------- Total assets........................ $4,090,836 $ 7,397,277 ========== =========== Liabilities, redeemable preferred stock and stockholders' deficit Current liabilities: Accounts payable................... $ 358,638 $ 530,860 Accrued liabilities................ 934,953 1,019,647 Current portion of long-term debt.. 467,203 979,208 Current portion of capital lease obligations....................... 65,101 49,343 Deferred subscription revenue...... 4,023,228 5,502,869 ---------- ----------- Total current liabilities........... 5,849,123 8,081,927 Long-term debt, less current portion............................ 1,750,372 1,100,628 Capital lease obligations, less current portion.................... 71,955 22,612 Deferred rent....................... 108,906 71,187 ---------- ----------- Total liabilities................... 7,780,356 9,276,354 Commitments Redeemable convertible preferred stock, par value $.01 per share; 5,000,000 shares authorized: Series A, 4,270,336 shares issued and outstanding at December 31, 1997 and 1998..................... 5,815,806 6,114,730 $ -- Series B, 637,790 shares issued and outstanding at December 31, 1998.. -- 893,912 -- Stockholders' deficit: Class A common stock, par value $.01 per share; 16,503,750 shares authorized; 3,501,626 shares issued and outstanding (at stated value) at December 31, 1997 and 1998 (7,133,643 pro forma-- unaudited)........................ 29,219 29,219 65,655 Class B common stock, par value $.01 per share; 1,833,750 shares authorized; 31,907 shares issued and outstanding at December 31, 1998 (0 pro forma--unaudited)..... -- 435 -- Additional paid-in capital........ -- 4,669,150 11,641,791 Warrants.......................... -- 398,000 398,000 Deferred compensation............. -- (2,538,421) (2,538,421) Accumulated deficit............... (9,534,545) (11,446,102) (11,446,102) ---------- ----------- ----------- Total stockholders' deficit......... (9,505,326) (8,887,719) $(1,879,077) ---------- ----------- =========== Total liabilities, redeemable preferred stock and stockholders' deficit............................ $4,090,836 $ 7,397,277 ========== ===========
See accompanying notes. F-3 COMPS.COM, Inc. Statements of Operations
Years ended December 31, ------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Net revenues............................ $ 8,140,693 $10,449,936 $12,805,761 Cost of revenues........................ 4,356,973 5,053,998 5,746,180 ----------- ----------- ----------- Gross profit............................ 3,783,720 5,395,938 7,059,581 Operating expenses: Selling and marketing................. 2,812,596 3,407,906 4,181,945 Product development and engineering... 376,331 768,051 1,230,349 General and administrative............ 2,835,271 2,525,526 2,936,052 ----------- ----------- ----------- Total operating expenses................ 6,024,198 6,701,483 8,348,346 ----------- ----------- ----------- Loss from operations.................... (2,240,478) (1,305,545) (1,288,765) Other: Gain from termination of covenant not- to-compete........................... 58,396 -- -- Interest income....................... 34,616 16,650 42,595 Interest expense...................... (159,905) (268,290) (302,152) ----------- ----------- ----------- Net loss................................ (2,307,371) (1,557,185) (1,548,322) Dividend accretion on preferred stock... 298,924 298,924 453,685 ----------- ----------- ----------- Net loss attributable to common stockholders........................... $(2,606,295) $(1,856,109) $(2,002,007) =========== =========== =========== Net loss per share attributable to common stockholders, basic and diluted................................ $ (0.74) $ (0.53) $ (0.57) =========== =========== =========== Shares used in computing net loss attributable to common stockholders, basic and diluted...................... 3,501,626 3,501,626 3,517,056 =========== =========== =========== Pro forma net loss per share, basic and diluted................................ $ (0.22) =========== Shares used in computing pro forma net loss per share, basic and diluted...... 7,067,180 ===========
See accompanying notes. F-4 COMPS.COM, Inc. Statements of Stockholders' Deficit
Common Stock ------------------------------- Additional Total Class A Class B Paid-In Deferred Accumulated Stockholders' Shares Amount Shares Amount Capital Warrants Compensation Deficit Deficit --------- ------- ------ ------ ---------- -------- ------------ ------------ ------------- Balance at December 31, 1995................... 3,501,626 $29,219 -- $ -- $ -- $ -- $ -- $ (5,072,141) $(5,042,922) Accretion of preferred stock redemption value................. -- -- -- -- -- -- -- (298,924) (298,924) Net loss............... -- -- -- -- -- -- -- (2,307,371) (2,307,371) --------- ------- ------ ----- ---------- -------- ----------- ------------ ----------- Balance at December 31, 1996................... 3,501,626 29,219 -- -- -- -- -- (7,678,436) (7,649,217) Accretion of preferred stock redemption value................. -- -- -- -- -- -- -- (298,924) (298,924) Net loss............... -- -- -- -- -- -- -- (1,557,185) (1,557,185) --------- ------- ------ ----- ---------- -------- ----------- ------------ ----------- Balance at December 31, 1997................... 3,501,626 29,219 -- -- -- -- -- (9,534,545) (9,505,326) Issuance of stock upon exercise of options... -- -- 31,907 435 12,615 -- -- -- 13,050 Accretion of preferred stock redemption value................. -- -- -- -- -- -- -- (363,235) (363,235) Warrants issued in connection with Series B preferred stock..... -- -- -- -- -- 398,000 -- -- 398,000 Accretion of warrants.. -- -- -- -- (90,450) -- -- -- (90,450) Grant of stock options in connection with REALBID acquisition... -- -- -- -- 2,091,000 -- -- -- 2,091,000 Deferred compensation related to grant of certain stock options............... -- -- -- -- 2,655,985 -- (2,655,985) -- -- Amortization of deferred compensation.......... -- -- -- -- -- -- 117,564 -- 117,564 Net loss............... -- -- -- -- -- -- -- (1,548,322) (1,548,322) --------- ------- ------ ----- ---------- -------- ----------- ------------ ----------- Balance at December 31, 1998................... 3,501,626 $29,219 31,907 $ 435 $4,669,150 $398,000 $(2,538,421) $(11,446,102) $(8,887,719) ========= ======= ====== ===== ========== ======== =========== ============ ===========
See accompanying notes. F-5 COMPS.COM, Inc. Statements of Cash Flows
Years ended December 31, ------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Operating activities Net loss................................ $(2,307,371) $(1,557,185) $(1,548,322) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization......... 1,020,029 913,781 803,998 Deferred compensation................. -- -- 117,564 Provision for bad debts............... -- 39,491 167,858 Impairment loss on acquired intangibles.......................... -- 183,233 -- Loss on disposal/write-off of assets.. -- 97,011 -- Interest imputed on note payable to TRW REDI............................. -- 48,619 49,252 Gain from covenant not-to-compete..... (58,396) -- -- Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable................. (293,785) (529,824) (978,508) Prepaid expenses.................... 50,916 (41,820) (27,969) Deposits and other assets........... 23,414 3,767 (674) Accounts payable.................... 82,033 (56,032) 172,222 Accrued liabilities................. 334,016 326,864 84,694 Deferred rent....................... 24,534 (19,172) (37,719) Deferred subscription revenue....... 527,010 667,801 1,479,641 ----------- ----------- ----------- Net cash provided by (used in) operating activities............................. (597,600) 76,534 282,037 Investing activities Maturities of marketable securities, available-for-sale..................... 459,645 243,645 -- Purchases of furniture and equipment.... (592,278) (725,835) (933,876) Purchase of TRW REDI and LSR............ -- (80,000) -- Purchase of REALBID, net of cash acquired............................... -- -- (209,900) Loans to employees, net of repayments... 1,285 (6,715) (10,188) ----------- ----------- ----------- Net cash used in investing activities... (131,348) (568,905) (1,153,964) Financing activities Proceeds from notes payable............. 1,411,879 742,800 300,000 Payments on notes payable............... (264,851) (384,683) (486,991) Payments on capital lease obligations... (100,286) (91,664) (65,101) Proceeds from sale of preferred stock, net of issuance costs.................. -- -- 1,137,151 Proceeds from issuance of common stock.. -- -- 13,050 ----------- ----------- ----------- Net cash provided by financing activities............................. 1,046,742 266,453 898,109 ----------- ----------- ----------- Net increase (decrease) in cash......... 317,794 (225,918) 26,182 Cash at beginning of year............... 259,745 577,539 351,621 ----------- ----------- ----------- Cash at end of year..................... $ 577,539 $ 351,621 $ 377,803 =========== =========== =========== Supplemental disclosures of cash flow information: Interest paid......................... $ 143,024 $ 244,877 $ 251,527 =========== =========== =========== Income taxes paid..................... $ 5,563 $ 3,941 $ 3,712 =========== =========== =========== Supplemental schedule of noncash investing and financing activities: Equipment financed under capital leases............................... $ -- $ 30,806 $ -- =========== =========== ===========
See accompanying notes. F-6 COMPS.COM, Inc. Notes to Financial Statements December 31, 1998 1. Organization and Significant Accounting Policies Organization and Business Activity COMPS.COM, Inc., formerly known as COMPS InfoSystems, Inc. (the Company), compiles and maintains a national database of confirmed commercial real estate information. The Company provides its customers with reports on sales of office, industrial, retail, apartments, residential land, commercial land, hotels, motels and other special use properties. As of December 31, 1998, national coverage includes over 45 major cities throughout the United States. The Company anticipates that it will require additional funds to continue the Company's product development activities; expand the Company's marketing and sales and customer services and support capabilities; fund the Company's capital expenditures to accommodate the anticipated increase in customers and geographic expansion; and expand certain financial and administrative functions. Management believes that the funds necessary to meet its capital requirements for the next twelve months will be raised either from a public offering or by private equity or debt financing. Without the additional funds, the Company will reduce the scope of its product development projects and reduce its expenditures on geographic expansion. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Concentration of Credit Risk The majority of sales and the related accounts receivable are from companies dealing in the commercial real estate industry throughout the United States. Credit is extended based upon an evaluation of the customer's financial condition and generally collateral is not required. Reserves for doubtful accounts are maintained by the Company. The Company has not experienced losses in excess of its reserves. Furniture and Equipment Furniture and equipment are depreciated using the double-declining-balance method over estimated useful lives of five and seven years, respectively. F-7 COMPS.COM, Inc. Notes to Financial Statements (continued) 1. Organization and Significant Accounting Policies (continued) Intangible Assets Intangible assets arose primarily from the acquisition of REALBID, LLC (see Note 2). The excess of cost over the fair value of the net assets purchased has been allocated to goodwill, customer base, database and web site technology, trademark and trade name and assembled work force. These intangible assets are being amortized over estimated useful lives ranging from three to five years. Asset Impairment In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of (SFAS 121), the Company recognizes impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. During 1997, the Company determined that the subscription base relating to its 1995 acquisitions was impaired because of lower than expected retention of the purchased subscription base. Fair value of the assets was calculated based on estimated future cash flows to be generated by the remaining subscriber, discounted at a market rate of interest. This resulted in a write-down of the acquired intangibles of approximately $183,000, which is reflected in general and administrative expense on the statement of operations. In 1996 and 1998, no impairment losses were recorded. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and related Interpretations in accounting for its employee stock options. Revenue Recognition The Company recognizes product and related services revenue at the time of shipment or performance of services. A substantial portion of the Company's revenues come from subscription sales. Subscriptions are recorded as accounts receivable and as deferred revenues at the time the customer is invoiced. Subscription revenue, net of reserve for cancellations, is recognized over the subscription term. Significant Customers During 1996, 1997 and 1998, no single customer accounted for more than 10% of revenues. Product Development and Engineering Costs incurred in the development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Because the Company believes that its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no software development costs have been capitalized to date. Other product development and engineering costs are expensed in the period incurred. Net Loss Per Share and Unaudited Pro Forma Stockholders' Deficit Historical basic and diluted net loss per share are computed using the weighted average number of Class A and Class B common shares outstanding. The Class B non voting common stock will automatically convert into Class A common stock upon the closing of the Company's initial public offering. Options, warrants and preferred stock were not included in the computation of diluted net loss per share because the effect would be antidilutive. F-8 COMPS.COM, Inc. Notes to Financial Statements (continued) 1. Organization and Significant Accounting Policies (continued) Pro forma net loss per share has been computed as described above and also gives effect to common equivalent shares from preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the as-if-converted method). If the offering contemplated is consummated, all of the redeemable convertible preferred stock outstanding as of the closing date will automatically be converted into an aggregate of 4,908,126 shares of common stock. Unaudited pro forma stockholders' deficit at December 31, 1998, as adjusted for the conversion of redeemable convertible preferred stock, is disclosed on the balance sheet. Net Loss Per Share and Unaudited Pro Forma Stockholders' Deficit (continued) A reconciliation of shares used in the calculation of historical and pro forma basic and diluted net loss per share attributable to common stockholders follows:
Year ended December 31, ------------------------------------- 1996 1997 1998 ----------- ----------- ----------- Historical net loss per share attributable to common stockholders, basic and diluted: Net loss attributable to common stockholders...................... $(2,606,295) $(1,856,109) $ 2,002,007 =========== =========== =========== Shares used in computing net loss attributable to common stockholders, basic and diluted... 3,501,626 3,501,626 3,517,056 =========== =========== =========== Net loss per share attributable to common stockholders, basic and diluted........................... $ (0.74) $ (0.53) $ (0.57) =========== =========== =========== Antidilutive securities including options, warrants, and preferred stock, an as if converted to common stock basis not included in historical net loss per share attributable to common stockholders calculations......... 7,510,132 7,836,432 11,220,093 =========== =========== =========== Pro forma net loss per share: Net loss attributable to common stockholders...................... $(2,002,007) Less: dividend accretion on redeemable convertible preferred stock............................. 453,685 ----------- Pro forma net loss................. $(1,548,322) =========== Shares used in computing net loss attributable to common stockholders, basic and diluted... 3,517,056 Adjustment to reflect the effect of the assumed conversion of weighted average shares of redeemable convertible preferred stock....... 3,550,124 ----------- Shares used in computing pro forma net loss per share, basic and diluted........................... 7,067,180 =========== Pro forma net loss per share, basic and diluted........................ $ (0.22) ===========
F-9 COMPS.COM, Inc. Notes to Financial Statements (continued) 1. Organization and Significant Accounting Policies (continued) Impact of Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. SFAS 130 is effective for fiscal years beginning after December 15, 1997. There was no difference between the Company's net loss and its total comprehensive loss for the years ended December 31, 1996, 1997 and 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 replace SFAS 14, "Financial Reporting for Segments of a Business Enterprise" and changes the way the public companies report segment information. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and has been adopted by the Company for the year ending December 31, 1998. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). This standard requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and amortize them over the software's estimated useful life. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on its financial statements and related disclosures. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 Reporting for the Costs of Start-Up Activities (SOP 98-5). This standard requires companies to expense the cost of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company believes the adoption of SOP 98-5 will not have a material impact on its results of operations. Reclassification Reclassifications have been made to certain prior period amounts to conform to the 1998 presentation. 2. Acquisitions Experian RES On November 30, 1997, the Company acquired the Experian RES investment property publishing business in Georgia and Florida for $80,000. The purchase price has been allocated to the assets purchased and the liabilities assumed based upon the fair values at the date of acquisition as follows: Current assets.................................................... $114,244 Subscription contracts............................................ 124,198 Deferred revenues................................................. (158,442) -------- $ 80,000 ========
Deferred revenues represent liabilities assumed to fulfill subscription contracts acquired from Experian. Deferred revenues will be recognized over the subscription term as product is shipped. The subscription contracts represent the estimated value of future revenue streams from renewals of subscription contracts F-10 COMPS.COM, Inc. Notes to Financial Statements (continued) 2. Acquisitions (continued) purchased. Experian RES is the successor-in-interest to TRW REDI and based on the Company's 1995 acquisition of TRW REDI's investment property publishing business, 50% of the subscription contracts were amortized in 1997 and the remaining 50% were amortized in 1998. REALBID On November 6, 1998, the Company acquired the assets of REALBID, LLC (REALBID) a real estate marketing services company which supports commercial real estate transactions over the Internet. The transaction was accounted for as a purchase. The purchase price consisted of cash payments of $163,000 and the grant of stock options to the principals to acquire 399,473 shares of the Company's common stock at $1.64 per share. The options were valued using the minimum value method for option pricing with a risk-free interest rate of 5%, dividend yield of 0% and an expected life of 5 years. The fair value of the options was determined to be $5.24 per share as of the date of the acquisition. As a result, the purchase price is calculated to be $2,308,400, which includes acquisition costs of $54,400. The purchase price has been allocated based on a valuation by an independent appraiser which was performed in conjunction with management's best estimate of expected future results. In addition, employment and incentive compensation agreements were entered into with the two principals of REALBID. The purchase price has been allocated as follows: Current assets.................................................... $ 64,500 Intangible assets................................................. 2,243,900 ---------- Net purchase price................................................ $2,308,400 ==========
The accompanying statements of operations reflect the operating results of REALBID since the date of the acquisition. The pro forma unaudited results of operations for the years ended December 31, 1997 and 1998, assuming the purchase of REALBID has occurred on June 19, 1997 (date of inception of REALBID) and January 1, 1998, respectively, are as follows:
1997 1998 ----------- ----------- Net revenues..................................... $10,465,436 $13,028,927 =========== =========== Net loss attributable to common stockholders..... $(2,362,860) $(2,525,361) =========== =========== Net loss per share attributable to common stockholders.................................... $ (0.67) $ (0.72) =========== ===========
AOBR, Inc. On December 4, 1998, the Company agreed to acquire certain assets of AOBR, Inc., subject to certain conditions, including completion of due diligence and approval by the Company's Board of Directors. The transaction closed on January 7, 1999. The purchase price consisted of cash payments of $120,000 plus acquisition costs of $9,200. The transaction will be recorded as a purchase and the purchase price will be allocated to the acquired database, non-competition agreement and goodwill. These intangibles will be amortized over two to five years. F-11 COMPS.COM, Inc. Notes to Financial Statements (continued) 3. Furniture and Equipment Furniture and equipment are stated at cost and consist of the following at December 31:
1997 1998 ----------- ----------- Machinery and equipment............................ $ 2,394,486 $ 3,200,644 Office furniture and fixtures...................... 87,559 141,877 Leasehold improvements............................. 150,553 223,953 ----------- ----------- 2,632,598 3,566,474 Accumulated depreciation........................... (1,428,848) (2,095,936) ----------- ----------- $ 1,203,750 $ 1,470,538 =========== ===========
F-12 COMPS.COM, Inc. Notes to Financial Statements (continued) 4. Intangibles Assets Intangible assets consist of the following at December 31:
1997 1998 -------- ---------- Customer base.......................................... $ -- $1,791,100 Database and web site technology....................... -- 268,700 Assembled workforce.................................... -- 94,600 Trademark and trade name............................... -- 89,500 Subscription contracts................................. 141,426 -- -------- ---------- 141,426 2,243,900 Less accumulated amortization.......................... (87,941) (81,550) -------- ---------- $ 53,485 $2,162,350 ======== ==========
