-----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, Fv6W7MQ2LGCzuHt7xiRDZMyllGWM/8VhCHTR1sFXGJSBqSwSu2f0K6J+XwYLF4dh kcIPyRRHGkMBGTwY9ckMOw== 0000891618-98-005000.txt : 19981118 0000891618-98-005000.hdr.sgml : 19981118 ACCESSION NUMBER: 0000891618-98-005000 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLESOFT INC CENTRAL INDEX KEY: 0000875570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 680137069 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20710 FILM NUMBER: 98752592 BUSINESS ADDRESS: STREET 1: 4305 HACIENDA DR POST OFFICE BOX 8015 CITY: PLEASANTON STATE: CA ZIP: 945833-861 BUSINESS PHONE: 5102253000 MAIL ADDRESS: STREET 1: 4440 ROSEWOOD DRIVE CITY: PLEASANTON STATE: CA ZIP: 94588-3031 10-Q 1 FORM 10-Q 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. Commission File Number: 0-20710 PEOPLESOFT, INC. (Exact name of registrant as specified in its charter) Delaware 68-0137069 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4460 Hacienda Drive, Pleasanton, CA 94588 (Address of principal executive officers) (Zip Code) Registrant's telephone number, including area code: (925) 694-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: CLASS OUTSTANDING AT OCTOBER 31, 1998 ----- ------------------------------- Common Stock, par value $.01 233,017,263 ================================================================================ 2 PEOPLESOFT, INC. TABLE OF CONTENTS
PAGE NO. -------- PART I FINANCIAL INFORMATION ITEM 1 - Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of 3 December 31, 1997 and September 30, 1998 Condensed Consolidated Statements of Income for the 4 Three Months Ended September 30, 1997 and September 30, 1998; and Nine Months Ended September 30, 1997 and September 30, 1998 Condensed Consolidated Statements of Cash Flows for 5 the Nine Months Ended September 30, 1997 and September 30, 1998 Notes to Condensed Consolidated Financial Statements 6 ITEM 2 - Management's Discussion and Analysis of 9 Financial Condition and Results of Operations PART II OTHER INFORMATION ITEM 1 - Legal Proceedings 31 ITEM 2 - Changes in Securities and Use of Proceeds 31 ITEM 3 - Defaults upon Senior Securities 31 ITEM 4 - Submission of Matters to a Vote of Security 31 Holders ITEM 5 - Other Information 31 ITEM 6 - Exhibits and Reports on Form 8 - K 31 SIGNATURES 32
2 3 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS PEOPLESOFT, INC. ---------------- CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1997 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $267,897 $ 474,905 Short term investments 124,565 150,974 Accounts receivable, net 299,243 351,612 Deferred income taxes 25,320 39,613 Other current assets 9,021 38,504 -------- ---------- Total current assets 726,046 1,055,608 Property and equipment, at cost 195,667 282,633 Less accumulated depreciation and amortization (78,492) (112,236) -------- ---------- 117,175 170,397 Investments 26,783 51,742 Deferred income taxes 7,371 7,371 Capitalized software, less accumulated amortization 9,706 8,878 Other assets 11,255 12,110 -------- ---------- $898,336 $1,306,106 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 63,508 $ 80,894 Accrued compensation and related expenses 67,486 102,584 Income taxes payable 22,370 28,781 Deferred revenue 327,668 397,648 -------- ---------- Total current liabilities 481,032 609,907 Long term deferred revenue -- 58,537 Long term deferred gain -- 19,529 Stockholders' equity: Common stock 2,237 2,502 Additional paid-in capital 219,005 303,767 Accumulated foreign currency translation adjustment (1,292) (2,611) Retained earnings 197,354 314,475 -------- ---------- 417,304 618,133 -------- ---------- $898,336 $1,306,106 ======== ==========
See notes to condensed consolidated unaudited financial statements 3 4 PEOPLESOFT, INC. ---------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Revenues: License fees $112,977 $147,273 $293,418 $432,732 Services 104,073 204,032 261,662 516,769 -------- -------- -------- -------- Total revenues 217,050 351,305 555,080 949,501 Costs and expenses: Cost of license fees 6,113 8,184 15,440 30,420 Cost of services 59,805 116,254 158,350 301,206 Sales and marketing 61,495 90,033 155,967 247,302 Product development 34,851 54,478 89,689 148,377 General and administrative 10,978 17,029 30,548 47,608 -------- -------- -------- -------- Total costs and expenses 173,242 285,978 449,994 774,913 -------- -------- -------- -------- Operating income 43,808 65,327 105,086 174,588 Other income, interest expense and other 2,480 5,909 6,955 14,317 -------- -------- -------- -------- Income before income taxes 46,288 71,236 112,041 188,905 Provision for income taxes 17,589 27,070 43,233 71,784 -------- -------- -------- -------- Net income $ 28,699 $ 44,166 $ 68,808 $117,121 ======== ======== ======== ======== Basic income per share $ 0.13 $ 0.19 $ 0.31 $ 0.51 ======== ======== ======== ======== Shares used in basic per share computation 221,010 231,078 218,793 228,479 ======== ======== ======== ======== Diluted income per share $ 0.11 $ 0.17 $ 0.27 $ 0.45 ======== ======== ======== ======== Shares used in diluted per share computation 253,830 257,518 250,389 259,439 ======== ======== ======== ========
See notes to condensed consolidated unaudited financial statements 4 5 \ PEOPLESOFT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1998 --------- --------- OPERATING ACTIVITIES Net income $ 68,808 $ 117,121 Adjustments: Depreciation and amortization 28,673 40,953 Provision for doubtful accounts 6,935 29,130 Provision for deferred income taxes 7,952 (14,293) Changes in operating assets and liabilities: Accounts receivable (155,371) (245,075) Cash received from sales of accounts receivable 53,894 163,576 Other current assets and noncurrent assets (3,635) (28,766) Accounts payable and accrued liabilities 1,808 12,324 Accrued compensation and related expenses 20,930 35,098 Deferred revenue 100,564 128,517 Income taxes payable 7,537 6,411 Tax benefits from employee stock transactions 9,343 24,741 --------- --------- Net cash provided by operating activities 147,438 269,737 INVESTING ACTIVITIES Purchase of investments (127,971) (180,728) Sale of investments 50,044 129,360 Purchase of property and equipment (43,019) (68,090) Proceeds from sale of property and equipment -- 147 Additions to capitalized software, net (1,557) (2,385) --------- --------- Net cash used in investing activities (122,503) (121,696) FINANCING ACTIVITIES Net proceeds from sale of common stock and exercise of common stock options 28,753 60,286 --------- --------- Net cash provided by financing activities 28,753 60,286 Effect of foreign exchange rate changes on cash (1,194) (1,319) --------- --------- Net increase in cash and cash equivalents 52,494 207,008 Cash and cash equivalents at beginning of period 169,875 267,897 --------- --------- Cash and cash equivalents at end of period $ 222,369 $ 474,905 ========= =========
See notes to condensed consolidated unaudited financial statements 5 6 PEOPLESOFT, INC. NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The information at September 30, 1997 and 1998 and for the three and nine month periods then ended is unaudited, but includes all adjustments (consisting only of normal, recurring adjustments) which the Company's management believes to be necessary for the fair presentation of the financial position, results of operations, and changes in cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Despite management's best effort to establish good faith estimates and assumptions, and to manage the achievement of the same, actual results may differ. Certain prior period amounts have been reclassified to conform to the current period presentation. The accompanying interim financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report to Stockholders (Form 10-K) for the year ended December 31, 1997. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. Interim results of operations for the nine month period ended September 30, 1998 are not necessarily indicative of operating results or performance levels that can be expected for the full fiscal year. 2. PER SHARE DATA Basic income per share is computed using the weighted average number of common shares outstanding during the period. Diluted income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options and warrants (using the treasury stock method). The following table sets forth the computation of basic and diluted income per share (in thousands except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1998 1997 1998 -------- -------- -------- -------- Numerator: Net income $ 28,699 $ 44,166 $ 68,808 $117,121 ======== ======== ======== ======== Denominator: Denominator for basic income per share - weighted average shares 221,010 231,078 218,793 228,479 Employee stock options 29,339 23,065 28,692 27,219 Warrants 3,481 3,375 2,904 3,741 -------- -------- -------- -------- Denominator for diluted income per share - adjusted weighted average shares and assumed conversions 253,830 257,518 250,389 259,439 ======== ======== ======== ======== Basic income per share $ 0.13 $ 0.19 $ 0.31 $ 0.51 ======== ======== ======== ======== Diluted income per share $ 0.11 $ 0.17 $ 0.27 $ 0.45 ======== ======== ======== ========
6 7 3. ACCOUNTS RECEIVABLE Accounts receivable are comprised of billed receivables arising from recognized and deferred revenues, and unbilled receivables, which include accrued license fees for payments not yet due and accrued services. The principal components of accounts receivable at December 31, 1997 and September 30, 1998 were as follows (in thousands):
DEC. 31, SEPT. 30, 1997 1998 --------- --------- Billed receivables $ 200,081 $ 304,600 Unbilled receivables 118,655 80,230 --------- --------- 318,736 384,830 Allowance for doubtful accounts (19,493) (33,218) --------- --------- $ 299,243 $ 351,612 ========= =========
4. DEFERRED REVENUE Deferred revenue is comprised of deferrals for license fees, maintenance, training and other services. Long term deferred revenue represents amounts received for maintenance and support services to be provided beginning in periods on or after October 1, 1999. The principal components of deferred revenue at December 31, 1997 and September 30, 1998 were as follows (in thousands):
DEC. 31, SEPT. 30, 1997 1998 --------- --------- License fees $ 71,168 $ 66,217 Maintenance 184,171 262,925 Training 46,201 70,239 Other services 26,128 56,804 --------- --------- 327,668 456,185 Less: Long term deferred revenue -- (58,537) --------- --------- $ 327,668 $ 397,648 ========= =========
5. TRANSFER OF FINANCIAL ASSETS The Company transfers the accounts receivable under certain software license and service agreements with customers to financing institutions, on a non-recourse basis. The Company records such transfers as sales of the related accounts receivable when it is considered to have surrendered control of such receivables under the provisions of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Company typically does not maintain any servicing obligations under these arrangements and any servicing assets or liabilities resulting from the arrangements are insignificant. 6. HEDGING OF INTERCOMPANY BALANCES In the first quarter of 1998, the Company initiated a hedging program designed to mitigate the potential for future adverse impact on intercompany balances due to changes in foreign exchange rates. The program uses forward foreign exchange contracts as the vehicle for hedging these intercompany balances. In general, these forward foreign exchange contracts have three months or less to maturity. Gains and losses on hedges are recorded in Other income and offset against losses and gains on the underlying exposures. Management of the foreign exchange hedging program is done in accordance with a corporate policy approved by the Company's Board of Directors. 7. COMMITMENTS AND CONTINGENCIES During the third quarter of 1998, the Company entered into agreements to sell one of its Pleasanton, California office buildings and related land, and to simultaneously lease back a substantial portion of the office space contained therein. The initial lease term is for 5 years. The Company has options to terminate up to 50% of the space as early as 4 years and the remaining 50% at the 5th year; or alternatively, the Company may extend the term of the lease in five year increments up to 20 years. Fees due upon termination, if applicable, are not significant to the overall lease payments but are being expensed over the initial term of the agreement. The sales price of approximately $50.0 million resulted in a book gain of approximately $20.0 million, which will be amortized over the lease period. The monthly lease charge over the term is equivalent to prevailing market rates for similar office space in the area. The Company holds a right of first refusal to additional space within the site as other tenants' leases expire. 7 8 Additionally, the Company purchased two parcels of land for $50.0 million during the third quarter. The Company has entered into an operating lease agreement on a building that will be constructed on one of the parcels. The monthly lease amount will be determined at the end of construction when the final construction cost is known. The estimated construction costs for the facilities of $110.0 million includes interest costs during construction that are added to the lease balance rather than paid by the Company during construction. The expected interest rate during construction is LIBOR plus 0.75%; this rate may change depending on certain financial ratios. The lease term is for 5 years with the option to purchase the building for $110.0 million at the end of the lease term. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to a specified percentage of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. For tax purposes, the above transactions qualified as a tax deferred like-kind exchange. There is no impact on immediate cash flow. In December 1996, the Company entered into a five-year lease for a new office facility in Pleasanton, California. The lease is structured as an operating lease and rental payments will begin when the construction on the facility is completed, which the Company anticipates to be in the fourth quarter of 1998. The available financing (or the maximum lease balance) for the construction of the facility totals $70.0 million of which $64.1 million has been drawn as of September 30, 1998. The interest rate charged on amounts funded is LIBOR plus .0625% as measured on the date of each funding rollover. At each funding rollover date, the Company has its choice of term and LIBOR rate (1 month, 2 months, 3 months, 6 months, 9 months or 12 months) applicable to each tranche at the date the respective funding amount is requested and approved. Each subsequent funding rollover date is the corresponding maturity of the chosen LIBOR term. The Company began accruing interest concurrent with the lessor's first drawdown of the construction commitment in January 1997. Throughout the construction period, the accrued interest amount, which was approximately $1.1 million as of December 31, 1997 and $3.5 million as of September 30, 1998, has been and will continue to be added to the outstanding lease balance. The Company has the option to renew the lease for an additional three years, subject to certain conditions, or purchase the building for $70.0 million. If at the end of the lease term the Company does not purchase the property, the Company would guarantee a residual value to the lessor equal to a specified percentage of the lessor's cost of the facility. Under this lease, the Company is required to maintain compliance with certain financial covenants, is prohibited from making certain payments, including cash dividends, and is subject to various other restrictions. Due to the above real estate transactions, the following represents additional future minimum operating lease payments beyond those presented in the Company's 1997 Annual Report on Form 10K for the years ending December 31 (in thousands): 1999 $ 10,226 2000 16,868 2001 17,464 2002 18,252 2003 11,278 Thereafter 7,746 -------- $ 81,834
8. SUBSEQUENT EVENTS The acquisition of Intrepid Systems, Inc. ("Intrepid") was completed in early October 1998 with the Company acquiring all of Intrepid's outstanding equity interests for approximately $45 million in cash and other consideration. Although initially structured as a stock-for-stock exchange, the transaction was consummated as a cash-for-stock transaction to facilitate a more rapid close. The transaction will be recorded in the Company's fourth quarter and will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the net assets acquired, including in-process research and development, based on their fair values. The portion of the purchase price allocated to in-process research and development will be charged to expense during the fourth quarter, the period in which the transaction closed. The valuation to determine the fair value of the net assets acquired has not been completed. Accordingly, the Company cannot estimate the amount of the in-process research and development charge but believes it could be a significant portion of the purchase price. 8 9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of the Company's expectations regarding future trends affecting its business. These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following discussion sets forth certain factors the Company believes could cause actual results to differ materially from those contemplated by the forward-looking statements. Forward-looking statements include, but are not limited to, those items identified with a footnote (1) symbol. The Company undertakes no obligation to update the information contained herein. STATEMENT OF FUTURE DIRECTION: THIS DOCUMENT CONTAINS STATEMENTS OF FUTURE DIRECTION CONCERNING POSSIBLE FUNCTIONALITY FOR THE COMPANY'S SOFTWARE PRODUCTS AND TECHNOLOGY. ALL FUNCTIONALITY AND SOFTWARE PRODUCTS WILL BE AVAILABLE FOR LICENSE AND SHIPMENT FROM THE COMPANY ONLY IF AND WHEN GENERALLY COMMERCIALLY AVAILABLE. THE COMPANY DISCLAIMS ANY EXPRESS OR IMPLIED COMMITMENT TO DELIVER FUNCTIONALITY OR SOFTWARE UNLESS OR UNTIL ACTUAL SHIPMENT OF THE FUNCTIONALITY OR SOFTWARE OCCURS. THE STATEMENTS OF POSSIBLE FUTURE DIRECTION ARE FOR INFORMATIONAL PURPOSES ONLY AND THE COMPANY MAKES NO EXPRESS OR IMPLIED COMMITMENTS OR REPRESENTATIONS CONCERNING THE TIMING AND CONTENT OF ANY FUTURE FUNCTIONALITY OR RELEASES. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain line items in the Company's statements of operations:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------- PERCENTAGE OF TOTAL REVENUES PERCENTAGE DOLLAR INCREASE 1997 1998 YEAR OVER YEAR - ----------------- --------------------- ------------------ Revenues: 52% 42% License fees 30% 48 58 Services 96 --- --- --- 100 100 Total revenues 62 Costs and expenses: 3 2 Cost of license fees 34 28 33 Cost of services 94 28 26 Sales and marketing 46 16 15 Product development 56 5 5 General and administrative 55 --- --- --- 80 81 Total costs and expenses 65 --- --- --- 20 19 Operating income 49 1 2 Other income 138 --- --- --- 21 21 Income before income taxes 54 8 8 Provision for income taxes 54 --- --- --- 13% 13% Net income 54% === === ===
9 10
FOR THE NINE MONTHS ENDED SEPTEMBER 30, - ---------------------------------------------------------------------------------------- PERCENTAGE OF TOTAL REVENUES PERCENTAGE DOLLAR INCREASE 1997 1998 YEAR OVER YEAR - ----------------- --------------------- ---------------- Revenues: 53% 46% License fees 47% 47 54 Services 97 --- --- --- 100 100 Total revenues 71 Costs and expenses: 3 3 Cost of license fees 97 29 32 Cost of services 90 28 26 Sales and marketing 59 16 16 Product development 65 5 5 General and administrative 56 --- --- --- 81 82 Total costs and expenses 72 --- --- --- 19 18 Operating income 66 1 2 Other income 106 --- --- --- 20 20 Income before income taxes 69 8 8 Provision for income taxes 66 --- --- --- 12% 12% Net income 70% === === ===
A substantial portion of the Company's cost structure is employee-related. The breakdown of employees by functional area is as follows:
EMPLOYEE COUNT PERCENTAGE OF TOTAL EMPLOYEES PERCENTAGE INCREASE 12/31/97 9/30/98 12/31/97 9/30/98 SINCE 12/31/97 -------- ------- -------- ------- -------------- 2,114 3,336 Services 47% 51% 58% 1,006 1,458 Sales and marketing 23 22 45 918 1,211 Product development 21 19 32 414 557 General and ----- ---- administrative 9 8 35 --- --- --- 4,452 6,562 Total 100% 100% 47% ===== ===== === === ===
REVENUES The Company generally recognizes revenue when a non-cancelable license agreement has been signed, the software product has been shipped, there are no uncertainties surrounding product acceptance, the fees are fixed and determinable, and collection is considered probable. For customer license agreements that meet the Company's revenue recognition policy, the portion allocated to software license fees will generally be recognized in the current period, while the portion allocated to services is recognized as the services are performed. When the Company enters into a license agreement with a customer requiring significant customization of the software products or is obligated to perform other substantial implementation efforts, the Company recognizes revenue related to the license agreement using contract accounting. Revenues from licensing fees increased by 30% from $113.0 million in the three month period ended September 30, 1997 to $147.3 million for the same period in 1998. Year to date, licensing fees increased 47% from $293.4 million in 1997 to $432.7 million in 1998. The increase in license fee revenues was attributable to increased market acceptance of, and expanded breadth of, the Company's software product offerings, the increased capacity created by continued growth in the Company's sales, marketing and customer service organizations, and achievement of specific contract related milestones or other conditions which allowed the Company to recognize more deferred license revenue than in the prior year period. In the third quarter, the Company's deferred license revenue declined by $9.8 million versus the prior quarter. The reported deferred license revenue amounts do not include items which are both deferred and unbilled. The Company's practice is to net such deferred items against the related receivables balances. In the third quarter, both the net deferred license fees and the gross (before netting unbilled items) deferred license fees declined sequentially from the prior quarter. The decline in gross deferred license fees is due to all of the following factors: (i) considerable efforts made by the Company during the third quarter on converting previously deferred revenue to recognizable revenue through the satisfaction or elimination of certain contingencies or additional obligations, the existence of which had previously caused such revenue to be deferred; (ii) a higher than normal percentage of the Company's current quarter contracting activity qualified for immediate recognition of revenue, reflecting the Company's increased efforts to move its business to standard software license terms and conditions; (iii) the 10 11 cancellation during the third quarter of a significant unbilled contract which was effected consistent with a cancellation clause in the contract, reflecting a decision made by the customer based entirely on the customer's fiscal spending constraints. No revenues had previously been recognized under this agreement; and (iv) the elimination of deferred revenue associated with the SMS distribution agreement, which was mutually terminated by the parties during the third quarter. Revenues from services increased by 96% from $104.1 million in the three month period ended September 30, 1997 to $204.0 million for the same period in 1998. Year to date, service revenues increased by 97% from $261.7 million in 1997 to $516.8 million in the same period in 1998. The Company's customer license agreements provide for initial maintenance, training, and installation services for specified periods or amounts. Therefore increases in customer licensing agreements have resulted in increases in revenues from these services. Service revenues as a percentage of total revenues were 48% and 58% for the quarters ended September 30, 1997 and 1998, respectively and 47% and 54% for the nine months ended September 30, 1997 and 1998, respectively. The increase in the relative percentage of service revenues to total revenues in these periods was attributable to two primary factors: increases in the installed base of customers receiving ongoing maintenance, training and other support services from 1,900 customers as of September 30, 1997 to 2,545 as of June 30, 1998 to 3,060 as of September 30, 1998; and a $50.6 million and $110.4 million increase in consulting revenue, for the three month and nine month periods, respectively, as a result of expanded demand for the Company's consulting services in enterprise implementation projects. In response to strong market demand for single vendor product and implementation service solutions, the Company continues to expand its service delivery capacity, particularly for consulting services. Total revenues increased from $217.1 million in the three month period ended September 30, 1997 to $351.3 million for the same period in 1998. Year to date, total revenues increased 71% from $555.1 million in 1997 to $949.5 million in 1998. Total revenue growth quarter over quarter of 62% exceeded the Company's previously forecasted growth of 60%, and on a sequential basis, increased approximately 10% over the total revenues recorded in the second quarter of 1998. The higher than forecasted growth rate over the prior year was due primarily to service revenues. During each of the quarters ended September 30, 1997 and 1998, the Company's international revenues were approximately 16% of total revenues. Revenues from international operations increased 58% from $34.8 million in the three month period ended September 30, 1997 to $55.0 million in the same quarter in 1998. The dollar increase in international revenues resulted from expanded international operations and the introduction of Release 6 in December 1996 that incorporated additional global features and functionality. The Company expects international revenues to continue to grow in absolute dollar terms during 1998, and accordingly, continues to invest heavily in international infrastructure, global product functionality and translated versions of financial and other products(1). PeopleSoft 7.5, which was released in the second quarter of 1998, provides stronger international functionality for European businesses, including both new country specific functionality and support for the European monetary unit. In the event international expansion and/or product globalization are not successful, the Company's business operating results and financial condition may be materially adversely affected. COSTS AND EXPENSES Cost of license fees increased 34% from $6.1 million in the three month period ended September 30, 1997 to $8.2 million for the same period in 1998, representing 3% and 2% of total revenues in each quarter, respectively and 5% and 6% of license fee revenues in each quarter, respectively. Cost of license fees in the nine month periods ended September 30, 1997 and 1998 were $15.4 million and $30.4 million, respectively and represented 3% of total revenues for each quarter and 5% and 7% of license fee revenues in the nine month periods ended September 30, 1997 and 1998, respectively. Royalty costs in the first quarter of 1998 included a one time $2.5 million buy out of royalty fees related to providing certain technology embedded in Release 7.5 to its existing customer installed base. In addition, cost of license fees has grown as a percentage of license revenues due to royalty agreements related to OLAP tools embedded within the Company's products and royalties owed on the Student Administration and Treasury products. The Company's system solutions are based on a combination of internally developed technology and application software products, as well as bundled third party software products and technology. Cost of license fees as a percentage of license fee revenues may fluctuate from period to period due principally to the mix of sales of royalty-bearing software products in each period and seasonal fluctuations in revenues contrasted with certain fixed expenses such as the amortization of capitalized software. Royalties associated with certain software products currently under development by joint business arrangements and charges associated with software products and technologies acquired from various third party vendors may cause the cost of license fees as a percentage of license fee revenues to increase in future periods (1). - -------- (1) Forward-Looking Statement 11 12 Cost of services consists principally of consulting, account management field support, training, and product support. These costs increased 94% from $59.8 million in the three month period ended September 30, 1997 to $116.3 million for the same period in 1998, representing 28% and 33% of total revenues in each quarter, respectively, and 57% of service revenues in each of those quarters. Costs increased by 90% from $158.4 million in the nine month period ended September 30, 1997 to $301.2 million for the same period in 1998, representing 29% and 32% of total revenues and 61% and 58% of service revenues in those periods, respectively. The increase in cost of services is due to significant expansion of the Company's customer service resources across all categories, including consulting, telephone support, training and account management staff. In particular, the Company has made a significant investment in its professional consulting services organization which has grown substantially over the past two years in response to customer demand. The Company anticipates cost of services will increase in dollar amount, and may increase as a percentage of total revenues, in future periods (1). Sales and marketing expenses increased by 46% from $61.5 million in the three month period ended September 30, 1997 to $90.0 million for the same period in 1998, representing 28% and 26% of total revenues in each period, respectively. These expenses increased by 59% from $156.0 million in the nine month period ended September 30, 1997 to $247.3 million for the same period in 1998, representing 28% and 26% of total revenues, respectively. The increase in sales and marketing expenses is largely attributable to the increase in the Company's direct sales force, both domestic and international. Sales and marketing expenses as a percentage of total revenues have declined versus the prior year due to the relatively lower expense levels associated with both maintenance and other services, both of which are growing more quickly than license sales. However, such expenses may increase as a percentage of total revenues in future periods as the Company continues to increase its direct sales and marketing expenditures to address certain international markets, grow its industry focused enterprise sales force structure, expand its middle market sales organization and fund both cross industry and industry specific marketing and sales activities (1). Software product development expenses increased by 56% from $34.9 million in the three month period ended September 30, 1997 to $54.5 million for the same period in 1998, representing 16% and 15% of total revenues in each quarter, respectively. These expenses increased by 65% from $89.7 million in the nine month period ended September 30, 1997 to $148.4 million for the same period in 1998, representing 16% of total revenues in each period. Software product development expenditure consists of costs related to the Company's staff of software engineers and consultants, and the associated infrastructure costs required to support software product development initiatives in the following areas: (i) expansion and enhancement of the Company's core software product offerings in the areas of HRMS, Financial Management Systems, and Distribution/Materials Management Systems and Supply Chain Management software; (ii) the enhancement of the Company's platform development, certification, software product testing and overall release management capabilities; (iii) the continued enhancement of the Company's client/server architecture including its software development tools and the integration of these tools with various third party purchased or licensed technologies; (iv) the localization and translation of certain versions of the Company's software products for specific foreign markets; and (v) the development of certain industry market products and versions of its core products suitable to the unique needs of customers within certain industries. The Company intends to continue to invest significant resources in upcoming releases, and anticipates software product development expenditures will significantly increase