During 1997, the Company determined that the subscription base relating to the 1995 acquisitions of TRW REDI and The Land Sales Resource was impaired as a result of lower than expected retention of the purchased subscription base. Fair value of the assets was calculated based on estimated future cash flows to be generated by the subscription base, discounted at a market rate of interest. This resulted in a write-down of the acquired intangibles of $183,233, which is reflected in general and administrative expense on the statement of operations. 5. Long-Term Debt In September 1996, the Company entered into a $3.0 million loan agreement with Venture Lending & Leasing, Inc. The terms of the agreement provide $1.5 million for fixed asset acquisition and $1.5 million as working capital. Borrowings for fixed assets acquisition and working capital are due forty-eight months and thirty-six months, respectively, from the date of disbursement. At December 31, 1998, $541,750 is available for draw for general operations and none is available for fixed asset acquisitions. The loan agreement originally expired on June 30, 1998, but was extended during 1998 to June 30, 1999. Notes payable to Venture Lending & Leasing, Inc. bear interest at 8.75% per annum during the term and a one-time balloon interest payment of 15% of the original principal amount is due upon completion of the term. The notes payable are secured by all fixed assets of the Company with the exception of two notes payable which are secured by all business assets of the Company. Long-term debt consists of the following at December 31:
1997 1998 --------- --------- Note payable to Venture Lending & Leasing, Inc. Principal and interest of $18,458 are due monthly through August 1, 1999 with additional balloon interest of $86,250 due October 1, 1999.............................. $ 378,636 $ 212,367 Note payable to Venture Lending & Leasing, Inc. Principal and interest of $21,006 are due monthly through August 1, 2000 with additional balloon interest of $125,532 due October 1, 2000............................. 630,194 463,489 Note payable to Venture Lending & Leasing, Inc. Principal and interest of $8,557 are due monthly through February 1, 2001 with additional balloon interest of $51,140 due April 1, 2001................................ 286,960 224,051
F-13 COMPS.COM, Inc. Notes to Financial Statements (continued) 5. Long-Term Debt (continued)
1997 1998 ---------- ---------- Note payable to Venture Lending & Leasing, Inc. Principal and interest of $2,555 are due monthly through October 1, 2001 with additional balloon interest of $15,268 due December 1, 2001............................ 96,356 79,851 Note payable to Venture Lending & Leasing, Inc. Principal and interest of $2,595 are due monthly through October 1, 2001 with additional balloon interest of $15,505 due January 1, 2002............................. 98,180 82,494 Note payable to Venture Lending & Leasing, Inc. Principal and interest of $2,931 are due monthly through November 1, 2001 with additional balloon interest of $17,514 due January 1, 2002............................. 110,301 93,431 Note payable to Venture Lending & Leasing, Inc. Principal and interest of $2,672 are due monthly through November 1, 2000 with additional balloon interest of $12,486 due December 1, 2001............................ 77,473 59,709 Note payable to Venture Lending & Leasing, Inc. Principal and interest of $9,630 are due monthly through September 1, 2001 with additional balloon interest of $45,000 due November 1, 2001............................ -- 275,717 Unsecured note payable to TRW REDI, due as follows: $405,800 on December 1, 1999; $145,000 on December 1, 2000; and $135,000 on December 31, 2001. Interest is imputed at 10% through December 1, 1999. Note bears interest at 8% subsequent to December 1, 1999........... 539,475 588,727 ---------- ---------- 2,217,575 2,079,836 Less current portion..................................... 467,203 979,208 ---------- ---------- Total long-term debt..................................... $1,750,372 $1,100,628 ========== ==========
Future annual payments of long-term debt are as follows at December 31, 1998: 1999........................................................... $ 979,208 2000........................................................... 659,738 2001........................................................... 423,812 2002........................................................... 17,078 ---------- Total.......................................................... $2,079,836 ==========
F-14 COMPS.COM, Inc. Notes to Financial Statements (continued) 6. Commitments Leases The Company leases its offices under operating leases which expire at various dates through June 2002. Under these operating leases, the Company pays taxes, insurance and maintenance expenses related to the premises. Certain of the leases provide for increasing minimum annual rental amounts. Rent payable for the Company's corporate headquarters office during the period from July 2000 through June 2002 will be determined based upon fair market rental value at July 1, 2000. Rent expense is recorded evenly over the term of the lease. Accordingly, deferred rent, as reflected on the accompanying balance sheets, represents the difference between rent expense accrued and amounts paid under the terms of the lease agreement. Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled $410,705, $405,874 and $468,533, respectively. The Company leases certain equipment under capital lease obligations. Cost and accumulated depreciation of equipment under capital leases were $379,978 and $321,854, respectively, at December 31, 1998. Future minimum lease payments under operating and capital leases at December 31, 1998 are as follows:
Operating Capital Leases Leases --------- ------- 1999...................................................... $513,505 $54,463 2000...................................................... 256,144 15,714 2001...................................................... 92,603 8,890 2002...................................................... 81,294 -- -------- ------- Total minimum lease payments.............................. $943,546 79,067 ======== Less amount representing interest......................... 7,112 ------- Present value of minimum lease payments................... 71,955 Less current portion...................................... 49,343 ------- Noncurrent portion........................................ $22,612 =======
Employment, Incentive Compensation, and Stock Agreements The Company has employment and incentive compensation agreements with key employees which grant these employees the right to receive bonuses and incentive compensation upon certain events and circumstances as defined in the agreements. The agreements provide for severance pay of three to eight months in the event of termination of employment. 7. Information Sharing Agreement The Company has agreements to license its database to other information service providers for licensing through their computer networks. Under the agreements, the Company receives a certain percentage of the related annual gross receipts earned by these other service providers. In addition, neither the Company nor the other service providers shall develop competing products during the term of the agreement. The Company earned $307,381, $163,341 and $41,185 under the agreements during the years ended December 31, 1996, 1997 and 1998, respectively. F-15 COMPS.COM, Inc. Notes to Financial Statements (continued) 8. Redeemable Convertible Preferred Stock During 1994, the Company sold 4,270,336 shares of Series A convertible redeemable preferred stock and warrants to purchase 379,869 shares of Class B common stock at $.01 per share (Note 10), for $4,856,758, net of issuance costs of $143,242. The holders of the Series A preferred stock are entitled to receive cumulative dividends at an annual rate of $.07 per share, payable at the time of: 1) repurchase of Series A preferred stock; 2) liquidation of the Company; or 3) sale of the Company's securities pursuant to an underwritten public offering. The right to such dividends will be forfeited in the event of a repurchase of all of the outstanding shares of Series A preferred stock or a liquidation if the holders of the Series A preferred stock are entitled to receive in excess of $3.52 per share prior to the payment of dividends or upon a public offering of not less than $10 million at a purchase price of not less than $3.52 per share. Holders of Series A preferred stock have a liquidation preference of $1.17 per share plus all accumulated but unpaid dividends. In February 1998, the Company sold 637,790 shares of Series B redeemable convertible preferred stock and warrants to purchase 306,097 shares of Class B common stock and 37,329 shares of Class A common stock at $.01 per share (Note 10), for $1,137,151, net of issuance costs of $12,849. The holders of the Series B preferred stock are entitled to receive cumulative dividends at an annual rate of $0.11 per share, payable at the time of 1) repurchase of Series A or Series B preferred stock; 2) liquidation of the Company; or 3) sale of the Company's securities pursuant to an underwritten public offering. The right to such dividends will be forfeited in the event of a repurchase of all of the outstanding shares of Series B preferred stock or a liquidation if the holders of the Series B preferred stock are entitled to receive in excess of $3.83 per share prior to the payment of dividends or upon a public offering of not less than $10 million at a purchase price of not less than $3.83 per share. Holders of Series B preferred stock have a liquidation preference of $1.80 per share plus all accumulated but unpaid dividends. The Series A and Series B preferred stock is convertible at the option of the holder into an equal number of shares of Class A common stock. The holders of preferred and Class A common stock vote together as a class on all matters to be voted on by the shareholders of the Company, with each holder of preferred stock entitled to one vote for each share held. A summary of the redeemable convertible preferred stock and the liquidation and redemption values at December 31, 1998 are as follows:
Liquidation Redemption Shares Preference Value --------- ----------- ---------- Series A preferred stock................... 4,270,336 $5,000,000 $6,257,972 Series B preferred stock................... 637,790 1,150,000 1,214,311 --------- ---------- ---------- Total...................................... 4,908,126 $6,150,000 $7,472,283 ========= ========== ==========
9. Repurchase Agreement As part of the issuance of Series A and Series B redeemable convertible preferred stock and Class B common stock warrants, (see Note 10), the Company granted the purchasers a "put option" in which the Company is required to repurchase the shares held by the purchasers; the repurchase is required to take place in October 2001 or earlier if an event such as a liquidation or merger or acquisition occurs and there is a 50% change in the holders of voting securities. The repurchase price is the greater of the original purchase price plus accrued dividends or fair market value of the shares held. This put option is terminated if the Company has a public offering of its shares in which the Company's gross proceeds are at least $10 million and the per share price is not less the $3.52 for the Series A preferred stock and $3.83 for the Series B preferred stock. F-16 COMPS.COM, Inc. Notes to Financial Statements (continued) 9. Repurchase Agreement (continued) The purchasers have also been granted registration rights in certain conditions and a right of first refusal in the event the Company intends to sell shares in a private transaction. 10. Stockholders' Deficit Common Stock The Class A and Class B common stock shall have the same rights and privileges except that the Class B common stock shall not have any right to vote. Additionally, each share of Class B common stock shall automatically convert into one share of Class A common stock upon the earlier of the time of consent of the holders of at least 66 2/3% of the outstanding Class A common stock to the conversion is obtained or upon the closing of a public offering. Warrants In connection with the issuance of the Series A redeemable preferred stock, the Company issued warrants to purchase 278,634 shares of Class B common stock at $.01 per share. The warrants may be exercised in whole or in part on the earlier to occur of one day prior to the closing of a liquidity event, as defined in the agreement, or October 14, 2001. The warrants expire on October 14, 2004. The Company estimated the fair value of the warrant using the minimum value option pricing model, however, no value was allocated to the warrant as the estimated fair value was nominal. In connection with the issuance of the Series B redeemable preferred stock, the Company issued warrants to purchase 224,522 shares of Class B common stock and 27,381 shares of Class A common stock at $0.01 per share. The warrants to purchase Class B common stock are exercisable at the earlier of (i) one day prior to the closing or effective time of a liquidity event, as defined in the warrant agreement, or (ii) October 14, 2001. The warrant to purchase Class A Common Stock is immediately exercisable. All warrants issued in connection with the Series B Preferred Stock expire on February 6, 2008. The Company estimated the fair value of the warrants to be $398,000 using the minimum value option pricing model with a risk-free interest rate of 5.5%, dividend yield of 0% and a weighted average expected life of three years. In connection with the loan agreement with Venture Lending & Leasing, Inc. (see Note 5), the Company issued a warrant to purchase 156,285 shares of the Company's Class B common stock at $2.40 per share, subject to antidilutive adjustments. The warrant expires on September 24, 2003. The Company estimated the fair value of the warrant using the minimum value option pricing model, however, no value was allocated to the warrant as the estimated fair value was nominal. Stock Options In November 1998, the Company replaced its amended and restated stock option plan (Old Plan), under which options to purchase 739,368 shares of Class B common stock were outstanding, with the 1998 Equity Participation Plan and the 1998 Supplemental Option Plan (the 1998 Plans). Under the 1998 Plans, both incentive stock options and non-qualified stock options to purchase Class B common stock may be issued to key employees, board members and consultants of the Company. The aggregate number of shares which the Company is authorized to issue under the 1998 Plans, together with the aggregate number of shares which may be issued under the Old Plan, is 2,047,993. Options granted under the Plans generally vest over five years, except for options issued to independent directors under the 1998 Plans which vest over four years, and are exercisable for a period of ten years from the date of grant. The board of directors may, in its discretion, accelerate the period during which an option granted to an employee or consultant vests. Generally, stock options are granted at a price which approximates the fair value of the shares at the date of grant as determined by the board of directors. F-17 COMPS.COM, Inc. Notes to Financial Statements (continued) 10. Stockholders' Deficit (continued) Stock Options (continued) The following table summarizes stock option activity:
Weighted Average Exercise Shares Price --------- -------- Outstanding at December 31, 1995......................... 520,718 $0.41 Granted................................................ 86,412 $0.41 Canceled............................................... (133,723) $0.41 --------- Outstanding at December 31, 1996......................... 473,407 $0.41 Granted................................................ 244,872 $0.41 Canceled............................................... (69,316) $0.41 --------- Outstanding at December 31, 1997......................... 648,963 $0.41 Granted................................................ 1,143,673 $1.57 Exercised.............................................. (31,907) $0.41 Canceled............................................... (11,002) $0.89 --------- ----- Outstanding at December 31, 1998......................... 1,749,727 $1.17 =========
Included above are options to purchase a total of 109,860 shares of common stock which were issued outside of the Plans, of which 88,772 shares were issued to a principal of REALBID (Note 2). The remaining 21,088 were issued to a consultant in February 1995. No value was assigned to the February 1995 options as the estimated fair value was nominal. In addition, 139,365 of the options granted in 1997 will become fully vested upon the closing of an initial public offering. At December 31, 1998, options to purchase 498,503 shares (including 101,425 shares related to options granted outside the Plans) are exercisable and 376,219 shares are available for future grant. All options granted during 1998 had exercise prices below the deemed fair value of the Company's common stock. Through December 31, 1998, the Company recorded deferred compensation expense for the difference between the exercise price and the fair value for financial statement presentation purposes of the Company's common stock, as determined in part by an independent valuation, for options granted during 1998. This deferred compensation aggregates to $2,655,985, which is being amortized over the vesting period of the related options. Amortization during 1998 was $117,564. Following is a further breakdown of the options outstanding as of December 31, 1998:
Weighted average Weighted average exercise price of Range of Options remaining life Weighted average Options options Exercise Prices Outstanding in years exercise price exercisable exercisable - --------------- ----------- ---------------- ---------------- ----------- ----------------- $0.41-$0.61 664,001 7.33 $0.42 256,955 $0.41 $1.36-$1.64 1,085,726 9.82 $1.62 241,549 $1.64 - ----------- --------- ---- ----- ------- ----- $0.41-$1.64 1,749,727 8.93 $1.17 498,504 $1.00
Pro forma information regarding net loss is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of the options was estimated at the date of grant, using the "minimum value" method for option pricing with the following weighted-average assumptions for options granted in 1996, 1997 and 1998: risk-free interest rate of 6%, 6% and 5.5%, respectively; dividend yield of 0%; and a weighted-average expected life of options of five years. The weighted-average fair value of options granted in 1996, 1997 and 1998 was $0.11, $0.11 and $0.38, respectively. F-18 COMPS.COM, Inc. Notes to Financial Statements (continued) 10. Stockholders' Deficit (continued) Stock Options (continued) For purpose of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
Year ended December 31, ---------------------------------------- 1996 1997 1998 ------------ ------------ ------------ Pro forma net loss attributable to common stockholders.............. $ (2,615,089) $ (1,867,929) $ (2,029,778) Pro forma basic and diluted net loss per share attributable to common stockholders.............. $ (0.74) $ (0.53) $ (0.58)
Common Stock Reserved for Issuance At December 31, 1998, the Company has reserved shares of common stock for future issuance as follows: Stock options...................................................... 2,125,946 Preferred stock.................................................... 4,908,126 Warrants........................................................... 686,823 --------- 7,720,895 =========
11. Income Taxes At December 31, 1998, the Company had federal and state tax net operating loss carryforwards of approximately $4,942,000 and $2,494,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the 50% limitation on California loss carryforwards. The federal and California tax loss carryforwards begin expiring in 2009 and 1999, respectively, unless previously utilized. Pursuant to Internal Revenue Code Section 382, use of the Company's net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. Significant components of the Company's deferred tax assets at December 31, 1997 and 1998 are shown below. A valuation allowance of $1,652,000 has been recognized to offset the deferred tax assets as realization of such assets is uncertain.
1997 1998 ---------- ---------- Deferred tax assets: Net operating loss carryforwards................... $1,343,000 $1,826,000 Other.............................................. 338,000 361,000 Amortization....................................... 464,000 463,000 ---------- ---------- Total deferred tax assets............................ 2,145,000 2,650,000 Deferred tax liabilities: Intangibles........................................ -- (998,000) ---------- ---------- Net deferred tax assets.............................. 2,145,000 1,652,000 Valuation allowance for deferred tax assets.......... (2,145,000) (1,652,000) ---------- ---------- Net deferred tax assets.............................. $ -- $ -- ========== ==========
F-19 COMPS.COM, Inc. Notes to Financial Statements (continued) 12. Employee Benefit Plan The Company has a 401(k) defined contribution employee benefit plan (the "Plan") for the benefit of eligible employees, generally those who have completed one year of service. The Company is not required to contribute to the Plan. In 1996, the Company did not contribute to the Plan. Contributions totaling $14,956 and $34,130 were charged to expense in 1997 and 1998, respectively. 13. Related Party Transactions The Company currently leases its corporate headquarters operating space from a limited partnership whose general partner is a company owned by the President and major stockholder of the Company. Another director and stockholder is a limited partner of this limited partnership. Rent expense to this related party of $253,684, $295,018 and $304,579 was incurred in 1996, 1997 and 1998, respectively. The Company retains the consulting services of one of its board of director members. Consulting expense to this related party of $57,000, $11,580 and $25,780 was incurred in 1996, 1997 and 1998, respectively. 14. Reportable Segments Description of the types of products and services from which each reportable segment derives its revenues The Company has two reportable segments: information services and transactions support products. Revenues for the Company's information services division are derived from licensing commercial real estate sales comparable information on a subscription and ad-hoc basis. Revenues of $16,500 for transaction support products were derived from REALBID, a marketing services company acquired in November 1998 which supports commercial real estate transactions over the Internet. Measurement of segment profit or loss and segment assets The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Factors management used to identify the enterprise's reportable segments The Company's reportable segments are business units that offer different products and services. The Company did not have reportable segments in prior years, and therefore only the information for the year ended December 31, 1998 is included below.
Year ended December 31, 1998 ------------------------------------ Transaction Information Support Services Services Totals ----------- ----------- ----------- Revenues from external customers..... $12,789,261 $ 16,500 $12,805,761 Intersegment revenues................ -- -- -- Interest expense..................... 302,152 -- 302,152 Depreciation and amortization expense............................. 721,648 82,350 803,998 Segment profit (loss) before income taxes............................... (1,180,704) (367,618) (1,548,322) Other significant non cash item: Deferred compensation on stock options........................... 967,231 1,571,190 2,538,421 Segment assets Fixed assets, net.................. 1,460,211 10,327 1,470,538 Intangible assets, net............. -- 2,162,350 2,162,350 Expenditures of long-lived assets.... 922,749 11,127 933,876
F-20 COMPS.COM, Inc. Notes to Financial Statements (continued) 15. Subsequent Events In February 1999, the Company entered into a $1.8 million loan agreement with Venture Lending & Leasing, Inc., under which the Company may purchase both equipment and working capital. The borrowing base under the loan is limited to $1.8 million or 80% of the Company's eligible accounts. The loan agreement expires on March 31, 2000. In connection with the loan agreement, the Company issued a warrant to purchase a certain number of shares of Class B non-voting common stock with an aggregate exercise price of $306,749. The exercise price per share will be based on an amount equal to the median of i) $2.46 and ii) the per share price in the next round of equity financing. If there is no new equity financing done within 18 months of the date of the loan agreement (February 12, 1999) the exercise price will be $3.68. The Company will account for this warrant in accordance with SFAS 123. In February 1999, the Company entered into a new lease agreement for its corporate headquarters. The new lease is with the same related party (see Note 13) and is effective February 1, 1999. The Company's prior lease, which was due to expire in June 2002 and provided for monthly rent payments of $37,015 will be canceled upon commencement of the new lease. The term of the new lease is 5 years, with the option to extend for five terms of two years each. The initial monthly rent payment of $44,843 will be increased by 3 1/2% each year during the original five year term. Upon commencement of each extension of the term, monthly base rent will be adjusted to reflect the fair market rental value. In February 1999, the Board of Directors adopted the 1999 Stock Incentive Plan and the 1999 Employee Stock Purchase Plan. The plans are effective on the date the underwriting agreement is signed in connection with the Company's contemplated initial public offering. Shares reserved for issuance under the 1999 Stock Incentive Plan and the 1999 Employee Stock Purchase Plan total 2,800,000 and 300,000, respectively. In March 1999, the Company's Board of Directors approved an increase in the authorized number of shares of preferred stock to 5,100,000. On April 1, 1999, the Company's Board of Directors authorized a 1-for-.7335 reverse stock split of the Company's common stock (all share and per share amounts included in the accompanying consolidated financial statements and notes have been adjusted retroactively to give effect to the stock split) and approved a decrease in the authorized number of common stock to 18,337,500. In March 1999, the Company accepted a letter of commitment from a bank under which the bank agreed to provide a $3,000,000 senior subordinated non-revolving loan facility, which the Company expects to close in April 1999. The loan matures in April 2001 and bears interest at 13%. In connection with this loan, the Company will issue warrants to purchase up to 98,000 shares of preferred stock at prices ranging from $0.75 to $5.00 per share. F-21 Report of Ernst & Young LLP, Independent Auditors The Members REALBID, LLC We have audited the accompanying statements of operations, members' equity (deficit) and cash flows of REALBID, LLC for the period from June 19, 1997 (inception) through December 31, 1997. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of REALBID, LLC for the period from June 19, 1997 (inception) through December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP San Diego, California February 17, 1999 F-22 REALBID, LLC Statements of Operations
For the period from June 19, 1997 For the nine-month (inception) to period ended December 31, 1997 September 30, 1998 ----------------- ------------------ (unaudited) Net revenues............................... $ 15,500 $ 196,666 Cost of revenues........................... 9,615 37,608 --------- --------- Gross profit............................... 5,885 159,058 Operating expenses: General and administrative............... 247,598 271,477 --------- --------- Total operating expenses................... 247,598 271,477 --------- --------- Net loss................................... $(241,713) $(112,419) ========= =========
See accompanying notes. F-23 REALBID, LLC Statements of Members' Equity (Deficit)
Members' Total Shares Members' ------------- Accumulated Equity Shares Amount Deficit (Deficit) ------ ------ ----------- --------- Issuance of members' shares.............. 8,000 $8,000 $ -- $ 8,000 Net loss for the period from June 19, 1997 (inception) to December 31, 1997... -- -- (241,713) (241,713) ----- ------ --------- --------- Balance at December 31, 1997............. 8,000 8,000 (241,713) (233,713) Net loss for nine-month period ended September 30, 1998 (unaudited).......... -- -- (112,419) (112,419) ----- ------ --------- --------- Balance at September 30, 1998 (unaudited)............................. 8,000 $8,000 $(354,132) $(346,132) ===== ====== ========= =========
See accompanying notes. F-24 REALBID, LLC Statements of Cash Flows
For the period from June 19, 1997 For the nine-month (inception) to period ended December 31, 1997 September 30, 1998 ----------------- ------------------ (unaudited) Operating activities Net loss................................. $(241,713) $(112,419) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation........................... -- 699 Provision for bad debts................ -- 10,000 Changes in operating assets and liabilities: Accounts receivable.................. -- (79,000) Prepaid assets....................... -- (2,000) Accounts payable..................... 1,797 13,331 Accrued liabilities.................. 150,000 187,000 --------- --------- Net cash provided by (used in) operating activities.............................. (89,916) 17,611 Financing activities Payments on lease obligation............. -- (1,748) Proceeds from member advances............ 83,510 12,704 Proceeds from issuance of members' shares.................................. 8,000 -- --------- --------- Net cash provided by financing activities.............................. 91,510 10,956 --------- --------- Net increase in cash and cash equivalents............................. 1,594 28,567 Cash and cash equivalents at beginning of period.................................. -- 1,594 --------- --------- Cash and cash equivalents at end of period.................................. $ 1,594 $ 30,161 ========= ========= Supplemental disclosure of cash flow information: Interest paid............................ $ -- $ 176 Supplemental schedule of non cash investing and financing activities: Equipment financed under capital leases.. $ -- $ 8,713
See accompanying notes. F-25 REALBID, LLC Notes to Financial Statements December 31, 1997 (Information subsequent to December 31, 1997 and pertaining to the nine-month period ended September 30, 1998 is unaudited) 1. Organization and Summary of Significant Accounting Policies Organization and Business Activities REALBID, LLC (the "Company") is a California company with limited liability status which was formed on June 19, 1997 and shall continue until June 30, 2047 or until dissolution in accordance with the terms of the Operating Agreement. Each member's liability is limited pursuant to the Beverly-Killea Limited Liability Company Act. The Company is a real estate marketing services company which facilitates commercial property transactions using both the internet and traditional communication technologies. The Company's primary purpose is to provide computer on-line real estate services, including market data, specific property information, buyer profiles and a trading platform for private and public format transactions. Basis of Presentation The Company has an accumulated deficit at December 31, 1997 and has not yet generated income from operations and thus needs to continue to raise cash to fund future operations. Refer to Note 5 for subsequent event. Unaudited Interim Financial Information The financial statements for the nine months ended September 30, 1998 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth therein, in accordance with generally accepted accounting principles. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of revenues and expenses reported during the period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with a remaining maturity of three months or less when acquired to be cash equivalents. Equipment Equipment is depreciated using the straight-line method over estimated useful lives of three to five years. Revenue Recognition The Company recognizes revenue at the time of performance of services. F-26 REALBID, LLC Notes to Financial Statements (continued) (Information subsequent to December 31, 1997 and pertaining to the nine-month period ended September 30, 1998 is unaudited) 1. Organization and Summary of Significant Accounting Policies (continued) Profits and Losses and Distributions Profits and losses of the Company are allocated to the members and distributions are made in accordance with the Operating Agreement. 2. Commitments During the nine months ended September 30, 1998, the Company leased its facilities under two operating leases expiring on November 30, 1998 and January 5, 1999, each of which was renewed for an additional six month term. Rent expense totaled $8,490 for the period from June 19, 1997 through December 31, 1997 and $24,914 for the nine-month period ended September 30, 1998. The Company leases certain equipment under capital leases obligations. The leases expire on March 27, 2000 and August 23, 2000. 3. Related Party Transactions Since inception and through the nine month period ended September 30, 1998, two of the Company's members have loaned the Company funds to be used for expenditures incurred by the Company in order to conduct business. At December 31, 1997 and at September 30, 1998, loan amounts due to members totaled $83,510 and $96,214, respectively. 4. Income Taxes Under federal and California law, income or loss of limited liability companies are passed through to the separate tax returns of the members. Accordingly, no provision (benefit) for taxes based on income or losses is shown in the accompanying financial statements. 5. Sale of Assets On November 6, 1998, COMPS.COM Inc. purchased substantially all of the assets of the Company for $163,000 and stock options granted to the members. 6. Year 2000 Compliance (Unaudited) Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists concerning the potential effects associated with compliance. Although the Company believes that it is year 2000 compliant, there can be no assurance that coding errors or other defects will not be discovered in the future. Any year 2000 compliance problem of the Company, its service providers, its customers or the Internet infrastructure could result in a material adverse effect on the Company's business, operating results and financial condition. F-27 COMPS.COM, Inc. Unaudited Pro Forma Condensed Statement of Operations On November 6, 1998, the Company acquired REALBID, LLC (REALBID) for approximately $2.3 million, including acquisition costs. The unaudited pro forma condensed statement of operations for the year ended December 31, 1998 give effect to the acquisition of REALBID as if it had occurred on January 1, 1998. The pro forma condensed statement of operations is based on historical results of operations of the Company for the year ended December 31, 1998 and REALBID for the period from January 1, 1998 to November 5, 1998. The pro forma condensed statement of operations should be read in conjunction with the historical financial statements and notes thereto of the Company and REALBID. The pro forma condensed statement of operations is presented for illustrative purposes only and is not necessarily indicative of results of operations that would have actually occurred had the acquisition of REALBID been effected on January 1, 1998.
COMPS.COM, REALBID, LLC Inc. Period from Year ended January 1, 1998 December 31, to November 5, Pro Forma 1998 1998 Adjustments Pro Forma ------------ --------------- ----------- ----------- Net revenues............. $12,805,761 $ 223,166 -- $13,028,927 Cost of revenues......... 5,746,180 44,988 -- 5,791,168 ----------- --------- --------- ----------- Gross profit............. 7,059,581 178,178 -- 7,237,759 Operating expenses: Selling and marketing... 4,181,945 -- -- 4,181,945 Product development..... 1,230,349 -- -- 1,230,349 General and administrative......... 2,936,052 293,782 407,750 3,637,584 ----------- --------- --------- ----------- Total operating expenses................ 8,348,346 293,782 407,750 9,049,878 ----------- --------- --------- ----------- Loss from operations..... (1,288,765) (115,604) (407,750) (1,812,119) Other income (expense)... (259,557) -- -- (259,557) ----------- --------- --------- ----------- Net loss................. (1,548,322) (115,604) (407,750) (2,071,676) Dividend accretion on preferred stock......... 453,685 -- -- 453,685 ----------- --------- --------- ----------- Net loss attributable to common stockholders..... $(2,002,007) $(115,604) $(407,750) $(2,525,361) =========== ========= ========= =========== Net loss per share attributable to common stockholders, basic and diluted................. $ (0.57) (0.72) =========== =========== Shares used in computing net loss attributable to common stockholders, basic and diluted....... 3,517,056 3,517,056 =========== ===========
See accompanying notes. F-28 COMPS.COM, Inc. Notes to Unaudited Pro Forma Condensed Statement Of Operations Note 1. On November 6, 1998, COMPS.COM, Inc. (the Company) acquired all of the assets of REALBID, LLC (REALBID) for cash of $163,000 and options to acquire 399,473 shares of the Company's common stock at $1.64 per share. The fair value of the options was determined to be $5.24 per share as of the date of the acquisition. As a result, the purchase price is calculated to be $2,308,400, which includes acquisition costs of $54,400. The purchase price was allocated as follows, based upon a valuation of the tangible and intangible assets by an independent appraiser, as well as management's best estimates: Current assets acquired....................................... $ 64,500 Customer base................................................. 1,791,100 Database and website technology............................... 268,700 Assembled workforce........................................... 94,600 Trademark and trade name...................................... 89,500 ---------- $2,308,400
The intangible assets are being amortized over estimated useful lives ranging from three to five years. Note 2. The accompanying unaudited pro forma condensed statement of operations for the year ended December 31, 1998 gives effect to the acquisition of REALBID as if it had occurred as of January 1, 1998. The pro forma adjustment reflects twelve months of amortization expense. F-29 Inside Back Cover: NATIONAL COVERAGE [A map of the U.S. is shown. Seven icons are lined up across the top of the map. Below each icon is the name of one of the seven property types that we cover in our database. Each icon will have a picture of the property type that it represents. White dots are placed on the map in cities representing our current market. Red dots are placed on the map in cities representing the markets in our expansion plan. A legend is provided explaining the meaning of the dots. [LOGO] Outside back cover: INTERNET SOLUTIONS FOR COMMERCIAL REAL ESTATE [The back cover will consist of a dark background with white text. There will be a picture of a database wheel resembling a radar screen with a picture of a group of commercial real estate buildings inside the database wheel. The text "Information and Services ONLINE" appears at the top of the database wheel.] [LOGO] www.comps.com PART II Information Not Required in Prospectus Item 13. Other Expenses of Issuance and Distribution The expenses to be paid by the registrant are as follows. All amounts other than the SEC registration fee, the NASD filing fees and the Nasdaq National Market listing fee are estimates.
Amount to be Paid -------- SEC registration fee............................................... $ 15,794 NASD filing fee.................................................... 6,181 Nasdaq National Market listing fee................................. 5,000 Legal fees and expenses............................................ 250,000 Accounting fees and expenses....................................... 200,000 Printing and engraving............................................. 120,000 Blue sky fees and expenses (including legal fees).................. 5,000 Transfer agent fees................................................ 10,000 Miscellaneous...................................................... 13,025 -------- Total.......................................................... $625,000 ========
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 permitted by the Delaware General Corporation Law, the registrant's Second Restated 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 (1) for any breach of the director's duty of loyalty to the registrant or its stockholders, (2) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (3) under section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases) or (4) for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the bylaws of the registrant provide that (1) 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, (2) the registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law, (3) the registrant is required to advance expenses, as incurred, to its directors and executive 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 (4) the rights conferred in the bylaws are not exclusive. The registrant has entered into indemnification agreements with each of its directors and executive 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. II-1 Reference is also made to Section of the Underwriting Agreement, which provides for the indemnification of officers, directors and controlling persons of the registrant against certain liabilities. The indemnification provision in the registrant's Certificate of Incorporation, bylaws and the indemnification agreements entered into between the registrant and each of its directors and executive officers may be sufficiently broad to permit indemnification of the registrant's directors and executive officers for liabilities arising under the Securities Act of 1933. The registrant has applied for liability insurance for its officers and directors. Reference is made to the following documents filed as exhibits to this registration statement regarding relevant indemnification provisions described above and elsewhere in this prospectus:
Exhibit Document Number -------- ------- Underwriting Agreement (draft dated , 1999).................. 1.1 Form of Second Restated Certificate of Incorporation of Registrant...... 3.2 Form of Restated Bylaws of Registrant................................... 3.4 Form of Indemnification Agreement....................................... 10.22 Form of Indemnification Agreement....................................... 10.23
Item 15. Recent Sales of Unregistered Securities The registrant has sold and issued the following securities since January 1, 1996 (such share numbers do not reflect the ): (1) The registrant from time to time has granted stock options to employees and consultants in reliance upon exemption from registration pursuant to either (1) Section 4(2) of the Securities Act of 1933 or (2) Rule 701 promulgated under the Securities Act of 1933. The following table sets forth certain information regarding such grants:
Number of Exercise Shares Prices --------- ----------- January 1, 1996 to December 31, 1996.................. 86,412 $0.41 January 1, 1997 to December 31, 1997.................. 244,872 $0.41 January 1, 1998 to December 31, 1998.................. 1,143,672 $0.61-$1.64
For additional information concerning these transactions, please see "Management--Benefit Plans" in the Prospectus included in this registration statement. (2) On September 24, 1996, we issued a warrant to purchase 156,285 shares of Class B common stock to Venture Lending & Leasing, Inc. in consideration for entering into a certain loan agreement. (3) On February 9, 1998, we issued 637,790 shares of Series B preferred stock, warrants to purchase 27,381 shares of Class A common stock and warrants to purchase 224,522 shares of Class B common stock to various venture capitalists and insiders for an aggregate consideration of $1,150,000. (4) On May 18, 1998, we issued 24,572 shares of Class B common stock to a director upon exercise of options for a consideration of $10,050. (5) On December 28, 1998, we issued 7,335 shares of Class B common stock to a director upon exercise of options for a consideration of $3,000. (6) On February 15, 1999, we issued a warrant to purchase no more than 91,181 shares of Class B common stock to Venture Lending & Leasing, Inc. in consideration for entering into a certain loan agreement. The above securities were offered and sold by the registrant in reliance upon exemptions from registration pursuant to either (1) Section 4(2) of the Securities Act of 1933 as transactions not involving any public offering, or (2) Rule 701 promulgated under the Securities Act of 1933. No underwriters were involved in connection with the sales of securities referred to in this Item 15. II-2 Item 16. Exhibits and Financial Statement Schedules (a) Exhibits.
Number Description ------ ----------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1 Restated Certificate of Incorporation, as amended. 3.2+ Form of Second Restated Certificate of Incorporation to be in effect upon the closing of this offering. 3.3+ Bylaws. 3.4+ Form of Restated Bylaws to be in effect upon the closing of this offering. 4.1* Specimen common stock certificate. 5.1 Opinion of Brobeck, Phleger & Harrison LLP. 10.1+ Amended and Restated Investor Rights Agreement among us and certain of our stockholders, dated February 9, 1998. 10.2+ Stock and Warrant Purchase Agreement among us and the purchasers identified in Exhibit A to the Agreement, dated October 14, 1994. 10.3+ Stock and Warrant Purchase Agreement among us and the purchasers identified in Exhibit A to the Agreement, dated February 9, 1998. 10.4+ Form of Class B Common Stock Warrant between us and the persons listed on the attached schedule, dated October 14, 1994. 10.5+ Class A Common Stock Warrant issued to Christopher A. Crane, dated February 9, 1998. 10.6+ Form of Class B Common Warrant between us and the persons listed on the attached schedule, dated February 9, 1998. 10.7+ Warrant to Purchase 156,285 Shares of Class B Common Stock between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.8+ Loan Agreement between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.9+ Security Agreement between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.10+ Trademark Collateral Assignment between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.11+ Patent Collateral Assignment between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.12+ Form of Promissory Note between us and Venture Lending & Leasing, in such principal amounts as set forth on the attached schedule. 10.13+ Form of Promissory Note between us and Venture Lending & Leasing, in such principal amounts as set forth on the attached schedule. 10.14 Office Building Lease between us and Comps Plaza Associates, L.P., dated January 31, 1999. 10.15+ Form of Employment and Incentive Compensation Agreement between us and the employees listed on the attached schedule. 10.16+ Executive Employment Agreement between us and Christopher A. Crane, dated October 14, 1994. 10.17+ Form of Employment Agreement between us and the employees listed on the attached schedule, dated November 6, 1998. 10.18+ Covenant Not to Compete between us and Robert C. Beasley, dated October 14, 1994. 10.19+ Form of Non-Competition and Non-Disclosure Agreement between us and the parties listed on the attached schedule, dated November 6, 1998. 10.20+ Form of Non-Competition and Non-Disclosure Agreement between us and the parties listed on the attached schedule, dated January 7, 1999. 10.21+ Form of Employee Confidentiality and Inventions Agreement. 10.22+ Form of Indemnification Agreement between us and each of our directors. 10.23+ Form of Indemnification Agreement between us and each of our officers. 10.24+ Software License Agreement between us and Qualitative Marketing Software, Inc., dated February 27, 1997. 10.25+ License and Subscription Agreement between us and Transamerica Information Management Services, dated December 17, 1992.