in future periods due to continued incremental investment in all of the above areas, and overall development expenditures may increase as a percentage of revenues (1). General and administrative expenses increased 55% from $11.0 million in the three month period ended September 30, 1997 to $17.0 million for the same period in 1998, representing 5% of total revenues in each quarter. These expenses increased by 56% from $30.5 million in the nine month period ended September 30, 1997 to $47.6 million for the same period in 1998, representing 5% of total revenues in each period. The increase in general and administrative expenses resulted primarily from the increase in the staffing to support the Company's growth. These expenses include one-time charges of $3.4 million and $2.9 million during the second and third quarters of 1998, respectively, related to a contractual dispute and associated termination of the Company's arrangement with a distributor. Excluding the one-time charges, general and administrative expenses would be 4% of total revenues for the three and nine month periods ended September 30, 1998. Operating margins for the three month period ended September 30, 1998 decreased to 18.6% compared to 20.2% for the same period last year and increased slightly from 18.2% for the second quarter of 1998. The year over year decline in operating margin reflects a comparison with the prior year percentage that exceeded the Company's target range and normal seasonal level for the third quarter. By way of illustration, the operating margin for the third quarter of 1996 was 17.7%. Operating margins for the nine month period ended September 30, 1998 decreased slightly to 18.4% compared to 18.9% for the same period in 1997. - -------- (1) Forward-Looking Statement 12 13 During the fourth quarter of 1998 the Company formed a new company, Momentum Business Applications, Inc. ("Momentum"), to select and develop certain software application products, and to commercialize such products, most likely through licensing to the Company. In exchange for all of the shares of Momentum Common Stock outstanding prior to the distribution, the Company will contribute up to $300.0 million to Momentum to be used for the development of these software application products. The Company, as the sole holder of the Momentum Class B Common Stock following the distribution, will have the option to repurchase all, but not less than all, of the outstanding shares of Momentum Class A Common Stock under specified conditions. In addition, in exchange for technology licenses granted by the Company to Momentum and a commitment by the Company to make specified payments on sales of certain products, the Company will have the option to license any products and technology developed by Momentum. Momentum's software application development activities will take place under a development and license agreement with the Company. It is anticipated that substantially all of Momentum's funds will be directed toward developing the following software application products: (i) electronic business ("e-business") applications; (ii) analytic applications; and (iii) software applications designed for specific industry segments. The goal of providing e-business applications, analytic applications and industry-specific software applications for a number of different industries involves an ambitious product development effort that requires market specific domain expertise significantly different from the Company's existing skill base. The Company believes that it should form Momentum to pursue this opportunity because of time to market considerations and the unique skills and technologies needed to develop these new software application products. Therefore, the Company will contribute up to $300.0 million to Momentum for development of such new products. Shares of Momentum Class A Common Stock will be distributed to the Company's stockholders as a taxable dividend. By creating Momentum and distributing the Momentum Class A Common Stock to the Company's stockholders, the Company will separate the risks associated with developing these new software application products from the risks associated with the Company's traditional cross-industry enterprise resource planning ("ERP") applications. Thus, the transaction will provide an opportunity for the Company's stockholders to increase or decrease their level of participation in this new business by varying their level of investment in Momentum. The Company will file a registration statement with the Securities and Exchange Commission on behalf of Momentum relating to a proposed special distribution of callable Class A Common Stock to the Company's stockholders. Each stockholder will receive one share of callable Class A Common Stock for every fifty shares of the Company's common stock held as of a specified date. The Company's stockholders are not required to pay any cash or other consideration for the Momentum shares received. The distribution is taxable as a dividend to each holder in the amount of the fair market value of the Momentum shares distributed to each shareholder. The Company will record a dividend for the amount of the market value of Momentum stock on the date of distribution. The remainder of the contribution will be recorded as a one-time charge against operating income during the fourth quarter. Other income, consisting primarily of interest, increased from $2.5 million in the three month period ended September 30, 1997 to $5.9 million for the same quarter in 1998, and increased from $7.0 million in the nine month period ended September 30, 1997 to $14.3 million for the same period in 1998. The increase was due to higher cash balances based upon improved cash collections and higher pre-tax return on investments based on a shift into higher yield taxable securities. In January 1998, the Company initiated a foreign currency transaction hedging program. The hedging transactions were effective in offsetting foreign currency transaction gains and losses in the quarter ending September 30, 1998. PROVISION FOR INCOME TAXES The Company's income tax provision increased from $17.6 million in the three month period ended September 30, 1997 to $27.1 million for the same quarter in 1998 and increased from $43.2 million in the nine month period ended September 30, 1997 to $71.8 million for the same period in 1998. The provision for income taxes was 38% of income before taxes for the nine months ended September 30, 1998, which represents a .5% decline from the 1997 annual effective income tax rate of 38.5%. The effective tax rate is based on management's current estimates and forecasts of the Company's taxable income in multiple domestic and foreign taxing jurisdictions. The estimated annual effective tax 13 14 rate is relatively sensitive to the results of operations in various jurisdictions, and because actual results may differ from such projections in future periods, the actual effective tax rate could differ from this estimate. As permitted by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company has recorded $47.0 million in net deferred tax assets as of September 30, 1998. EARNINGS PER SHARE The Company's earnings per share are calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". This method requires calculation of both a basic earnings per share and a diluted earnings per share. The basic earnings per share excludes the dilutive effect of common stock equivalents such as stock options and warrants, while the diluted earnings per share includes such dilutive effects. Diluted earnings per share increased from $0.11 in the three month period ended September 30, 1997 to $ 0.17 for the same period in 1998 and from $0.27 for the nine month period ended September 30, 1997 to $0.45 for the same period in 1998. Earnings per share for the nine months ended September 30, 1998 increased as a result of the 70% increase in net income from $68.8 million for the nine month period ended September 30, 1997 to $117.1 million for the same period of 1998, partially offset by a 4% increase in the number of shares used in the diluted per share computation from 250.4 million shares for the nine month period ended September 30, 1997 to 259.4 million shares for the same period in 1998. The increase in weighted average shares outstanding was due to the exercise of stock options, the exercise of warrants in the fourth quarter of 1997, and the issuance of shares under the employee stock purchase plan. Shares outstanding during the remainder of 1998 will be impacted by the following factors: (i) the ongoing issuance of common stock associated with stock option exercises; (ii) the anticipated exercise during the fourth quarter of 1998 of warrants for approximately 3.2 million shares; (iii) any fluctuations in the Company's stock price, which could cause changes in the number of common stock equivalents included in the earnings per share computation; and, (iv) the issuance of common stock to affect business combinations should the Company enter into such transactions. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities provided cash of $269.7 million during the nine month period ended September 30, 1998, compared to $147.4 million in the same period in 1997. In both periods, cash provided by operating activities was due principally to earnings plus non-cash expenses, increases in deferred revenues and accrued compensation and tax benefits related to employee stock transactions that were partially offset by increases in other assets and receivables. From December 31, 1997 to September 30, 1998, net accounts receivable increased from $299.2 million to $351.6 million, respectively, and deferred revenues increased from $327.7 million to $456.2 million over the same period. The increase in net accounts receivable resulted from the growth in customer licensing and service activity offset by cash collections. The Company's expanded installed base of customers and emphasis on selling prepaid maintenance and training contracts has resulted in a significant increase in deferred revenues related to ongoing maintenance and other services. Increases in payables and other assets were due to general growth in the Company's operations. As discussed under "Cost and Expenses", during the fourth quarter of 1998 the Company formed a new company, Momentum Business Applications, Inc. ("Momentum"), to select and develop certain software application products outside the Company's core business. The Company will contribute up to $300.0 million during the fourth quarter to Momentum for development of new products. The Company will file a registration statement with the Securities and Exchange Commission on behalf of Momentum relating to a proposed special distribution of callable Class A Common Stock to the Company's stockholders. Each stockholder will receive one share of callable Class A Common Stock for every fifty shares of the Company's common stock held as of a specified date. The Company's stockholders are not required to pay any cash or other consideration for the Momentum shares received. The distribution is taxable as a dividend to each holder in the amount of the fair market value of the Momentum shares distributed to each stockholder. The Company will record a dividend for the amount of the market value of Momentum stock on the date of distribution. The remainder of the contribution will be recorded as a one-time charge against operating income during the fourth quarter. In November 1995, PeopleSoft issued stock warrants with annual exercise dates through 1999. The November 1998 maturity consists of 1,600,000 warrants with an exercise price of $13.75 per share and 1,600,000 warrants with an exercise price of $16.875 per share. Upon the annual notice of exercise by the holders of the warrants, the Company, at its option, may settle such exercise by either issuing the full amount of shares and receiving cash proceeds, issuing a net amount of shares with no cash proceeds, or purchasing the warrants for an amount equal to the difference between the then fair market value of the common stock and the warrant exercise price. The Company has received notice that the holders intend on exercising their 1998 warrants; by mutual consent of the Company and the warrant holder, the maturity date for the warrants has been extended to early December. The Company has elected the gross exercise provision and thus will receive $49.0 million in the fourth quarter related to these warrants. 14 15 The Company calculates accounts receivable days sales outstanding ("DSO") as the ratio of a quarter-end accounts receivable to the sum of quarterly revenues and the net change in quarter-end current deferred revenues, multiplied by 90. The Company believes this calculation is appropriate because license fees are typically billable regardless of whether revenue has been recognized or deferred. Under this method, DSO was 86 days as of September 30, 1997, 88 days as of December 31, 1997 and 84 days as of September 30, 1998. Since billing terms of the Company's agreements typically are spread out over a sequence of events (including contract execution through standard acceptance) or dates that generally span four to nine months, and contracting activity is concentrated at the end of each quarter, the Company anticipates that its DSO will continue to be substantial in future periods. During the first nine months of 1997 and 1998, the Company's principal use of cash for investing activities included net purchases of investments and property and equipment, comprised of computer and network equipment, to accommodate employee and facility expansions and to support the Company's growing training capacity requirements. As discussed in footnote 7 in the condensed consolidated unaudited financial statements, during the third quarter the Company entered into agreements to sell one of its Pleasanton, California office buildings and related land, and lease back a substantial portion of the premises. Additionally, the Company purchased two parcels of land for $50.0 million during the quarter. These transactions were structured as a like-kind exchange for tax purposes and, therefore do not impact immediate cash flow. The Company is committed to lease a $110.0 million building which will be constructed on one of the sites. The construction is expected to be completed in the first quarter of 2000. The lease term is for six years with the option to purchase the building for $110.0 million at the end of the lease term. The Company also entered into a five year lease for a new facility in Pleasanton, California. The lessor has agreed to fund $70.0 million for the construction of this facility that is expected to be completed in the fourth quarter of 1998. The Company has an option to purchase the building at the end of the lease term for $70.0 million. In the event the Company exercises the options to purchase these buildings, the Company plans on utilizing cash flow from operations to fund the purchase(s), however there can be no assurance that the Company will maintain its levels of cash flows from operations. (1) Financing activity for the first nine months of 1997 and 1998 related to the proceeds from the exercise of common stock options by employees and stock issuances under the employee stock purchase program. The Company believes granting stock options is essential in attracting and retaining key employees who are critical to the Company's success. The Company anticipates that it will continue to grant a significant number of options each year. The actual number of options granted each year is based on a variety of factors including the Company's historical and anticipated employee count, the level of hiring activity, competitive factors associated with the labor market, and comparison of the Company's compensation philosophy and practice to other similar technology companies. There can be no assurance that employee stock activity will continue to generate substantial funds in the future. As of September 30, 1998, the Company had $445.7 million in working capital, including $474.9 million in cash and cash equivalents, and $151.0 million in short term investments, consisting primarily of high quality municipal bonds and money market funds. The Company believes that existing cash and short term investment balances, proceeds from sales of stock under the employee purchase plan and stock option exercises, potential proceeds from issuance of stock for warrants, and potential cash flow from operations will be sufficient to meet its operating cash requirements, at least through September 1999(1). ACQUISITIONS The acquisition of Intrepid was completed in early October 1998 with the Company acquiring all of Intrepid's outstanding equity interests for approximately $45 million in cash and other consideration. Although initially structured as a stock-for-stock exchange, the transaction was modified to a cash-for-stock transaction to facilitate a more rapid close. The transaction will be recorded in the Company's fourth quarter and will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the net assets acquired, including in-process research and development, based on their fair values. The portion of the purchase price allocated to in-process research and development will be charged to expense during the fourth quarter, the period in which the transaction closed. The valuation to determine the fair value of the net assets acquired has not been completed. Accordingly, the Company cannot estimate the amount of the in-process research and development charge but believes it could be a significant portion of the purchase price and may result in a significant charge to earnings in the fourth quarter. - -------- (1) Forward-Looking Statement 15 16 During June 1998, the Company entered into a definitive agreement to acquire all outstanding equity interest of TriMark Technologies, Inc., a leading provider of software solutions for the life insurance industry. The Company and TriMark are taking initial steps toward the life insurance industry's first single-source, integrated enterprise solution. The Company will issue shares of common stock and options for all of the outstanding equity interests of TriMark in a transaction that is expected to be accounted for as a pooling of interests. The transaction is expected to close prior to the end of the first half of 1999. Prior to closing the transaction, the Company and TriMark will operate independently within a development, marketing, sales and support relationship that will streamline the eventual merging of the two companies. YEAR 2000 The Company has established a Year 2000 Program Management Office ("PMO") to ensure that it has adequately addressed exposures related to the Year 2000 and is Year 2000 Ready. "Year 2000 Ready" means that the performance or functionality of the Company's internal systems will not be significantly affected by the dates prior to, during, and after the Year 2000, to include leap year calculations and specific day-of-the-week calculations. Through an extensive risk analysis the Company has identified critical processes that will require Level One Year 2000 Readiness testing. Level One testing will involve full Year 2000 system and end-to-end testing. In cases where Level One testing is not feasible, Level Two Readiness testing at the vendor site will be employed. Additionally, all hardware and software associated with the Company's identified critical business processes will be subject to Level Three Readiness certification which consists of verification from the vendor indicating that the item is Year 2000 Ready. At present, the PMO is in the process of establishing dedicated test environments for Year 2000 Readiness testing. The building of the environment and testing is based on a comprehensive methodology, a collaborative effort between the Company and Compuware. The Year 2000 PMO anticipates that testing of critical processes will commence during the fourth quarter of 1998. Costs directly attributed to the Company's internal Year 2000 initiative, are currently estimated at approximately $2 million. This estimate is comprised primarily of consulting fees and the cost of hardware and software required to complete Year 2000 testing within the enterprise. This cost estimate excludes internal resource costs for individuals outside of the PMO, however, these costs are not considered to be material. The Company, which was established in 1987, is a relatively new company that does not have the level of exposure to Year 2000 issues as many older companies. There are no legacy mainframe applications within the organization. The Company's commercial application software products generally offered for license by the Company are also used to develop internal business information systems within the enterprise. In addition, third party software, hardware, and telecommunication products are also used for the development of the Company's systems. As a matter of strategic direction, the Company attempts to utilize the most recent release versions/models of in-house and third party products. With respect to embedded systems consisting of facilities, utilities, and third-party interfaces on which the enterprise is dependent but does not have direct control, the Company is in the process of developing detailed contingency plans for its core support centers. The Company currently anticipates that the approach described above will enable it to achieve Year 2000 readiness with respect to its critical internal processes and therefore, the Company does not expect that Year 2000 issues will have a material adverse impact on the Company's financial condition. However, because of the vast scope of potential Year 2000 issues, the Company cannot be certain to what extent the Company may be impacted. Although the Company feels confident that its internal critical processes will be Year 2000 Ready, the Company does recognize that it is vulnerable, as are most organizations, to the inability of significant suppliers, third-party external interface suppliers, and utility organizations to achieve Year 2000 Readiness. In light of these possibilities, the Company is in the process of developing detailed contingency plans for its core support centers to ensure the continuity of its operations. FINANCIAL RISK MANAGEMENT Foreign Exchange The Company's revenue originating outside the United States was 15% of total revenues in the first nine months of 1998 and 16% for the same period in 1997. International sales are made mostly from the Company's foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. 16 17 The Company's international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The Company's exposure to foreign exchange rate fluctuations arise in part from intercompany accounts in which cost of software, including certain development costs, incurred in the United States is charged to the Company's foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company in the United States. The Company is also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. In the first quarter of 1998, the Company initiated a hedging program designed to mitigate the potential for future adverse impact on intercompany balances due to changes in foreign exchange rates. The program uses forward foreign exchange contracts as the vehicle for hedging these intercompany balances. In general, these forward foreign exchange contracts have three months or less to maturity. Gains and losses on hedges are recorded in Other income and offset against losses and gains on the underlying exposures. Management of the foreign exchange hedging program is done in accordance with a corporate policy approved by the Company's Board of Directors. At September 30, 1998, hedge positions totaled U.S. Dollar 11.6 Million equivalent. All hedge positions are carried at fair value and all hedge positions had maturity dates within three months. For the nine month periods ended September 30, 1997 and 1998, the Company's revenues in the Asia/Pacific region, which includes Far East countries and Australia and New Zealand, were less than 5% of total revenues. As of September 30, 1998, less than 5% of the Company's assets are in the Asia/Pacific region. the Company's operations in the region are relatively new and to date are generating losses and negative cash flows. As the Asia/Pacific currencies devalue, the translated loss reported on the consolidated financial statements decreases. In addition, such currency devaluations cause the Company's cash funding requirements of these foreign subsidiaries to decrease. Interest Rates The Company invests its cash in a variety of financial instruments, including bank time deposits, and taxable and tax-advantaged variable rate and fixed rate obligations of corporations, municipalities, and local, state and national governmental entities and agencies. These investments are denominated in U.S. Dollars. Cash balances in foreign currencies overseas are operating balances and are only invested in short term time deposits of the local operating bank. Interest income on the Company's investments is recorded in Other income. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalent, short term, and long term investments are treated as "available-for-sale" under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The Company's investments are made in accordance with an investment policy approved by the Board of Directors. At September 30, 1998, the average maturity of the Company's investment securities was approximately four months. No investment securities had maturities exceeding two years. The following table presents certain information about the Company's financial instruments at September 30, 1998 that are sensitive to changes in interest rates. These instruments are not leveraged and are held for purposes other than trading. For 17 18 available-for-sale investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The Company believes its available-for-sale securities, comprised of highly liquid debt securities of corporations, municipalities, and the U.S. Government, are similar enough to aggregate. Because of the Company's effective tax rate, the Company finds it advantageous to invest largely in tax-advantaged securities, therefore the average interest rates below are most comparable to tax-exempt interest rates. Below is a tabular presentation of the maturity profile of the available-for-sale investment securities held by the Company at September 30, 1998: INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY WEIGHTED AVERAGE INTEREST RATE
(DOLLARS IN MILLIONS) 1 YEAR OR MORE THAN TOTAL FAIR VALUE LESS 1 YEAR 9/30/98 - --------------------------------- ------------ ------------ ---------- --------- Available-for-sale securities $324.0 $51.7 $375.7 $376.2 Weighted average interest rate 3.9% 3.9%
The Company is not an issuer of any corporate debt nor does it have any bank borrowings outstanding. BUSINESS OUTLOOK The following forward-looking statements are based on current expectations which are subject to material change due to a variety of factors including but not limited to, those which are listed below and in the section titled "Factors That May Affect Future Results". These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, those items identified with a footnote (1) symbol. The Company undertakes no obligation to update the information contained herein. o Based on the Company's current expectations of contracting activity, a review of the Company's deferred license fee revenue position, and an analysis of the Company's service delivery capacity and the expected customer utilization of such services, the Company forecasts total revenues for 1998 to increase approximately 60% over total revenues recorded in the prior year (1). For the 1999 calendar year, the Company forecasts total revenues to increase in the range of 25% to 35% over the total revenues currently expected to be recorded for 1998 (1). As with any forecast, actual results could vary within a few percentage points on either side of these estimates even if there are no material changes to the underlying assumptions, and longer term forecasts can be expected to have relatively higher variability. The Company's confidence level in its forecasts are lower than in the recent past due to economic uncertainties, the potential impact of the Year 2000 problem on the enterprise market, increasing levels of competition in the enterprise market, and the potential maturation of the enterprise applications market. Moreover, the Company experienced a difficult third quarter period for license sales, including a number of large contracts which were anticipated to close in the quarter but were pushed out or canceled by the customers due apparently to economic uncertainties. In addition, the Company opens the fourth quarter with lower than planned deferred license fees, which reduces the amount to flow into revenue in future periods. The key assumptions on which this forecast is based include, but are not limited to, the following: (i) total actual available market opportunities in the range of those forecasted by certain major information technology market research firms; (ii) the preservation of the Company's ability to generate a sufficient number of qualified leads through its ongoing marketing programs; (iii) an increase in the Company's direct sales capacity through the successful recruitment, hiring, training and retention of additional sales and sales support personnel; (iv) a competitive environment consistent with recent experience rather than a competitive environment that may increase in intensity of pricing and terms and conditions; (v) no significant change in U.S. and worldwide IT budgets and activities versus recent experience as the Year 2000 approaches; and (vi) no significant deterioration in the global economic environment or associated general reduction in capital investment due to economic uncertainty. In addition, the achievement of expected contracting activity and total revenues is highly dependent upon the Company's ability to successfully manage the potential risks detailed below in the section titled "Factors That May Affect Future Results" including, but not limited to, increasing economic uncertainty across all geographies in which the Company operates; potential for increasing intensity of market competition, the potential slowdown to the Year 2000 problem; fluctuations in quarterly 18 19 operating results; changes in customer demand; the timing and complexity of large transactions including the bundling of significant amounts of professional services; ability to recognize contracting activity in the current quarter under revenue recognition accounting rules; success of international operations; reliance on third parties for sales, marketing and implementation assistance; timing and acceptance of software products and product development; and the ability to execute hiring and facility expansion plans. o The Company's current operating model is based on a rolling four quarter target operating margin of between 18% and 20%. The Company forecasts that the 1998 full year results will fall within this range and that the fourth quarter operating margin is likely to be at the lower end of this range (1). These operating margin forecasts exclude the one-time charges associated with the purchase of Intrepid Systems, Inc. and the Momentum transaction, both charges are expected to be incurred in the fourth quarter. Due to the significant operating leverage which is characteristic of the software industry, any deviation in the expected revenues could significantly impact the Company's ability to meet the target operating margins. Achievement of forecasted operating margins is highly dependent upon the Company's ability to successfully manage the potential risks detailed below in the section titled "Factors That May Affect Future Results" including, but not limited to, achievement of revenue forecasts as discussed above; continued introduction and marketing of new and enhanced versions of software products; successful penetration of international markets; continued acceptance of the Company's software products, particularly its proprietary software development tools; successful porting and acceptance of its software products on a variety of platforms; continued acceptance of its application security architecture and intellectual property, preservation of its proprietary rights and product liability protections; and continued success in hiring, training and retaining key personnel and completing expansion of facilities. o Based on projected cash and investment balances, the expected distribution of cash to Momentum, current interest rates (which have declined recently) and no unusual items of other income or expense, the Company expects other income for the fourth quarter of 1998 to be slightly down compared to the level of other income recorded in the third quarter of 1998 (1). The achievement of forecasted other income targets is dependent on: (i) stable financial markets which preclude a significant overall decline in investment yields, or a significant fluctuation in foreign currency exchange rates, and (ii) avoidance of default on any individual significant investment. Should the Company decide to utilize a significant portion of its current cash and investments to acquire complementary businesses, products, technologies, additional facilities through purchase of land and/or buildings, repurchase shares of stock, or pay dividends, interest income may decline significantly causing other income to deviate from forecasted amounts. o Based on current tax law and the Company's present forecast of operating results by country, the Company expects its effective tax rate in 1998 to be 38%, excluding the impact on this rate, if any, of the purchase of Intrepid Systems, Inc. and the anticipated Momentum transaction (1). The estimated annual effective tax rate is relatively sensitive to the results of operations in various foreign legal entities, and because such projections may change in future periods, the actual effective tax rate could differ from this estimate. Please read the section below titled "Factors That May Affect Future Results" for additional information and discussion of conditions which the Company believes could cause actual results to differ materially from those contemplated by forward-looking statements. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company has identified certain forward-looking statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations (which includes the Business Outlook Section) with a footnote (1) symbol. The Company may also make oral forward-looking statements from time to time. Actual results may differ materially from those projected in any such forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Form 10-Q. The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties that may have a material adverse effect on the Company's business, financial condition or results of operations. This section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto included - -------- (1) Forward-Looking Statement 19 20 in Part I -- Item 1 of this Quarterly Report and the audited Consolidated Financial Statements and Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1997, contained in the Company's 1997 Annual Report to Stockholders (Form 10-K). FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's revenues and operating results can vary substantially from quarter to quarter. License revenues in any quarter are substantially dependent on the aggregate contracting activity and the Company's ability to recognize revenue in that quarter in accordance with its revenue recognition policies. Contracting activity is difficult to forecast for a variety of reasons including: (i) increasing economic uncertainty across all geographies in which the Company operates; (ii) potential maturation of the enterprise software market; (iii) a significant portion of the Company's license agreements are completed within the last few weeks of each quarter; (iv) the duration of the Company's sales cycle is relatively long and increasingly variable because the Company has broadened its marketing emphasis to encompass software product solutions for each customer's overall business, thereby increasing the financial value of individual transactions and the complexity of the customer selection, negotiation and approval process; (v) the size of license transactions can vary significantly; (vi) system replacement projects and new system evaluations may be postponed or canceled at any time due to changes in a customer's project, customer company management, budgetary constraints or strategic priorities; (vii) customer evaluations and procurement processes vary significantly from company to company, and a customer's internal approval and expenditure authorization process can be arduous, even after selection of a vendor; (viii) the number, timing and significance of software product enhancements and new software product announcements by the Company and its competitors; (ix) potential customer evaluations of their legacy systems and their decisions whether to repair or replace existing applications which have Year 2000 operability issues; (x) changes in the Company's sales incentive plans have had and may continue to have an unpredictable impact on seasonal business patterns; and (xi) changes in economic, political and market conditions can adversely impact business opportunities without reasonable notice. With respect to potential customer evaluations of their Year 2000 operability issues, while the Company believes that such evaluations through early 1998 have, on balance, increased demand for its applications, such demand is subject to change as the Year 2000 draws closer since lead times required to complete systems implementations preclude system replacement as a timely solution to the Year 2000 issue. More recently, and in particular with respect to the third quarter of 1998, the Company believes that Year 2000 issues have actually decreased demand for its applications. Given the lack of precedent for an issue of this magnitude, the Company's ability to accurately forecast the impact of the issue on quarter to quarter revenue achievement is limited. The Company's recognition of license fee revenue can be deferred for a significant period of time after execution of the related license agreements as a result of several factors, including the following: (i) the license agreement may be entirely related to then currently undeliverable software products; and (ii) enterprise transactions may include software products that are then currently deliverable, as well as software products that are still under development. To the extent that Company enters into a license agreement for the provision of both software product categories, the Company must have established separate values for all elements under the license agreement, and the license agreement and supporting schedules to the license agreement must contain very precise contractual provisions consistent with generally accepted accounting principles to permit any revenue recognition under the license agreement. Other factors in determining the Company's recognition of license fee revenue include the following: (i) whether the customer demands services that include significant modifications, customizations or complex interfaces; (ii) whether the license agreement includes non-standard acceptance criteria which may preclude revenue recognition prior to customer acceptance; and (iii) whether the license agreement includes fees with extended payment terms or fees that are dependent upon acceptance of services or other contingencies. All of the above factors, as well as other specific requirements under recently published generally accepted accounting standards for software revenue recognition, create circumstances under which the Company must have very precise contractual agreements in order to recognize revenue upon initial software product delivery. Although the Company has a standard form of license agreement that meets the demanding criteria under generally accepted accounting principles, the Company must often negotiate and revise certain terms and conditions in large enterprise transactions. Negotiation of mutually acceptable language can extend the sales cycle, and in certain situations, the Company does not always obtain terms and conditions that permit recognition of revenue at the time of delivery or even allow the recognition of revenue using percentage of completion contract accounting. These factors arising from contract negotiations, coupled with the reduction of the deferred license fees at the end of the third quarter increase the Company's dependence on signing contracts in the future that generate revenue in the same quarter as a means to avoid quarterly fluctuations of revenue. Service revenues may vary from quarter to quarter due to variances in prior quarter contracting activity because service revenue typically lags license fee revenue. The Company's ability to increase services revenue is dependent on its ability to increase the number of its licensing agreements that provide opportunities for consulting, 20 21 training, and subsequent maintenance revenues. Additionally the Company may not be able to recruit, hire, and train sufficient numbers of qualified consultants to perform such services. POSSIBLE ADVERSE IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" were issued by the American Institute of Certified Public Accountants in October 1997 and March 1998, respectively and address software revenue recognition matters. These standards supersede SOP 91-1 and are effective for transactions entered into for fiscal years beginning after December 15, 1997. The Company believes its current revenue recognition policies and practices are materially consistent with these standards. However, complete implementation guidelines for these standards have not yet been issued and a wide range of potential interpretations is being discussed within the accounting profession. Once available, such implementation guidance could lead to unanticipated changes in the Company's current revenue accounting practices, and such changes could materially adversely affect the Company's future revenue and net income. In addition, such implementation guidance may necessitate substantial changes in the Company's business practices in order for the Company to continue to recognize a substantial portion of its license fee revenue upon delivery of its software products. Such changes may reduce demand, extend sales cycles, increase administrative costs and otherwise adversely affect operations. In addition, the Company could become competitively disadvantaged relative to foreign-based competitors not subject to U.S. generally accepted accounting principles. An accounting committee of the AICPA is currently considering implementation guidance for these standards and may issue such guidance in the near future. Depending on the nature of the guidance issued by the committee, such guidance may cause adverse changes in the Company's revenue recognition practices, which may significantly impact the Company's revenues and earnings. OPERATING LEVERAGE Like many of its competitors, the Company's business model is characterized by a very high degree of operating leverage. Employee and facility related expenditures comprise a significant portion of the Company's operating costs and expenses, and over the short term are relatively fixed. In addition, the Company's expense levels and hiring plans are based, in significant part, on the Company's projections of future revenue. If revenue levels fall below expectations, net income is likely to be disproportionately adversely affected. There can be no assurance that the Company will be able to increase or even maintain its current level of profitability on a quarterly or annual basis in the future. FUTURE OPERATING RESULTS UNCERTAIN Segments of the software industry have experienced significant economic downturns characterized by decreased product demand, price erosion, technological shifts, work slowdowns and layoffs. The Company's operations may, in the future, experience substantial fluctuations from period to period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from customers, and other factors affecting capital spending. There can be no assurance that any one or more of such factors will not have a materially adverse effect on the Company's business, operating results, financial condition, or business prospects. Although the Company's 1998 operating budget is based on projections of a material increase in total revenues over the corresponding actual results for 1997, the Company does not believe that the percentage increases in revenues achieved in prior periods should be anticipated in future periods. The operating results of many software companies reflect seasonal trends, and the Company has been, and expects to continue to be, affected by such trends in the future. The Company's seasonal revenue patterns, which are typically characterized by relatively weak first and second quarters and relatively strong third and fourth quarters, can be caused by a variety of factors, including sales incentives, customer demand based on available capital budgets and release of new technologies. However, there can be no assurance that the fourth quarter of the current fiscal year will produce stronger revenues or earnings than those recorded in the first three quarters. INTERNATIONAL OPERATIONS The Company has committed, and will continue to commit substantial resources and funding to build its international service and support infrastructure. Operating costs in many countries, including many of those in which the Company operates, are higher than in the United States. In order to increase international sales in 1998 21 22 and subsequent periods, the Company must continue to globalize its software product lines, expand existing and establish additional foreign operations, hire additional personnel, identify suitable locations for sales, marketing, customer service and development, and recruit international distributors and resellers in selected territories. If the Company's international expansion and/or product globalization is not successful, it is likely to have a negative impact on the Company's operating results. The Company's sales through its foreign operations are generally denominated in the functional currency of each of its foreign subsidiaries. Unexpected changes in the exchange rates for these foreign currencies could result in significant fluctuations in the foreign currency transaction and translation gains and losses in future periods. In January 1998, the Company implemented a hedging program designed to mitigate the potential impact of exchange rate fluctuations. In addition to hedging existing transaction exposures, the Company's foreign exchange management policy allows for the hedging of anticipated transactions, and exposure resulting from the translation of foreign financial results into U.S. Dollars. Such hedges can only be undertaken to the extent that the exposures are highly certain, reasonably estimable, and significant in amount. These hedges will only be undertaken should the Company deem them necessary to protect the U.S. Dollar value of the underlying exposure. The Company began hedges of existing foreign currency transaction exposures in the first quarter of 1998. However, if the Company is unable to hedge potential significant exposures due to lack of certainty or ability to reasonably estimate its foreign exchange exposure, there could be a material adverse impact to the Company's operating results. COMPETITION The market for business application software has been intensely competitive for the past three years and is currently intensifying. The Company faces competition from a variety of software vendors including enterprise application software vendors, manufacturing application software vendors, enterprise resource optimization application software vendors, financial management systems and HRMS application software vendors and software tools vendors. Although the Company believes its success has been due in part to its early emphasis on the client/server architecture, virtually all of the Company's competitors now offer software products based on a client/server architecture. Consequently, competitive differentiators now include more subtle architectural and technological factors, such as web enablement, enterprise software product breadth and individual product features, service reputation, product flexibility, ease of implementation, international software product version availability and support, and price. Intense competition could potentially lead to increased price competition in the market, forcing the Company to reduce prices which may result in reduced gross margins and loss of market share by the Company which in turn, could materially adversely affect the Company's business, operating results, financial condition, and business prospects. In recent quarters, the Company has observed increasingly aggressive pricing practices and/or unusual terms and conditions offered to customers by or on the part of its competitors. There can be no assurance that the Company will continue to compete successfully with its existing competitors or will be able to compete successfully with all new competitors that may enter into the enterprise application software market, the Company faces significant competition from SAP AG and Oracle Corporation, and to a lesser degree, Dun & Bradstreet Software (now operating as two separate divisions of Geac Computer Systems, Inc.), Computer Associates International, Inc. and other companies such as System Software Associates who previously focused primarily on the AS/400 marketplace. In this market, the chief competitive factors include the breadth and completeness of the enterprise solution offered by each vendor, the extent of software product integration across the enterprise solution, the viability and reputation of the software vendors, and the availability of localized software products and technical support in key markets outside the United States. Primarily due to their significant worldwide presence and longer operating and product development history, both SAP and Oracle have certain competitive advantages over the Company in each of these areas. In addition, both SAP and Oracle have substantially greater financial, technical and marketing resources, and a larger installed base than the Company. Furthermore, Oracle's RDBMS (relational database management system) is a supported platform underlying a significant share of the Company's installed applications. The Company entered the manufacturing software application markets in 1996. In these markets, the Company faces competition from several of its existing competitors including those listed immediately above and others such as Baan Company N.V., QAD, Ross Systems, J.D. Edwards and a large number of niche competitors already in the manufacturing market. 22 23 In addition, since its acquisition of Red Pepper Software in the fourth quarter of 1996, the Company has competed in the emerging enterprise resource optimization software solutions market. the Company faces several current and potential competitors in this market including: (i) companies such as i2 Technologies, Manugistics and Numetrix Software which have developed or are attempting to develop advanced planning and scheduling software products which complement or compete with MRP (material requirements planning) solutions; (ii) other companies that provide specialized planning and scheduling software for niche markets, including Chesapeake Systems, Waterloo Manufacturing Software, MAPICS, Inc. (formerly Marcam Corporation), Marcam Solutions, Inc. and Cap Logistics; (iii) other business application software vendors that may broaden their product offerings by internally developing (such as SAP's initiatives in this area), acquiring (such as Baan's acquisitions of Berclain Group, Inc. and Antalys, Inc.) or partnering with independent developers of advanced planning and scheduling software; (iv) internal development efforts by corporate information technology departments; and (v) companies offering standardized or customized products on mainframe and/or mid-range computer systems. The Company also faces competition from providers of HRMS software products including Cyborg Systems, Lawson Associates, Integral Systems, Inc., InPower, Inc. and Ceridian, and from providers of financial management systems software products including Computron Software, Inc., Flexiware International, Hyperion Software, Lawson Associates and other smaller companies. During the third quarter of 1998, the Company mutually terminated a distribution agreement with Shared Medical Systems, Inc. ("SMS"). SMS had the right to sublicense selected the Company's software products in competition with the Company's marketing efforts in the healthcare market. In addition, as the year 2000 approaches, potential customers may consider outsourcing options, including data center outsourcing and service bureaus, as viable alternatives to purchasing the Company's software products which in turn may result in increased competition from outsource services such as Computer Science Corporation (CSC), Electronic Data Systems Corporation (EDS), IBM, ADP, Ceridian, and other smaller companies. During the third quarter of 1998, the Company signed agreements with IT service providers CIBER, Inc., CSC, Corio, KPMG Peat Marwick, reSOURCE PARTNER, and Usinternetworking to provide industry-specific outsourcing solutions encompassing software implementation and management services. Although the Company is pursuing an outsourcing partner program which the Company believes will address the potential requirements of the marketplace, no assurance can be given to the ultimate success, or the significance of any revenue to be generated from such program CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets, decrease in earnings as a result of additional costs associated with the acquired entity, adverse impact on the Company's annual effective tax rate, dilution of existing equity holders, difficulty in maintaining controls, procedures, and policies, and the impairment of relationships with employees and customers as a result of any integration of new personnel. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. In the fourth quarter, the Company completed its acquisition of Intrepid Systems, Inc., which will be accounted for under the purchase method of accounting. The Company is currently evaluating the purchase price and the related accounting treatment. Potential writedowns associated with the acquisition may significantly impact fourth quarter earnings. In addition, depreciation and amortization charges associated with Intrepid's acquired assets may impact earnings in 1999 and thereafter. RELIANCE ON PROPRIETARY SOFTWARE DEVELOPMENT TOOLS The Company's software products include a suite of proprietary software development tools known as "PeopleTools," which are fundamental to the effective use of the Company's software products. While no industry standard exists for software development tools, several companies have focused on providing software development 23 24 tools and are attempting to establish their software development tools as accepted industry standard. In the event that a software product other than PeopleTools becomes the clearly established and widely accepted industry standard, the Company may need to abandon or modify PeopleTools in favor of such an established standard, may be forced to redesign its software products to operate with such third party's software development tools, or may be faced with the potential sales obstacle of marketing a proprietary software product against other vendors' software products incorporating a standardized software development toolset. Accordingly, in any of these cases, the Company's results of operations could be materially adversely affected. RELIANCE ON THIRD PARTIES FOR SALES AND MARKETING A key aspect of the sales and marketing strategy for the Company is to build and maintain strong working relationships with businesses the Company believes play an important role in the successful marketing of its software products. The Company's customers and potential customers often rely on third party system integrators to develop, deploy and manage client/server applications. These include: (i) RDBMS software vendors; (ii) hardware vendors which offer both hardware platforms and, in the case of IBM, proprietary RDBMS products on which the Company's software products run; (iii) technology consulting firms and systems integrators, some of which are active in the selection and implementation of large information systems for the information-intensive organizations that comprise the Company's principal customer base; and (iv) benefits consulting firms that are active in the implementation of HRMS. The Company believes that its marketing and sales efforts are enhanced by the worldwide presence of these companies. However, there can be no assurance that these companies, most of which have significantly greater financial and marketing resources than the Company, will not start, or in some cases increase, the marketing of business application software in competition with the Company, or will not otherwise discontinue their relationships with or support of the Company. If the Company or its partners are unable to recruit and adequately train a sufficient number of consulting personnel to support the implementation of the Company's software products, demand for these software products could subsequently be materially adversely affected. In addition, the Company's software application architecture, including PeopleTools, may facilitate reduced implementation efforts for customers compared to the competitive alternatives. Consequently, the Company's software products may be a less desirable recommendation alternative for integrators who both provide selection advice and generate consulting fees from customers by providing implementation services. Due to the foregoing factors, the Company's results of operations could be materially adversely affected. DEPENDENCE ON THIRD PARTY TECHNOLOGY The Company incorporates numerous critical third party software products into its software product offerings under reseller license agreements with third parties. In the event that any of the Company's licenses to such software are terminated, there could be a material adverse effect to the Company including its products becoming inoperable or their performance being materially reduced. If any of the third party software vendors change their product offerings, the Company may need to incur additional engineering costs to ensure continued performance of its products. In addition, material increases in the cost to license any of these third party software products could result in a material adverse change from the Company's historical gross margin levels. The Company relies on existing partnerships with certain other software vendors who are also competitors. For example, the Company partners with Oracle when the Company's customers select an Oracle database to run in conjunction with the Company's financial package. However, Oracle is a competitor of the Company in the financial data management area. These partners/competitors may change their business practices in the future resulting in the Company's need to find alternative vendors of complementary software. COMPLEXITY OF SOFTWARE PRODUCTS AND PRODUCT DEVELOPMENT The market for the Company's software products is characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. The Company's future success will depend in part upon its ability to continue to enhance and expand its core applications, to continue to provide enterprise solutions, to enter new markets and to develop and introduce new products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance. If the Company is unable to enhance existing products or develop and introduce new products in a timely manner, the Company's business and results of operations could be materially adversely affected. 24 25 The Company's software products can be licensed for use with a variety of popular industry standard RDBMSs. There may be future or existing RDBMS platforms which achieve popularity within the business application marketplace and on which the Company may desire to offer its applications. Such future or existing RDBMS products may or may not be architecturally compatible with the Company's software product design. No assurance can be given concerning the successful development of the Company's software products on additional platforms, the specific timing of the releases of any future software products, the performance characteristics of PeopleSoft applications on additional platforms or their acceptance in the marketplace. Beginning with Release 6, the Company integrated certain features of BEA's Tuxedo product into its applications. Over the next several releases, additional Tuxedo features will be integrated to allow applications to run on a distributed basis using a multi-tiered client/server architecture. Cognos' Powerplay product and Arbor's Essbase product will be bundled to incorporate desktop on-line analytical processing ("OLAP") capabilities. Such enhancements may be critical to the competitiveness of the Company's software products in the future. Integration of these and other products is complex and no assurance can be made that these efforts will be successful or result in significant software product enhancements. Software programs as complex as those offered by the Company are likely to contain a number of undetected errors or "bugs" when they are first introduced or as new releases are thereafter released. Despite testing by the Company and by third-parties, errors or system performance issues may arise with the possible result of reduced acceptance of the Company's software products in the marketplace. Due to the increasing number of possible combinations of vendor hardware platforms, operating systems and updated versions, PeopleSoft application software products and updated versions, and RDBMS platforms and updated versions, the effort and expense of developing, testing and maintaining these software product lines in an increasing number of combinations will increase, and the ability to develop consistent software product performance characteristics across all of these combinations could place a significant strain on the Company's development resources and software product release schedules. RELIANCE ON CLIENT PLATFORMS At the present time, the Company supports client platforms utilizing browsers certified to run Java based Web client, or Microsoft's Windows family of software products, including Windows 3.1 (PeopleSoft releases prior to Release 6 only), Windows NT and Windows 95. If Microsoft were to fundamentally change the architecture of its software product such that users of the Company's software applications experienced significant performance degradation or were rendered incompatible with future versions of Microsoft's Windows Operating System, the Company's results of operations could be materially adversely affected. The use of a Web browser (running on either a PC or network computer) to access client/server systems is emerging as an alternative client to the traditional desktop access through Microsoft Windows based personal computers. Such client access via the Internet will be subject to numerous risks inherent in utilizing the Internet including security, availability and reliability. There may be future or existing client platforms which achieve popularity within the business application marketplace and on which the Company may desire to offer its applications. Such future or existing client platforms may or may not be architecturally compatible with the Company's software product design. No assurance can be given concerning the Company's successful support for new client platforms, the specific timing of their availability or their acceptance in the marketplace. RELIANCE ON JOINT BUSINESS ARRANGEMENTS The Company has entered, and may in the future enter, into various development or joint business arrangements for the purpose of developing new software products or extensions to existing software products. Under these development arrangements, the Company is generally the exclusive remarketer of the developed software products and pays a royalty to the funding entities based on license fees received from end user licenses of these software products. Under joint business arrangements, the Company may distribute or jointly sell with its business partner an integrated software product. While the intent of such arrangements is to develop business applications that are integrated with the Company's software products, there can be no assurance that such software products will in fact be integrated or that an integrated enterprise solution will be accepted by the market. In addition, should such arrangements require additional investments from third parties or business partners to complete development or enhance the software product, there can be no assurance that investments will be available on terms mutually acceptable to the Company and the business partner, or the existing or other potential third party funding source(s). Should the Company acquire title to the software products or technology from the third party entity, such an acquisition might be accounted for using the purchase method which is likely to result in either or both of the following accounting treatments: (i) a charge to earnings for in-process research and development which would be recorded in the Statement of Income in the period such acquisition was completed; or (ii) the creation of 25 26 significant intangible assets by virtue of an allocation of a substantial portion of the purchase price to the acquired technology or other intangible assets. Such intangible assets would be amortized in future periods as a cost of operations. Should either of these scenarios occur, the results of operations of one or more future periods could be materially adversely impacted. For example, in connection with its acquisition of PMI in 1996, the Company incurred a charge to earnings of $22.5 million for in-process research and development. APPLICATION SECURITY ARCHITECTURE The Company's application software products incorporate extensive security features designed to protect certain sensitive data managed by these applications from unauthorized retrieval or modification. The Company has developed a security architecture utilizing the capabilities of its own applications, the client operating system software, some of the security features contained in the RDBMS platforms on which the applications run, as well as certain third party security products. To date, the Company is not aware of any violations of its application security architecture within its installed base. Although these security features are subject to constant review and enhancement, no assurances can be given concerning the successful implementation of these security features and their effectiveness within a particular customer's operating environment. Should a breach of security or a suspected breach of security occur, the accompanying publicity or any subsequent claims against the Company could have an adverse impact on the demand for the Company's software products and/or cause a decline in the market price of the Company's stock and/or adversely impact the Company's financial results due to lost or delayed closing of software licensing opportunities. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company regards certain aspects of its internal operations, software and documentation as proprietary, and relies on a combination of contract, patent, copyright, trademark and trade secret laws and other measures to protect its proprietary information. The Company has title to five software patents. In July of 1998, the Company received title to another software patent relating to Iterative Repair Optimization. This patent, in addition to an earlier issued patent relating to the Red Pepper Software, also have pending continuation applications. There can be no assurance that any issued patents will result from such applications or that, even if issued, such patents will provide any meaningful competitive advantage or protection. Existing copyright laws afford only limited protection. The Company believes that, because of the rapid pace of technological change in the computer software industry, patent, trade secret and copyright protection are less significant than factors such as the knowledge, ability and experience of the Company's employees, frequent software product enhancements and the timeliness and quality of support services. There can be no assurance that these protections will be adequate or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Many customers of the Company are beneficiaries of a source code escrow arrangement to enable the customer to acquire a future limited right to use the Company's source code solely for their internal provision of maintenance services. This possible access to the Company's source code may increase the likelihood of misappropriation or other misuse of the Company's intellectual property. In addition, the laws of certain countries in which the Company's software products are or may be licensed do not protect the Company's software products and intellectual property rights to the same extent as the laws of the United States. The Company does not believe that its software products, software products acquired from acquisitions, third party software products the Company offers under sublicense agreements, Company trademarks or other Company proprietary rights infringe the property rights of any third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future software products or that any such assertion may not require the Company to enter into royalty arrangements or result in costly litigation. PRODUCT LIABILITY The Company's license agreements contain provisions designed to limit the exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be valid as a result of federal, state, local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the license and support of its software for use in mission critical applications creates the risk of a claim being pursued against the Company. Damage or injunctive relief resulting under such a successful claim could cause a materially adverse impact on the Company's business, operating results and financial condition. In addition, as the Company continues to compete in the manufacturing software application market, the mission critical nature of such software products may increase the Company's exposure to product liability claims against the Company. 26 27 GROWTH IN OPERATIONS The Company has experienced an extended period of significant revenue growth, growth in the Company's customer base, expansion of its software product lines and supported platforms, a significant expansion in the number of its employees, increased pressure on the viability and scope of its operating and financial systems and expansion in the geographic scope of its operations. This growth has resulted in new and increased responsibilities for management personnel and has placed a significant strain upon the Company's management, operating and financial controls and resources, including its services and development organizations. To accommodate recent growth, compete effectively and manage potential future growth, the Company must continue to implement and improve the speed and quality of its information decision support systems, management decisions, reporting systems, procedures and controls. There can be no assurance that the Company's personnel, procedures, systems and controls will be adequate to support the Company's future operations. KEY PERSONNEL The Company believes that its continued success will depend in large part upon its ability to attract, train and retain highly skilled technical, managerial and marketing personnel. The Company continues to hire a significant number of additional sales, services and technical personnel. Competition for the hiring of such personnel in the software industry is intense, and the Company from time to time experiences difficulty in locating candidates with appropriate qualifications within various desired geographic locations, or with certain industry specific domain expertise. Growth in contracting activity could be impacted by the Company's ability to attract, train, retain and manage productive sales and sales support personnel. The loss of services of one or more of the Company's key employees could have a materially adverse effect on the Company's business, operating results and financial condition. The Company has historically experienced a very low attrition rate amongst all of its employees, especially those in critical positions. The Company has several retention programs in place to retain such key personnel including granting of stock with annual vesting periods over five years. A number of key employees have vested stock options that have a relatively low price when compared to the Company's current stock price. These potential gains provide these employees the economic freedom to explore personal objectives both within and outside the Company which may result in the loss of one or more key employees during the coming years. Due to recent declines in the Company's share price, a large portion of stock options granted over the last two years have exercise prices above the Company's stock value at the end of the third quarter. As a result, the Company has increased risk of losing a significant number of key employees. It is widely held that the technology industry is at or beyond a condition of full employment. There can be no assurance that the Company will be successful in attracting, training and retaining the personnel it requires to develop, market, sell and support new or existing software or to continue to grow. In addition, the Company's success in penetrating key vertical markets is dependent upon its ability to attract, train and retain personnel with industry specific domain expertise. YEAR 2000 COMPLIANCE The Company's internal business information systems are primarily comprised of the same commercial application software products generally offered for license by the Company to end user customers. These applications have been tested for Year 2000 compliance and are certified by the Information Technology Association of America (ITAA) as Year 2000 compliant, therefore the Company does not expect any Year 2000 compliance issues to arise related to its primary internal business information systems. Costs directly attributed to the Company's internal Year 2000 initiative are currently estimated at approximately $2.0 million. However, the Company utilizes other third party vendor network equipment, telecommunication products, and other third party software products that may or may not be Year 2000 compliant. Although the Company is currently taking steps to address the impact, if any, of the Year 2000 issue surrounding such third party products, failure of any critical technology components to operate properly in the Year 2000 may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. See the expanded disclosure of the Year 2000 issue under Management's Discussion and Analysis. EUROPEAN MONETARY UNION (EMU) The Company's internal business information systems are primarily comprised of the same commercial application software products generally offered for license by the Company to end user customers. The Company's 27 28 latest software release contains EMU functionality that allows for dual currency reporting and information management. The Company is not aware of any material operational issues or costs associated with preparing internal systems for the EMU. However, the Company utilizes other third party vendor network equipment, and other third party software products that may or may not be EMU compliant. Although the Company is currently taking steps to address the impact, if any, of EMU compliance for such third party products, failure of any critical technology components to operate properly post EMU may have an adverse impact on business operations or require the Company to incur unanticipated expenses to remedy any problems. Furthermore, the company's foreign exchange exposures to legacy sovereign currencies of the participating countries in the EMU will become foreign exchange exposures to the Euro upon its introduction. Currently, the Company has no derivative foreign exchange contracts denominated in legacy sovereign currencies with maturity of January 1, 1999 or later. To the extent hedging transactions are entered for exposures after January 1, 1999, they will be denominated in Euros as applicable. Although the Company is not aware of any material adverse financial risk consequences of the change from legacy sovereign currencies to the Euro, conversion may result in problems which may have an adverse impact on the Company's business because the Company may be required to incur unanticipated expenses to remedy these problems. EXPANSION OF FACILITIES The Company has experienced an extended period of growth that has resulted in a significant expansion in the number of its employees. Commercial building vacancy rates have significantly dropped in many of the markets where the Company has significant operations. As a consequence, the Company may experience increasing difficulty in obtaining additional space within which to expand its operations. Failure to either obtain space, or obtain it on reasonably attractive commercial terms, may inhibit the Company's ability to grow, or otherwise adversely affect the Company's operations and financial results. Additionally, the Company may commit to real estate projects in order to expand its operations to accommodate expected growth. Such real estate projects typically have a lead time of over one year from commitment date to occupancy. There can be no assurance that the anticipated growth projections will be realized, and therefore, the Company may be subject to increased fixed costs which cannot be recovered from operations, resulting in material reductions to net income and cash flows. VOLATILITY OF STOCK PRICE As is frequently the case with stock of high technology companies, the market price of the Company's stock has been and may continue to be quite volatile. Factors such as quarterly fluctuations in results of operations, announcements of technological innovations by the Company or its competitors or the introduction of new software products by the Company or its competitors, and macroeconomic conditions in the computer hardware and software industries generally, may have a significant impact on the market price of the stock of the Company. If revenue or earnings in any quarter fail to meet the expectations (published or otherwise) of the investment community, there could be an immediate impact on the Company's stock price. In addition, as described in the Possible Adverse Effects of Outstanding Warrants and Options section below, the Company has issued shares, stock options and warrants which, if sold directly or exercised and sold on the open market in large numbers, could cause the Company's stock price to decline in the short term. The Company can provide no assurance as to when and if such a short term stock price decline may recover. Furthermore, the stock market has from time to time experienced extreme price and volume fluctuations that have particularly affected the market price for many high technology companies and which, on occasion, have been unrelated to the operating performance of those companies. Any such broad market fluctuations may materially adversely affect the market price of the Company's stock POSSIBLE ADVERSE EFFECTS OF OUTSTANDING WARRANTS AND OPTIONS The Company has outstanding warrants to purchase 6,400,000 shares of its common stock, which have exercise prices below the current market price of the common stock. The exercise of these warrants and resale of the underlying shares could adversely affect the market price of the Company's common stock. At September 30, 1998 the Company had 12,649,078 outstanding exercisable options to purchase common stock issued pursuant to employee stock plans which could have exercise prices below the current market price of the common stock. The exercise of such stock options and sale of a significant number of the underlying shares could adversely affect the market price of the Company's common stock. INVESTMENTS AND LIQUIDITY 28 29 The Company's short term and long term investments consist primarily of high quality municipal bonds, U.S. government securities, corporate debt securities and tax-advantaged money market funds. Despite favorable credit ratings on these investments, there can be no assurance the issuers will not default on their obligations, and any such default may result in the loss of principal and accrued interest by the Company. While operating activities may provide cash in certain periods, to the extent the Company experiences growth in the future, operating and investing activities may use cash, and, consequently, such growth may require the Company to obtain additional sources of financing. In addition, material acquisitions of complementary businesses, products or technologies and capital expenditures may require additional sources of financing. There can be no assurance that the Company would be able to obtain additional sources of financing or additional financing at terms favorable to the Company. MOMENTUM BUSINESS APPLICATIONS, INC. The Company expects to distribute up to $300.0 million to Momentum in the fourth quarter in order to fund certain new product development efforts by Momentum. Shares of Momentum will be distributed to the Company's stockholders as a taxable stock dividend. There is no assurance that Momentum's product development efforts will be successful in creating marketable products or technologies or that the Company will realize any return on its distribution or that the Company will recover any of the funds distributed to Momentum. 29 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to various legal disputes and proceedings arising from the ordinary course of general business activities. In the opinion of management, resolution of these matters is not expected to have a material adverse effect on the financial position, results of operations and cash flows of the Company. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect the Company's future results of operations or cash flows in a particular period. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.35 Agreement of Purchase and Sale dated July 22, 1998 between the Registrant and William Willson & Associates 10.36 Lease dated September 14, 1998 between the Registrant and Hacienda Plaza Associates, LLC 10.37 Agreement and Plan of Merger dated September 30, 1998 between the Registrant and Intrepid Systems, Inc. 27.1 Financial Data Schedule - Nine months ended September 30, 1998 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 1998. 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 14, 1998 PEOPLESOFT, INC. By: /s/ ALFRED J. CASTINO --------------------------------------------- Alfred J. Castino Senior Vice President of Finance and Administration, Chief Accounting Officer and Corporate Controller (Principal Accounting Officer) 31 32 PEOPLESOFT, INC. INDEX OF EXHIBITS EXHIBIT # EXHIBIT TITLE --------- ------------- 10.35 Agreement of Purchase and Sale dated July 22, 1998 between the Registrant and William Willson & Associates 10.36 Lease dated September 14, 1998 between the Registrant and Hacienda Plaza Associates, LLC 10.37 Agreement and Plan of Merger dated September 30, 1998 between the Registrant and Intrepid Systems, Inc. 27.1 Financial Data Schedule - September 30, 1998 32 EX-10.35 2 AGREEMENT OF PURCHASE 1 AGREEMENT OF PURCHASE AND SALE This Agreement, dated as of July 22, 1998, is between PeopleSoft Properties, Inc., a California corporation ("Seller"), and William Wilson & Associates Investors, Inc., a California corporation ("Buyer"). ARTICLE I PURCHASE AND SALE OF PROPERTY Section 1.1 Sale. Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, subject to the terms, covenants and conditions set forth herein, that certain real property commonly known as 4301, 4305 and 4309 Hacienda Drive, Pleasanton, California, which real property is more particularly described in Exhibit A attached hereto and made a part hereof (the "Land"), together with the following, which together with the Land shall be termed the "Property" herein: a. a three (3) tower office building, and all fixtures, parking areas, landscaping and other improvements located upon the Land (the "Improvements"); b. the machinery, equipment, furnishings and other tangible personal property owned by Seller and used in connection with the maintenance or operation of the Land or Improvements (the "Personal Property"), listed on Exhibit B attached hereto; c. all easements, rights of way, privileges, licenses, appurtenances and other rights and benefits of Seller belonging to or in any way related to the Land to the extent owned and/or transferable by Seller, specifically excluding, however, Excess FAR (as hereinafter defined) (which, together with the Land and Improvements, are referred to collectively herein as the "Real Property"); d. all transferable or assignable certificate(s) of occupancy, building or equipment permits, consents, authorizations, variances, waivers, licenses, permits, certificates and approvals from any governmental or quasi-governmental authority with respect to the Land or the Improvements to the extent in Seller's possession or control (collectively the "Approvals"); and e. all architectural, mechanical, engineering, as-built and other plans, specifications and drawings in Seller's possession or control (the "Plans"), all surveys and all soil, environmental, engineering, or other reports or studies in Seller's possession or control (the "Reports"), all trademarks, service marks, logos and other marks, trade or business names and other intangible property used in connection with the operations of the Property (the "Trademarks") to the extent owned by and/or transferable by Seller, specifically excluding, however, any and all Trademarks referring to or relating to the Seller, and all transferable or assignable warranties, representations, guaranties, and miscellaneous rights (the "Warranties") to the extent owned by or in the possession of Seller relating to the ownership, development, use and operation of the Land and Improvements. 2 Notwithstanding the foregoing the parties acknowledge that Seller, or its affiliates, presently occupy, and will continue to occupy after the Closing hereunder, all or a substantial portion of the Real Property and that in connection with such occupancy Seller has on the Real Property substantial personal property that is not included in the transaction described herein. The only personal property included in this sale is the Personal Property listed on Exhibit B. Section 1.2 Purchase Price. (a) The purchase price of the Property is Fifty Million Three Hundred Forty Five Thousand Dollars ($50,345,000) (the "Purchase Price"). (b) The Purchase Price shall be paid as follows: (1) Within three (3) business days after the mutual execution of this Agreement, Buyer shall deposit in escrow with Chicago Title Insurance Company, located in Pleasanton, California ("Title Company") a deposit in the amount of Two Million Five Hundred Thousand Dollars ($2,500,000) (the "Deposit"). (2) THE DEPOSIT SHALL BE HELD IN AN INTEREST BEARING ACCOUNT AND ALL INTEREST THEREON SHALL BE DEEMED A PART OF THE DEPOSIT. IF THE SALE OF THE PROPERTY AS CONTEMPLATED HEREUNDER IS CONSUMMATED, THEN THE DEPOSIT SHALL BE PAID TO SELLER AT THE CLOSING AND CREDITED AGAINST THE PURCHASE PRICE. IF THE SALE OF THE PROPERTY IS NOT CONSUMMATED DUE TO SELLER'S DEFAULT HEREUNDER, THEN, AS BUYER'S SOLE REMEDIES, BUYER MAY EITHER: (1) TERMINATE THIS AGREEMENT AND RECEIVE A REFUND OF THE DEPOSIT, IN WHICH EVENT NEITHER PARTY SHALL HAVE ANY FURTHER RIGHTS OR OBLIGATIONS HEREUNDER EXCEPT AS PROVIDED IN SECTIONS 6.1, 9.3 AND 9.9 BELOW, OR (2) BUYER MAY ENFORCE SPECIFIC PERFORMANCE OF THIS AGREEMENT. IF THIS TRANSACTION FAILS TO CLOSE FOR ANY REASON OTHER THAN BUYER'S DEFAULT HEREUNDER, THE DEPOSIT SHALL BE RETURNED TO BUYER. IF BUYER FAILS TO CONSUMMATE THIS TRANSACTION ON THE SCHEDULED CLOSING DATE ON ACCOUNT OF BUYER'S SOLE DEFAULT, SELLER SHALL BE ENTITLED TO THE DEPOSIT AS LIQUIDATED DAMAGES. THE PARTIES HAVE AGREED THAT SELLER'S ACTUAL DAMAGES, IN THE EVENT OF A FAILURE TO CONSUMMATE THIS SALE DUE TO BUYER'S DEFAULT, WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE. AFTER NEGOTIATION, THE PARTIES HAVE AGREED THAT, CONSIDERING ALL THE CIRCUMSTANCES EXISTING ON THE DATE OF THIS AGREEMENT, THE AMOUNT OF THE DEPOSIT IS A REASONABLE ESTIMATE OF THE DAMAGES THAT SELLER WOULD INCUR IN SUCH EVENT. BY PLACING THEIR INITIALS BELOW, EACH PARTY SPECIFICALLY CONFIRMS THE ACCURACY OF THE STATEMENTS MADE ABOVE AND THE FACT THAT EACH PARTY WAS REPRESENTED BY COUNSEL WHO EXPLAINED, AT THE TIME THIS AGREEMENT WAS MADE, THE CONSEQUENCES OF THIS LIQUIDATED DAMAGES PROVISION. THE FOREGOING IS NOT INTENDED TO LIMIT BUYER'S OBLIGATIONS UNDER SECTIONS 6.1, 9.3 AND 9.9. INITIALS: SELLER ________ BUYER _______ 2 3 (3) The balance of the Purchase Price, shall be paid to Seller in cash, or readily available funds, at the consummation of the purchase and sale contemplated hereunder (the "Closing"). ARTICLE II Intentionally Deleted ARTICLE III BUYER'S EXAMINATION Section 3.1 Representations and Warranties of Seller. Subject to the provisions of Sections 3.2 and 3.3 below, Seller hereby makes the following representations and warranties with respect to the Property, provided that Seller makes no representations or warranties with respect to the matters (the "Disclosure Items") as set forth on Schedule 1 attached hereto and made a part hereof. Notwithstanding anything to the contrary contained herein or in any document delivered in connection herewith, Seller shall have no liability with respect to the Disclosure Items. (a) To the best of Seller's knowledge, except as set forth in Schedule 1 or as may be specifically and expressly disclosed in the contracts, agreement, leases, documents reports and other materials delivered or made available to Buyer (the "Due Diligence Materials"), Seller has received no written notice from any governmental authority that the present use, condition and operation of the Property is in violation of any applicable law (including, without limitation, (i) the Americans with Disabilities Act ("ADA"), Title 24 of the California Administrative Code, and other similar federal, state and local laws , (ii) building codes and any other laws relating to the construction or design of the improvements on the Property, including, without limitation, fire, safety, handicapped access, or seismic design (collectively, "Building Codes"), and (iii) any laws relating to environmental matters (the "Environmental Laws")). (b) Seller has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by Seller's creditors, (iii) suffered the appointment of a receiver to take possession of all, or substantially all, of Seller's assets, (iv) suffered the attachment or other judicial seizure of all, or substantially all, of Seller's assets, (v) admitted in writing its inability to pay its debts as they come due, or (vi) made an offer of settlement, extension or composition to its creditors generally. (c) Seller is not a "foreign person" as defined in Section 1445 of the Internal Revenue Code of 1986, as amended (the "Code") and any related regulations. 3 4 (d) Seller is a California corporation duly organized, validly existing and in good standing under the laws of the State of California; this Agreement and all documents executed by Seller which are to be delivered to Buyer at the Closing are, or at the time of Closing will be, duly authorized, executed, and delivered by Seller, and are, or at the Closing will be, legal, valid, and binding obligations of Seller, and do not, and at the time of Closing will not, violate any provision of any agreement to which Seller is a party or to which it is subject or any law, judgment or order applicable to Seller. Seller has the power and authority to enter into this Agreement and to perform its obligations hereunder. (e) Seller has received no written notice from any governmental authority of any condemnation, environmental, zoning, sewer moratorium, or other land-use regulation proceedings, either instituted or planned to be instituted, which would affect the use and operation of the Property, nor has Seller received written notice of any special assessment proceedings affecting the Property. (f) The copies of the leases and contracts delivered or made available to Buyer by Seller are true and accurate copies of such items. (g) The rent roll ("Rent Roll") attached to this Agreement as Exhibit F is a true and accurate statement of the information contained therein regarding the leases in force for, or otherwise affecting, the Property as of the date of this Agreement, which information, to the best of Seller's knowledge, includes the names of all tenants at the Property, the dates of all leases and amendments thereto, the commencement and expiration dates of all leases, the square footage covered by each lease, all security deposits paid by tenants (noting any amounts applied by landlord to the tenants' obligations), the annual rent per square foot payable by each tenant, the amounts of brokerage commissions remaining due from the landlord under each lease, the amount of any tenant improvement payment or other monetary obligation due from landlord under each lease, and the expansion, extension, right of first refusal or other similar rights given to tenants under each lease. All tenants or other persons possessing contractual rights to occupy or persons actually in possession or occupying a portion of the Property as of the date of this Agreement are set forth on the Rent Roll or are permitted assignees or subtenants under the leases. (h) Seller has not been served in connection with any litigation, and to the best of Seller's knowledge, there is no litigation or proceeding pending or threatened, involving Seller or the Property which would materially and adversely affect the Property or Seller's ability to consummate the transactions contemplated by this Agreement, including claims of encroachment or prescriptive easement effecting the Property. Each of the representations and warranties of Seller contained in this Section 3.1: (1) is true as of the date of this Agreement; (2) shall be deemed remade by Seller, and shall be true in all material respects as of the date of Closing, subject to (A) any Exception Matters (as defined below), (B) the Disclosure Items; and (C) other matters expressly permitted in this Agreement or otherwise specifically approved in writing by Buyer, including, but not limited to, the Due Diligence Materials; and (3) shall survive the close of escrow as provided in Section 3.3 below. All exceptions and qualifications to the foregoing representations and warranties, as of the date of 4 5 this Agreement, shall be specifically described on Schedule 1 attached to and made a part of this Agreement. Section 3.2 No Liability for Exception Matters. As used herein, the term "Exception Matter" shall refer to a matter disclosed to Buyer in writing or identified by Buyer before the Closing, that would make a representation or warranty of Seller contained in this Agreement untrue or incorrect or that would constitute a material adverse change in the Property or its future use or operation, including, without limitation, matters specifically and expressly disclosed in writing to Buyer by Seller or by any other person. If, prior to the Closing, Seller becomes aware of any Exception Matter, then Seller shall promptly, and in all events at least five (5) days prior to the Closing Date (which date shall be extended if and as necessary to give Buyer five (5) days to review such material change), give written notice of such changed fact or circumstance to Buyer. If, prior to the Closing, Buyer becomes aware of any Exception Matter, then Buyer shall promptly, and in all events at least five (5) days prior to the Closing Date (which date shall be extended if and as necessary to give Buyer five (5) days to review such material change), give written notice of such changed fact or circumstance to Seller. Seller shall have the right, but not the obligation, to cure such Exception Matter within thirty (30) days after Seller becomes aware of the Exception Matter and Seller shall provide Buyer with written notice of its election. If Seller cures such Exception Matter as provided herein, Buyer shall proceed with the acquisition of the Property and the Closing Date shall be extended for such thirty (30) day period. If Buyer receives notice of, or identifies, any Exception Matter after the date hereof, and Seller elects as set forth in the notice to Buyer not to cure such Exception Matter, Buyer shall have the option of: (i) waiving such Exception Matter and completing its purchase of the Property pursuant to this Agreement, and Seller shall have no liability with respect to such Exception Matter, notwithstanding any contrary provision, covenant, representation or warranty contained in this Agreement, or (ii) terminating this Agreement and receiving the return of the Deposit as Buyer's sole remedy prior to Closing. Upon any such termination of this Agreement, neither party shall have any further rights or obligations hereunder, except as provided in Sections 6.1, 9.3 and 9.9 below. Section 3.3 Survival of Representations and Warranties. The representations and warranties of Seller and Buyer contained herein shall survive for a period of one (1) year after the Closing. Any claim which Buyer or Seller may have at any time against the other for a breach of any such representation or warranty, whether known or unknown, which is not asserted by written notice to Seller or Buyer within such one (1) year period shall not be valid or effective, and the party shall have no liability with respect thereto. Section 3.4 Seller's Knowledge. For purposes of this Agreement and any document delivered at Closing, whenever the phrase "to the best of Seller's knowledge" or the "knowledge" of Seller or words of similar import are used, they shall be deemed to refer to the current actual knowledge of Bob Finnell, Deborah Oxendine and Brian Griggs, who are Seller's employees or representatives who are most knowledgeable about the Property, at the times indicated only and not any implied, imputed or constructive 5 6 knowledge, after making such reasonable investigations as Seller deems necessary in order to make the representations and warranties above on a reasonably informed basis. Section 3.5 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: (a) Buyer represents and warrants to Seller that this Agreement and all documents executed by Buyer which are to be delivered to Seller at Closing do not and at the time of Closing will not violate any provision of any agreement or judicial order to which Buyer is a party or to which Buyer is subject. (b) Buyer represents and warrants to Seller that Buyer has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by Buyer's creditors, (iii) suffered the appointment of a receiver to take possession of all, or substantially all, of Buyer's assets, (iv) suffered the attachment or other judicial seizure of all, or substantially all, of Buyer's assets, (v) admitted in writing its inability to pay its debts as they come due, or (vi) made an offer of settlement, extension or composition to its creditors generally. (c) Buyer is duly formed, validly existing and in good standing under the laws of the state in which it was formed. Buyer has duly authorized, executed and delivered this Agreement. Each of the representations and warranties of Buyer contained in this Section shall be deemed remade by Buyer as of the Closing and shall survive the Closing as provided in Section 3.3 above. Section 3.6 Buyer's Independent Investigation. (a) Buyer acknowledges and agrees that it has been given a full opportunity to inspect and investigate each and every aspect of the Property, including without limitation the items listed on Exhibit E, either independently or through agents of Buyer's choosing, including, without limitation: (1) All matters relating to title and survey, together with all governmental and other legal requirements such as taxes, assessments, zoning, use permit requirements and building codes. (2) The physical condition and aspects of the Property, including, without limitation, the interior, the exterior, the square footage within the improvements on the Real Property and within each tenant space therein, the structure, seismic aspects of the Property, the paving, the utilities, and all other physical and functional aspects of the Property. Such examination of the physical condition of the Property shall include an examination for the presence or absence of Hazardous Materials, as defined below, which shall be performed or arranged by Buyer at Buyer's sole expense. For purposes of this Agreement, "Hazardous 6 7 Materials" shall mean inflammable explosives, radioactive materials, asbestos, polychlorinated biphenyls, lead, lead-based paint, under and/or above ground tanks, hazardous materials, hazardous wastes, hazardous substances, oil, or related materials, which are listed or regulated in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 6901, et seq.), the Resources Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901, et seq.), the Clean Water Act (33 U.S.C. Section 1251, et seq.), the Safe Drinking Water Act (14 U.S.C. Section 1401, et seq.