II-3
Number Description ------ ---------------------------------------------------------------------- 10.26+ License Agreement between us and NCompass Labs Inc., dated December 2, 1998. 10.27+ Amended and Restated Stock Option Plan. 10.28+ Form of Amended and Restated Stock Option Plan Incentive Stock Option Agreement. 10.29+ Form of Amended and Restated Stock Option Plan Non-Qualified Stock Option Agreement. 10.30+ The 1998 Equity Participation Plan. 10.31+ Form of 1998 Equity Participation Plan Incentive Stock Option Agreement. 10.32+ Form of 1998 Equity Participation Plan Non-Qualified Stock Option Agreement. 10.33+ The 1998 Supplemental Option Plan. 10.34+ 1998 Supplemental Option Plan Form of Notice of Grant of Stock Option. 10.35+ 1999 Stock Incentive Plan. 10.36* Form of 1999 Stock Incentive Plan Notice of Grant. 10.37* Form of 1999 Stock Incentive Plan Stock Option Agreement. 10.38+ Employee Stock Purchase Plan. 10.39+ Assignment and Assumption Agreement between us and REALBID LLC, dated November 6, 1998. 10.40+ Intellectual Property Assignment between us and REALBID LLC, dated November 6, 1998. 10.41+ Service Mark Assignment between us and REALBID LLC, dated November 6, 1998. 10.42+ Asset Purchase Agreement between us, The Land Sales Resource and Kitty Layne, dated July 17, 1995. 10.43++ Purchase Agreement between us and TRW Redi Property Data, dated August 31, 1995, as amended by the Addendum, dated November 20, 1997. 10.44++ Asset Purchase Agreement among us, REALBID LLC, Emmett DeMoss and Robert Potter, dated November 6, 1998. 10.45++ Asset Purchase Agreement between us and AOBR, Inc., dated December 4, 1998. 10.46+ Loan and Security Agreement between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.47+ Patent Collateral Assignment Agreement between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.48+ Trademark Collateral Assignment between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.49+ Warrant to Purchase an aggregate of $225,000 of Class B Shares of Common Stock between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.50* Commitment Letter between us and Silicon Valley Bank, dated February 25, 1999. 11.1* Statement re: Computation of Basic and Diluted Net Loss Per Share. 23.1 Consent of Ernst & Young LLP 23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1) 24.1+ Powers of Attorney. 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. + Previously filed. ++ We have sought confidential treatment pursuant to Rule 406 of portions of the referenced exhibit. (b) Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts. All other schedules are omitted because they are not required, are not applicable or the information is included in our financial statements or notes thereto. Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-4 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the 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 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 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 of 1933 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 of 1933 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 of 1933 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 of 1933 the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in San Diego, California, on this 2nd day of April, 1999. COMPS.COM, INC. By: /s/ Christopher A. Crane ---------------------------------- Name: Christopher A. Crane Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933 this Registration Statement has been signed by the following persons in the capacities indicated on April 2, 1999:
Signature Title(s) Date --------- ------- ---- /s/ Christopher A. Crane Chairman of the Board, President and April 2, 1999 ____________________________________ Chief Executive Officer (principal Christopher A. Crane executive officer) /s/ Karen Goodrum Vice President of Finance and April 2, 1999 ____________________________________ Administration and Chief Financial Karen Goodrum Officer (principal financial and accounting officer) and Secretary * Director April 2, 1999 ____________________________________ Gregory M. Avis * Director April 2, 1999 ____________________________________ Robert C. Beasley *By: /s/ Christopher A. April 2, 1999 Crane Christopher A. Crane Attorney-In-Fact
II-6 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report on the COMPS.COM, Inc. financial statements dated February 5, 1999 (except for Note 15, as to which the date is February 22, 1999) and our report on the REALBID, LLC financial statements dated February 17, 1999, in the Registration Statement (Form S-1) and related Prospectus of COMPS.COM, Inc. dated February 24, 1999. Our audits also included the financial statement schedule of COMPS.COM, Inc. for the three years ended December 31, 1998 listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP San Diego, California February 23, 1999 II-7 Schedule II COMPS.COM, Inc. Valuation And Qualifying Accounts
Additions -------------------- Balance at Charged to Balance Allowance for Doubtful Beginning Costs and at End of Accounts of Year Expenses Other (1) Deductions Year - ---------------------- --------- ---------- --------- ---------- --------- Year ended December 31, 1996..................... 362,913 -- 644,322 437,109 570,126 Year ended December 31, 1997..................... 570,126 39,491 1,238,593 463,968 1,384,242 Year ended December 31, 1998..................... 1,384,242 167,858 260,627 347,805 1,464,922
- -------- (1) These amounts have been offset against deferred subscription revenue. II-8 Index to Exhibits
Number Description ------ ----------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3.1 Restated Certificate of Incorporation, as amended. 3.2+ Form of Second Restated Certificate of Incorporation to be in effect upon the closing of this offering. 3.3+ Bylaws. 3.4+ Form of Restated Bylaws to be in effect upon the closing of this offering. 4.1* Specimen common stock certificate. 5.1 Opinion of Brobeck, Phleger & Harrison LLP. 10.1+ Amended and Restated Investor Rights Agreement among us and certain of our stockholders, dated February 9, 1998. 10.2+ Stock and Warrant Purchase Agreement among us and the purchasers identified in Exhibit A to the Agreement, dated October 14, 1994. 10.3+ Stock and Warrant Purchase Agreement among us and the purchasers identified in Exhibit A to the Agreement, dated February 9, 1998. 10.4+ Form of Class B Common Stock Warrant between us and the persons listed on the attached schedule, dated October 14, 1994. 10.5+ Class A Common Stock Warrant issued to Christopher A. Crane, dated February 9, 1998. 10.6+ Form of Class B Common Warrant between us and the persons listed on the attached schedule, dated February 9, 1998. 10.7+ Warrant to Purchase 156,285 Shares of Class B Common Stock between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.8+ Loan Agreement between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.9+ Security Agreement between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.10+ Trademark Collateral Assignment between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.11+ Patent Collateral Assignment between us and Venture Lending & Leasing, Inc., dated September 24, 1996. 10.12+ Form of Promissory Note between us and Venture Lending & Leasing, in such principal amounts as set forth on the attached schedule. 10.13+ Form of Promissory Note between us and Venture Lending & Leasing, in such principal amounts as set forth on the attached schedule. 10.14 Office Building Lease between us and Comps Plaza Associates, L.P., dated January 31, 1999. 10.15+ Form of Employment and Incentive Compensation Agreement between us and the employees listed on the attached schedule. 10.16+ Executive Employment Agreement between us and Christopher A. Crane, dated October 14, 1994. 10.17+ Form of Employment Agreement between us and the employees listed on the attached schedule, dated November 6, 1998. 10.18+ Covenant Not to Compete between us and Robert C. Beasley, dated October 14, 1994. 10.19+ Form of Non-Competition and Non-Disclosure Agreement between us and the parties listed on the attached schedule, dated November 6, 1998. 10.20+ Form of Non-Competition and Non-Disclosure Agreement between us and the parties listed on the attached schedule, dated January 7, 1999. 10.21+ Form of Employee Confidentiality and Inventions Agreement. 10.22+ Form of Indemnification Agreement between us and each of our directors. 10.23+ Form of Indemnification Agreement between us and each of our officers. 10.24+ Software License Agreement between us and Qualitative Marketing Software, Inc., dated February 27, 1997. 10.25+ License and Subscription Agreement between us and Transamerica Information Management Services, dated December 17, 1992.
Number Description ------ ---------------------------------------------------------------------- 10.26+ License Agreement between us and NCompass Labs Inc., dated December 2, 1998. 10.27+ Amended and Restated Stock Option Plan. 10.28+ Form of Amended and Restated Stock Option Plan Incentive Stock Option Agreement. 10.29+ Form of Amended and Restated Stock Option Plan Non-Qualified Stock Option Agreement. 10.30+ The 1998 Equity Participation Plan. 10.31+ Form of 1998 Equity Participation Plan Incentive Stock Option Agreement. 10.32+ Form of 1998 Equity Participation Plan Non-Qualified Stock Option Agreement. 10.33+ The 1998 Supplemental Option Plan. 10.34+ 1998 Supplemental Option Plan Form of Notice of Grant of Stock Option. 10.35+ 1999 Stock Incentive Plan. 10.36* Form of 1999 Stock Incentive Plan Notice of Grant. 10.37* Form of 1999 Stock Incentive Plan Stock Option Agreement. 10.38+ Employee Stock Purchase Plan. 10.39+ Assignment and Assumption Agreement between us and REALBID LLC, dated November 6, 1998. 10.40+ Intellectual Property Assignment between us and REALBID LLC, dated November 6, 1998. 10.41+ Service Mark Assignment between us and REALBID LLC, dated November 6, 1998. 10.42+ Asset Purchase Agreement between us, The Land Sales Resource and Kitty Layne, dated July 17, 1995. 10.43++ Purchase Agreement between us and TRW Redi Property Data, dated August 31, 1995, as amended by the Addendum, dated November 20, 1997. 10.44++ Asset Purchase Agreement among us, REALBID LLC, Emmett DeMoss and Robert Potter, dated November 6, 1998. 10.45++ Asset Purchase Agreement between us and AOBR, Inc., dated December 4, 1998. 10.46+ Loan and Security Agreement between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.47+ Patent Collateral Assignment Agreement between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.48+ Trademark Collateral Assignment between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.49+ Warrant to Purchase an aggregate of $225,000 of Class B Shares of Common Stock between us and Venture Lending & Leasing II, Inc., dated February 12, 1999. 10.50* Commitment Letter between us and Silicon Valley Bank, dated February 25, 1999. 11.1* Statement re: Computation of Basic and Diluted Net Loss Per Share. 23.1 Consent of Ernst & Young LLP 23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1) 24.1+ Powers of Attorney. 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. + Previously filed. ++ We have sought confidential treatment pursuant to Rule 406 of portions of the referenced exhibit. EX-3.1 2 RESTATED CERT. OF INCORPORATION AS AMENDED EXHIBIT 3.1 CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF COMPS.COM, INC. COMPS.COM, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That resolutions were duly adopted by the Board of Directors of the Corporation setting forth a proposed amendment to the Restated Certificate of Incorporation of the Corporation, and declaring said amendment to be advisable and recommended for approval by the stockholders of the Corporation. The resolutions setting forth the proposed amendment are as follows: NOW, THEREFORE, BE IT RESOLVED, that the Restated Certificate of Incorporation of the Corporation be amended by changing the initial recital paragraph of ARTICLE IV thereof so that, as amended, said paragraph shall ---------- read in its entirety as follows: "The Corporation is authorized to issue two classes of shares to be designated respectively "Preferred Stock" and "Common Stock." The total number of shares of Preferred Stock par value $.01 per share, which are authorized is 5,100,000. The total number of shares of Common Stock, par value $.01 per share, which are authorized is 25,000,000." RESOLVED, FURTHER, that the Restated Certificate of Incorporation of the Corporation be amended by changing initial paragraph of ARTICLE IV, Section ---------- B thereof so that, as amended, said paragraph shall read in its entirety as follows: "B. Preferred Stock. The first series of Preferred Stock shall be --------------- comprised of 4,368,200 shares designated as "Series A Preferred Stock." The second series of Preferred Stock shall be comprised of 731,800 shares designated as "Series B Preferred Stock." The relative rights, preferences, restrictions and other matters relating to the Series A Preferred Stock and Series B Preferred Stock are as follows:" SECOND: That, thereafter, the stockholders approved the foregoing amendment by written consent in accordance with Section 228 of the Delaware General Corporation Law. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. FOURTH: That the capital of said Corporation shall not be reduced under or by reason of said amendment. [Remainder of This Page Intentionally Left Blank] -2- IN WITNESS WHEREOF, said COMPS.COM, INC. has caused this certificate to be signed by Christopher A. Crane, its President and Chief Executive, this 30 day -- of March, 1999. By: /s/ CHRISTOPHER A. CRANE ------------------------------------ Christopher A. Crane, President and Chief Executive Officer -3- RESTATED CERTIFICATE OF INCORPORATION OF COMPS INFOSYSTEMS, INC. A DELAWARE CORPORATION COMPS INFOSYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: ONE: The name of this Corporation is COMPS INFOSYSTEMS, INC. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of Delaware on September 1, 1994. The Certificate of Incorporation was later amended and restated and filed with the Delaware Secretary of State on October 13, 1994. TWO: Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Restated Certificate of Incorporation of this Corporation. THREE: The text of the Restated Certificate of Incorporation as heretofore in effect is hereby restated and further amended to read in its entirety as follows: ARTICLE I --------- The name of the Corporation is COMPS InfoSystems, Inc. (the "Corporation"). ARTICLE II ---------- The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, City of Wilmington, Delaware. The name of the registered agent at that address is The Prentice Hall Corporation System, Inc., County of New Castle. ARTICLE III ----------- The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. ARTICLE IV ---------- The Corporation is authorized to issue two classes of shares to be designated respectively "Preferred Stock" and "Common Stock." The total number of shares of Preferred Stock par value $.01 per share, which are authorized is 5,000,000. The total number of shares of Common Stock, par value $.01 per share, which are authorized is 25,000,000. A. Common Stock. The first series of Common Stock shall be comprised of ------------ 22,500,000 shares designated "Class A Common Stock." The second series of Common Stock shall be comprised of 2,500,000 shares of Common Stock designated "Class B Common Stock." 1 The Class A and Class B Common Stock shall have the same rights and privileges except as provided below: 1. Voting. The Class B Common Stock shall not have any right to vote ------ unless otherwise required by law. 2. Conversion. Each share of Class B Common Stock shall automatically ---------- convert into one share of Class A Common Stock upon the earlier to occur of (i) the time the consent of at least 66 2/3% of the outstanding Class A Common Stock to such conversion is obtained, or (ii) closing of the sale of the Corporation's securities pursuant to an underwritten public offering. Upon conversion of the Class B Common Stock, the Class A Common Stock shall be renamed "Common Stock." (a) In case the Corporation shall at any time (i) subdivide the outstanding Class A Common Stock, or (ii) issue a stock dividend on its outstanding Class A Common Stock, the number of shares of Class B Common Stock issuable upon conversion of the Class B Common Stock immediately prior to such subdivision or the issuance of such stock dividend shall be proportionately increased by the same ratio as the subdivision or dividend. In case the Corporation shall at any time combine its outstanding Class A Common Stock, the number of shares of Class B Common Stock issuable upon conversion of the Class B Common Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination. All such adjustments described herein shall be effective at the close of business on the date of such subdivision, stock dividend or combination, as the case may be. (b) In case of any capital reorganization (other than in connection with a merger or other reorganization which the Corporation is not the continuing or surviving entity) or any reclassification of the Common Stock of the Corporation, the Class B Common Stock shall thereafter be convertible into that number of shares of stock or other securities or property to which a holder of the number of shares of Class A Common Stock of the Corporation deliverable upon conversion of the shares of Class B Common Stock immediately prior to such reorganization or recapitalization would have been entitled upon such reorganization or reclassification. B. Preferred Stock. The first series of Preferred Stock shall be --------------- comprised of 4,270,336 shares designated as "Series A Preferred Stock." The second series of Preferred Stock shall be comprised of 637,790 shares designated as "Series B Preferred Stock." The relative rights, preferences, restrictions and other matters relating to the Series A Preferred Stock and Series B Preferred Stock are as follows: 1. Dividend Rights of Preferred. The holders of Preferred Stock shall ---------------------------- be entitled to receive, out of any assets at the time legally available therefor, cumulative non-compounded dividends from the date of issuance at the rate per annum of $0.07025 per share (subject to adjustments for stock splits, dividends, recapitalizations and the like) of Series A Preferred Stock and $0.10808 per share (subject to adjustments for stock splits, dividends, recapitalization and the like) of Series B Preferred Stock, payable immediately prior to the effective time of (i) any repurchase of the Series A Preferred Stock or Series B Preferred Stock; (ii) any liquidation pursuant to Section B(2)(b) of this Article IV, or (iii) any sale of the 2 Corporation's securities pursuant to an underwritten public offering, provided, -------- however, that the right to receive such accrued and unpaid dividends shall - ------- forfeit with respect to a particular Series of Preferred Stock in the event of (x) a repurchase of all of the outstanding shares of a series of Preferred Stock (each series with shares still outstanding retains such right) or a liquidation pursuant to Section B(2)(b) of this Article IV, if the aggregate amount to be received by the holders of the Series A Preferred Stock and Series B Preferred Stock prior to the payment of such accrued and unpaid dividends would exceed $3.52 and $3.83 per share, respectively, (as adjusted for stock-splits, combinations, reorganizations and the like) or (y) with respect only to the Series A Preferred Stock, an underwritten public offering of the Corporation's securities if the Corporation receives gross proceeds of not less than $10,000,000 at a purchase price of not less than $3.52 per share (as adjusted for stock splits, stock dividends, reorganizations and the like), and with respect only to the Series B Preferred Stock, an underwritten public offering of the Corporation's securities of the Corporation receives gross proceeds of not less than $10,000,000 at a purchase price of not less than $3.83 per share (as adjusted for stock splits, stock dividends, reorganizations and the like). Upon conversion of the Preferred Stock any accrued but unpaid dividends shall remain accrued and shall remain payable pursuant to this Section B(1) of this Article IV. In addition to the cumulative dividends specified above, no cash dividends shall be paid on any Common Stock unless an equal dividend is paid with respect to all outstanding shares of Preferred Stock in an amount for each such share of Preferred Stock equal to the aggregate amount of such dividends for all Common Stock into which each such share of Preferred Stock could then be converted. 2. Preference on Liquidation. ------------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, distributions to the stockholders of the Corporation shall be made in the following manner: (i) The holders of the Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, the amount of (A) $1.17087 per share for each share of Series A Preferred Stock and $1.80310 per share for each share of Series B Preferred Stock then held by them, adjusted for any stock split, combination, consolidation, or stock distributions or stock dividends with respect to such shares, and (B) an amount equal to all accumulated but unpaid dividends on the Preferred Stock as provided in Subsection 1 above. If the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Preferred Stock, pari passu, in proportion to their aggregate ---- ----- preferential amounts. (ii) The remaining assets of the Corporation, after payment in full to the holders of Preferred Stock of all amounts exclusively payable on or with respect to said shares, shall be distributed ratably among the holders of the Common Stock. (b) The following shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Subsection: (i) an acquisition, consolidation or merger of 3 this Corporation with or into any other corporation or corporations unless the stockholders of the Corporation prior to such transaction directly or indirectly own more than fifty percent (50%) of the voting stock of the surviving or acquiring corporation or corporations; (ii) the sale, transfer or other disposition of all or substantially all of the assets of this Corporation to a person other than a corporation or partnership controlled by the Corporation or its stockholders; and (iii) the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the outstanding voting power of the Corporation prior to such transaction or series of related transactions is disposed of. (c) In the event the Corporation shall propose to take any action of the type described in subsection (a) or (b) of this Subsection 2, the Corporation shall, within ten (10) days after the date the Board of Directors approves such action or twenty (20) days prior to any stockholders' meeting called to approve such action, whichever is earlier, give each holder of shares of the Preferred Stock written notice of the proposed action. Such written notice shall describe the material terms and conditions of such proposed action, including a description of the stock, cash and property to be received by the holders of shares of the Preferred Stock upon consummation of the proposed action and the proposed date of delivery thereof. If any material change in the facts set forth in the notice shall occur, the Corporation shall promptly give written notice to each holder of shares of the Preferred Stock of such material change. (d) The Corporation shall not consummate any proposed action of the type described in subsection (a) or (b) of this Subsection 2 before the expiration of thirty (30) days after the mailing of the initial written notice or ten (10) days after the mailing of any subsequent written notice, whichever is later; provided, however, that any such 30-day or 10-day period may be -------- ------- shortened upon the written consent of the holders of a majority of the outstanding shares of the Preferred Stock. (e) If the Corporation shall propose to take any action of the type described in subsection (a) or (b) of this Subsection 2 which will involve the distribution of assets other than cash, the Corporation shall, if requested by the holders of a majority of the Preferred Stock, promptly engage independent competent appraisers to determine the value of the assets to be distributed to the holders of shares of the Preferred Stock and the Common Stock. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice of the appraiser's valuation to each holder of shares of the Preferred Stock. 3. Voting. ------ (a) Except as set forth in paragraph (b) of this Subsection 3 and in Subsection 6 hereof, or as otherwise required by law, the shares of the Preferred Stock shall be voted together with the Corporation's Class A Common Stock at any annual or special meeting of the stockholders of the Corporation, or may act by written consent in the same manner as the Corporation's Class A Common Stock; and shall have the voting rights and powers equal to the voting right of the Class A Common Stock, upon the following basis: each holder of shares of Preferred Stock shall be entitled to such number of votes for the Preferred Stock held by him on the record date fixed for such meeting or, if no record date is established, at the date such vote is taken or on the effective date of any such written consent, as shall be equal to the nearest whole number of shares of the Corporation's Common Stock into which his shares of Preferred Stock 4 are convertible immediately after the close of business on the record date fixed for such meeting, the date of such vote or the effective date of such written consent. (b) The holders of Series A and Series B Preferred Stock, voting together as a separate class, shall be entitled to elect one director. The election of a director by the holders of the Preferred Stock shall occur at the annual meeting of holders of Common Stock or at any special meeting of holders of Preferred Stock called by holders of a majority of the outstanding shares of Preferred Stock or by the written consent of all such holders. If the person elected by the holders of Preferred Stock should cease to be a director for any reason, the vacancy shall only be filled by the vote or written consent of holders of a majority of the outstanding shares of Preferred Stock. The holders of the Common Stock shall be entitled to elect the remaining directors. 4. Status of Converted or Redeemed Stock. In the event that any shares ------------------------------------- of Preferred Stock shall be converted pursuant to Subsection 5 hereof or shall be repurchased or otherwise acquired by the Corporation in any manner whatsoever, such shares shall be retired and canceled promptly after the acquisition thereof. Such shares shall not be reissued as shares of any series of Preferred Stock. Upon such cancellation, and upon the filing of any certificates required or appropriate under applicable law, the number of authorized shares of Preferred Stock as set forth in Article IV, shall be reduced by the number of such shares so canceled. 