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the and Toxic Substance Control Act (15 U.S.C. Section 2601, et seq.), the California Hazardous Waste Control Law (California Health and Safety Code Section 25100, et seq.), the Porter-Cologne Water Quality Control Act (California Water Code Section 13000, et seq.), and the Safe Drinking Water and Toxic Enforcement Act of 1986 (California Health and Safety Code Section 25249.5, et seq.) and any other applicable federal, state or local laws. (3) Any easements and/or access rights affecting the Property. (4) The leases and all matters in connection therewith, including, without limitation, the ability of the tenants to pay the rent and the economic viability of the tenants. (5) The service contracts and any other documents or agreements of significance affecting the Property. (6) All other matters of material significance affecting the Property. (b) BUYER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT SELLER IS SELLING AND BUYER IS PURCHASING THE PROPERTY ON AN "AS IS WITH ALL FAULTS" BASIS AND THAT BUYER IS NOT RELYING ON ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, FROM SELLER, ITS AGENTS, OR BROKERS AS TO ANY MATTERS CONCERNING THE PROPERTY EXCEPT AS EXPRESSLY SET FORTH IN SECTION 3.1 ABOVE, INCLUDING WITHOUT LIMITATION: (i) the quality, nature, adequacy and physical condition and aspects of the Property, including, but not limited to, the structural elements, seismic aspects of the Property, foundation, roof, appurtenances, access, landscaping, parking facilities and the electrical, mechanical, HVAC, plumbing, sewage, and utility systems, facilities and appliances, the square footage within the improvements on the Real Property and within each tenant space therein, (ii) the quality, nature, adequacy, and physical condition of soils, geology and any groundwater, (iii) the existence, quality, nature, adequacy and physical condition of utilities serving the Property, (iv) the development potential of the Property, and the Property's use, habitability, merchantability, or fitness, suitability, value or adequacy of the Property for any particular purpose, (v) the zoning or other legal status of the Property or any other public or private restrictions on use of the Property, (vi) the compliance of the Property or its operation with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions and restrictions of any governmental or quasi-governmental entity or of any other person or entity, (vii) the presence of Hazardous Materials on, under or about the Property or the 7 8 adjoining or neighboring property, (viii) the quality of any labor and materials used in any improvements on the Real Property, (ix) the condition of title to the Property, (x) the leases, service contracts, or other agreements affecting the Property and (xi) the economics of the operation of the Property. Section 3.7 Release. (a) Without limiting the above, and subject to the representations and warranties of Seller contained in Section 3.1 hereof, Buyer on behalf of itself and its successors and assigns waives its right to recover from, and forever releases and discharges, Seller, Seller's affiliates, Seller's investment manager, Griggs Resource Group, the partners, trustees, beneficiaries, shareholders, members, directors, officers, employees and agents of each of them, and their respective heirs, successors, personal representatives and assigns (collectively, the "Seller Related Parties"), from any and all demands, claims, legal or administrative proceedings, losses, liabilities, damages, penalties, fines, liens, judgments, costs or expenses whatsoever (including, without limitation, attorneys' fees and costs), whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with (i) the physical condition of the Property including, without limitation, all structural and seismic elements, all mechanical, electrical, plumbing, sewage, heating, ventilating, air conditioning and other systems, the environmental condition of the Property and Hazardous Materials on, under or about the Property, or (ii) any law or regulation applicable to the Property, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 6901, et seq.), the Resources Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901, et seq.), the Clean Water Act (33 U.S.C. Section 1251, et seq.), the Safe Drinking Water Act (14 U.S.C. Section 1401, et seq.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the and Toxic Substance Control Act (15 U.S.C. Section 2601, et seq.), the California Hazardous Waste Control Law (California Health and Safety Code Section 25100, et seq.), the Porter-Cologne Water Quality Control Act (California Water Code Section 13000, et seq.), and the Safe Drinking Water and Toxic Enforcement Act of 1986 (California Health and Safety Code Section 25249.5, et seq.) and any other federal, state or local law. The release provided for in this Section 3.7(a) shall not apply to any liability resulting from Hazardous Materials brought on to or released from, on, at or about the Property during the period of Seller's ownership thereof. (b) In connection with section 3.7(a) above, Buyer expressly waives the benefits of Section 1542 of the California Civil Code, which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR EXPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN TO HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR." Section 3.8 Indemnification. Each party hereby agrees to indemnify, defend, protect and hold harmless the other party from and against any and all claims, demands, liabilities, costs and damages, including, without 8 9 limitation, reasonable attorneys' fees (collectively, "Claims"), resulting from any misrepresentations or breach of warranty or covenant made by such party in this Agreement or in any document, certificate, or exhibit given or delivered to the other party pursuant to or in connection with this Agreement. Each party further agrees to indemnify, defend, protect and hold harmless the other party from and against any Claims suffered by the other party and resulting from or arising out of all third party tort claims of the type that would typically be insured under a Commercial General Liability Insurance Policy which are based on actions, facts or circumstances existing or occurring during the indemnifying party's ownership of the Property, excluding any Claims related to Hazardous Materials. Section 3.9 Survival. The provisions of this Article III shall survive the Closing subject to the limitations and qualifications contained in such provisions. ARTICLE IV TITLE Section 4.1 Conditions of Title. At the Closing, Seller shall convey title to the Property to Buyer by grant deed (the "Deed") subject to no exceptions other than: (a) Interests of tenants in possession; (b) The PeopleSoft Lease; (c) Non-delinquent liens for real estate taxes and assessments; and (d) The exceptions disclosed in the proforma title policy attached hereto as Exhibit D, the public records or the Due Diligence Materials. All of the foregoing exceptions shall be referred to collectively as the "Conditions of Title." Notwithstanding the foregoing, the term "Conditions of Title" shall not include (x) any monetary liens, including, without limitation, the liens of any deeds of trust or other loan documents secured by the Property, or (y) any mechanics' liens. By acceptance of the Deed and the Closing of the purchase and sale of the Property, (i) Buyer agrees it is assuming for the benefit of Seller all of the obligations of Seller with respect to the Conditions of Title from and after the Closing, and (ii) Buyer agrees that Seller shall have conclusively satisfied its obligations with respect to title to the Property. The provisions of this Section shall survive the Closing. Section 4.2 Evidence of Title. Delivery of title in accordance with the foregoing shall be evidenced by the willingness of the Title Company to issue, at Closing, a title policy in the form of the proforma title policy attached 9 10 as Exhibit D (the "Title Policy"). Buyer shall have prepared, at Buyer's cost, the ALTA Survey of the Property necessary to support the issuance of the Title Policy. ARTICLE V RISK OF LOSS AND INSURANCE PROCEEDS Section 5.1 Insurance Seller represents to Buyer that the Improvements are presently insured by a fire and extended coverage policy of insurance in an amount equal to 100% of the replacement cost of the Improvements. Seller agrees to maintain the policy in effect through the Closing Date, and upon Buyer's request, to provide Buyer evidence of such insurance. Seller shall promptly (and in any event prior to Closing) notify Buyer of any damage or destruction of the Improvements and Seller's estimate of the cost of repair. Section 5.2 Minor Loss. Buyer shall be bound to purchase the Property for the full Purchase Price as required by the terms hereof, without regard to the occurrence or effect of any damage to the Property or destruction of any improvements thereon, provided that: (a) the cost to repair any such damage or destruction does not exceed One Million Dollars ($1,000,000) or no tenant is entitled to terminate its lease as a result of such occurrence and (b) upon the Closing, Buyer may elect to either (i) receive a credit against the Purchase Price due hereunder equal to the amount of any insurance proceeds collected by Seller as a result of any such damage or destruction, plus the amount of any insurance deductible or (ii) receive no credit and require Seller to repair the Property and return the Property to a condition substantially similar to the condition immediately prior to such damage or destruction which may be completed after Closing. If the proceeds have not been collected as of the Closing, then such proceeds shall be assigned to Buyer. Section 5.3 Major Loss. If the amount of the damage or destruction as specified above (i) exceeds One Million Dollars ($1,000,000) or (ii) is less than One Million Dollars ($1,000,000) and a tenant is entitled to terminate its lease as a result of such occurrence, then Buyer may, at its option to be exercised within five (5) business days of Seller's notice of the occurrence of the damage or destruction, either terminate this Agreement or consummate the purchase for the full Purchase Price as required by the terms hereof. If Buyer elects to terminate this Agreement or fails to give Seller notice within such 5-day period that Buyer will proceed with the purchase, then the Deposit shall be returned to Buyer and neither party shall have any further rights or obligations hereunder except as provided in Sections 6.1, 9.3 and 9.9 below. If Buyer elects to proceed with the purchase, then upon the Closing, there shall be a credit against the Purchase Price due hereunder equal to the amount of any insurance proceeds collected by Seller as a result of any such damage or destruction, plus the amount of any insurance deductible. If the proceeds have not been collected as of the Closing, then such proceeds shall be assigned to Buyer. 10 11 Section 5.4 Condemnation If, prior to the Closing, all of the Land and Improvements are taken by eminent domain, this Agreement shall be deemed terminated. If only part of the Land or Improvements are so taken, Buyer shall have the option of (a) proceeding with the Closing and acquiring the Property as affected by such taking, together with all compensation and damage awarded or the right to receive same, or (b) terminating this Agreement, in which event the Deposit shall be returned to Buyer and Seller shall retain the rights to such proceeds or awards. If Buyer elects option (a) above, Seller agrees to assign to Buyer at the Closing its rights to such compensation and damages, and will not settle any proceedings relating to such taking without Buyer's prior written consent which shall not be unreasonably withheld, conditioned or delayed. Notwithstanding anything to the contrary contained herein, in the event of an immaterial taking by eminent domain, such as a widening of a street or similar matter which has no material effect on the value or use of the Property, Buyer shall proceed with the purchase of the Property and shall have no right to exercise any of the remedies set forth in this Section 5.4. Seller shall promptly (and in any event prior to the Closing) notify Buyer of any actual or threatened condemnation affecting the Property. ARTICLE VI BROKERS AND EXPENSES Section 6.1 Brokers. The parties represent and warrant to each other that no broker or finder was instrumental in arranging or bringing about this transaction except for Griggs Resource Group ("Seller's Broker"). At Closing, Seller shall pay the commission due, if any, to Seller's Broker, which shall be paid pursuant to a separate agreement between Seller and Seller's Broker. If any other person brings a claim for a commission or finder's fee based upon any contact, dealings or communication with Buyer or Seller, then the party through whom such person makes his claim shall defend the other party (the "Indemnified Party") from such claim, and shall indemnify the Indemnified Party and hold the Indemnified Party harmless from any and all costs, damages, claims, liabilities or expenses (including without limitation, reasonable attorneys' fees and disbursements) incurred by the Indemnified Party in defending against the claim. The provisions of this Section 6.1 shall survive the Closing or, if the purchase and sale is not consummated, any termination of this Agreement. Section 6.2 Expenses. Except as provided in Section 8.8 below, each party hereto shall pay its own expenses incurred in connection with this Agreement and the transactions contemplated hereby. ARTICLE VII LEASES, OTHER AGREEMENTS AND OPERATION OF THE PROPERTY Section 7.1 Buyer's Approval of New Leases and Agreements Affecting the Property. 11 12 Between the date hereof and the Closing, Seller shall not enter into any new lease or other agreement affecting the Property, or modify or terminate any existing lease or other agreement affecting the Property, without first obtaining Buyer's approval, which will not be unreasonably withheld or delayed. Buyer shall be entitled to take into account the proposed leasing commissions, free rent, tenant improvement allowances of other monetary inducements in determining whether or not to approve or withhold its approval of a new lease or the modification of an existing lease pursuant to this Section 7.1. If Buyer fails to give Seller notice of its approval or disapproval of any such proposed action within five (5) business days after Seller notifies Buyer of Seller's desire to take such action, then Buyer shall be deemed to have given its approval. Upon the written request of Buyer, Seller shall terminate prior to Closing, at no cost and expense to Buyer, service contracts affecting the Property that are terminable on not more than thirty (30) days prior notice. Section 7.2 Tenant Improvement Costs, Leasing Commissions and Free Rent. With respect to any new lease or lease modification entered into by Seller between the date of this Agreement and the Closing Date, and with respect to any renewal or extension of any lease occurring between the date of this Agreement and the Closing Date, if Seller performs or pays or contracts for any tenant improvement work or pays or contracts for any leasing commissions before the Closing or grants any free rent period, then at Closing, Buyer shall reimburse Seller for all such expenses and shall assume pursuant to an assignment and assumption agreement acceptable to Seller any and all obligations outstanding with respect to tenant improvements and leasing commissions; provided, however, that in the case of lease modifications, renewals or extensions, Buyer shall have no obligations and Seller shall be responsible for brokerage commissions, tenant improvement costs and free rent, to the extent such costs would of have been due or incurred in the absence of such lease modification, renewal or extension. All such tenant improvement costs, brokerage fees, and free rent (collectively "New Lease Expenses") shall be prorated between Seller and Buyer as of the Closing based on the portion of the lease term, if any, occurring before 12:01 a.m. on the date the Deed is recorded, and the portion of the lease term occurring on and after such date and time. On and after the Closing, Seller shall have no future obligations with respect to any leases or other agreements affecting the Property, including, without limitation, tenant improvement work, leasing commissions and free rent. The provisions of this Section shall survive the Closing. Section 7.3 Tenant Notices. At the Closing, Seller shall furnish Buyer with a signed notice to be given to each tenant of the Property. The notice shall disclose that the Property has been sold to Buyer, that, after the Closing, all rents should be paid to Buyer and that Buyer shall be responsible for all the tenant's security deposit. The form of the notice shall be otherwise reasonably acceptable to the parties. Section 7.4 Operation of the Property. Between Seller's execution of this Agreement and the Closing, or earlier termination of this Agreement as permitted hereunder, Seller shall (i) maintain the Property in the same condition and repair as previously maintained, reasonable wear and tear excepted; provided, however, Seller shall 12 13 have no obligation to make capital expenditures unless requested by Buyer and at Buyer's sole cost and expense; (ii) not make any material physical changes to the Improvements except if an emergency; (iii) continue to manage the Property in the manner in which it is currently being managed; (iv) not enter into any contracts or agreements affecting the Property unless such contracts can be completed or terminated prior to the Closing or Buyer, in its sole discretion, agrees to assume such contract or agreement as of the Closing Date, in which case such contracts shall be included within the term "Service Contracts"; (v) not enter into any lease, amendment of lease or other agreement pertaining to the Property, or permit any tenant of the Property to enter into any sublease or assignment of lease, except as provided in Section 7.1; and (vi) after the date hereof, not offer the Property for sale publicly or otherwise solicit, make, pursue, negotiate or accept offers for the sale of the Property to or from any party. From and after the date hereof and up to the Closing, Seller hereby agrees to perform such work, make such improvements or repairs as reasonably requested by Buyer, at Buyer's sole cost and expense. Section 7.5 Ford Motor Credit Company Lease. In the event Ford Motor Credit Company ("Ford") elects to vacate the space it occupies at the Property during the period from the date of execution of this Agreement and the Closing, in accordance with the terms of that certain Lease dated December 1, 1998, as amended by the First Amendment to Lease dated March 2, 1990, Second Amendment to Lease dated February 11, 1994 and Third Amendment to Lease dated as of May, 1998 (collectively, the "Ford Lease"), the Purchase Price shall be reduced by the amount which is required to be paid to Ford pursuant to Section 3 of the Ford Lease (the "Relocation Cost") and such Relocation Cost shall be paid by Buyer to Ford. In the event Ford vacates its space during the period after the Closing and prior to February 17, 1999, Seller will pay the Relocation Cost to Buyer within ten (10) days after receipt of written request from Buyer and Buyer will pay such sum to Ford. The obligations set forth in this Section 7.5 shall survive the Closing. Section 7.6 Cellular One Lease. Buyer hereby acknowledges and agrees that at any time during the period after execution of this Agreement up to the Closing, Seller shall, at the request of PeopleSoft, Inc., enter into a lease with Cellular One, for space on the roof of the office building for an initial term of five (5) years with an option to extend the term for an additional five (5) years, and monthly rent equal to Two Thousand Dollars ($2000) and upon other terms and conditions as reasonably approved by Buyer. If such lease has not been entered into by Seller prior to the Closing, Buyer shall, at the request of PeopleSoft, Inc., enter into such lease on such terms. ARTICLE VIII CLOSING AND ESCROW Section 8.1 Escrow Instructions. Upon execution of this Agreement, the parties hereto shall deposit an executed counterpart of this Agreement with the Title Company, and this instrument shall serve as the instructions to the 13 14 Title Company as the escrow holder for consummation of the purchase and sale contemplated hereby. Seller and Buyer agree to execute such reasonable additional and supplementary escrow instructions as may be appropriate to enable the Title Company to comply with the terms of this Agreement; provided, however, that in the event of any conflict between the provisions of this Agreement and any supplementary escrow instructions, the terms of this Agreement shall control. Section 8.2 Buyer's Closing Conditions. Buyer's obligation to purchase the Property is conditioned upon the satisfaction of each of the following conditions each of which is for the exclusive benefit of Buyer. Buyer may, at any time or times before the Closing, waive one or more of the following conditions, without affecting its rights and remedies with respect to the remaining conditions: (a) The performance by Seller of all its obligations hereunder, and the truth, completeness and accuracy of each representation and warranty made by Seller as of the date of this Agreement and the Closing. (b) Buyer's election to accept the Property pursuant to Section 2.2. (c) The issuance at Closing of the Title Policy. (d) No lease that Buyer believed to be in effect as of the date hereof shall have terminated, nor shall any tenant occupying more than 10,000 square feet under any such lease have vacated its premises after the date hereof or be more than sixty (60) days in default of paying any rent due thereunder as of the Closing; provided, however, Seller may elect to remedy any tenant default upon ten (10) days written notice from Buyer that the condition set forth in this Section 8.2(e) has not been satisfied (and the Closing Date shall be extended if and as necessary to permit Seller such ten (10) day cure period) or add the defaulting tenant's premises to the Premises (as defined in the PeopleSoft Lease). Section 8.3 Seller's Conditions to Closing. Seller's obligation to sell the Property is conditioned upon (a) the performance by Buyer of all its obligations hereunder, (b) the truth, completeness and accuracy of each representation and warranty made by Buyer as of the Contract Date and the Closing and (c) neither party terminating this Agreement as provided herein. Section 8.4 Closing. The Closing hereunder shall be held and delivery of all items to be made at the Closing under the terms of this Agreement shall be made at the offices of the Title Company upon not less than twenty (20) days written notice to Buyer from Seller (the "Closing Date"); provided that the Closing Date shall not occur sooner than thirty (30) days after the date hereof. If the Closing 14 15 Date has not occurred before October 31, 1998, the notice period shall be extended from twenty (20) days to thirty (30) days. In no case shall the Closing Date occur later than March 31, 1999. Section 8.5 Deposit of Documents. (a) At or before the Closing, Seller shall deposit into escrow the following items: (1) the duly executed and acknowledged Deed conveying the Real Property to Buyer subject only to the Conditions of Title; (2) four (4) duly executed counterparts of the Bill of Sale in the form attached hereto as Exhibit G (the "Bill of Sale"); (3) four (4) duly executed counterparts of an Assignment and Assumption of Leases, Service Contracts and Warranties in the form attached hereto as Exhibit H pursuant to the terms of which Buyer shall assume all of Seller's obligations under the leases identified on the rent roll, new leases approved by Buyer pursuant to Section 7.1 and the Service Contracts (the "Assignment of Leases"); (4) four (4) duly executed counterparts of the lease between PeopleSoft, Inc., an affiliate of Seller, as tenant and Buyer, as landlord attached hereto as Exhibit C; (5) an affidavit pursuant to Section 1445(b)(2) of the Code, and on which Buyer is entitled to rely, that Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code; (6) California 590 Certificate; (7) tenant notice letters for all tenants at the Property informing them of the sale of the Property and assignment of the Leases to Buyer in the form of attached Exhibit I; (8) instructions to Title Company to deduct Seller's share of the closing costs as described in Section 8.8 from the Purchase Price; and (12) instructions to Title Company to deduct cash equal to the amount of all refundable tenant security deposits required under the Leases from the Purchase Price. (b) At or before Closing, Buyer shall deposit into escrow the following items: (1) funds necessary to close this transaction; (2) four (4) duly executed counterparts of the Bill of Sale; (3) four (4) duly executed counterparts of the Assignment of Leases; and 15 16 (4) four duly executed counterparts of the PeopleSoft Lease. (c) Buyer and Seller shall each deposit such other instruments as are reasonably required by the Title Company or otherwise required to close the escrow and consummate the purchase and sale of the Property in accordance with the terms hereof, including, without limitation, an agreement (the "Designation Agreement") designating Title Company as the "Reporting Person" for the transaction pursuant to Section 6045(e) of the Code and the regulations promulgated thereunder, and executed by Seller, Buyer and Title Company. The Designation Agreement shall be in a form reasonably acceptable to the parties, and, in any event, shall comply with the requirements of Section 6045(e) of the Code and the regulations promulgated thereunder. (d) Seller shall deliver to Buyer complete originals of all of the leases, copies of all of the tenant correspondence files in Seller's possession or control, and originals of any other items which Seller was required to furnish Buyer copies of or make available at the Property pursuant to Section 2.1 above, except for Seller's general ledger and other internal books or records which shall be retained by Seller, within two (2) business days after the Closing Date. Seller shall deliver to Buyer a set of keys to the Property on the Closing Date. Section 8.6 Estoppel Certificates. (a) If in accordance with Section 2 of this Agreement Buyer elects to proceed with the purchase of the Property, then Seller shall use its reasonable efforts to obtain estoppel certificates from each tenant of the Property in the form attached hereto as Exhibit J. It shall be a condition to Buyer's obligation to close the sale and purchase of the Property that on or before the Closing, Buyer is able to obtain estoppel certificates from all of the tenants, including, but not limited to Seller (the "Required Estoppels"); provided that in the event that Buyer is unable to obtain one or more of the Required Estoppels, Seller may, at its sole option, provide and Buyer shall accept in lieu of the Required Estoppel an estoppel certificate ("Seller's Estoppel") certifying as to the following items for the applicable lease and tenant: commencement date and termination date, no uncured defaults under the lease on the part of landlord or, to the best of the landlord's knowledge, on the part of tenant, rent and additional charges payable under the lease, tenant's prorata share of taxes and expenses under the applicable lease. Notwithstanding the foregoing, the receipt by Buyer of estoppel certificates from Zenith (in the form of Exhibit K attached hereto and in accordance with the terms and conditions contained in Section 26 of the Lease between Zenith Insurance Company and Rosewood Associates dated January 18, 1993) and PeopleSoft, Inc. shall be a condition to Buyer's obligation to purchase the Property. Buyer hereby agrees that Buyer may not reject an estoppel in the event that a tenant strikes out or modifies Sections 16, 17 or 18 or the form estoppel attached hereto as Exhibit J and makes no other material modifications. Any Seller's Estoppel delivered in connection with the Closing shall be effective until the earlier of (i) one (1) year after the Closing, or (ii) the receipt of an estoppel certificate from the applicable tenant. (b) If the condition contained in Section 8.6(a) above is not satisfied, then Buyer may, by written notice given to Seller before the Closing, elect to terminate this 16 17 Agreement and receive a refund of the Deposit or waive said condition. If Buyer so elects to terminate this Agreement, neither party shall have any further rights or obligations hereunder except as provided in Section 6.1 above and Sections 9.3 and 9.9 below. Section 8.7 Prorations. All rents and other sources of income and all expenses for the Property will be prorated on the Closing Date (based on actual days of the month and a 365-day year) and the Purchase Price will be adjusted on the following basis: (a) All rents receivable under the leases attributable to the period prior to the Closing Date will be paid to or retained by Seller. Rents attributable to the period beginning on the Closing Date and thereafter will be paid to Buyer. Buyer will pay over to Seller any rents received by Buyer after the Closing attributable to the period prior to the Closing Date (determined on the basis of applying rents received to the most recently accrued rent first), after deduction by Buyer of all expenses incurred in collecting same. (b) All sums due for accounts payable which were owing or accrued by the Property for any period prior to the Closing and for all agreements and contracts not assumed by Buyer will be paid by Seller. Buyer will furnish to Seller for payment any bills received after the Closing that apply to any period prior to the Closing with respect to such accounts, agreements and contracts, and Buyer will have no further obligation with respect thereto. Payments due under any Service Contracts shall be prorated as of the Closing Date, and Buyer shall be liable for all payments accruing thereunder after the Closing. (c) All real and personal property ad valorem taxes and special assessments, if any, will be prorated to the Closing Date, based on the latest available tax rate and assessed valuation. With respect to any property tax appeal or reassessment filed by Seller for tax years (or portions thereof) prior to the Closing, Seller shall be entitled to the full amount of any refund or rebate resulting therefrom applicable to the period before the Closing Date, except to the extent such amounts are payable to, or otherwise accrue to the benefit of, the tenants pursuant to the leases. (d) All utility (including electricity, gas, water, sewer and telephone) charges will be prorated to the Closing Date. All utility security deposits, if any, will be retained by Seller. (e) If the amount of any proration cannot be determined at the Closing, the adjustments will be made between the parties as soon after Closing as possible but in no event later than ninety (90) days after Closing. (f) The provisions of this Section 8.7 shall survive the Closing. Section 8.8 Closing Costs. Seller shall pay the transfer taxes applicable to this transaction and one-half (1/2) of the escrow fee. Buyer shall pay the costs of obtaining the ALTA title insurance policy, the cost of any 17 18 endorsements, the costs of obtaining an updated ALTA Survey and one-half (1/2) of the escrow fee. Recording charges and any other expenses of the escrow for the sale shall be paid by Buyer and Seller in accordance with customary practice as determined by the Title Company. Section 8.9 Possession. Seller shall deliver possession of the Property to Buyer on the Closing Date. ARTICLE IX MISCELLANEOUS Section 9.1 Notices. Any notices required or permitted to be given hereunder shall be given in writing and shall be delivered (a) in person, (b) by certified mail, postage prepaid, return receipt requested, (c) by facsimile with confirmation of receipt, or (d) by a commercial overnight courier that guarantees next day delivery and provides a receipt, and such notices shall be addressed as follows: To Buyer: William Wilson & Associates Investors, Inc. c/o William Wilson & Associates, Inc. 2929 Campus Drive, Suite 450 San Mateo, California 94403 Attention: R. Matthew Moran Fax No.: (650) 345-7619 with a copy to: Farella Braun & Martell LLP 235 Montgomery Street San Francisco, CA 94104 Attention: Mary G. Murphy, Esq. Fax No.: (415) 954-4480 To Seller: PeopleSoft, Inc. 4305 Hacienda Drive Pleasanton, California 94588 Attention: Director of Real Estate Fax: (925) 467-7050 with copies to: PeopleSoft, Inc. 4305 Hacienda Drive Pleasanton, California 94588 Attention: General Counsel Fax: (925) 467-7184 Griggs Resource Group. 3470 Mt. Diablo Blvd, Suite A-205 18 19 Lafayette, California 94549 Attention: Brian Griggs Fax: (925) 299-4872 Orrick, Herrington & Sutcliffe LLP 400 Sansome Street San Francisco, CA 94111 Attention: William G. Murray, Jr., Esq. Fax No.: (415) 773-4285 or to such other address as either party may from time to time specify in writing to the other party. Any notice shall be effective only upon delivery. Section 9.2 Entire Agreement. This Agreement, together with the Exhibits hereto, contains all representations, warranties and covenants made by Buyer and Seller and constitutes the entire understanding between the parties hereto with respect to the subject matter hereof. Any prior correspondence, memoranda or agreements are replaced in total by this Agreement together with the Exhibits hereto. Section 9.3 Entry and Indemnity. Seller shall afford Buyer and authorized representatives of Buyer reasonable access to the Property to conduct inspections for the purpose of determining whether or not to purchase the Property. In connection with any entry by Buyer, or its agents, employees or contractors onto the Property, Buyer shall give Seller reasonable advance notice of such entry and shall conduct such entry and any inspections in connection therewith so as to minimize, to the greatest extent possible, interference with Seller's business and the business of Seller's tenants and otherwise in a manner reasonably acceptable to Seller. Without limiting the foregoing, prior to any entry to perform any on-site testing at the Property, Buyer shall give Seller written notice thereof, including the identity of the company or persons who will perform such testing and the proposed scope of the testing. Seller shall approve or disapprove, in Seller's reasonable discretion, the proposed testing within three (3) business days after receipt of such notice. If Seller fails to respond within such three (3) business day period, Seller shall be deemed to have approved the proposed testing. If Buyer or its agents, employees or contractors take any sample from the Property in connection with any such approved testing, Buyer shall provide to Seller a portion of such sample being tested to allow Seller, if it so chooses, to perform its own testing. Seller or its representative may be present to observe any testing or other inspection performed on the Property. Upon the request of Seller, Buyer shall promptly deliver to Seller copies of any reports relating to any testing or other inspection of the Property performed by Buyer or its agents, employees or contractors. Except for telephonic contact and written requests for public records, Buyer shall not contact any governmental authority without first obtaining the prior written consent of Seller thereto, and Seller, at Seller's election, shall be entitled to have a representative present at any meeting by Buyer with a governmental authority. Buyer shall maintain, and shall assure that its contractors maintain, public liability and property damage insurance in amounts and in form and substance adequate to insure against all liability of Buyer and its agents, 19 20 employees or contractors, arising out of any entry or inspections of the Property pursuant to the provisions hereof, and Buyer shall provide Seller with evidence of such insurance coverage upon request by Seller. Buyer shall indemnify and hold Seller harmless from and against any costs, damages, liabilities, losses, expenses, liens or claims (including, without limitation, reasonable attorney's fees) arising out of or relating to the acts or omissions of Buyer, its agents, employees or contractors in the course of performing the inspections, testings or inquiries provided for in this Agreement. The foregoing indemnity shall survive beyond the Closing, or, if the sale is not consummated, beyond the termination of this Agreement. Section 9.4 Time. Time is of the essence in the performance of each of the parties' respective obligations contained herein. Section 9.5 Attorneys' Fees. In the event of any dispute between the parties, whether based on contract, tort or other cause of action or involving bankruptcy or similar proceedings, in any way related to this Agreement, the non-prevailing party shall pay to the prevailing party all reasonable attorneys' fees and costs and expenses of any type, without restriction by statute, court rule or otherwise, incurred by the prevailing party in connection with any action or proceeding (including arbitration proceedings, any appeal and the enforcement of any judgment or award), whether or not the dispute is litigated or prosecuted to final judgment. The "prevailing party" shall be determined based upon an assessment of which party's major arguments or positions taken in the action or proceeding could fairly be said to have prevailed (whether by compromise, settlement, abandonment by the other party of its claim or defense, final decision, after any appeals, or otherwise) over the other party's major arguments or positions on major disputed issues. Section 9.6 Assignment. Neither party hereto may assign its rights nor delegate its duties under this Agreement, without the prior written consent of the other party; provided, however, that Seller agrees that Buyer may, without Seller's consent, voluntarily or by operation of law, assign all of Buyer's rights and delegate all of its duties under this Agreement to any corporation, real estate investment trust or other entity or successor (i) which controls, is controlled by, or is under common control with Buyer, (ii) resulting from a merger or consolidation with Buyer, whether or not Buyer is the surviving entity under such transaction, or (iii) which acquires all or substantially all of the assets of Buyer. Without limiting the above, in no event shall Buyer have the right to assign its rights or obligations hereunder to any party which could not make the representations and warranties contained in subsections 3.5(b) and (c) above. Provided that William Wilson & Associates, Inc. can make the representations and warranties contained in subsections 3.5(b) and (c) above, Seller hereby consents to the assignment of Buyer's rights and duties under this Agreement to William Wilson & Associates, Inc. Section 9.7 Counterparts. 20 21 This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Section 9.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California (without giving effect to its choice of law principles). The parties agree that all suits or actions of any kind brought to interpret or enforce the terms of, or otherwise arising out of or relating to, this Agreement shall be filed and litigated solely in the state or federal courts in San Francisco, California. Each party hereby consents to the personal and subject matter jurisdiction of said courts. Section 9.9 Confidentiality and Return of Documents. Buyer and Seller shall each maintain as confidential any and all material obtained about the other or, in the case of Buyer, about the Property, this Agreement or the transactions contemplated hereby, and shall not disclose such information to any third party. This provision shall survive the Closing or any termination of this Agreement. Section 9.10 Interpretation of Agreement. The article, section and other headings of this Agreement are for convenience of reference only and shall not be construed to affect the meaning of any provision contained herein. Unless the context clearly requires otherwise, (i) the plural and singular numbers shall each be deemed to include the other; (ii) the masculine, feminine, and neuter genders shall each be deemed to include the others; (iii) "shall," "will," or "agrees" are mandatory, and "may" is permissive; (iv) "or" is not exclusive; (v) "includes" and "including" are not limiting; and (vi) "days" means calendar days unless specifically provided otherwise. The term "person" shall include any individual, partnership, joint venture, corporation, trust, unincorporated association, any other entity and any government or any department or agency thereof, whether acting in an individual, fiduciary or other capacity. Section 9.11 Limited Liability. The obligations of Seller and Buyer, other than the representations and warranties contained in Section 9.24 hereof, are intended to be binding only on Seller and Buyer and shall not be personally binding upon, nor shall any resort be had to, the private properties of any of either of Seller's or Buyer's trustees, officers, beneficiaries, directors, members, or shareholders, or of its investment manager, the general partners, officers, directors, members, or shareholders thereof, or any employees or agents of Seller or Buyer or their respective investment manager. Notwithstanding anything to the contrary contained herein, after the Closing the maximum aggregate liability of Seller, and the maximum aggregate amount which may be awarded to and collected by Buyer under this Agreement (including, without limitation, for any breach or representation or warranty contained herein), and any and all documents executed pursuant hereto or in connection herewith (collectively, the "Other Documents") including, without 21 22 limitation, the Deed, the Bill of Sale, the Assignment of Leases, shall under no circumstances whatsoever, exceed Two Million Dollars ($2,000,000). Section 9.12 Amendments. This Agreement may be amended or modified only by a written instrument signed by Buyer and Seller. Section 9.13 No Recording. Neither this Agreement or any memorandum or short form thereof may be recorded by Buyer. Section 9.14 Drafts not an Offer to Enter into a Legally Binding Contract. The parties hereto agree that the submission of a draft of this Agreement by one party to another is not intended by either party to be an offer to enter into a legally binding contract with respect to the purchase and sale of the Property. The parties shall be legally bound with respect to the purchase and sale of the Property pursuant to the terms of this Agreement only if and when the parties have been able to negotiate all of the terms and provisions of this Agreement in a manner acceptable to each of the parties in their respective sole discretion, including, without limitation, all of the Exhibits and Schedules hereto, and both Seller and Buyer have fully executed and delivered to each other a counterpart of this Agreement, including, without limitation, all Exhibits and Schedules hereto. Section 9.15 No Partnership. The relationship of the parties hereto is solely that of Seller and Buyer with respect to the Property and no joint venture or other partnership exists between the parties hereto. Neither party has any fiduciary relationship hereunder to the other. Section 9.16 No Third Party Beneficiary. The provisions of this Agreement are not intended to benefit any third parties. Section 9.17 Survival. Except as expressly set forth to the contrary herein, no representations, warranties, covenants or agreements of the Seller contained herein shall survive the Closing. Section 9.18 Survival of Article IX. The provisions of this Article IX shall survive the Closing. Section 9.19 Exchange. Buyer acknowledges that it is Seller's present intent to consummate the transaction contemplated herein pursuant to a like-kind exchange of property (the "Exchange") pursuant to Section 1031 of 22 23 the Internal Revenue Code of 1986, and comparable provisions of the California Revenue and Taxation Code. Buyer agrees, provided that such exchange results in no additional cost or expense and no liability to Buyer except for those reasonable costs and expenses reimbursed or paid to Buyer by Seller, to accommodate the Seller in such Exchange. In the event that Seller desires to consummate this transaction pursuant to an Exchange, Buyer agrees to perform all acts necessary to accommodate the Seller in effectuating such Exchange; provided that, in no event shall the Buyer be required to do any act other than execute required documentation or to acquire fee title to any property other than the Property. The Seller shall indemnify the Buyer and hold the Buyer harmless from and against any and all claims, damages, losses, liabilities, costs and expenses, including, without limitation, reasonable attorneys fees and costs, arising out of or in any way connected with the Exchange. Section 9.20 Assignment of Excess Floor Area Ratio. Buyer and Seller acknowledge that as of the date hereof the Improvements on the Property consist of approximately two hundred eighty thousand rentable square feet and that the former and/or present entitlements, zoning and land use designation for the Property may allow additional developable allocations ("Excess FAR") to the Property. Buyer in no way represents or warrants that any such development rights exist or are transferable. The statutes, rules and regulations of the City of Pleasanton and/or Hacienda Business Park may allow the excess FAR to be transferred to another site which Seller intends to purchase within the Hacienda Business Park. At any time up to thirty six (36) months after Closing, Seller, in its sole and absolute discretion, may purchase the Excess FAR from Buyer for One Hundred Thousand Dollars ($100,000) (the "Excess FAR Purchase Price") which may be paid in any manner reasonably agreed to by Buyer and Seller. Buyer shall use its good faith efforts to cooperate with Seller and execute such additional documents as are reasonably necessary or file any applications or requests with the City of Pleasanton, Hacienda Business Park or other governmental authority to effectuate the intent of this Section 9.20; provided, however, Buyer shall not be required to incur any liability or incur additional cost or expense except for those reasonable costs and expenses reimbursed or paid to Buyer by Seller, in addition to the Excess FAR Purchase Price. Section 9.21 IRS Form 1099-S Designation. In order to comply with information reporting requirements of Section 6045(e) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder, the parties agree (i) to execute an IRS Form 1099-S Designation Agreement to designate the Title Company (the "Designee") as the party who shall be responsible for reporting the contemplated sale of the Property to the Internal Revenue Service (the "IRS") on IRS Form 1099-S; and (ii) to provide the Designee with the information necessary to complete Form 1099-S. Section 9.22 Further Assurances. The parties hereby agree to execute such other documents and perform such other acts as may be necessary or desirable to carry out the purposes of this Agreement, whether before or after Closing. Section 9.23 Partial Invalidity. 23 24 If any term, covenant or condition of this Agreement or its application to any person or circumstances shall be held to be illegal, invalid or unenforceable, the remainder of this Agreement or the application of such term or provisions to other persons or circumstances shall not be affected, and each term hereof shall be legal, valid and enforceable to the fullest extent permitted by law, unless an essential purpose of this Agreement would be defeated by the loss of the illegal, unenforceable, or invalid provision. In the event of such partial invalidity, the parties shall seek in good faith to agree on replacing any such legally invalid provisions with valid provisions which, in effect, will, from an economic viewpoint, most nearly and fairly approach the effect of the invalid provision and the intent of the parties in entering into this Agreement. 24 25 Section 9.24 Authority. The individuals executing this Agreement on behalf of Seller and Buyer individually represent and warrant that he or she has been authorized to do so and has the power to bind the party for whom they are signing. The parties hereto have executed this Agreement as of the respective dates written below. Seller: PEOPLESOFT PROPERTIES, INC., a California corporation By: ----------------------------------------- Its: ----------------------------------------- Buyer: WILLIAM WILSON & ASSOCIATES INVESTORS, INC., a California corporation By: ----------------------------------------- Its: ----------------------------------------- By: ----------------------------------------- Its: ----------------------------------------- 25 26 LIST OF EXHIBITS EXHIBITS Exhibit A Real Property Description Exhibit B Personal Property Exhibit C PeopleSoft Lease Exhibit D Title Objection Letter Exhibit E Due Diligence Items Exhibit F Rent Roll Exhibit G Bill of Sale Exhibit H Assignment of Leases, Service Contracts and Warranties Exhibit I Form of Tenant Notice Exhibit J Form of Estoppel Certificate Exhibit K Form of Zenith Estoppel Certificate SCHEDULES Schedule 1 Disclosure Items 27 EXHIBIT A REAL PROPERTY DESCRIPTION A-1 28 EXHIBIT B LIST OF PERSONAL PROPERTY B-1 29 EXHIBIT C PEOPLESOFT LEASE C-1 30 EXHIBIT D PROFORMA D-1 31 EXHIBIT E DUE DILIGENCE ITEMS E-1 32 EXHIBIT F RENT ROLL F-1 33 EXHIBIT G BILL OF SALE ---------------------------------------- This Bill of Sale (the "Bill of Sale") is made and entered into ____________, 199__, by and between PeopleSoft Properties, Inc., a California corporation ("Assignor"), and William Wilson & Associates Investors, Inc., a California corporation ("Assignee"). In consideration of the sum of One Thousand Dollars ($1000) and other good and valuable consideration paid by Assignee to Assignor, the receipt and sufficiency of which are hereby acknowledged by Assignor, Assignor does hereby assign, transfer, convey and deliver to Assignee, its successors and assigns, free and clear of any liens or encumbrances created by, through or under Assignor, all items of tangible personal property, if any, owned by Assignor and situated upon and used exclusively in connection with the land described on the attached Exhibit A (the "Land") and the improvements located thereon (the "Improvements"), and described on the attached Exhibit B, but specifically excluding any and all personal property owned by tenants or otherwise considered the property of tenants under any leases affecting the Land or Improvements (the "Personal Property"). This Bill of Sale is made subject, subordinate and inferior to the easements, covenants and other matters and exceptions set forth on Exhibit C, attached hereto and made a part hereof for all purposes. ASSIGNEE ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED IN THAT CERTAIN AGREEMENT OF PURCHASE AND SALE DATED JULY 21, 1998, BY AND BETWEEN ASSIGNOR AND ASSIGNEE (THE "AGREEMENT"), ASSIGNOR HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO (A) THE NATURE, QUALITY OR CONDITIONS OF THE PERSONAL PROPERTY, (B) THE INCOME TO BE DERIVED FROM THE PERSONAL PROPERTY, (C) THE SUITABILITY OF THE PERSONAL PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH ASSIGNEE MAY CONDUCT THEREON, (D) THE COMPLIANCE OF OR BY THE PERSONAL PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY, (E) THE HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PERSONAL PROPERTY, OR (F) ANY OTHER MATTER WITH RESPECT TO THE PERSONAL PROPERTY. ASSIGNEE FURTHER ACKNOWLEDGES AND AGREES THAT, HAVING BEEN GIVEN THE OPPORTUNITY TO INSPECT THE PERSONAL PROPERTY, ASSIGNEE IS RELYING SOLELY ON ITS OWN INVESTIGATION OF THE PERSONAL PROPERTY AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY ASSIGNOR, EXCEPT AS SPECIFICALLY PROVIDED IN THE AGREEMENT. ASSIGNEE FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION PROVIDED OR TO BE PROVIDED WITH RESPECT TO THE PERSONAL PROPERTY WAS OBTAINED FROM A VARIETY OF SOURCES AND THAT ASSIGNOR HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION. ASSIGNEE FURTHER ACKNOWLEDGES AND AGREES THAT THE SALE OF THE PERSONAL PROPERTY AS PROVIDED FOR G-1 34 HEREIN IS MADE ON AN "AS IS, WHERE IS" CONDITION AND BASIS "WITH ALL FAULTS," EXCEPT AS SPECIFICALLY PROVIDED IN THE AGREEMENT. The obligations of Assignor are intended to be binding only on Assignor and shall not be personally binding upon, nor shall any resort be had to, the private properties of any of its trustees, officers, beneficiaries, directors, members, or shareholders, or of its investment manager, the general partners, officers, directors, members, or shareholders thereof, or any employees or agents of Assignor or its investment manager. IN WITNESS WHEREOF, Assignor and Assignee have caused this Bill of Sale to be executed on the date and year first above written. Assignor: PEOPLESOFT PROPERTIES, INC., a California corporation By: ---------------------------------------- Its: ---------------------------------------- Assignee: WILLIAM WILSON & ASSOCIATES INVESTORS, INC., a California corporation By: ---------------------------------------- Its: ---------------------------------------- By: ---------------------------------------- Its: ---------------------------------------- G-2 35 EXHIBIT H ASSIGNMENT OF LEASES, SERVICE CONTRACTS AND WARRANTIES ------------------------------- This Assignment of Lease, Service Contracts and Warranties (this "Assignment") is made and entered into _______________, 199__, by and between PeopleSoft Properties, Inc., a California corporation ("Assignor"), and William Wilson & Associates Investors, Inc., a California corporation ("Assignee"). For good and valuable consideration paid by Assignee to Assignor, the receipt and sufficiency of which are hereby acknowledged by Assignor, Assignor does hereby assign, transfer, set over and deliver unto Assignee all of Assignor's right, title, and interest in (i) those certain leases (the "Leases") listed on Exhibit A, attached hereto and made a part hereof for all purposes except for Seller's right to collect delinquent rent and other delinquent sums owing under such Leases for the period prior to the date hereof, (ii) those certain service contracts, equipment leases, tenant improvement agreements and leasing agreements (the "Contracts") listed on Exhibit B, if any, attached hereto and made a part hereof for all purposes, and (iii) those certain warranties held by Assignor (the "Warranties") listed on Exhibit C, attached hereto and made a part hereof for all purposes. This Assignment is made subject, subordinate and inferior to the easements, covenants and other matters and exceptions set forth on Exhibit D, attached hereto and made a part hereof for all purposes. ASSIGNEE ACKNOWLEDGES AND AGREES, BY ITS ACCEPTANCE HEREOF, THAT, EXCEPT AS EXPRESSLY PROVIDED IN THAT CERTAIN AGREEMENT OF PURCHASE AND SALE, DATED AS OF JULY 21, 1998, BY AND BETWEEN ASSIGNOR AND ASSIGNEE (THE "AGREEMENT"), THE LEASES, THE CONTRACTS AND THE WARRANTIES ARE CONVEYED "AS IS, WHERE IS" AND IN THEIR PRESENT CONDITION WITH ALL FAULTS, AND THAT ASSIGNOR HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO THE NATURE, QUALITY OR CONDITION OF THE LEASES, THE CONTRACTS OR THE WARRANTIES, THE INCOME TO BE DERIVED THEREFROM, OR THE ENFORCEABILITY, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE LEASES, THE CONTRACTS OR THE WARRANTIES. Except as otherwise expressly provided in the Agreement, by accepting this Assignment and by its execution hereof, Assignee assumes the payment and performance of, and agrees to pay, perform and discharge, all the debts, duties and obligations to be paid, performed or discharged from and after the date hereof, by (a) the "landlord" or the "lessor" under the terms, covenants and conditions of the Leases, including, without limitation, brokerage commissions and compliance with the terms of the Leases relating to tenant improvements and security deposits, and (b) the owner under the Contracts and/or the Warranties. H-1 36 The obligations of Assignor are intended to be binding only on Assignor and shall not be personally binding upon, nor shall any resort be had to, the private properties of any of its trustees, officers, beneficiaries, directors, members, or shareholders, or of its investment manager, the general partners, officers, directors, members, or shareholders thereof, or any employees or agents of Assignor or its investment manager. All of the covenants, terms and conditions set forth herein shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment to be executed on the day and year first above written. Assignor: PEOPLESOFT PROPERTIES, INC., a California corporation By: ---------------------------------------- Its: ---------------------------------------- Assignee: WILLIAM WILSON & ASSOCIATES INVESTORS, INC., a California corporation By: ---------------------------------------- Its: ---------------------------------------- By: ---------------------------------------- Its: ---------------------------------------- H-2 37 EXHIBIT I FORM OF TENANT NOTICE _______ ____, 199_ VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED - --------------------------- - --------------------------- - --------------------------- - --------------------------- RE: ________________________; LEASE DATED _____________, 199__ BETWEEN PEOPLESOFT PROPERTIES ("LANDLORD") AND _______________ ("TENANT") Dear ___________________: This is to notify you that PEOPLESOFT PROPERTIES, INC., the current landlord under the above captioned lease has sold its interest in the property commonly known as PeopleSoft Plaza and located at 4301, 4305 and 4309 Hacienda Drive, Pleasanton, California and has assigned its interest as landlord under your lease to the new owner, William Wilson & Associates Investors, Inc. Landlord has also transferred to William Wilson & Associates Investors, Inc. the security deposit held by Landlord under the lease in the amount of $__________ (if none, so state). No claims have been made against the security deposit (if a claim has been made, so state). Except as noted below, please direct all future rental and other payments and communications under your lease to: William Wilson & Associates Investors, Inc. --------------------- --------------------- --------------------- Sincerely, PEOPLESOFT PROPERTIES, INC., a California corporation By:____________________ Its:____________________ I-1 38 EXHIBIT J TENANT ESTOPPEL CERTIFICATE TO: [Buyer ] [Lender ] _______________________ _________________________ _______________________ _________________________ _______________________ _________________________ Re: Suite ____________, _________________, _________________ (the "Premises") This estoppel certificate is delivered by the undersigned ("Tenant") to ___________________________________("Buyer") in connection with its contemplated purchase of certain real property commonly known as ______________________________, ______________ (the "Property") from _________________________ ("Landlord") and to _____________________ ("Lender") in connection with its making of a loan to Buyer to finance Buyer's purchase of the Property, which loan will be secured by a deed of trust (the "Deed of Trust") on the Property. Tenant hereby certifies the following information on which Buyer may rely in connection with its purchase of the Property and Lender may rely in connection with its making a loan secured by the Property: 1. The undersigned is the tenant in possession of the Premises under a written lease with Landlord, dated _________________, 19__, [as amended by ________________], which lease [as amended] (the "Lease") is in full force and effect and each provision of which is binding on Tenant in accordance with its terms. The Lease has not been modified or amended in writing or orally or by course of conduct, except as specifically set forth above, and contains the entire understanding and agreement between Tenant and Landlord concerning the Premises. A true, complete and accurate copy of the Lease is attached hereto as Exhibit A. 1. The Premises consist of approximately ___________ [net rentable] or [gross] square feet of [office] [retail] space. 3. The term of the Lease commenced on _____________ and terminates on ____________. 4. Current monthly base rent under the Lease is ____________. [Percentage rent of ___________ is due [annually or quarterly]]. Base rent has been paid through the period ending ____________. The Lease provides for the monthly rent to increase as follows: ___________. As of the date hereof, Tenant has no existing right to free rent, partial rent, rent rebate, credit for improvements, rent abatement, or other rental concessions or any right to payments from Landlord to Tenant except as follows:____________________________. J-1 39 5. The Lease requires Tenant to pay its pro rata share of increases in real estate taxes and operating expenses for the Property and appurtenant property over the [base year 199__ real estate taxes and operating expenses of $________] or [expense stop of $_____________]. Tenant's pro rata share is_____. For the calendar year 19____, Tenant is obligated to pay monthly estimated amounts for real estate tax and operating expense increases of $ , and has paid such estimates through the period ending___________________. Tenant is owed no refund of real estate taxes or operating expense payments made for prior calendar years. 6. Tenant has no option to extend or to renew the term of the Lease, except as follows:______________________________________________________________ _______________________________________________________________________________. 7. The Lease contains no right of first refusal or offer to lease additional space, option to expand, option to terminate the Lease, or right of first refusal or offer or option to purchase the Property or any interest therein, except as follows:_____________________________________________________ _______________________________________________________________________________. 8. The actual cash amount of the security deposit currently held by Landlord is $______________. Landlord holds no other funds for Tenant's account. 9. Tenant is not, and to the best of Tenant's knowledge Landlord is not, in default under any provision of the Lease nor has any event occurred which with the passage of time or giving of notice, or both, would constitute a default on the part of Tenant or Landlord, both parties having fully performed the obligations required to be performed by each party thereunder through the date hereof. Tenant asserts no claim of default against Landlord or any other person or offset or defense against the payment of rent or other charges payable by Tenant or the performance of any other obligations by Tenant under the Lease. 