5. Conversion Rights. The holders of Preferred Stock shall have ----------------- conversion rights as follows: (a) Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time at the principal office of the Corporation or any transfer agent for such shares, into fully paid and nonassessable shares of Class A Common Stock of the Corporation. The number of shares of Class A Common Stock into which each share of Preferred Stock may be converted shall be determined by dividing $1.17087 for the Series A Preferred Stock and $1.80310 for the Series B Preferred Stock by the Conversion Price determined as hereinafter provided in effect at the time of the conversion. The Conversion Price per share at which shares of Class A Common Stock shall be initially issuable upon conversion of any shares of Preferred Stock shall be $1.17087 for the Series A Preferred Stock and $1.80310 for the Series B Preferred Stock, subject to adjustment as provided herein. (b) Each share of Preferred Stock shall be converted into Class A Common Stock automatically in the manner provided herein upon the earlier to occur of (i) the time the consent of holders of at least 66-2/3% of the outstanding Preferred Stock to such conversion is obtained, or (ii) the closing of the sale of the Corporation's securities pursuant to an underwritten public offering from which the Corporation receives gross proceeds of not less than $10,000,000 at a purchase price of not less than $3.73 per share (as adjusted for stock splits, stock dividends, reorganizations and the like). (c) Before any holder of Preferred Stock shall be entitled to convert the same into Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed in blank or accompanied by proper instruments of transfer, at the principal office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice 5 to the Corporation at such office that such holder elects to convert the same and shall state in writing therein the name or names in which such holder wishes the certificate or certificates for Common Stock to be issued. As soon as practicable thereafter, the Corporation shall issue and deliver at such office to such holder's nominee or nominees, certificates for the number of whole shares of Common Stock to which such holder shall be entitled. No fractional shares of Common Stock shall be issued by the Corporation and all such fractional shares shall be disregarded. In lieu thereof, the Corporation shall pay in cash the fair market value of such fractional share as determined by the Board of Directors of the Corporation. Such conversion shall be deemed to have been made as of the date of such surrender of the Preferred Stock to be converted, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on said date. (d) In case the Corporation shall at any time (i) subdivide (i.e. stock split) the outstanding Common Stock, or (d) issue a stock dividend on its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Preferred Stock immediately prior to such subdivision or the issuance of such stock dividend shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments in the Conversion Price of the Preferred Stock). In case the Corporation shall at any time combine (i.e. reverse stock split) its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Preferred Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination (with appropriate adjustments in the Conversion Price of the Preferred Stock). All such adjustments described herein shall be effective at the close of business on the date of such subdivision (i.e. stock split), stock dividend or combination (i.e. reverse stock split), as the case may be. (e) In case of any capital reorganization (other than in connection with a merger or other reorganization in which the Corporation is not the continuing or surviving entity) or any reclassification of the Common Stock of the Corporation, the Preferred Stock shall thereafter be convertible into that number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of the shares of Preferred Stock immediately prior to such reorganization or recapitalization would have been entitled upon such reorganization or reclassification. In any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Preferred Stock, such that the provisions set forth herein shall thereafter be applicable, as nearly as reasonably may be, in relation to any share of stock or other property thereafter deliverable upon the conversion. (f) In case: (i) the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend, or any other distribution, payable otherwise than in cash; or 6 (ii) the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to subscribe for or purchase any shares of stock of any class or to receive any other rights; or (iii) the Corporation shall effect a capital reorganization of the Corporation, reclassification of the capital stock of the Corporation (other than a subdivision or combination of its outstanding Common Stock), consolidation or merger of the Corporation (other than a merger or other reorganization in which the Corporation is not the continuing or surviving entity); then, and in any such case, the Corporation shall cause to be mailed to the holders of its outstanding Preferred Stock, at least twenty (20) days prior to the date hereinafter specified, a notice stating the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or such action is to be taken in connection with such reorganization, reclassification, merger or consolidation. (g) The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Preferred Stock from time to time outstanding. The Corporation shall from time to time (subject to obtaining necessary director and stockholder action), in accordance with the laws of the State of Delaware, increase the authorized amount of its Common Stock if at any time the authorized number of shares of Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Preferred Stock at the time outstanding. (h) Upon the issuance by the Corporation of Common Stock, or any right or option to purchase Common Stock, or any obligation or any shares of stock convertible into or exchangeable for Common Stock for a consideration per share less than the Conversion Price of a series of Preferred Stock in effect immediately prior to the time of such issue or sale other than the issuance of shares of Common Stock upon conversion of such series of Preferred Stock, then forthwith upon such issue or sale, the Conversion Price of such series of Preferred Stock shall be reduced to a price (calculated to nearest cent) determined by dividing: (i) an amount equal to the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Conversion Price of the affected series of Preferred Stock, (y) the number of shares of Common Stock issuable upon conversion of any shares of stock of the Corporation outstanding immediately prior to such issue or sale multiplied by the then existing Conversion Price of the affected series of Preferred Stock, and (z) an amount equal to the aggregate consideration received by the Corporation upon such issue or sale, by (ii) the sum of the number of shares of Common Stock outstanding immediately after such issue or sale and the number of shares of Common Stock (without taking into account any adjustment in such number resulting from such issue or sale) issuable upon conversion of any shares of stock of the Corporation outstanding immediately after such issue or sale. 7 For purposes of this subsection (h) the following provisions shall be applicable: (1) In the case of an issue or sale for cash of shares of Common Stock, the consideration received by the Corporation therefor shall be deemed to be the amount of cash received, before deducting therefrom any commissions or expenses paid or incurred by the Corporation. (2) In case of the issuance (otherwise than upon conversion or exchange of obligations or shares of stock of the Corporation) of additional shares of Common Stock for a consideration other than cash or a consideration partly other than cash, the amount of the consideration other than cash received by the Corporation for such shares shall be deemed to be the value of such consideration as reasonably determined by the Board of Directors. (3) In case of the issuance by the Corporation in any manner of any rights to subscribe for or to purchase shares of Common Stock, at a consideration per share (as computed below) less than the Conversion Price in effect for a series of Preferred Stock immediately prior to the date of the offering of such rights or the granting of such options, as the case may be, the maximum number of shares of Common Stock to which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed to be issued or sold as of the date of the offering of such rights or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the shares of Common Stock covered thereby, plus the consideration, if any, received by the Corporation for such rights or options, shall be deemed to be the consideration actually received by the Corporation (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issuance of such shares. (4) In case of the issuance or issuances by the Corporation in any manner of any obligations or of any shares of stock of the Corporation that shall be convertible into or exchangeable for Common Stock, at a consideration per share (as computed below) less than the Conversion Price in effect for a series of Preferred Stock immediately prior to the date such obligation or shares are issued, the maximum number of shares of Common Stock issuable upon the conversion or exchange of such obligations or shares shall be deemed issued as of the date such obligations or shares are issued, and the amount of the consideration received by the Corporation for such additional shares of Common Stock will be deemed to be the total of the amount of consideration received by the Corporation upon the issuance of such obligations or shares, as the case may be, plus the minimum aggregate consideration, if any, other than such obligations or shares, receivable by the Corporation upon such conversion or exchange, except in adjustment of dividends. (5) The amount of the consideration received by the Corporation upon the issuance of any rights or options referred to in subsection (3) above or upon the issuance of any obligations or shares which are convertible or exchangeable as describes in subsection (4) above, and the amount of the consideration, if any, other than such obligations or shares so convertible or exchangeable, receivable by the Corporation upon the exercise, conversion or exchange thereof shall be determined in the same manner provided in subsections (h)(1) and (2) above with respect to the consideration received by the Corporation in 8 case of the issuance of additional shares of Common Stock. On the expiration of any rights or options referred to in subsection (3), or the termination of any right of conversion or exchange referred to in subsection (4), the Conversion Price then in effect for a series of Preferred Stock shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustments made upon the issuance of such option, right or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered upon the exercise of such rights or options or upon the conversion or exchange of such securities. (6) Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Conversion Price in the case of (A) the sale and issuance by the Corporation of up to 1,944,909 shares of Common Stock or rights or options to purchase shares of Common Stock, net of repurchases and expired or canceled options, (as adjusted for stock splits, stock dividends, reorganizations and the like) to officers, directors, employees, consultants and equipment lessors to the Corporation; (B) the issuance of Common Stock upon the conversion of outstanding Preferred Stock; or (C) the issuance of up to 723,295 shares of Common Stock upon the exercise of Warrants issued to the holders of Preferred Stock. (i) Upon the occurrence of each adjustment or readjustment of the Conversion Price for any series of Preferred Stock pursuant to this Subsection 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the reasonable written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, and (ii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock. (j) In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities or other property of the Corporation other than Common Stock and other than as otherwise adjusted in this Subsection 5, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities and other property of the Corporation which they would have received had their shares of Preferred Stock been converted into shares of Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion; retained such securities and other property receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Subsection 5 with respect to the rights of the holders of Preferred Stock. (k) Any notices required by the provisions of this Subsection 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, first class, postage prepaid and addressed to each holder of record at its address appearing on the books of the Corporation. 9 6. Changes. So long as shares of Preferred Stock are outstanding, the ------- Corporation shall not, without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of Series A and Series B Preferred Stock outstanding, voting together as a single Class: (1) alter or change any of the powers, preferences, privileges or rights of any series of Preferred Stock; (2) increase the authorized number of shares of Preferred Stock; (3) amend the provisions of this Section 6; (4) undertake or effect any consolidation or merger of the Corporation with or into another corporation or any acquisition by or the conveyance of all or substantially all of the assets of the Corporation to another person; (5) create any new series of Preferred Stock; (6) amend this Certificate of Incorporation of the Corporation; (7) declare or pay any dividends on the Corporation's capital stock, (8) redeem or repurchase any outstanding stock other than from employees, consultants or directors upon the termination of their employment or services pursuant to agreements providing for such repurchases; or (9) increase the size of the Board of Directors to more than four directors. ARTICLE V --------- The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Restated Certificate of Incorporation or the By-laws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. ARTICLE VI ---------- A. The number of directors shall initially be four (4) and, thereafter, subject to the rights of the holders of any outstanding series of Preferred Stock, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Subject to the rights of the holders of any series of Preferred Stock then outstanding, a vacancy resulting from the removal of a director by the stockholders as provided in Article VI, Section C below may be filled at a special meeting of the stockholders held for that purpose in accordance with Article IV, Section B.3(b). All directors shall hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation or other 10 cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. C. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of the directors then in office, though less than a quorum or by the stockholders as provided in Article VI, Section A above. Directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation or removal of any director. ARTICLE VII ----------- The Board of Directors is expressly empowered to adopt amend or repeal By- laws of the Corporation. Any adoption, amendment or repeal of By-laws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directors at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the By-laws of the Corporation. Any adoption, amendment or repeal of By-laws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. ARTICLE VIII ------------ A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the 11 Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article VIII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE IX ---------- The Corporation shall to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. ARTICLE X --------- The Corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, -------- ------- notwithstanding any other provision of this Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Restated Certificate of Incorporation, the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this Article X, Article V, Article VI, Article VII, Article VIII, or Article IX. The foregoing Restated Certificate of Incorporation has been approved by the Board of Directors of the Corporation. The foregoing Restated Certificate of Incorporation has been approved by the outstanding shares of the Corporation in accordance with Sections 242 and 245 of the Delaware General Corporation Law. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been executed by the undersigned duly authorized officer of the Corporation on this 4th day of February, 1998. /s/ CHRISTOPHER A. CRANE -------------------------------------- Christopher A. Crane, President 12 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF COMPS INFOSYSTEMS, INC. COMPS INFOSYSTEMS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted a resolution proposing and declaring advisable the following amendment to the Restated Certificate of Incorporation of said corporation: RESOLVED, that the Restated Certificate of Incorporation of COMPS Infosystems, Inc. be amended by changing Article IV thereof so that, as amended, said Article shall read in its entirety as follows: "ARTICLE IV The Corporation is authorized to issue two classes of shares to be designated respectively "Preferred Stock" and "Common Stock." The total number of shares of Preferred Stock, par value $.01 per share, which are authorized is 5,000.000. The total number of shares of Common Stock, par value $.01 per share, which are authorized is 25,000,000. A. Common Stock. The first series of Common Stock shall be comprised of ------------ 22,500,000 shares designated "Class A Common Stock." The second series of Common Stock shall be comprised of 2,500,000 shares of Common Stock designated "Class B Common Stock." The Class A and Class B Common Stock shall have the same rights and privileges except as provided below. 1. Voting. The Class B Common Stock shall not have any right to vote ------ unless otherwise required by law. 2. Conversion. Each share of Class B Common Stock shall automatically ---------- convert into one share of Class A Common Stock upon the earlier to occur of (i) the time the consent of at least 66 2/3% of the outstanding Class A Common Stock to such conversion is obtained, or (ii) closing of the sale of the Corporation's securities pursuant to an underwritten public offering. Upon conversion of the Class B Common Stock, the Class A Common Stock shall be renamed "Common Stock." (a) In case the Corporation shall at any time (i) subdivide the outstanding Class A Common Stock or (ii) issue a stock dividend on its outstanding Class A Common Stock, the number of shares of Class B Common Stock issuable upon conversion of the Class B Common Stock immediately prior to such subdivision or the issuance of such stock dividend shall be proportionately increased by the same ratio as the subdivision or dividend. In case the Corporation shall at any time combine its outstanding Class A Common Stock, the number of shares of Class B Common Stock issuable upon conversion of the Class B Common Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination. All such adjustments described herein shall be effective at the close of business on the date of such subdivision, stock dividend or combination, as the case may be. (b) In case of any capital reorganization (other than in connection with a merger or other reorganization which the Corporation is not the continuing or surviving entity) or any reclassification of the Common Stock of the Corporation, the Class B Common Stock shall thereafter be convertible into that number of shares of stock or other securities or property to which a holder of the number of shares of Class A Common Stock of the Corporation deliverable upon conversion of the shares of Class B Common Stock immediately prior to such reorganization or recapitalization would have been entitled upon such reorganization or reclassification. B. Preferred Stock. The first series of Preferred Stock shall be --------------- comprised of 4,270,336 shares designated as "Series A Preferred Stock." The second series of Preferred Stock shall be comprised of 637,790 shares designated as "Series B Preferred Stock." The relative rights, preferences, restrictions and other matters relating to the Series A Preferred Stock and Series B Preferred Stock are as follows: 1. Dividend Rights of Preferred. The holders of Preferred Stock shall ---------------------------- be entitled to receive, out of any assets at the time legally available therefor, cumulative non-compounded dividends from the date of issuance at the rate per annum of $0.07025 per share (subject to adjustments for stock splits, dividends, recapitalizations and the like) of Series A Preferred Stock and $0.10808 per share (subject to adjustments for stock splits, dividends, recapitalizations and the like) of Series B Preferred Stock, payable immediately prior to the effective time of (i) any repurchase of the Series A Preferred Stock or Series B Preferred Stock; (ii) any liquidation pursuant to Section B(2)(b) of this Article IV; or (iii) any sale of the Corporation's securities pursuant to an underwritten public offering; provided, however, that the right -------- ------- to receive such accrued and unpaid dividends shall forfeit with respect to a particular Series of Preferred Stock in the event of (x) a repurchase of all of the outstanding shares of a series of Preferred Stock (each series with shares still outstanding retains such right) or a liquidation pursuant to Section B(2)(b) of this Article IV, if the aggregate amount to be received by the holders of the Series A Preferred Stock and Series B Preferred Stock prior to the payment of such accrued and unpaid dividends would exceed $3.52 and $3.83 per share, respectively, (as adjusted for stock splits, combinations, reorganizations and the like) or (y) with respect only to the Series A Preferred Stock, an underwritten public offering of the Corporation's securities if the Corporation receives gross proceeds of not less than $10,000,000 at a purchase price of not less than $3.52 per share (as adjusted for stock splits, stock dividends, reorganizations and the like), and with respect only to Series B Preferred Stock, an underwritten public offering of the Corporation's securities if the Corporation receives gross proceeds of not less than $10,000,000 at a purchase price of not less than $3.83 per share (as adjusted for stock splits, stock dividends, reorganizations and the like). Upon conversion of the Preferred Stock any accrued but unpaid dividends shall remain accrued and shall remain payable pursuant to this Section B(l) of this Article IV. In addition to the cumulative dividends specified above, no cash dividends shall be paid on any Common Stock unless an equal dividend is paid with respect to all outstanding shares of Preferred Stock in an amount for each such share of Preferred Stock equal to the aggregate amount of such dividends for all Common Stock into which each such share of Preferred Stock could then be converted. 2. Preference on Liquidation. ------------------------- (a) In the event of any liquidation, dissolution or winding up of the Corporation, distributions to the stockholders of the Corporation shall be made in the following manner: (i) The holders of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, the amount of (A) $1.17087 per share for each share of Series A Preferred Stock and $1.80310 per share for each share of Series B Preferred Stock then held by them, adjusted for any stock split, combination, consolidation, or stock distributions or stock dividends with respect to such shares, and (B) an amount equal to all accumulated but unpaid dividends on the Preferred Stock as provided in Subsection 1 above. If the assets and funds thus distributed among the holders of the Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Preferred Stock, pari passu, in proportion to their aggregate preferential ---- ----- amounts. (ii) The remaining assets of the Corporation, after payment in full to the holders of Preferred Stock of all amounts exclusively payable on or with respect to said shares, shall be distributed ratably among the holders of the Common Stock. (b) The following shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Subsection: (i) an acquisition, consolidation or merger of this Corporation with or into any other corporation or corporations unless the stockholders of the Corporation prior to such transaction directly or indirectly own more than fifty percent (50%) of the voting stock of the surviving or acquiring corporation or corporations, (ii) the sale, transfer or other disposition of all or substantially all of the assets of this Corporation to a person other than a corporation or partnership controlled by the Corporation or its stockholders; and (iii) the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the outstanding voting power of the Corporation prior to such transaction or series of related transactions is disposed of. (c) In the event the Corporation shall propose to take any action of the type described in subsection (a) or (b) of this Subsection 2, the Corporation shall, within ten (10) days after the date the Board of Directors approves such action or twenty (20) days prior to any stockholders' meeting called to approve such action, whichever is earlier, give each holder of shares of the Preferred Stock written notice of the proposed action. Such written notice shall describe the material terms and conditions of such proposed action, including a description of the stock, cash and property to be received by the holders of shares of the Preferred Stock upon consummation of the proposed action and the proposed date of delivery thereof. If any material change in the facts set forth in the notice shall occur, the Corporation shall promptly give written notice to each holder of shares of the Preferred Stock of such material change. (d) The Corporation shall not consummate any proposed action of the type described in subsection (a) or (b) of this Subsection 2 before the expiration of thirty (30) days after the mailing of the initial written notice or ten (10) days after the mailing of any subsequent written notice, whichever is later; provided, however, that any such 30-day or 10-day period may be -------- ------- shortened upon the written consent of the holders of a majority of the outstanding shares of the Preferred Stock. (e) If the Corporation shall propose to take any action of the type described in subsection (a) or (b) of this Subsection 2 which will involve the distribution of assets other than cash, the Corporation shall, if requested by the holders of a majority of the Preferred Stock, promptly engage independent competent appraisers to determine the value of the assets to be distributed to the holders of shares of the Preferred Stock and the Common Stock. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice of the appraiser's valuation to each holder of shares of the Preferred Stock. 