10. The Premises have been delivered to Tenant in accordance with the terms of the Lease, Tenant has accepted the Premises, and Landlord has fully completed all construction and improvements to the Premises required to be completed by Landlord under the Lease. Landlord has fulfilled all obligations to finance or provide an allowance for improvements to the Premises. 11. The Lease entitles Tenant to the [non-exclusive] or [exclusive] use of ____ parking spaces at the Property. 12. Tenant has not assigned its rights under the Lease or sublet any portion of the Premises. 13. There are no actions, whether voluntary or otherwise, pending against Tenant under any insolvency, bankruptcy or other debtor relief laws of the United States or of any state. J-2 40 14. All insurance required of Tenant under the Lease has been obtained by Tenant and all premiums have been paid. 15. Tenant has no notice of any prior assignment, hypothecation, grant of security interest, or pledge by Landlord of the Lease or the rents due thereunder. Tenant has not assigned, hypothecated, granted a security interest or pledged its interest in the Lease to any person or entity. 16. From the date hereof until the Deed of Trust is reconveyed, Tenant will not consent to or enter into any modification or termination of the Lease without the prior written consent of Lender, unless the Deed of Trust does not require Lender's consent to such modification or termination. 17. From the date hereof until the Deed of Trust is reconveyed, in the event of a default by Landlord under the Lease, Tenant shall give prompt written notice to Lender to the address set forth above and a reasonable time (which in no event shall be less than thirty (30) days or any longer period set forth in the Lease) to cure or commence cure of such default. 18. If Landlord's interests in the Property are acquired by Lender by foreclosure, deed in lieu of foreclosure or any other method, Lender shall not be liable for any act or omission of Landlord or any prior landlord. 19. Tenant's current address for Notices is: -------------------------------- -------------------------------- -------------------------------- The statements made herein shall be binding upon us, our successors and assigns, and shall inure to your benefit and the benefit of your successors and assigns. The officers executing this letter have been duly empowered to do so on behalf of the undersigned. Each of you may consider this certificate and the information contained herein accurate as of any date that is within 45 days after the date hereof set forth below, except to the extent we notify you in writing at your address set forth above of changes to the within-described information. Dated: ____________________ Very truly yours, By: -------------------------- Name: ------------------------ Its: ------------------------- J-3 41 EXHIBIT K FORM OF ZENITH ESTOPPEL CERTIFICATE K-1 42 Schedule 1-1 Disclosure Items Seller has disclosed to Buyer the following facts, circumstances, documents, agreements and matters: 1. Land use, zoning and similar laws, statutes and ordinances applicable to the Property. 2. All matters shown on the title report for the Property delivered to Buyer. 3. All matters shown on the survey delivered to Buyer. 4. All matters shown on the leases and other Due Diligence Materials delivered to Buyer. 5. With respect to the representations and warranties contained in Section 3.1(g), there is a lease with the property management company, Voit Management Company, L.P., that will terminated prior to Closing. Schedule 1-1 EX-10.36 3 LEASE DATED SEPTEMBER 14, 1998 1 OFFICE LEASE THIS LEASE (the "Lease"), dated as of September 14, 1998, is between Hacienda Plaza Associates, LLC, a California limited liability company ("Landlord"), and PeopleSoft, Inc., a Delaware corporation ("Tenant"). Landlord and Tenant hereby covenant and agree as follows: 1. Basic Lease Information. 1.1 Basic Lease Information. The Basic Lease Information is hereby incorporated into and made a part of this Lease. For convenience of reference only, defined terms and the sections in which they are defined are set forth in Exhibit B. 2. Premises. 2.1 Premises Defined. Landlord leases to Tenant and Tenant hires from Landlord on the terms and conditions contained in this Lease the Premises specified in the Basic Lease Information. Tenant and Landlord accept the Rentable Area of the Building, Initial Premises and Committed Expansion Premises, as specified in the Basic Lease Information as the accurate Rentable Area of such areas and such areas shall not be subject to recalculation. Landlord and Tenant agree that the square footage of any additional space that is added to the Premises over the first one hundred twenty (120) months of the Lease Term shall be calculated, by Landlord, in accordance with BOMA Standards [ANSI-Z65.1[1996]] for calculating useable square footage and that a load factor of fourteen and 41/100 percent (14.41%) shall be added thereto to arrive at the Rentable Area of such additional area. All areas, other than those specified in the previous sentence, that are added to this Lease after the over the first one hundred twenty (120) months of the Lease Term and become a part of the Premises shall be measured in accordance with then applicable BOMA standards for measuring rentable square feet. The term "Premises" shall mean all space that is occupied by the Tenant from time to time during the Term of this Lease or space which has been tendered to the Tenant by Landlord pursuant to the terms of this Lease and on which Tenant is obligated to pay Base Rent (subject to any free rent periods or rental abatement provided for herein) and shall also include any space added to this Lease over the Term hereof. The term "Initial Premises" is also used herein to mean all of the space in the Building that is occupied by the Tenant as of the date hereof. The terms "common area" and "common areas" shall mean spaces, facilities, and installations such as toilets, janitor, telephone, electrical, and mechanical rooms and closets, trash facilities, stairs, public lobbies, corridors and other circulation areas, wherever located in the Building. The Building, the real property upon which the Building stands, common areas, drives, parking areas, walkways and other amenities appurtenant to or servicing the Building, are herein sometimes collectively called the "Real Property." Without in any way limiting or expanding the definition of Premises, the Tenant shall have the right during the term of this Lease to use on a non-exclusive basis and in the manner and to the extent presently used by the Tenant as of the date hereof, the loading dock in the Building and the reception desk (which Tenant may use on an exclusive basis) and reception area presently used by Tenant on the ground floor of the building known as 4305 1 2 Hacienda Drive. The provisions of this Lease that may be applicable thereto will apply to Tenant's use of any portion of the Building or common area outside the Premises. 3. Term. 3.1 Term Commencement. The Premises are leased for a term (the "Term") commencing (i) on the date hereof for the Initial Premises, or (ii) on the date the Committed Expansion Premises, as defined in the Basic Lease Information, or the Expansion Premises, as defined in Section 28.18, is tendered to the Tenant by the Landlord. The Landlord shall notify Tenant as soon as reasonably possible regarding the date when the Committed Expansion Premises will be available for occupancy by Tenant. The Term of this Lease shall expire on the Expiration Date, as defined in Section 3.2 below, or on such earlier date as is provided for herein. As to all portions of the Premises, other than the Initial Premises, should Landlord tender possession of such portions of the Premises to Tenant prior to the date specified for commencement in the Basic Lease Information with respect to such portion of the Premises and Tenant accepts such prior tender, this Lease shall commence on the portions so tendered as of the date the Tenant takes occupancy of such portions. If, for any other reason whatsoever, Landlord cannot deliver possession of any portion of the Premises to Tenant on or prior to the date, if any, specified in the Basic Lease Information or such other date as Landlord may notify Tenant, if no date is specified in the Basic Lease Information, then (A) the validity of this Lease and the obligations of Tenant under this Lease shall not be affected except that the Lease shall commence as to such portion of the Premises upon Landlord's tender of possession thereof to the Tenant; (B) Tenant shall have no claim against Landlord on account of such late delivery; and (C) the Expiration Date of the Term shall not be extended. Within ten (10) days after written request from Landlord, Tenant shall execute and return to Landlord an acknowledgement of the commencement date of the term of this Lease as to each applicable portion of the Premises. Notwithstanding the foregoing, if the term shall not have commenced for any portion of the Premises for which a date is specified in the Basic Lease Information on or before six (6) months after the date set forth in the Basic Lease Information or the date that Landlord notifies Tenant in writing that such space will be available, if no date is specified in the Basic Lease Information, this Lease may be terminated (but only as to that portion of the Premises not delivered) by Tenant or Landlord by written notice to the other within ten (10) days of such date. Upon a termination of this Lease as to any portion of the Premises, as provided in the previous sentence, such space shall become subject to the provisions of Section 28.18 hereof. Landlord shall not voluntarily agree to the extension of the term of any lease that covers space that is part of the Committed Expansion Premises without the prior written consent of Tenant. 3.2 Expiration Date. (a) The Term of this Lease shall expire as to fifty percent (50%) of the Initial Premises and Committed Expansion Premises ("Four Year Space") on September 13, 2002. The Term of this Lease shall expire as to any portion of the Premises that is not Four Year Space ("Five Year Space") on September 13, 2003. (b) Tenant shall have the option (the "Four Year Space Option") to extend the 2 3 term of this Lease for six (6) years, with an Expiration Date of September 13, 2008, as to the Four Year Space by giving notice to Landlord on or before September 14, 2001. The notice with regard to the Four Year Space Option (the "Four Year Space Option Notice") shall specify whether or not Tenant elects to exercise the Four Year Space Option and the portion of the Four Year Space on which Tenant elects to exercise the Four Year Space Option. In the event that Tenant fails to give Landlord the Four Year Space Option Notice on or before September 14, 2001, Tenant shall be deemed to have elected to exercise the Four Year Space Option with respect to all of the Four Year Space. In the event that Tenant does not exercise the Four Year Space Option, or exercises, the Four Year Space Option with respect to less than all of the Four Year Space, any portion of the Four Year Space for which the Term is not extended (i) shall comply with the last four sentences of Section 28.16(a) below, and (ii) Tenant shall pay Landlord upon the termination of the Term for such portion of the Four Year Space a termination fee calculated in accordance with Section 28.16(c) below. (c) Tenant shall have the option (the "Five Year Space Option") to extend the term of this Lease for five (5) years, with an Expiration Date of September 13, 2008, as to the Five Year Space by giving notice to Landlord on or before September 14, 2002. The notice with regard to the Five Year Space Option (the "Five Year Space Option Notice") shall specify whether or not Tenant elects to exercise the Five Year Space Option and the portion of the Five Year Space on which Tenant elects to exercise the Five Year Space Option. In the event that Tenant fails to give Landlord the Five Year Space Option Notice on or before September 14, 2002, Tenant shall be deemed to have elected to exercise the Five Year Space Option with respect to all of the Five Year Space. In the event that Tenant does not exercise the Five Year Space Option, or exercises the Five Year Space Option with respect to less than all of the Five Year Space, any portion of the Five Year Space for which the Term is not extended (i) shall comply with the last four sentences of Section 28.16(a) below, and (ii) Tenant shall pay Landlord upon the termination of the Term for such portion of the Five Year Space a termination fee calculated in accordance with Section 28.16(c) below. Any of the Tenant's right to terminate this Lease pursuant to this Section 3.2 as to any portion of the Five Year Space shall be subject to the limitations of Section 28.16. (d) Notwithstanding any other provision of this Section 3.2 (i) Tenant must exercise both the Four Year Space Option and the Five Year Space Option as to all of the Four Year Space and all of the Five Year Space unless that portion of the Premises on which the Lease would be terminated as result of the Tenant's failure to exercise the Four Year Space Option and/or the Five Year Space Option is being vacated by Tenant as a result of a move by Tenant of the personnel or equipment using such space to a building or facility of which Tenant owns or controls more than thirty three percent (33%) of the fee interest (or a facility owned or controlled by an entity in which Tenant has not less than a thirty three percent (33%) interest in capital and profits) or in connection with a reduction in Tenant's overall space requirements in the Pleasanton/Dublin area, and (ii) if, as of (y) the date Tenant exercises the Four Year Space Option and/or the Five Year Space Option for less than all of the Four Year Space and/or the Five Year Space or fails to exercise the Four Year Space Option and/or the Five Year Space Option, or (z) the date on which the Lease would otherwise terminate as to any portion of the Four Year Space and/or the Five Year Space as a result of any of Tenant's rights under Sections 3 4 3.2(b) or (c) above, an event of default exists under this Lease and all applicable grace periods have expired, Landlord shall have, in addition to all of Landlord's other rights and remedies under this Lease, the right to extend unilaterally the Term of this Lease to September 13, 2008, for that portion of the Four Year Space or Five Year Space that would have otherwise been terminated as of such date. (e) The Base Rent for the Four Year Space during the extension of the Term resulting from the exercise of the Four Year Space Option and the Base Rent for the Five Year Space during the extension of the Term resulting from the exercise of the Five Year Space Option shall be the applicable Base Rent set forth in the Basic Lease Information. 4. Base Rent; Additional Charges. 4.1 Annual Rental. Tenant shall pay to Landlord during the Term at the address set forth in the Basic Lease Information, without demand, offset or deduction, except as otherwise provided herein, Base Rent as set forth in the Basic Lease Information. Base Rent shall be payable on or before the first day of each month, in advance, provided that Base Rent for the partial month commencing on the date hereof shall not be due until three (3) business days after the date hereof. If the Commencement Date or the Expiration Date should occur on a day other than the first or last day of a calendar month, respectively, then the Base Rent for such fractional month shall be prorated on a daily basis based upon the number of days in such month. Base Rent shall commence for the Initial Premises on the date hereof. Base Rent shall not commence on any portion of the Premises provided to Tenant after the date hereof, until sixty (60) days after the date that Landlord tenders possession to Tenant of such portion of the Premises (ninety (90) days in the case of space that Landlord acquires by virtue of the early termination of the prior lease for such space, whether as a result of the default of the tenant in such space, a negotiated early termination, or the recapture of such space pursuant to the terms of the applicable lease "Early Termination Space"). 4.2 Additional Charges. Tenant shall pay to Landlord when due all charges, fees and expenses and other amounts whatsoever as provided in this Lease ("Additional Charges"). Unless otherwise specifically provided for herein, all Additional Charges shall be due within thirty (30) days of Tenant's receipt of Landlord's invoice for the Additional Charges. Landlord shall have the same remedies for Tenant's failure to pay any item of Additional Charges when due as for failure to pay any installment of Base Rent when due. 4.3 Late Charges. If Tenant fails to pay any Rent (as defined below) within five (5) days after the date the same is due, such unpaid amounts will be subject to a late payment charge equal to four percent (4%) of the unpaid amounts in each instance. The late payment charge has been agreed upon by Landlord and Tenant, after negotiation, as liquidated damages and a reasonable estimate of the additional administrative costs and detriment that will be incurred by Landlord as a result of any such failure by Tenant, the actual costs thereof being extremely difficult if not impossible to determine. Notwithstanding the foregoing, Tenant may be late in making payments of Rent due under the Lease by up to five (5) days after written notice from Landlord on not more than one (1) occasion in any twelve (12) consecutive month 4 5 period (two (2) occasions in the first twelve (12) consecutive months of the Term) without being obligated to pay a late charge. 4.4 Payment of Rent. All amounts payable or reimbursable by Tenant under this Lease, including Base Rent, Additional Charges, late charges and interest (collectively, "Rent"), shall constitute rent and shall be payable and recoverable as rent in the manner provided in this Lease. All sums payable to Landlord on demand under the terms of this Lease shall be payable within twenty (20) days after notice from Landlord of the amounts due. All rent shall be paid without offset, recoupment or deduction, except as otherwise provided herein, in lawful money of the United States of America to Landlord at Landlord's Address as set forth in the Basic Lease Information, or to such other person or at such other place as Landlord may from time to time designate. 5. Expenses and Taxes. 5.1 Definitions. For purposes of this Article 5, the following terms shall have the following meanings: (a) "Real Estate Taxes" shall mean all real property taxes and general and special assessments, transit charges, fees or assessments, housing fund assessments, fees or charges, payments in lieu of taxes, and any tax, fee, assessment, charge, imposition or excise levied or assessed (whether at the date of this Lease or thereafter) (i) on the Real Property, any portion thereof or Landlord's interest therein, or Landlord's personal property used in the operation of the Real Property, (ii) on the use or occupancy of the Real Property or any portion thereof, including, without limitation, any tax or levy made against Base Rent, Additional Charges, or gross receipts from the Real Property, (iii) in connection with the business of renting space in the Real Property, or in connection with entering into this Lease or any other lease with respect to the Real Property, or (iv) for housing, police, fire, or other governmental services that are now or hereafter levied or assessed under clauses (i) through (iii) by any governmental or public entity. Real Estate Taxes shall also include any other tax, fee, or charge that may be levied or assessed as a substitute for any other Real Estate Taxes. Real Estate Taxes shall not include those amounts payable by Tenant pursuant to Section 26.1, or similar amounts attributable to other tenants of the Building. Real Estate Taxes shall also include reasonable legal fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Estate Taxes but only if such proceeding results in a reduction of Real Estate Taxes. In the event that at any time after the date hereof any assessments that are applicable to the Real Property during the Base Year are satisfied, the amount of such assessments paid during the Base Year (but excluding any prepayment penalty or late charges applicable thereto) shall be deducted from any future calculation of Base Year Real Estate Taxes in computing the Excess Taxes payable in any Comparison Year. In the event that this Lease commences at any time after January 1, 1999, Real Estate Taxes for the Base Year shall be adjusted to reflect a full calendar year of Real Estate Taxes at the fully assessed rate applicable to the Building after the Commencement Date of this Lease. (b) "Expenses" shall mean the reasonable and actual costs and expenses paid 5 6 and/or incurred by Landlord as determined in accordance with generally accepted accounting principles, consistently applied ("GAAP"), in connection with the management, operation, maintenance and repair of the Real Property, including, without limitation, (i) the cost of heating, ventilation, air conditioning, steam, electricity, gas, water, sewer service, mechanical, elevator and other systems and all other utilities, and the cost of supplies and equipment and maintenance and service contracts in connection therewith, (ii) the cost of repairs, replacements, general maintenance and cleaning, including, without limitation, the cost of janitorial and other service agreements (provided that the cost of security services shall be subject to Tenant's direct payment obligation under Section 18.2 below), trash removal, painting and paving (none of which shall in any event be considered capital improvements hereunder, provided that to the extent that the cost of painting and paving in any calendar year exceeds One Hundred Thousand Dollars ($100,000) it shall, at Landlord's option, either (y) be allocated over their useful life thereof which shall not be less than five (5) years), or (z) amounts in excess of said One Hundred Thousand Dollars ($100,000) shall be treated as Expenses in subsequent calendar years, provided that such items shall not in an calendar year exceed One Hundred Thousand Dollars ($100,000), (iii) the cost of property (including coverage for earthquake and flood if carried by Landlord), liability, rental income and other insurance relating to the Real Property, and expenditures for deductible amounts paid under such or similar insurance (provided that Landlord shall only be entitled to include as an Expense the cost of earthquake or any other type of insurance to the extent such insurance is reflected in Expenses for the Base Year, either initially or by subsequent adjustment), (iv) wages, salaries, payroll taxes and other labor costs and employee benefits (including without limitation, bonuses and contributions to pension or retirement plans consistent with industry standards) of all on-site employees, and the allocable share of all off-site employees to the extent engaged in the operation, management, maintenance and repair of the Real Property, (v) fees, charges and other costs, including, without limitation, property management fees (which shall be based on a percentage of the gross receipts of the Building not in excess of the lesser of three percent (3%) or the percentage applied in the Base Year) and the fair market rental value of a that portion of the property management office which does not exceed eight hundred and six (806) square feet of Rentable Area, and all such reasonable fees, charged or other costs charged by Landlord if Landlord performs services in connection with the Real Property, (vi) the cost of supplying, replacing and cleaning employee uniforms, (vii) the cost of rentals of capital equipment, (viii) all costs and fees for licenses, inspections or permits that Landlord may be required to obtain, (ix) exterior and interior landscaping, (x) depreciation on personal property used by Landlord on the Real Property, and (xi) reasonable reserves for any periodic items or improvements that would constitute an Expense when paid (but only to the extent reflected in the Expenses for the Base Year either initially or by subsequent adjustment). In addition to the foregoing, Expenses shall include the amortized cost of the following capital improvements: (x) capital improvements made to the Real Property after the date of this Lease as a labor-saving measure or to effect other economies in the operation or maintenance of the Real property (amortized in accordance with GAAP, or, at the Landlord's option, such items may be treated as an Expense in any calendar year up to the amount of the cost savings realized as a result thereof) but only to the extent of any actual reduction in Expenses resulting therefrom, (y) capital improvements made to the Real Property after the date of this Lease that are required under any governmental law or regulation that was not applicable to the Real Property at the date of this Lease (amortized in accordance with GAAP), and/or (z) other capital improvements and 6 7 for the general benefit of the Building (amortized over the greater of the period required by GAAP or five (5) years), provided that the total of all capital improvements under clause (z) shall not exceed two and one-half percent (2 1/2%) of all Taxes and Expenses (for the purpose of such calculation, Taxes shall include the annual amount payable on account of any assessments on the Building that are paid off by Landlord prior to maturity or are otherwise retired prior to maturity). Any capital improvements shall be amortized as provided above with interest in the unamortized balance(s) at the rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements, provided such rate shall not exceed ten percent (10%) per annum (or, if Landlord finances such improvements out of Landlord's funds without borrowing, the rate that Landlord would have paid to borrow such funds, as reasonably determined by Landlord). Notwithstanding the foregoing, Expenses shall not include any of the items listed in Section 5.1(c) below. Notwithstanding anything to the contrary contained in this Section 5, Tenant shall pay the entire cost of electricity service to the computer rooms located in the Parking Garage and elsewhere in the Building (and all expenses associated with any separate metering of such service) and the cost of such electricity shall not be included as an Expense hereunder. In calculating the Base Year Expenses, Expenses that would not ordinarily be incurred on an annual, recurring basis shall be excluded. (c) "Expenses" shall not include: (i) amortization or depreciation of the Building or Premises, except as specifically provided for in this Lease; (ii) interest, points, fees and amortization on mortgages or other debt costs or ground lease payments, if any; (iii) legal fees in connection with leasing, tenant disputes or enforcement of leases; (iv) real estate brokers' commissions or any other costs relating to the leasing or sale of the Premises; provided, that the reasonable rental cost of Landlord's management office (not to exceed 806 rentable square feet in area) may be included as an Expense, provided further that to the extent that such office is used to manage buildings or properties other than the Building, the cost thereof shall be equitably apportioned; (v) the cost of any items to the extent Landlord receives reimbursement therefor from insurance proceeds, any warranty on such item, pursuant to any other provision of this Lease or from a third party (such proceeds to be deducted from Expenses in the year in which received); (vi) capital expenditures, except those permitted under clauses (x)-(z) of Section 5.1(b); provided further that Expenses shall not under any circumstances include the first Eight Hundred and Fifty Thousand Dollars ($850,000) expended by Landlord on capital improvements from and after the Commencement Date; (vii) any costs relating to the development of the Building or any development of additional improvements on the Real Property; (viii) any costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements or renovations of existing tenant improvements for any tenant, including the Tenant, in the Building, provided that the foregoing shall not in any way limit or modify Tenant's obligation to reimburse Landlord for the cost of any tenant improvements provided for in the Lease, if any; (ix) any portion of Landlord's general corporate overhead (such as salaries for executives of Landlord and any and all affiliated or related entities and contributions to employee pension plans, except as specifically provided above), provided that Landlord shall be entitled to charge as an Expense a reasonable and customary management fee for properties such as the Building, whether paid to a third party, to Landlord or an affiliate of Landlord; (x) charitable or political contributions by Landlord; (xi) advertising and promotional costs; (xii) any costs relating to (a) the correction or repair of any defect in the Building, other than normal wear 7 8 and tear and customary repair and maintenance items, (b) the correction or repair of any aspect of the Building that does not comply with applicable building codes and regulations in effect and being enforced as of the Commencement Date, or (c) the removal, remediation or disposal in accordance with applicable laws of any Hazardous Materials (as the term is defined in the Lease) existing on or under the Premises which were placed on or are introduced on the Premises by any party other than Tenant, Tenant's invitees, contractors, employees, invitees, guests, sublessees or assignees; (xiii) costs resulting from the violation by Landlord of applicable laws, statues and regulations or covenants, conditions and restrictions affecting the Building or the Premises; (xiv) any payments for supplies, materials or services provided or rendered by affiliates of Landlord to the extent that the costs of such supplies, materials and services exceed the costs that would have been paid had the supplies, materials, and services been provided or rendered by parties unaffiliated with Landlord on a competitive basis; (xv) any Expenses paid directly by any tenant in the Building or reimbursable in full by any tenant in the Building; and (xvi) except as otherwise specifically provided for in this Lease, any excess cost resulting from the payment of assessments in other than the maximum number of installments permitted under applicable law. (d) "Comparison Year" shall mean each calendar year after the Base Year. (e) "Tenant's Share" shall be as provided on the Basic Lease Information. If the rentable area of the Premises or the rentable area of the Building is changed for any reason, Tenant's Share shall be recalculated by dividing the rentable area of the Premises after such occurrence by the Rentable Area of the entire Building after such occurrence. (f) "Excess Taxes" with respect to a given Comparison Year shall mean the excess of Real Estate Taxes for that Comparison Year over Real Estate Taxes for the Base Year. (g) "Excess Expenses" with respect to a given Comparison Year shall mean the excess of Expenses for that Comparison Year over Expenses for the Base Year. 5.2 Real Estate Taxes and Expense Gross-Up. Real Estate Taxes and Expenses for any period (including, without limitation, the Base Year) in which the Building is not one hundred percent (100%) occupied shall be adjusted according to Landlord's reasonable estimate to reflect the Real Estate Taxes and Expenses which would be payable if the Building were one hundred percent (100%) occupied. 