3. Voting. ------ (a) Except as set forth in paragraph (b) of this Subsection 3 and in Subsection 6 hereof, or as otherwise required by law, the shares of the Preferred Stock shall be voted together with the Corporation's Class A Common Stock at any annual or special meeting of the stockholders of the Corporation, or may act by written consent in the same manner as the Corporation's Class A Common Stock, and shall have the voting rights and powers equal to the voting rights of the Class A Common Stock, upon the following basis: each holder of shares of Preferred Stock shall be entitled to such number of votes for the Preferred Stock held by him on the record date fixed for such meeting, or, if no record date is established, as the date such vote is taken or on the effective date of any such written consent, as shall be equal to the nearest whole number of shares of the Corporation's Common Stock into which his shares of Preferred Stock are convertible immediately after the close of business on the record date fixed for such meeting, the date of such vote or the effective date of such written consent. (b) The holders of Series A and Series B Preferred Stock, voting together as a separate class, shall be entitled to elect one director. The election of a director by the holders of the Preferred Stock shall occur at the annual meeting of holders of Common Stock or at any special meeting of holders of Preferred Stock called by holders of a majority of the outstanding shares of Preferred Stock or by the written consent of all such holders. If the person elected by the holders of Preferred Stock should cease to be a director for any reason, the vacancy shall only be filled by the vote or written consent of holders of a majority of the outstanding shares of Preferred Stock. The holders of the Common Stock shall be entitled to elect the remaining directors. 4. Status of Converted or Redeemed Stock. In the event that any ------------------------------------- shares of Preferred Stock shall be converted pursuant to Subsection 5 hereof or shall be repurchased or otherwise acquired by the Corporation in any manner whatsoever, such shares shall be retired and canceled promptly after the acquisition thereof. Such shares shall not be reissued as shares of any series of Preferred Stock. Upon such cancellation, and upon the filing of any certificates required or appropriate under applicable law, the number of authorized shares of Preferred Stock as set forth in Article IV, shall be reduced by the number of such shares so canceled. 5. Conversion Rights. The holders of Preferred Stock shall have ----------------- conversion rights as follows: (a) Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time at the principal office of the Corporation or any transfer agent for such shares, into fully paid and nonassessable shares of Class A Common Stock of the Corporation. The number of shares of Class A Common Stock into which each share of Preferred Stock may be converted shall be determined by dividing $1.17087 for the Series A Preferred Stock and $1.80310 for the Series B Preferred Stock by the Conversion Price determined as hereinafter provided in effect at the time of the conversion. The Conversion Price per share at which shares of Class A Common Stock shall be initially issuable upon conversion of any shares of Preferred Stock shall be $1.17087 for the Series A Preferred Stock and $1.80310 for the Series B Preferred Stock, subject to adjustment as provided herein. (b) Each share of Preferred Stock shall be converted into Class A Common Stock automatically in the manner provided herein upon the earlier to occur of (i) the time the consent of holders of at least 66 2/3% of the outstanding Preferred Stock to such conversion is obtained, or (ii) the closing of the sale of the Corporation's securities pursuant to an underwritten public offering from which the Corporation receives gross proceeds of not less than $10,000,000 at a purchase price of not less than $3.73 per share (as adjusted for stock splits, stock dividends, reorganizations and the like). (c) Before any holder of Preferred Stock shall be entitled to convert the same into Common Stock, such holder shall surrender the certificate of certificates therefor, duly endorsed in blank or accompanied by proper instruments of transfer, at the principal office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same and shall state in writing therein the name or names in which such holder wishes the certificate or certificates for Common Stock to be issued. As soon as practicable thereafter, the Corporation shall issue and deliver at such office to such holder's nominee or nominees, certificates for the number of whole shares of Common Stock to which such holder shall be entitled. No fractional shares of Common Stock shall be issued by the Corporation and all such fractional shares shall be disregarded. In lieu thereof, the Corporation shall pay in cash the fair market value of such fractional share as determined by the Board of Directors of the Corporation. Such conversion shall be deemed to have been made as of the date of such surrender of the Preferred Stock to be converted, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock on said date. (d) In case the Corporation shall at any time (i) subdivide (i.e., stock split) the outstanding Common Stock or (ii) issue a stock dividend on its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Preferred Stock immediately prior to such subdivision or the issuance of such stock dividend shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments in the Conversion Price of the Preferred Stock). In case the Corporation shall at any time combine (i.e. reverse stock split) its outstanding Common Stock, the number of shares of Common Stock issuable upon conversion of the Preferred Stock immediately prior to such combination shall be proportionately decreased by the same ratio as the combination (with appropriate adjustments in the Conversion Price of the Preferred Stock). All such adjustments described herein shall be effective at the close of business on the date of such subdivision (i.e. stock split), stock dividend or combination (i.e. reverse stock split), as the case may be. (e) In case of any capital reorganization (other than in connection with a merger or other reorganization in which the Corporation is not the continuing or surviving entity) or any reclassification of the Common Stock of the Corporation, the Preferred Stock shall thereafter be convertible into that number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of the shares of Preferred Stock immediately prior to such reorganization or recapitalization would have been entitled upon such reorganization or reclassification. In any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Preferred Stock, such that the provisions set forth herein shall thereafter be applicable, as nearly as reasonably may be, in relation to any share of stock or other property thereafter deliverable upon the conversion. (f) In case: (i) the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend, or any other distribution payable otherwise than in cash; or (ii) the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to subscribe for or purchase any shares of stock of any class or to receive any other rights; or (iii) the Corporation shall effect a capital reorganization of the Corporation, reclassification of the capital stock of the Corporation (other than a subdivision or combination of its outstanding Common Stock), consolidation or merger of the Corporation (other than a merger or other reorganization in which the Corporation is not the continuing surviving entity); then, and in any such case, the Corporation shall cause to be mailed to the holders of its outstanding Preferred Stock, at least twenty (20) days prior to the date hereinafter specified, a notice stating the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or such action is to be taken in connection with such reorganization, reclassification, merger or consolidation. (g) The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of the Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all Preferred Stock from time to time outstanding. The Corporation shall from time to time (subject to obtaining necessary director and stockholder action), in accordance with the laws of the State of Delaware, increase the authorized amount of its Common Stock if at any time the authorized number of shares of Common Stock remaining unissued shall not be sufficient to permit the conversion of all of the shares of Preferred Stock at the time outstanding. (h) Upon the issuance by the Corporation of Common Stock, or any right or option to purchase Common Stock, or any obligation or any shares of stock convertible into or exchangeable for Common Stock for a consideration per share less than the Conversion Price of a series of Preferred Stock in effect immediately prior to the time of such issue or sale other than the issuance of shares of Common Stock upon conversion of such series of Preferred Stock, then forthwith upon such issue or sale, the Conversion Price of such series of Preferred Stock shall be reduced to a price (calculated to nearest cent) determined by dividing: (i) an amount equal to the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Conversion Price of the affected series of Preferred Stock, (y) the number of shares of Common Stock issuable upon conversion of any shares of stock of the Corporation outstanding immediately prior to such issue or sale multiplied by the then existing Conversion Price of the affected series of Preferred Stock, and (z) an amount equal to the aggregate consideration received by the Corporation upon such issue or sale, by (ii) the sum of the number of shares of Common Stock outstanding immediately after such issue or sale and the number of shares of Common Stock (without taking into account any adjustment in such number resulting from such issue or sale) issuable upon conversion of any shares of stock of the Corporation outstanding immediately after such issue or sale. For purposes of this subsection (h) the following provisions shall be applicable: (1) In the case of an issue or sale for cash of shares of Common Stock, the consideration received by the Corporation therefor shall be deemed to be the amount of cash received, before deducting therefrom any commissions or expenses paid or incurred by the Corporation. (2) In case of the issuance (otherwise than upon conversion or exchange of obligations or shares of stock of the Corporation) of additional shares of Common Stock for a consideration other than cash or a consideration partly other than cash, the amount of the consideration other than cash received by the Corporation for such shares shall be deemed to be the value of such consideration as reasonably determined by the Board of Directors. (3) In case of the issuance by the Corporation in any manner of any rights to subscribe for or to purchase shares of Common Stock, at a consideration per share (as computed below) less than the Conversion Price in effect for a series of Preferred Stock immediately prior to the date of the offering of such rights or the granting of such options, as the case may be, the maximum number of shares of Common Stock to which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed to be issued or sold as of the date of the offering of such right or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the shares of Common Stock covered thereby, plus the consideration, if any, received by the Corporation for such rights or options, shall be deemed to be the consideration actually received by the Corporation (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issuance of such shares. (4) In case of the issuance or issuances by the Corporation in any manner of any obligations or of any shares of stock of the Corporation that shall be convertible into or exchangeable for Common Stock, at a consideration per share (as computed below) less than the Conversion Price in effect for a series of Preferred Stock immediately prior to the date such obligation or shares are issued, the maximum number of shares of Common Stock issuable upon the conversion or exchange of such obligations or shares shall be deemed issued as of the date such obligations or shares are issued, and the amount of the consideration received by the Corporation for such additional shares of Common Stock shall be deemed to be the total of the amount of consideration received by the Corporation upon the issuance of such obligations or shares, as the case may be, plus the minimum aggregate consideration, if any, other than such obligations or shares, receivable by the Corporation upon such conversion of exchange, except in adjustment of dividends. (5) The amount of the consideration received by the Corporation upon the issuance of any rights or options refereed to in subsection (3) above or upon the issuance of any obligations or shares which are convertible or exchangeable as described in subsection (4) above, and the amount of the consideration, if any, other than such obligations or shares so convertible or exchangeable, receivable by the Corporation upon the exercise, conversion or exchange thereof shall be determined in the same manner provided in subsections (h)(1) and (2) above with respect to the consideration received by the Corporation in case of the issuance of additional shares of Common Stock. On the expiration of any rights or options referred to in subsection (3), or the termination of any right of conversion or exchange referred to in subsection (4), the Conversion Price then in effect for a series of Preferred Stock shall forthwith be readjusted to such Conversion Price as would have been obtained had the adjustments made upon the issuance of such option, right or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered upon the exercise of such rights or options or upon the conversion or exchange of such securities. (6) Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Conversion Price in the case of (A) the sale and issuance by the Corporation of up to 2,994,909 shares of Common Stock or rights or options to purchase shares of Common Stock, net of repurchases and expired or canceled options, (as adjusted for stock splits, stock dividends, reorganizations and the like) to officers, directors, employees, consultants and equipment lessors to the Corporation; (B) the issuance of Common Stock upon the conversion of outstanding Preferred Stock; or (C) the issuance of up to 723,295 shares of Common Stock upon the exercise of Warrants issued to the holders of Preferred Stock. (i) Upon the occurrence of each adjustment or readjustment of the Conversion Price for any series of Preferred Stock pursuant to this Subsection 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the reasonable written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, and (ii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock. (j) In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities or other property of the Corporation other than Common Stock and other than as otherwise adjusted in this Subsection 5, then and in each such event provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities and other property of the Corporation which they would have received had their shares of Preferred Stock been converted into shares of Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities and other property receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Subsection 5 with respect to the rights of the holders of Preferred Stock. (k) Any notices required by the provisions of this Subsection 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, first class, postage prepaid and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Changes. So long as shares of Preferred Stock are outstanding, the ------- Corporation shall not without first obtaining the approval by vote or written consent, in the manner provided by law, of the holders of at least a majority of the total number of shares of Series A and Series B Preferred Stock outstanding, voting together as a single class; (1) alter or change any of the powers, preferences, privileges or rights of any series of Preferred Stock; (2) increase the authorized number of shares of Preferred Stock; (3) amend the provisions of this Section 6; (4) undertake or effect any consolidation or merger of the Corporation with or into another corporation or any acquisition by or the conveyance of all or substantially all of the assets of the Corporation to another person; (5) create any new series of Preferred Stock; (6) amend this Certificate of Incorporation of the Corporation; (7) declare or pay any dividends on the Corporation's capital stock; (8) redeem or repurchase any outstanding stock other than from employees, consultants or directors upon the termination of their employment or services pursuant to agreements providing for such repurchases; or (9) increase the size of the Board of Directors to more than four directors." SECOND: That in lieu of a meeting and vote of stockholders, a majority of the outstanding stock entitled to vote on this amendment and a majority of the outstanding stock of each class entitled to vote on this amendment as a class have given their written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with Sections 242 and 228 of the General Corporation Law of the State of Delaware. Dated: October 29, 1998 COMPS INFOSYSTEMS, INC. By: /s/ CHRISTOPHER A. CRANE --------------------------------- Christopher A. Crane, President CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF COMPS INFOSYSTEMS, INC. COMPS INFOSYSTEMS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation, by the unanimous written consent of its members, filed with the minutes of the Board, adopted a resolution proposing and declaring advisable the following amendment to the Restated Certificate of Incorporation of said corporation: WHEREAS, it is deemed to be in the best interest of the Corporation and its stockholders to amend the Corporation's Restated Certificate of Incorporation. THEREFORE, BE IT RESOLVED, that the Corporation's Restated Certificate of Incorporation be amended by changing Article I thereof so that, as amended, said Article I shall read as follows: "ARTICLE I The name of the Corporation is COMPS.COM, INC." SECOND: That in lieu of a meeting and vote of stockholders, a majority of the outstanding stock entitled to vote on this amendment and a majority of the outstanding stock of each class entitled to vote on this amendment as a class have given their written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with Sections 242 and 228 of the General Corporation Law of the State of Delaware. Dated: December 31, 1998 COMPS INFOSYSTEMS, INC. By: /s/ CHRISTOPHER A. CRANE ------------------------------- Christopher A. Crane, President EX-5.1 3 OPINION OF BROBECK PHLEGER & HARRISON LLP EXHIBIT 5.1 [LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP] April 2, 1999 COMPS.COM, INC. 9888 Carroll Centre Road, Suite 100 San Diego, California 92126-4581 Re: COMPS.COM, INC. Registration Statement on Form S-1 for 4,370,000 Shares of Common Stock Ladies and Gentlemen: We have acted as counsel to COMPS.COM, INC., a Delaware corporation (the "Company"), in connection with the proposed issuance and sale by the Company of up to 4,370,000 shares of the Company's Common Stock (the "Shares"), including 570,000 Shares which the Underwriters have the option to purchase to cover over- allotments, if any, pursuant to the Company's Registration Statement on Form S-1 (the "Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). This opinion is being furnished in accordance with the requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K. We have reviewed the Company's charter documents and the corporate proceedings taken by the Company in connection with the issuance and sale of the Shares. Based on such review, we are of the opinion that the Shares have been duly authorized, and if, as and when issued in accordance with the Registration Statement and the related prospectus (as amended and supplemented through the date of issuance) will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the prospectus which is part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act, the rules and regulations of the Securities and Exchange Commission promulgated thereunder, or Item 509 of Regulation S-K. COMPS.COM, INC. Page 2 This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the Shares. Very truly yours, BROBECK, PHLEGER & HARRISON LLP EX-10.14 4 OFFICE BUILDING LEASE EXHIBIT 10.14 STANDARD INDUSTRIAL/COMMERCIAL MULTI-LESSEE LEASE--MODIFIED NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. BASIC PROVISIONS ("BASIC PROVISIONS"). 1.1 PARTIES: This lease ("LEASE"), dated for reference purposes only, January 31, 1999, is made by and between COMPS Plaza Associates, L.P. ("LESSOR") and COMPS.COM, INC., a Delaware corporation ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 (a) PREMISES: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 9888 Carroll Center Road, located in the City of San Diego, County of San Diego, State of California, with zip code 92126, as outlined on Exhibit A attached hereto ("PREMISES"). The "BUILDING" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): two story office building containing approximately 52,425 rentable square feet; stucco exterior and central courtyard. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "INDUSTRIAL CENTER." (Also see Paragraph 2). 1.2 (b) PARKING: 112 unreserved vehicle parking spaces ("UNRESERVED PARKING SPACES"); and 1 reserved vehicle parking spaces ("RESERVED PARKING SPACES"). (Also see Paragraph 2.6.) 1.3 TERM: Five (5) years and -0- months ("ORIGINAL TERM") commencing February 1, 1999 ("COMMENCEMENT DATE") and ending January 31, 2004 ("EXPIRATION DATE"). (Also see Paragraph 3.) 1.4 EARLY POSSESSION: not applicable ("EARLY POSSESSION DATE"). (Also see Paragraphs 3.2 and 3.3.) 1.5 BASE RENT: $32,718.75 per month ("BASE RENT"), payable on the first day of each month commencing March 1, 1999 (Also see Paragraph 4). [ X ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum 1, attached hereto. 1.6 (a) BASE RENT PAID UPON EXECUTION: $ -0- as Base Rent for the period not applicable. 1.6 (b) LESSEE'S SHARE OF OPERATING EXPENSES: See Addendum 1 percent (%) ("LESSEE'S SHARE") as determined by [ ] prorata square footage of the Premises as compared to the total square footage of the Building or [ XX ] other criteria as described in Addendum 1. 1.7 SECURITY DEPOSIT: $ 20,399.27 ("SECURITY DEPOSIT"). (Also see Paragraph 5.) 1.8 PERMITTED USE: General office, all uses incidental thereto and all other lawful uses permitted under applicable zoning laws ("PERMITTED USE"). (Also see Paragraph 6) 1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see Paragraph 8.) 1.10 (a) Intentionally Deleted 1.12 ADDENDA and EXHIBITS. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 12 , Inserts to Lease pages 1-4 and Exhibits A through C , all of which constitute a part of this Lease. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants that any improvements (other than those constructed by Lessee or at Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non-compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in Paragraph 2.4). 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Broker(s) to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively "APPLICABLE LAWS") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non- compliance of the Premises with said warranties. 2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full- size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law. 2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non- exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior Initials: CM ---- KG ---- -1- written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the reasonable cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable and non-discriminatory Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways, provided that such charges shall not unreasonably interfere with Lessee's business or access thereto; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 4. RENT. 4.1 BASE RENT. Lessee shall pay Base Rent, and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 OPERATING EXPENSES. Lessee shall pay monthly to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b)) of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "OPERATING EXPENSES" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas and the Building, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, lighting, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas and the Building. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas and the Building. (v) Real Property Taxes (as defined in Paragraph 10.2). (vi) The cost of the premiums for the insurance policies maintained by Lessor under Paragraph 8 hereof. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (viii) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Operating Expense. (b) Any Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Industrial Center. Insert 4.2(b) (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessor shall be credited the amount of such over-payment against Lessee's Share of Operating Expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. Insert 4.2(d) 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest except from and after the tenth (10) day following the expiration or earlier termination of this Lease, the Security Deposit shall accrue interest at the rate set forth in Paragraph 19 of this Lease or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. Upon execution of each Amendment for expansion space, Lessee shall deposit with Lessor a Security Deposit equal to the initial monthly Base Rent for such expansion space. 6. USE. 6.1 PERMITTED USE. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. Initials: CM ---- KG ---- -2- 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system) in violation of applicable laws. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. Insert 6.2(c) 6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Insert 6.3 Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements reasonably specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise with at least 24 hours prior notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, interior windows, doors, plate glass, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when reasonably necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, roof, roof membrane, skylights, smoke hatches, fire sprinkler and/or standpipes and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, irrigation systems, exterior lighting, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace interior windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. Insert 7.2 7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all air lines, power panels, electrical distribution, security and fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent which shall not be unreasonably withheld or delayed. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any Initials: CM ---- KG ---- -3- existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $10,000.00 per year. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consents, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. (c) LIEN PROTECTION. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall reasonably decide it is to its best interest to do so. 7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may (at the time Lessor gives its consent to the installation of such Lessee-owned Alterations or Utility Installations) require that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted and subject to Paragraph 9. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. Insert 7.4(c) 8. INSURANCE; INDEMNITY. 8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance policies maintained by Lessor under this Paragraph 8 shall be an Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "INSURED CONTRACT" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) RENTAL VALUE. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Operating Expenses shall include any deductible amount in the event of such loss. (c) ADJACENT PREMISES. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) LESSEE'S IMPROVEMENTS. Since Lessor is the insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $10,000.00 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the reasonable cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Initials: CM ---- KG ---- -4- 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessor and Lessee each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 INDEMNITY. Except for Lessor's or Lessor's agents', employees', or contractors' negligence, willful misconduct and/or breach of this Lease, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor, shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except for Lessor's negligence, gross negligence, willful misconduct and/or breach of this Lease Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "INSURED LOSS" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor acts to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date of the occurrence of such damage. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate as of the date of such Premises Total Destruction, whether or not the damage or destruction is an insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last twelve (12) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, either party may, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to the other party of its election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration except for damages due to Lessor's negligence, willful misconduct or breach of this Lease. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease Initials: CM ---- KG ---- -5- shall continue in full force and effect. "COMMENCE" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may, at Lessor's option either: (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twenty (20) times the then monthly Base Rent, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as to the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twenty (20) times the then monthly Base Rent. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the requiring funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. Insert 10.2 10.3 ADDITIONAL IMPROVEMENTS. Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by Lessee or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 LESSEE'S PROPERTY TAXES. Subject to Lessee's right to contest the amount or application of such taxes Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) Insert 12.1(b) (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the Initials: CM ---- KG ---- -6- intended use and/or required modification of the Premises, if any, together with reimbursement of Lessor's legal fees and costs which shall not exceed $500.00. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's and Lessee's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. Insert 12.3(f) 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), Lessor may include the reasonable cost of such services and costs in said notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3; (a) The vacating of the Premises without a Lessor authorized assignee or sublessee or without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Operating Expenses, or any other monetary payment required to be made by Lessee hereunder within five (5) days of when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of seven (7) business days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false without a reasonable explanation from Lessee for such error. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency without notice), Lessor may at its option (but without obligation to do so) perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments for a period of one (1) calendar year to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises to the extent required by Paragraph 7.4(c), reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such Initials: CM ---- KG ---- -7- statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession (under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If Lessee's business is materially affected or more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking is taken by condemnation, or Lessee may elect to continue this Lease with Base Rent abated in proportion to the adverse effect of the condemnation on Lessee's business in the Premises, as reasonably determined by Lessee and Lessor. Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or attributable to loss of Lessee's Trade Fixtures and any Lessee owned Alterations and/or Utility Installations which Lessee would be entitled to remove on expiration or earlier termination of this Lease. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKERS' FEES. 15.1 15.2 15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. TENANCY AND FINANCIAL STATEMENTS. 16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Insert 17 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent with the exception of unused portion of the Security Deposit. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. NOTICES. 23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to either hereunder shall be concurrently transmitted to such party or parties at such addresses as such party may from time to time hereafter designate by written notice to Lessee. 23.2 DATE OF NOTICE. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given seventy-two (72) hours after Initials: CM ---- KG ---- -8- the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessor or Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") in a form reasonably acceptable to Lessee from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all reasonable attorneys' fees incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach, Broker(s) shall be intended third party beneficiaries of this Paragraph 31. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon 24 hours' prior notice for the purpose of showing the same to prospective purchasers, lenders, or lessees during the last 8 months of the lease term, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the Building) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and such signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves air rights to the use of the roof of the Building. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessee's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 Initials: CM ---- KG ---- -9- 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Lease, the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given three (3) or more notices of separate Defaults under Paragraph 13.1 three (3) or more times during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option if after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due, or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 three (3) or more times during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and observe all reasonable and non-discriminatory rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. See attached Exhibit "C". 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property against the acts of third parties. 42. RESERVATIONS. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease together with reasonable fees incurred in the recovery of such costs. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. Initials: CM ---- KG ---- -10- LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: San Diego, California Executed at: San Diego, California ----------------------------------------------- ----------------------------------------------- on: 1/31/99 on: 1/31/99 --------------------------------------------------------- -------------------------------------------------------- By LESSOR: By LESSEE: COMPS Plaza Associates, L.P. COMPS.COM, INC., a Delaware corporation - ------------------------------------------------------------ ------------------------------------------------------------ By: Alden Properties, Inc., a California corporation - ------------------------------------------------------------ ------------------------------------------------------------ By: /s/ CHRISTOPHER S. McKELLAR By: /s/ KAREN GOODRUM - ------------------------------------------------------------ ------------------------------------------------------------ Name Printed: Christopher S. McKellar Name Printed: Karen Goodrum ---------------------------------------------- ---------------------------------------------- Title: Vice President Title: Chief Financial Officer ----------------------------------------------------- ----------------------------------------------------- By: ________________________________________________________ By: ________________________________________________________ Name Printed: ______________________________________________ Name Printed: ______________________________________________ Title: _____________________________________________________ Title: _____________________________________________________ Address: 12526 High Bluff Dr., Suite 100 Address: 9888 Carroll Center Road, #100 --------------------------------------------------- --------------------------------------------------- San Diego, CA 92130 San Diego, CA 92126 - ------------------------------------------------------------ ------------------------------------------------------------ Telephone: (619) 793-2622 Telephone: (619) 578-3000 ------------------------------------------- ------------------------------------------- Facsimile: (619) 793-7616 Facsimile: (619) 684-3288 ------------------------------------------- -------------------------------------------
NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071, (213) 687-8777. (C) 1993 by American Industrial Real Estate Association All rights reserved. No part of these words may be reproduced in any form without permission in writing. Initials: CM ---- KG ---- -11- Exhibit A Outline of Floor Plan of Premises First Floor Initials: CM ---- KG ---- A-1 Exhibit A Outline of Floor Plan of Premises Second Floor Initials: CM ---- KG ---- A-2 EXHIBIT B TENANT IMPROVEMENT AGREEMENT ---------------------------- 1. TENANT IMPROVEMENTS. Lessee shall cause to be performed the ------------------- improvements (the "Tenant Improvements") in the Premises in accordance with ------------------- plans and specifications approved by Lessee and Lessor (the "Plans"), which ----- approvals shall not be unreasonably withheld or delayed. The Tenant Improvements shall be performed at the Lessee's cost, subject to the Lessor's Contribution (hereinafter defined). Lessee shall cause the Plans to be prepared by a registered professional architect and engineer acceptable to Lessor and Lessee. Lessee shall furnish the initial draft of the Plans to Lessor for Lessor's review and approval. Lessor shall within two (2) weeks after receipt either provide comments to such Plans or approve the same. Lessor shall be deemed to have approved such Plans if it does not timely provide comments on such Plans. If Lessor provides Lessee with comments to the initial draft of the Plans, Lessee shall provide revised Plans to Lessor incorporating Lessor's comments within one week after receipt of Lessor's comments. Lessor shall within one week after receipt then either provide comments to such revised Plans or approve such Plans. Lessor shall be deemed to have approved such revised Plans if Lessor does not timely provide comments on such Plans. The process described above shall be repeated, if necessary, until the Plans have been finally approved by Lessor. Lessee hereby agrees that the Plans for the Tenant Improvements shall comply with all Applicable Laws. Lessor's approval of any of the Plans (or any modifications or changes thereto) shall not impose upon Lessor or its agents or representatives any obligation with respect to the design of the Tenant Improvements or the compliance of such Tenant Improvements or the Plans with Applicable Laws. A contractor acceptable to Lessor and Lessee ("Contractor") ---------- shall perform the construction of the Tenant Improvements. Lessee shall enter into a contract with Contractor for the construction of the Tenant Improvements. 2. CHANGE ORDERS. If, prior to the Commencement Date, Lessee shall ------------- require improvements or changes (individually or collectively, "Change Orders") ------------- to the Premises in addition to, revision of or substitution for the Tenant Improvements, Lessee shall deliver to Lessor for its approval plans and specifications for such Change Orders. If Lessor does not approve of the plans for Change Orders, Lessor shall advise Lessee of the revisions required. Lessee shall revise and redeliver the plans and specifications to Lessor within five (5) business days of Lessor's advice or Lessee shall be deemed to have abandoned its request for such Change Orders. Lessee shall pay for all preparations and revisions of plans and specifications, and the construction of all Change Orders, subject to Lessor's Contribution. 3. CONTRIBUTION. Lessor shall contribute an amount up to $2.00 per ------------ rentable square foot for previously improved space and $22.00 per rentable square foot for Suite 236 (not previously improved) ("Lessor's Contribution") --------------------- toward the costs incurred for the Tenant Improvements and Change Orders. Lessor's contribution to be made upon Substantial Completion as defined in Section 4 of this Agreement. Lessor has no obligation to pay for costs of the Tenant Improvements or Change Orders in excess of Lessor's Contribution. For the purposes of this Lease, the costs incurred for the Tenant Improvements and Change Orders shall include, without limitation, the preparation of the Plans, hard construction costs, architectural and engineering fees, all governmental and other regulatory fees and costs associated with the Tenant Improvements and Change Orders, costs of utility connection and permitting. 4. SUBSTANTIAL COMPLETION. The Tenant Improvements shall be deemed ---------------------- to be "Substantially Completed", and "Substantial Completion" shall be deemed to occur when the Contractor certifies in writing to Lessor and Lessee that (a) Contractor has substantially performed all of the Tenant Improvement work required to be performed under this Plans, other than decoration and minor "punch list" items and adjustments which do not materially interfere with Lessee's access to or use of the Premises; and, if required, and (b) Contractor or Lessee has obtained a temporary certificate of occupancy or other required approval from the local governmental authority permitting occupancy of the Premises. The Contractor shall guaranty all work and Improvements for one (1) year from the earlier of Substantial Completion of the Tenant Improvements or the commencement of the warranty for those items covered by manufacturer's or vendor's warranties and, to the extent possible, shall assign all warranties to Lessee. 5. ARBITRATION. ----------- A. Dispute Resolution. If any dispute arises in connection with ------------------ this Tenant Improvement Agreement, such dispute shall be resolved in accordance with this Article. Such dispute shall be determined by a panel consisting of one representative of Lessor, one of Lessee's construction representatives (or another party designated by Lessee), and a third party with extensive development and construction experience in the construction of commercial office space in the San Diego County area selected in accordance with paragraph 5C of this Tenant Improvement Agreement ("Construction Panel"). B. Notice. All disputes to be determined in accordance with this ------ Section 5 shall be raised by notice to the other party, which notice shall state with particularity the nature of the dispute and the demand for relief, making specific reference by paragraph number and title to the provision of this Tenant Improvement Agreement alleged to give rise to the dispute. Such notice shall also refer to this Section 5. C. Selection of Third Party/Costs. Lessor and Lessee shall mutually ------------------------------ and promptly select a third party who meets the qualifications set forth in paragraph 5A of this Tenant Improvement Agreement. In the event a selection is not made within two (2) days after demand for resolution is made, the third party shall, upon the request of either party, be appointed by the then-president of the Association of General Contractors of San Diego County. All proceedings contemplated by this Section 5 shall take place at the locations for all job-site meetings, unless the Construction Panel mutually agrees to another location. The cost for the third party's services shall be paid by the non-prevailing party, unless the Construction Panel determines otherwise. D. Interpretation and Resolution. In determining any dispute, the ----------------------------- Construction Panel shall apply the pertinent provisions of this Tenant Improvement Agreement (and the Lease, if applicable) without departure therefrom in any respect. The Construction Panel shall not have the power to add to, modify or change any of the provisions of this Tenant Improvement Agreement, but this provision shall not prevent in any appropriate case the interpretation, construction and determination by the Construction Panel of the applicable provisions of this Tenant Improvement Agreement to the extent necessary in applying the same to the matters to be determined by the Construction Panel. E. Continued Performance. During any proceedings pursuant to this --------------------- Section 5, Lessor and Lessee shall, to the extent possible, continue to perform and discharge all of their respective obligations under this Tenant Improvement Agreement and the Lease. F. Binding Resolution. The Construction Panel shall meet within two ------------------ (2) days of the third party being selected as a member of the Construction Panel and the Construction Panel shall thereafter resolve the issue in dispute within two (2) business days, unless it is mutually agreed among the Construction Panel members that additional times is necessary to resolve the dispute, but in no event shall such additional time exceed five (5) business days. Lessor and Lessee agree that time and strict punctual performance are of the essence with respect to each provision of this Tenant Improvement Agreement and that any and all decisions of the Construction Panel as to the matter in dispute shall be binding upon both Lessor and Lessee. 6. MISCELLANEOUS. Terms used in this Exhibit B shall have the ------------- --------- meanings assigned to them in the Lease. The terms of this Exhibit B are subject --------- to the terms of the Lease. LANDLORD: TENANT: COMPS PLAZA ASSOCIATES, L.P. COMPS.COM, INC., A CALIFORNIA LIMITED PARTNERSHIP A DELAWARE CORPORATION By: Alden Properties, Inc. By: /s/ CHRIS McKELLAR By: /s/ KAREN GOODRUM ---------------------------------- --------------------------------- Name: Chris McKellar Name: Karen Goodrum -------------------------------- ------------------------------- Title: Vice President Title: Chief Financial Officer ------------------------------- ------------------------------ 2 EXHIBIT C --------- Rules and Regulations 1. Tenant must use window coverings approved by Landlord in all exterior or atrium window offices. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near partitions, doors, or windows which may appear unsightly from outside the Premises. 2. The halls, passages, exits, entrances, elevators, and stairways are not for the use of the general public. Tenant shall not obstruct the hall, passages, exits, entrances, elevators or stairways. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the reasonable judgment of Landlord would be prejudicial to the safety, character, reputation, or interests of the Building and its tenants; provided that nothing contained herein shall be construed to prevent access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building or into mechanical, electrical, or phone rooms without Landlord's consent. All common areas and facilities forming a part of the Building shall be under the sole and absolute control of Landlord with exclusive right to regulate and control these areas. 3. Any directory of the Building will be provided, at Tenant's expense, exclusively for the display of the name and location of tenants only and Landlord reserves the right to limit the number of listings and exclude any other names therefrom. 4. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, at Tenant's expense, and except with the written consent of Landlord, no person or persons other than those approved by Landlord may be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the orderliness and cleanliness of the Premises. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any Tenant's property by the janitor or any other employee or any other person. 5. 6. Any freight elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its sole discretion, shall deem appropriate. 7. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry. Landlord shall have the right to prescribe the weight, size, and position of all equipment, materials, furniture, or other property brought into the Building. If heavy objects are deemed necessary by Tenant, and are pre-approved by Landlord, said objects shall stand on platforms to properly distribute the weight, the size and thickness of which shall be in Landlord's sole discretion. Any mechanical equipment or business machines which cause noise or vibration to be transmitted to the structure of the Building or other tenant's space and is objectionable to Landlord shall be placed on vibration eliminators or other devices sufficient to eliminate noise or vibration. Said eliminators shall be installed and maintained at Tenant's sole expense. The persons employed to move such equipment in or out of the Building must be reasonably acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other affected property or any damage done to the Building or other tenants by maintaining or moving such equipment or other property. Any such loss or damage shall be Tenant's responsibility and/or repaired at Tenant's sole expense. 8. Tenant shall not use or keep in the Premises any kerosene, gasoline, or flammable or combustible fluid or material. 9. Tenant shall not use, or permit to be used, in the Premises any foul or noxious gas or substance. 10. Tenant shall not permit or allow the premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations. 11. Tenant shall not bring or keep in or about the Premises any birds or animals, except seeing-eye dogs when accompanied by their masters. 12. The building systems hours of operation shall be 7:00 a.m. to 6:00 p.m. Monday through Friday, excluding legal holidays. Tenant shall not use any method of heating or air conditioning other than that supplied or approved by Landlord. Tenant shall not waste electricity, water, or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws, or regulations for which Tenant has actual notice and shall refrain from attempting to adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor and/or exterior doors closed, and shall close window coverings at the end of each business day. 13. Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 7:00 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any persons unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom its requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damage or for any error with regard to the admission to or exclusion from the Building of any person unless caused by the negligence or willful misconduct of Landlord or Landlord's agents. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement, or other commotion by closing the doors or by other reasonably appropriate action. 14. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus and, except with regard to Tenant's computers and other equipment which must be run on a twenty-four hour basis, all electricity, gas or air outlets before Tenant and its employees lease the Premises. Tenant shall be Initials: CM ---- KG ---- C-1 responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord resulting from noncompliance with this rule. 15. 16. The toilet rooms, toilet, urinals, wash bowls, and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any suite-to-suite solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease. 18. Tenant shall not mark, drive nails, screw, or drill into the partitions, woodwork, or plaster or in any way deface the Premises or any part thereof, except to install normal wall hangings. Landlord reserves the right to direct electricians as to where and how telephones and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. 19. 20. Canvassing, soliciting, or distribution of handbills or any other written material and peddling in the Building or on the Site are prohibited and each tenant shall cooperate to prevent same. 21. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of drugs or who is in violation of any of the Rules and Regulations of the Building. 22. Tenant shall store all its trash and garbage within its Premises or deposit in outside refuse containers intended for this purpose. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. The outside areas immediately adjoining the Premises shall be kept clean and free of rubbish by Tenant to the satisfaction of Landlord, and Tenant shall not place or permit any obstruction or materials in such areas. 23. The Premises shall not be use for lodging nor shall the Premises be used for any illegal purpose. No cooking shall be done or permitted by any tenant on the Premises, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted and the use of a microwave oven with all applicable federal, state, county, and city laws, codes, ordinances, rules and regulations. 24. Tenant shall not use in any space or in the public halls of the Building any mailcarts or hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. Tenant shall not bring any vehicles of any kind into the Building. Carpet stains caused by hand trucks shall be cleaned at Tenant's expense. 25. Tenant shall comply with all safety, fire protection, and evacuation procedures and regulations established by Landlord or any governmental agency. 26. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery, or pilferage unless caused by Landlord's negligence or willful misconduct. 27. Tenant shall address repair requests, concerns, etc., in writing to the office of the Building. Employees of Landlord shall not perform on behalf of Landlord or Tenant without express authority from Landlord. 28. Heat and air conditioning shall be furnished to the Premises by Landlord (as part of the Operating Expenses to be reimbursed by Tenant) during normal business hours of generally recognized business days, but not less than the hours of 7:00 a.m. to 6:00 p.m. Monday through Friday (excluding in any event Saturdays, Sundays and legal holidays). 29. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. Parking Rules and Regulations 1. Tenant and authorized users shall not park vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building. 2. 3. Tenant and authorized users shall not park any vehicle in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles, or trucks. Landlord may, in its sole discretion, designate separate areas for bicycles and motorcycles. 4. Cars must be parked entirely within the painted stall lines. 5. All directional signs and arrows must be observed. Initials: CM ---- KG ---- C-2 6. The speed limit shall be 5 miles per hour. 7. Parking is prohibited: a. in areas not striped for parking; b. in aisles; c. where "No Parking" signs are posted; d. on ramps; e. in crosshatched areas; or f. in such other areas as may be designated by Landlord, its agent, lessee or licensee. 8. Parking stickers or any other device or form of identification that may be supplied by Landlord shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable, and any device in the possession of an unauthorized holder will be void. There will be a reasonable replacement charge to the Tenant or authorized user for any loss of any magnetic parking card or other parking identification device. 9. Parking managers or attendants, if any, are not authorized to make or allow any exception to these Parking Rules and Regulations. 10. Loss or theft of parking identification devices from automobiles must be reported to the garage manager and/or Landlord immediately. Any parking identification devices found on any unauthorized car will be confiscated. Lost or stolen devices previously reported and then found must be reported to the office of the garage and/or Landlord immediately. 11. Spaces are for the express purpose of one automobile per space. Washing, waxing, cleaning, or servicing of any vehicle by the Tenant, authorized user and/or its agents or representatives is prohibited. 12. The parking management, if any, and/or Landlord reserve the right to refuse the issuance of monthly stickers or other parking identification devices to any tenant, authorized user, or person and/or its agent or representative who willfully refuse to comply with the above Parking Rules and Regulations or any City, State, or Federal ordinance, law, or agreement. 13. Tenant, authorized users or its agents or representatives shall not load or unload in areas other than those designated by Landlord for such activities. 14. Tenant, authorized users or agents or representatives therefor and unauthorized users parked in prohibited areas, are subject to towing at tenant's or owner's expense. 15. These Rules and Regulations are in addition to the terms, covenants, agreements and conditions of any lease of premises in the Building. In the event these Rules and Regulations conflict with any provision of the Lease, the Lease shall govern. 16. 17. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees, and guests. Initials: CM ---- KG ---- C-3 INSERTS TO COMPS PLAZA ASSOCIATES, L.P./COMPS.COM, INC. LEASE ------------------------------------------------------------- INSERT 4.2(B): - ------------- The amount of any charges for any services provided by affiliates, related or designated parties of Lessor, which are included in the Operating Expenses, shall be reasonable, customary and competitive with charges for similar services of independent contractors in the area where the Industrial Center is located. Notwithstanding the provisions of this Paragraph 4, the following shall not be included within Operating Expenses: (i) any depreciation on the Building or Industrial Center, (ii) costs incurred due to Lessor's violation of any terms or conditions of this Lease or any other lease relating to the Industrial Center, (iii) all principal interest, loan fees, and other financing costs related to any mortgage or deed of trust and all rental and other payable due under any ground or underlying lease of the Industrial Center, (iv) advertising, promotional, legal limit to leasing and marketing costs, space planning costs, Lessee allowances and concessions and other costs and expenses incurred in connection with any lease, sublease and/or assignment negotiations and transactions with present or prospective Lessees or other occupants of the Industrial Center (except as otherwise provided herein), (v) costs, including permit, license and inspection costs, incurred with respect to the installation of other Lessees or occupants in the Industrial Center, improvements made for the premises of other lessees or other occupants in the Industrial Center or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for lessees or other occupants of the Industrial Center, (vi) any costs fines or penalties incurred due to violations by Lessor or other Tenants of the Industrial Center (other than Lessee) of any governmental rule or authority, this Lease or any other lease in the Industrial Center, or due to Lessor's gross negligence or willful misconduct, (vii) expenses incurred by Lessor in connection with services or other benefits which are exclusively provided to one or more Lessees of the Industrial Center, other than Lessee, without reimbursement, (viii) wages salaries, or other compensation paid to any executive employees of Lessor above the grade of project manager, (ix) Lessor's general corporate overhead and administrative expenses, (xii) reserves for any Expenses, (xiii) costs of correcting defects, including allowances for same, in the construction of the Building (including latent defects) or equipment used therein (or the replacement of defective equipment) and any associated Common Areas or other improvements, (xiv) costs directly resulting from the negligence or willful misconduct of Lessor, its employees, agents or contractors, (xv) all costs of initial construction and landscaping within the Industrial Center, (xvi) costs or fees related to the defense of Lessor's title to the Building and/or Industrial Center and (xvii) contributions to charitable or political organizations. Notwithstanding the specific itemization elsewhere in this Lease as to certain components of Operating Expenses, Lessor shall not be entitled to recover from all Lessees of the Industrial Center more than its actual costs and expenses of the Industrial Center. INSERT 4.2(D): - ------------- At any time within three (3) months of Lessee's receipt of any statement from Lessor relating to Operating Expenses, Lessor shall furnish Lessee following Lessee's written request therefor, invoices and other source documents relating to Operating Expenses. If it is determined from Initials: CM ---- KG ---- Lessee's audit of such Operating Expenses that Lessee was overcharged by more than three percent (3%), such overcharge shall entitle Lessee to credit against its next payment of Operating Expenses the amount of the overcharge and the costs associated with the audit (and, if such credit occurs following the expiration of the Term, Lessor shall promptly pay the amount of such credit to Lessee). If the audit determines that the Lessee was overcharged less than three percent (3%), such overcharge shall entitle Lessee to credit against its next payment(s) of Operating Expenses in the amount of the overcharge and Lessee shall pay for all costs associated with the audit. If the audit shall determine that Lessee was undercharged for the Operating Expenses, Lessee shall promptly pay the amount of such undercharge to Lessor and Lessee shall pay for all costs associated with the audit. Notwithstanding anything to the contrary herein, any Operating Expenses attributable to a period which falls only partially within the term of this Lease shall be prorated between Lessor and Lessee so that Lessee shall pay only that portion thereof which the part of such period within the Lease term bears to the entire period. INSERT 6.2(C): - ------------- Lessor shall indemnify, protect, defend and hold Lessee, its agents, employees and shareholders harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance existing in, under or about the Premises prior to the Commencement Date of that certain Lease dated March 8, 1994 (as identified with more particularity in Paragraph 1 of Addendum #1) or brought onto the Premises by or for Lessor or by anyone under Lessor's control. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessor from its obligations under this Lease with respect to such Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. INSERT 6.3: - ---------- Notwithstanding the foregoing, Lessee's obligations under this Paragraph 6.3 shall not require Lessee to comply with Applicable Requirements with respect to any Hazardous Substances or environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, which existed prior to the Commencement Date of that certain Lease dated March 8, 1994 (as identified with more particularity in Paragraph 1 of Addendum #1) or which were caused by Lessor or any other lessee of the Industrial Center or their respective agents, employees or contractors. INSERT 7.2: - ---------- If Lessor fails to perform any of its repair and maintenance obligations under this Paragraph 7.2 or otherwise as required in this Lease, and such failure materially affects Lessee's ability to use and occupy the Premises for the purposes permitted herein, Lessee shall have the right, but not the obligation, to perform such repairs and/or maintenance if such failure continues for more than fifteen (15) days after written notice from Lessee; provided, however, that if the nature of the repairs and/or maintenance to be completed by Lessor is such that more than fifteen (15) days are required to complete such repairs and/or maintenance, Lessor shall have such additional time Initials: CM ---- KG ---- 2 as is reasonably necessary to complete such repairs and/or maintenance so long as Lessor takes appropriate action to commence such repairs and/or maintenance within such fifteen (15) day period and thereafter diligently pursues such repairs and/or maintenance to completion. In such event, Lessor shall reimburse Lessee for the reasonable costs incurred by Lessee to complete such repairs and/or maintenance within thirty (30) days after receipt of Lessee's written demand therefore, together with copies of the paid invoices evidencing the costs incurred by Lessee. Any repairs and/or maintenance permitted herein shall be performed in a good workmanlike manner by licensed contractors. If Lessor objects to the repairs and/or maintenance performed or the expenses incurred by Lessee in performing such work, Lessor shall deliver a written notice of Lessor's objection to Lessee within thirty (30) days after Lessor's receipt of Lessee's invoice evidencing the expenses incurred by Lessee. Lessor's notice shall set forth in reasonable detail Lessor's reasons for its claim that such repairs and/or maintenance were not required or were not Lessor's obligation in the terms of this lease and/or the reasons for Lessor's dispute of the expenses incurred by Lessee in performing such work. INSERT 7.4(C): - ------------- Any Trade Fixtures and Equipment purchased by Lessee and installed in the Premises, which Lessee intends to remove from the Premises upon the expiration or earlier termination of this Lease, shall be separately identified on a list ("Equipment List") to be compiled by Lessee for approval of Lessor, which approval shall not be unreasonably withheld. The Lease shall be amended to incorporate the Equipment List upon its completion. The Trade Fixtures and Equipment on the Equipment List shall be and remain the sole property of Lessee. Said Fixtures and Equipment may be removed form the Premises by Lessee at any time during the term of this Lease. INSERT 10.2: - ----------- Notwithstanding the foregoing provisions of this Paragraph 10.2 to the contrary, "real property taxes" shall not include (a) Lessor's federal or state income, franchise, inheritance or estate taxes or (b) any taxes on Lessor's personal property not located in or on the Industrial Center or (c) any taxes on the personal property of other tenants in the Building. In the case of any assessment which may be evidenced by improvement or other bonds or which may be paid in annual or other periodic installments, Lessor shall elect to cause such assessment to be paid in installments over the maximum period permitted by law. INSERT 12.1(B): - -------------- (b) Any provision in this Lease to the contrary notwithstanding, Lessor's consent shall not be required for an assignment or subletting to: (i) any entity who controls, is controlled by or is under common control with Lessee, (ii) any successor corporation resulting from a merger, acquisition, consolidation or reorganization or (iii) to any person or legal entity having a consolidated net worth of at least $5 million which acquires all the assets of Lessee as a going concern of the business being conducted on the Premises (each of the foregoing is hereinafter referred to as a "PERMITTED TRANSFEREE"), provided that before such assignment shall be Initials: CM ---- KG ---- 3 effective (i) said Permitted Transferee shall assume, in full, the obligations of Lessee under this Lease, (ii) Lessor shall be given written notice of such assignment and assumption and (iii) the use of -the Premises by the Permitted Transferee shall be for the Permitted Use only. For purposes of this paragraph, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management, affairs and policies of anyone, whether through the ownership of voting securities, by contract or otherwise. For purposes of this Lease, the sale or transfer of Lessee's capital stock, including without limitation a private or public offering or a transfer in connection with a merger, consolidation or reorganization of Lessee, shall not be deemed an assignment, subletting or other transfer or encumbrance of the Lease or the Premises. An assignment or subletting to a Permitted Transferee shall not release the assigning Lessee from any of its duties and obligations hereunder. INSERT 12.3(F): - -------------- (f) The parties agree that fifty percent (50%) of any amounts paid by an assignee or subtenant in excess of (i) the Basic Rent payable by Lessee hereunder or, in the case of a sublease of a portion of the Premises, in excess of the Basic Rent reasonably allocated to such portion plus (ii) Lessee's out- of-pocket costs for such assignment or subletting including, without limitation, broker's commissions, attorney's fees, tenant improvements and any payment under Paragraph 12.2(e), shall be the property of Lessor and such amounts shall, at Lessee's option, be payable by Lessee or directly to Lessor by the assignee or subtenant. At Lessor's request, a written agreement shall be entered into by and between Lessor, Lessee and the proposed assignee or subtenant in a form reasonably acceptable to each confirming the requirements of this subparagraph. INSERT 17: - --------- Notwithstanding the foregoing, a Lessor whose interest in this Lease or the Premises is foreclosed by a foreclosure or execution sale shall not be relieved of liability unless the party who acquires the Lessor's interest agrees to recognize Lessee's interest and rights in and under this Lease and not to disturb Lessee's possession hereunder so long as Lessee is not in default beyond any applicable cure period hereunder. Initials: CM ---- KG ---- 4 ADDENDUM #1 COMPS PLAZA ASSOCIATES, L.P./COMPS.COM, INC. LEASE DATED JANUARY 31, 1999 1. CANCELLATION OF PRIOR LEASE That certain Lease dated March 8, 1994 by and between COMPS Plaza Associates, L.P., (successor in interest to Plaza Associates, a joint venture partnership), as Landlord and Business Real Estate Information Corp., a California corporation, as Tenant, as amended by Amendment #One dated May 5, 1994; Amendment of Lease dated September 15, 1994; Third Amendment to Lease dated January 3, 1997; Fourth Amendment to Lease dated October 22, 1997; Fifth Amendment to Lease dated July 29, 1998; Sixth Amendment to Lease dated September 1, 1998 and Seventh Amendment to Lease dated October 5, 1998 shall be canceled upon the Commencement Date of this Agreement ( March 1, 1999) and neither Tenant nor Landlord shall have any obligations under the prior lease beyond its cancellation date. 2. PREMISES The Premises consist of approximately 33,217 rentable square feet as specified below and shown on the attached Exhibit "A". SUITE RENTABLE SQUARE FEET ----- -------------------- 100 8,813 101 2,747 111 1,383 116 1,518 120 1,279 200 6,432 212 2,387 222 2,105 225 3,510 235 905 236 2,138 3. EXPANSION SPACE Lessee shall take possession of each suite specified below immediately upon the vacating of each individual suite by its respective current tenant. The Base Rent for each said expansion suite, which Lessee will be obligated to pay starting on the date Lessee takes possession of each expansion suite, shall be calculated by using the per square foot rental rate which is in effect at the time Lessee takes possession of each expansion suite. The Base Rent for the expansion suites shall be adjusted in accordance with Paragraph 4 of this Addendum. Lessee shall be entitled to the tenant improvement allowance set forth in this Paragraph 6 of this Addendum with respect to each expansion suite. RENTABLE CURRENT TENANT SUITE SQUARE FEET LEASE EXPIRATION ------ ----------- ---------------- 115 2,042 Month to Month (14 day notice) 122 2,105 Month to Month (60 day notice) 214 852 5/31/99 216 769 5/31/99 218 871 3/31/99 220 1,159 3/31/99 Initials: CM ---- KG ---- 23 4. BASE RENT ADJUSTMENT The monthly Base Rent shall be adjusted upward by three and one half percent (3 1/2%) on each anniversary of the Commencement Date during the five (5) years of the Original Term. Upon the Substantial Completion ( as defined in attached Exhibit "B", Tenant Improvement Agreement) of Tenant Improvements in Suite 236, the then current monthly Base Rent shall be increased $622.00 per month. Upon the Commencement Date of each extension of the Term, monthly Base Rent shall be adjusted to reflect the fair market rental value of such space as determined according to Paragraph 5 below. Annual adjustments will thereafter continue at three and one half percent (3 1/2%). 5. DETERMINATION OF FAIR MARKET VALUE The fair market rental value of the Premises for purposes of the adjustment set forth above shall be determined in accordance with the following procedure: No later than sixty (60) days prior to the Adjustment Date, Lessor and Lessee will attempt to agree on a fair market rental for the Premises. If Lessor and Lessee fail to agree on the fair market rental value of the Premises by thirty (30) days before the Adjustment Date, Lessor and Lessee shall each select, within ten (10) days after such failure, an appraiser who is a member of a nationally recognized society of appraisers (MAI) to render an opinion on the fair market rental value of the Premises and each party shall notify the other, in writing, of the name and qualifications of the appraiser selected. If either party fails to designate an appraiser within the time required, the determination of the fair market rental value made by the appraiser selected in a timely manner shall be conclusively the fair market rental value for the Premises and the rental for the period in question, subject to the ten percent (10%) adjustment limitation set forth above. The appraisers selected by the parties shall submit their opinions of the fair market rental value of the Premises to both parties, in writing, within fifteen (15) days after their selection. If the difference between the opinions of the two (2) appraisers is ten percent (10%), the two appraisers shall, within ten (10) days after the date that the later opinion of value is rendered to the parties, designate a third similarly qualified appraiser. The sole responsibility of the third appraiser shall be to determine which of the opinions presented by the first two appraisers is most accurate. The third appraiser shall have no right to propose a middle ground or any modification of either of the opinions of the first two appraisers. The third appraiser's choice shall be submitted to the parties within ten (10) days after his or her designation. Such determination shall bind both the parties and shall establish the fair market rental value of the Premises. Each party shall pay the fees and expenses of the appraisers selected by it, and they shall pay equal shares of the fees and expenses of the third appraiser. If the rent for a particular period has not yet been established as herein above provided at the commencement date of that period, Lessee shall continue to pay the rent paid during the year immediately preceding the period until the rent for the period in question has been established. Lessee shall (i) pay any additional amount of Rent that may be due within fifteen (15) days after the Rent for the period in question has been determined or (ii) receive a credit for any over-payment to its next Rent payment. "Fair market rental value" for the purpose of this Agreement shall mean the then prevailing rent for properties (a.) in the general geographic vicinity as; (b.) comparable in size and use to; (c.) improved to similar standards as; and (d.) leased similarly to the Premises. Initials: CM ---- KG ---- 24 6. TENANT IMPROVEMENTS At the inception of this Lease, Lessor shall at its sole cost and expense paint and clean the carpet in the Premises where needed as reasonably agreed by Lessee and Lessor. Lessor shall grant Lessee an allowance of $2.00 per rentable square foot for tenant improvements made to previously improved expansion space and $22.00 per rentable square foot for tenant improvements made to Suite 236 (which has not previously been improved) as it is expended by Lessee. The allowance may not be accumulated to be spent disproportionately amongst the suites. All tenant improvements shall be made pursuant to the terms of the Tenant Improvement Agreement attached hereto as Exhibit "B" (the "T.I. Agreement"); provided, however, that the parties may amend such T.I. Agreement to the extent the anticipated improvements are to be made to space currently occupied by Lessee. Lessor and Lessee agree to work together in good faith to ensure that any tenant improvements to be made by Lessor do not unreasonably disturb Lessee's business operations in the premises or access thereto. 7. RIGHT OF FIRST REFUSAL Provided Lessee is not in default under all or any of the terms and conditions of the Lease beyond any applicable cure period, Lessor agrees that it will not enter into a new lease for any space in the building not occupied by Lessee without first notifying Lessee in writing. If Lessee, within ten (10) business days after receipt of Lessor's written notice, indicates and delivers in writing to Lessor its agreement to lease such space, said space shall be leased to Lessee for the same rate as that then payable by Lessee per square foot in accordance with the Base Rent schedule of this Lease. 8. OPERATING EXPENSES Notwithstanding anything to contrary in this Lease Operating Expenses for the 1999 calendar year will be billed at $.365 per rentable square foot per month (based on 1998 actual Operating Expenses) and shall be due and payable on the first day of each month commencing upon the Commencement Date of the Lease. Operating Expenses will be increased no more than three and one half percent (31/2 %) per year on a cumulative basis effective February 1 of each year of the Term and any extension(s) thereof. In addition to the costs defined in Section 4.2 of the Lease and not withstanding anything to the contrary in this Lease, Operating Expenses shall include the cost of (i) all utilities, including without limitation, water, electricity and gas provided to Lessee's Premises; and (ii) five (5) day janitorial service provided to Lessee's Premises. 9. RELOCATION OF TENANT IN SUITE 228 Lessor acknowledges that Lessee desires to occupy Suite 228 which is currently occupied by Nowak-Meulmester. Lessor agrees to cooperate with Lessee to relocate or buy Nowak-Meulmester out of its remaining lease term and will diligently negotiate with Nowak-Meulmester in an effort to have them vacate their premises so that Lessee may occupy Suite 228. Lessee shall cooperate with Lessor in connection with such negotiations, participating in them where reasonably necessary. Lessor's contribution toward actual costs of such relocation or buy out shall not exceed $34,000.00. Initials: CM ---- KG ---- 25 10. AFTER HOURS AIR CONDITIONING/HEATING/VENTILATION Lessor shall furnish to the Premises ( as part of the Operating Expenses to be reimbursed by Lessee to Lessor) heating, ventilation and air conditioning ("HVAC") during normal business hours which shall mean between the hours of 7:00 a.m. to 6:00 p.m., Monday through Friday, excluding Federal holidays. Should Lessee request HVAC services outside normal business hours, Lessor shall use reasonable efforts to provide such services and Lessee shall pay, as additional rent, $15.00 per hour for each hour of service requested. 11. PARKING Lessee shall be entitled to the use, on a nonexclusive and unreserved basis, of one hundred twelve (112) parking spaces in the Building parking lot. In addition, one space shall be designated for Lessee's "Employee of the Month" in a location to be determined by Lessor in its sole discretion. Lessee shall pay all costs incurred with respect to any sign or pavement stenciling to identify the "Employee of the Month" parking space. 12. OPTION TO EXTEND Lessee may extend the Term of the Lease for five (5) terms of two (2) years each. The Term shall automatically extend for two (2) years upon the expiration of the preceding Term unless Lessee provides to Lessor a six (6) month prior written notice that states that Lessee will not extend the Term. Provided, however, if Lessee is in default beyond any applicable cure period on the date the extended term is to commence, at Lessor's option, the Lease shall expire at the end of the then current Term. The options granted to Lessee in the Lease are personal to Lessee and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee or Permitted Transferee. Lessee's Base Rent during said extended Terms shall be the then "market rent" for the Premises as determined pursuant to Paragraph 5 of this Addendum. Lessor and Lessee shall promptly execute an addendum to the Lease memorializing the extension of the Terms and the Base Rent. Lessee's occupancy during such extended Term shall be governed by all of the other terms, conditions, covenants and provisions of the Lease, and all references to the Term shall mean the Term as extended. LESSOR: LESSEE: COMPS Plaza Associates, L.P. COMPS.COM, Inc., By: Alden Properties, Inc., a Delaware corporation a California corporation Signature: /s/ CHRISTOPHER S. McKELLAR Signature /s/ KAREN GOODRUM ---------------------------- ----------------------- Christopher S. McKellar Karen Goodrum Vice President Vice President and Chief Financial Officer Date: 1/31/99 Date: 3/24/99 -------------------------------- --------------------------- 26 EX-23.1 5 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report on the COMPS.COM, Inc. financial statements dated February 5, 1999 (except for Note 15, as to which the date is April 1, 1999) and our report on the REALBID, LLC financial statements dated February 17, 1999, in Amendment No. 1 to the Registration Statement (Form S-1) and related Prospectus of COMPS.COM, Inc. dated April 2, 1999. Our audits also included the financial statement schedule of COMPS.COM, Inc. for the three years ended December 31, 1998 listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP San Diego, California April 1, 1999 -----END PRIVACY-ENHANCED MESSAGE-----