5.3 Payment of Tenant's Share of Additional Charges. Commencing on the later of (i) January 1st of the calendar year following the Base Year or (ii) one month after receipt of a statement from Landlord which sets forth the estimated amount of Tenant's Share of Excess Taxes and Expenses, Tenant shall pay to Landlord, in advance on or before the first day of each month during such Comparison Year, as Additional Charges one twelfth (1/12th) of Tenant's Share of Excess Taxes and Excess Expenses for each Comparison Year in an amount reasonably estimated by Landlord in good faith and billed by Landlord to Tenant. Tenant's Share of Excess Taxes and Excess Expenses shall be calculated separately but shall be aggregated. Landlord shall use commercially reasonable efforts to provide Tenant within one hundred eighty (180) days after the expiration of each Comparison Year with a statement ("Landlord's Statement") setting forth the actual amount of Real Estate Taxes and Expenses for such Comparison Year, 8 9 and Tenant's Share of Excess Taxes and Expenses. In the event that Landlord has not provided the Landlord's Statement within such one hundred and eighty (180) period, then Tenant may give Landlord notice of such fact and Landlord must provide such statement within ninety (90) days of the date of such notice by Tenant or Landlord shall waive any claim for any additional Excess Taxes or Excess Expenses for the Comparison Year in question. If the actual amount of Tenant's Share of Excess Taxes and Expenses due for such Comparison Year differs from the estimated amount of Tenant's Share of Excess Taxes and Expenses paid by Tenant for such Comparison Year, the difference shall be paid by Tenant (whether or not this Lease has terminated) within thirty (30) days after the receipt of Landlord's Statement, or credited against the next installments of Rent due from Tenant hereunder, as the case may be; provided, however, that in no event shall aggregate Excess Taxes and Excess Expenses actually payable for a given Comparison Year be less than zero. Tenant's Share of Excess Taxes and Excess Expenses for any Comparison Year that is less than a full year shall be prorated equitably by Landlord. Notwithstanding any other provision of this Section 5.3, in the event that Landlord in the Base Year incurs Expenses for the capital improvements designated on Exhibit C in excess of the eight hundred and fifty thousand dollars ($850,000) specified in Section 5.1(c), then Tenant shall immediately upon receipt of an invoice from Landlord therefore, commence paying on a monthly basis Tenant's Share of the amortized cost of such excess improvements (amortized in accordance with GAAP and the requirements of Section 5.1(b)). 5.4 Objections to Statements. If Tenant disputes the amount set forth on the Landlord's Statement, Tenant shall have the right, not later than one hundred eighty (180) days from the date of the receipt of such Landlord's Statement, to initiate and complete an audit at Landlord's offices of Landlord's books and records with respect to the Expenses for such calendar year, subject to the following terms and conditions: (a) No audit shall be conducted at any time that Tenant is in default of any of the terms of this Lease; (b) any audit shall be conducted only by independent certified public accountants practicing for an accounting firm of national prominence, employed by Tenant on an hourly or fixed fee basis, and not on a contingency fee basis; and (c) Tenant shall not audit Landlord's books and records more than one (1) time for any calendar year. Tenant acknowledges that Tenant's right to inspect Landlord's books and records with respect to Expenses for the preceding calendar year is for the exclusive purpose of determining whether Landlord has complied with the terms of the Lease with respect to Additional Charges. Except as required by law or court or administrative order, Tenant shall keep the results of any such audit confidential. The Landlord's Statement shall be appropriately adjusted on the basis of such audit. Tenant shall pay the costs of the audit except if such audit discloses an overstatement, in the aggregate, greater than three and one-half percent (3.5%) of the total Expenses and Real Estate Taxes previously reported, then the cost of such audit shall be borne by Landlord. In the event the audit reveals that Tenant has overpaid Expenses, the amount of the overpayment shall be applied to the next installment of Rent due under the Lease or paid to Tenant in cash if at the end of the Lease Term. In the event the audit reveals that Tenant has underpaid Expenses, the difference shall be paid by Tenant (whether or not this Lease has terminated) within thirty (30) days after the conclusion of the audit. 6. Acceptance of Premises. Landlord shall have no obligation whatsoever to construct leasehold improvements for Tenant or to repair or refurbish the Premises, other than its repair 9 10 and maintenance obligations expressly set forth in this Lease, subject to Landlord's obligation to pay Tenant the applicable Tenant Improvement Contribution set forth in the Basic Lease Provisions at the time set forth in the Basic Lease Provisions. Tenant acknowledges and agrees that neither Landlord nor Landlord's employees, contractors, or agents have made any representations or promises with respect to the Building, the Premises or this Lease except as expressly set forth herein. Subject to Landlord's obligation to pay the Tenant Improvement Contribution as and when provided in the Basic Lease Provisions, the taking of possession of the Premises by Tenant shall be conclusive evidence that Tenant accepts the same "as is" and that the Premises and the Building are suited for the use intended by Tenant and were in good and satisfactory condition at the time such possession was taken; provided that for any portion of the Premises other than the Initial Premises: (i) Landlord shall deliver such space to Tenant in the condition in which such space was required to be surrendered to Landlord under the lease for the previous tenant in such space, and (ii) Tenant may notify Landlord within two (2) weeks of Tenant's taking occupancy of such portion of the Premises of any matters such as nonworking lights or electrical outlets, damage to walls or doors or similar matters, that were not in good, working condition and repair as of the date that Tenant took occupancy of such portion of the Premises. Tenant represents and warrants to Landlord that (a) its sole intended use of the Premises is for general office use, including training, demonstration, non-retail sales, marketing, research and development for software and related uses, which has no special requirements, including but not limited to, special security requirements, (b) it does not intend to use the Premises for any other purpose, and (c) prior to executing this Lease it has made such investigations as it deems appropriate with respect to the suitability of the Premises for its intended use and has determined that the Premises is suitable for such intended use. 7. Common Areas. 7.1 Right to Use Common Areas. Tenant and Tenant's agents shall have the right to use during the Term the common areas of the Building in common with other persons approved by Landlord, subject to Landlord's rules and regulations and the provisions of this Lease. 7.2 Alteration by Landlord. Subject to Landlord's obligation to make commercially reasonable efforts to minimize interference with Tenant's business, Landlord hereby reserves the right, at any time and from time to time, without the consent of or liability to Tenant of any kind whatsoever, to make alterations or additions to the Real Property, to change, add to, eliminate or reduce the extent, size, shape, number or configuration of any aspect of the Real Property; to close to the general public any portion of the Real Property, to the extent and for the period necessary to avoid any dedication to the public, to effect any repairs or further construction, or in case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord's reasonable opinion; to change the arrangement, character, use or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, landscaping, toilets, mechanical, plumbing, electrical or other operating systems of the Real Property. 8. Use. 10 11 8.1 Permitted Use. The Premises shall be used for general office purposes, training, demonstration, non-retail sales, marketing, research and development for software, incidental storage and related uses, provided that such research and development does not involve the use or storage of Hazardous Materials, as defined below. Notwithstanding the foregoing, no more than twenty-thousand (20,000) square feet of the Premises may be used for training. Tenant's change in use shall be subject to the reasonable consent of Landlord. In addition to the above, Tenant shall be allowed to establish and maintain a cafeteria on the Premises for its employees, contractors and invitees, provided that such cafeteria shall not exceed five thousand rentable square feet in size and shall be only for the distribution of food and beverages and shall not involve any substantial food preparation activities, without Landlord's prior approval. 8.2 No Nuisance. Tenant shall not allow, suffer or permit the Premises or any use thereof to constitute a nuisance or unreasonably interfere with the safety, comfort or enjoyment of the Building by Landlord or any other occupants of the Building or their customers, invitees or any others lawfully in, upon or about the Building or its environs. 8.3 Compliance with Laws. Tenant, at Tenant's expense, shall comply with and cause all of Tenant's agents to comply with all applicable laws, ordinances, rules and regulations of governmental authorities applicable to the Premises and all rest rooms on floors occupied entirely by Tenant, whether or not a part of the Premises, or the use or occupancy thereof, including, without limitation, all laws relating to the existence, use, handling, or discharge of Hazardous Materials (as hereinafter defined) and all access laws or codes, including, without limitation, the Americans With Disabilities Act and Title 24 of the California Administrative Code (collectively, the "Laws"); provided that Tenant shall not be obligated to make any alterations to the electrical, mechanical, heating, ventilation or air conditioning, life safety or plumbing systems of the Building (collectively the "Building Systems"), structural elements of the Building or common areas pursuant to this Section 8.3, whether or not located within the Premises, unless such alterations are (i) caused by Tenant's activities in or Alterations to the Premises, and are mandated by Laws that were not in effect or not enforced as of the date hereof, (ii) caused by any use of the Premises, other than the Initial Premises, by Tenant that is in excess of or different from normal and customary general office use, or (iii) caused as a result of any alterations required in connection with any subleasing of all or any portion of the Premises. In the event that any alterations to (i) the so-called path of travel, or (ii) any sprinkler or life safety systems in the Building, are required as a result of any Alterations made by Tenant to the Premises, Tenant shall pay the cost of such path of travel, sprinkler or life safety systems alterations. Tenant acknowledges that the Real Property and this Lease are subject to that certain Declaration of Covenants, Conditions and Restrictions for Hacienda Business Park (No.2) dated as of April 30,1998, as may be amended from time to time (the "CC&R's") and that the provisions of the CC&R's are an integral part of this Lease. 8.4 Hazardous Materials. Tenant shall not cause or suffer or permit any Hazardous Materials, as defined below, to be brought upon, kept, used, discharged, deposited or leaked in or about the Premises or the Real Property by Tenant or any of Tenant's agents (other than Landlord or its agents, employees or contractors), except to the extent such Hazardous 11 12 Materials are customarily kept or used in customary amounts by typical office tenants and are kept and used in accordance with all applicable laws. If, during the Term, Tenant breaches the obligations stated in the preceding sentence, or if the presence of any Hazardous Material on the Premises or the Real Property caused or suffered or permitted by Tenant or any of Tenant's agents or by anyone in the Premises (other than Landlord or its agents, employees or contractors) results in contamination of the Premises or the Real Property during the Term, then Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, damages, costs, liabilities and expenses (including, without limitation, diminution in value or use of the Real Property, attorneys' fees, consultant fees and expert fees) which arise during or after the Term as a result of such contamination. This indemnification shall include, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work on or under the Premises and shall survive the termination of this Lease. "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local, state or federal governmental authority or by common law decisions, including without limitation (i) all chlorinated solvents, (ii) petroleum products or by-products, (iii) asbestos and (iv) polychlorinated biphenyls. 8.5 Building Systems. (a) Tenant shall not, without the prior consent of Landlord, (i) bring into the Building or the Premises anything that may cause substantial noise, odor or vibration, overload the floors in the Premises or the Building or any of the Building Systems, or jeopardize the structural integrity of the Building or any part thereof; (ii) connect to the utility systems of the Building any apparatus, machinery or other equipment other than typical office equipment; or (iii) connect to any electrical circuit in the Premises any equipment or other load with aggregate electrical power requirements in excess of 80% of the rated capacity of the circuit. The provisions of this Section shall not apply to the uses, configuration of improvements, density, utility requirements or any other similar matters relating to the Initial Premises, or any portion of the Premises added to this Lease after the date hereof that is similarly configured, used, improved and with similar utility requirements as the initial portion of the Premises. (b) (i) In the event that Tenant's use of the Premises or the configuration of Tenant's tenant improvements in the Premises places requirements or loads on the Building Systems in excess of that of customary office tenants in the Pleasanton-San Ramon area, and as a result thereof, Landlord is required to increase the capacity or otherwise improve the Building Systems, Tenant shall pay the reasonable cost of such increases in capacity or improvements that are attributable to Tenant's requirements that are in excess of customary office tenants in the Pleasanton-San Ramon area. The provisions of the preceding sentence shall not apply to electrical usage which is dealt with in Section 8.5(b)(ii) below nor shall it apply to any aspect of the Initial Premises. Tenant acknowledges that Landlord is making no representation that the Building Systems are sufficient or adequate for Tenant's use and occupancy of the Building. (ii) In the event that at any time during the term hereof the aggregate 12 13 electrical requirements of the Premises, calculated on a per rentable square foot basis, exceeds the electrical capacity of the Building calculated on a per rentable square foot basis, which shall equal the total electrical capacity of the Building, less the Building System usage, divided by the total rentable square feet in the Building, then Tenant shall pay all cost to increase the electrical capacity available to the Premises by a sufficient amount to remedy such deficiency. (iii) Subject to the provisions of Section 9.1(c), at any time from and after the date hereof, Tenant agrees that Tenant shall reimburse Landlord for any amounts expended by Landlord, up to a maximum of Thirty Thousand Dollars ($30,000) to repair and correct certain deficiencies identified by Landlord in the chillers and related calibration and regulation equipment for the Building. Tenant shall reimburse Landlord for such amount within fifteen (15) days of Landlord's demand therefore. Notwithstanding the foregoing, Tenant may do the work described in this Section 8.5(b)(iii) itself prior to the date hereof, in which case, Tenant shall not be obligated to reimburse Landlord for any such work as provided in this Section. 9. Alterations and Tenant's Property. 9.1 Alterations. (a) Tenant shall not before or during the Term make or suffer to be made any alterations, additions or improvements in or to the Premises (herein collectively called "Alterations") without first obtaining Landlord's written consent thereto based on detailed plans and specifications submitted by Tenant; provided, however, Landlord's consent shall not be required if the Alterations made by Tenant cost less than One Hundred Thousand Dollars ($100,000) per Alteration (provided that in no event shall the total Alterations made by Tenant without Landlord's consent during any calendar year (12) month period exceed the lesser of (x) Two Hundred Fifty Thousand Dollars ($250,000) or (y) three dollars ($3.00) per rentable square foot of the Premises) and said Alterations do not materially affect the structural integrity or Building Systems of the Building, cause Landlord's insurance costs to increase, or violate the provisions of any insurance policy held by Landlord with respect to the Real Property, and are not visible from the exterior of the Building. Landlord's consent may be withheld in Landlord's sole discretion if Alterations will materially affect the structural integrity of the Building or Building Systems, cause Landlord's insurance costs to increase, violate the provisions of any insurance policy held by Landlord with respect to the Real Property, or be visible from the exterior of the Building; otherwise Landlord's consent shall not be unreasonably withheld; provided further that, Landlord's consent shall not be unreasonably withheld in connection with any Alterations that are substantially consistent with the tenant improvements in the Initial Premises. Notwithstanding any other provision of this Section 9.1(a), in the event that Tenant seeks to make any Alterations in connection with a cafeteria in the Premises (i) such Alterations shall be subject to Landlord's approval, in Landlord's sole and absolute discretion, to the extent that such Alterations involve any substantial food preparation or long-term food storage, and (ii) to the extent not subject to clause (i) Landlord shall have the right in any event to review and reasonably approve or disapprove the plans therefore. 13 14 (b) If the consent by Landlord to the Alteration is required, such consent shall be withheld or given by Landlord as soon as reasonably possible but in any event within fifteen (15) days after request by Tenant and at the time such consent is given (or, in the case of Alterations for which Landlord's consent is not required, within fifteen (15) days after receiving notice of the proposed Alteration), Landlord shall inform Tenant whether or not Tenant shall be obligated to remove the Alteration upon the expiration or earlier termination of the Lease; provided that, notwithstanding any other provision of this Lease, Tenant shall not be obligated to remove the tenant improvements in the Initial Premises or any similarly configured tenant improvements constructed after the date hereof and Tenant shall be obligated to remove any cafeteria improvements. In the event that Landlord fails to inform Tenant that Tenant will be required to remove such Alteration at the end of the Term, then Tenant shall not be required to remove such Alteration. Notwithstanding any other provision hereof, (i) Tenant shall give Landlord not less than ten (10) days notice of the commencement of work on any Alteration, and (ii) any Alterations constructed by Tenant in connection with any new space added to the Premises after the date hereof shall not be subject to, or add to, the dollar limitation set forth above and shall not require Landlord's consent, provided that such Alterations do not materially affect the structural integrity or Building Systems of the Building and provided that such Alterations are consistent in type and quality with the existing improvements in the Initial Premises. All work by Tenant shall be performed with new materials, in a good and workmanlike manner, at Tenant's expense by contractors approved by Landlord, or in case that such work involves the structural integrity of the Building or the Building Systems Landlord may designate the contractors. Landlord's right to review and approve (or withhold approval of) Tenant's plans, drawings, specifications, contractor(s) and other aspects of construction work proposed by Tenant is intended solely to protect Landlord, the Real Property and Landlord's interests. No approval or consent by Landlord shall be deemed or construed to be a representation or warranty by Landlord as to the adequacy, sufficiency, fitness or suitability thereof or compliance thereof with applicable Laws or other requirements. (c) Within eighteen (18) months of the date hereof Tenant shall provide written notice to Landlord regarding whether Tenant intends to continue to occupy any portion of the Premises as a separate raised floor computer room. In the event that Tenant gives notice within such eighteen (18) month period that Tenant intends to occupy any portion of the Premises as a separate raised floor computer room, or in the event that Tenant fails to give such notice within such eighteen (18) month period but does, in fact, continue to occupy any portion of the Premises as a separate raised floor computer room, Tenant shall, subject to compliance with all applicable laws, codes, statutes and regulations and the requirements of the HBPOA, install and maintain a supplemental air conditioning unit in the approximate location shown on Exhibit G, or other location mutually agreeable to Landlord and Tenant, of sufficient size and capacity to provide all cooling and HVAC needs for the then existing raised floor computer rooms maintained by Tenant in the Premises. In addition, Tenant shall have the right to install on the Real Property such piping, conduits, electrical and other connections as may be necessary to enable such supplemental air conditioning unit to perform effectively, provided that any such piping, conduits, electrical and other connections shall either be installed in existing raceways or in such locations as Landlord may reasonably approve. All plans and specifications for any portion of the foregoing improvements to be installed within the Building or the Parking Garage 14 15 shall be subject to Landlord's consent, which shall not be unreasonably withheld, conditioned or delayed. All work by Tenant shall be performed with new materials, in a good and workmanlike manner, at Tenant's expense by contractors approved by Landlord, or in case that such work involves the structural integrity of the Building or the Building Systems Landlord may designate the contractors. Tenant and Tenant's contractors shall abide by all of Landlord's reasonable rules and regulations relating to such construction or installation. Landlord's right to review and approve (or withhold approval of) Tenant's plans, drawings, specifications, contractor(s) and other aspects of construction work proposed by Tenant is intended solely to protect Landlord, the Real Property and Landlord's interests. Tenant shall take reasonable efforts to minimized interference with existing tenants in the installation of such unit and related facilities and shall repair any damage caused as a result of such installation. Tenant shall maintain such unit and related facilities in good condition and consistent with the other elements of the Real Property. Upon the termination of this Lease, Tenant shall remove such unit and related facilities and repair any damage caused by such removal. In the event that Tenant installs the unit described in this Section 9.1(c), Tenant shall not be obligated to pay, or if previously paid (including if Tenant performed such work itself prior to the date hereof), shall be entitled to a reimbursement for, the sums specified in Section 8.5(b)(iii) above. Landlord and Tenant acknowledge that Tenant may perform the work described in this Section 9.1(c) prior to the date of this Lease, in which case this Section 9.1(c) shall be null and void and Tenant shall have no obligation to make the reimbursement described in Section 8.5(b)(iii). 9.2 Construction Process. Before making any Alterations (other than those with respect to which Landlord's consent is not required), Tenant shall submit to Landlord for Landlord's prior approval reasonably detailed final plans and specifications prepared by a licensed architect or engineer (to the extent reasonably required), a copy of the construction contract, including the name of the contractor and all subcontractors proposed by Tenant to make the Alterations and a copy of the contractor's license. Tenant shall reimburse Landlord upon demand for any actual expenses incurred by Landlord in connection with any Alterations made by Tenant, including actual and reasonable fees charged by Landlord's contractors or consultants to review plans and specifications prepared by Tenant and, if reasonable, to update the existing as-built plans of the Building to reflect the Alterations. Tenant shall obtain all applicable permits, authorizations and governmental approvals and deliver copies of the same to Landlord before commencement of any Alterations. Tenant shall provide Landlord with one set of plans and specifications for all Alterations, whether or not Landlord's approval of such Alterations is required. 9.3 Removal of Property. All Alterations shall become the property of Landlord, and shall be surrendered to Landlord, upon the expiration or earlier termination of this Lease; provided, however, that this provision shall not apply to movable equipment, trade fixtures, computers and peripheral equipment and cabling, and personal property or furniture which are owned by Tenant. Notwithstanding the foregoing, Tenant shall have the affirmative obligation, to remove Tenant's personal property, trade fixtures and specialty improvements installed by Tenant, including, but not limited to all computer rooms, any tenant improvements in connection with any cafeteria use, fiber optic cabling and satellite dishes; provided that, notwithstanding any other provision of this Lease, Tenant shall have no obligation to remove (i) 15 16 the tenant improvements in the Initial Premises and any similarly configured tenant improvements in any other portion of the Premises, or (ii) cabling in the Initial Premises or in any other portion of the Premises delivered to Tenant after the date hereof that has cabling in it from a previous tenant when delivered to Tenant. Tenant waives and releases its rights under Section 1019 of the California Civil Code, or any similar law, statute or ordinance now or hereafter in effect, to the extent inconsistent with the provisions of this Lease. Tenant's obligations under this Section shall survive any termination of this Lease. 10. Repairs and Other Work. 10.1 Tenant's Obligations. Tenant shall at all times during the Term maintain the Premises in good, clean and sanitary condition and, at Tenant's cost and expense, shall make all repairs and replacements as and when necessary to preserve the Premises in good working order and condition; provided that the Tenant shall not be obligated to repair or maintain the Building Systems or the structural elements of the Building located within the Premises unless such repair or maintenance is necessitated by Tenant's specific use of the Premises or the Real Property (as opposed to office use generally) or any act or omission of Tenant, its agents, contractors, employees or invitees; provided that Tenant shall only be responsible for its invitees while they are on the Premises. Except as otherwise specifically set forth herein, Landlord shall not be liable for, and there shall be no abatement of Base Rent or Additional Charges, with respect to, any injury to or interference with Tenant's business arising from any repairs, maintenance, alteration or improvement in or to any portion of the Real Property, including, without limitation, the Premises, or in or to the fixtures, appurtenances and equipment therein. 10.2 Landlord's Obligations. Landlord shall at all times during the Term maintain the Building, the structural elements of the Building, and the common areas in good, clean and sanitary condition and shall make all repairs and replacements as and when necessary. Landlord shall maintain the Real Property in compliance with Laws; provided that Landlord shall not be obligated to make any repairs or do any maintenance that is Tenant's obligations under Section 10.1. Without limiting the generality of the foregoing and notwithstanding any other provision of this Lease which may require Tenant to perform the same or similar work, Landlord shall (i) no later than two (2) years from the date hereof make the "Mandatory Capital" improvements designated on Exhibit C, (ii) on the date that such improvements are required under applicable laws, codes or regulations make the capital improvements designated as "Code Triggered" capital improvements on Exhibit C, and (iii) on the date that such improvements are required as a result of Tenant's occupancy of any portion of the Premises other than the Initial Premises make the capital improvements designated as "Occupancy Triggered" capital improvements on Exhibit C. All such work by Landlord shall be done with new materials and in a good and workmanlike manner. In the event that Landlord fails to make repairs as required hereunder within ten (10) days after written notice by Tenant, Tenant shall give Landlord a second notice and if Landlord fails to make such repairs within five (5) days after such second written notice by Tenant, or fails to commence to make such repairs within such periods of time and thereafter diligently prosecute such repairs to completion, Tenant may make the repairs and seek immediate reimbursement from Landlord. In the event Landlord disputes Tenant's right to make such repairs, such dispute shall be arbitrated pursuant to Section 28.21 hereof. If such 16 17 arbitration determines that Tenant was entitled to make such repairs and that Landlord owes Tenant for the cost thereof and Landlord fails to reimburse Tenant within thirty (30) days of the conclusion of such arbitration, Tenant shall be entitled to deduct the cost of such repairs from Rent; provided that any such deduction shall not exceed one hundred thousand dollars ($100,000) in any calendar year. As a material part of the consideration for this Lease, Tenant hereby waives any benefits of any applicable existing or future Law, including the provisions of California Civil Code Sections 1932(1), 1941 and 1942, that allows a tenant to make repairs at its landlord's expense. 10.3 Conditions Applicable to Repairs and Other Work. All repairs, replacements, and reconstruction (including, without limitation, all Alterations) made by or on behalf of Tenant or any of Tenant's agents shall be made and performed (a) at Tenant's cost and expense and at such time and in such manner as Landlord may reasonably designate, (b) by contractors or mechanics reasonably approved by Landlord, (c) with new materials and in a good and workmanlike manner, (d) in accordance with such reasonable requirements as Landlord may impose with respect to insurance and bonds to be obtained by Tenant in connection with the proposed work, (e) in accordance with the Rules and Regulations for the Real Property reasonably adopted by Landlord from time to time and in accordance with all applicable laws and regulations of governmental authorities having jurisdiction over the Premises, (f) so as not to interfere with the use and enjoyment of the Building by Landlord, other tenants of the Building or any other persons, and (g) in compliance with such other requirements as Landlord may reasonably impose, including requirements similar to those specified in Sections 9.1 and 9.2. 11. Liens. 11.1 Tenant shall keep the Premises and the Real Property free from any liens during the term of the Lease, except to the extent caused by Landlord. In the event that Tenant shall not, within thirty (30) days following notice of the imposition of any such lien, cause same to be released of record by payment or posting of a bond fully satisfactory to Landlord in form and substance, Landlord shall have, in addition to all other remedies provided herein and by law, the right (but not the obligation) to cause the lien to be released by such means as Landlord shall deem reasonably proper, including, without limitation, payment of the claim giving rise to such lien. All such sums paid by Landlord and all actual and reasonable expenses incurred by it in connection therewith shall be considered Additional Charges and shall be payable by Tenant within thirty (30) days after written demand by Landlord with interest thereon from the date of expenditure by Landlord at the Interest Rate (as defined in Section 20.4). Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or that Landlord shall deem reasonably proper for the protection of Landlord, the Premises, the Real Property and any other party having an interest therein, from mechanics', materialmen's and other liens. In addition to all other requirements contained in this Lease, Tenant shall give to Landlord at least ten (10) days' prior written notice of commencement of any construction on the Premises. 12. Subordination. 17 18 12.1 Subordination. Tenant agrees that this Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases that may now exist or hereafter be executed affecting the Real Property or any portion thereof, and (b) the lien of any mortgage, deed of trust, or other security instrument that may now exist or hereafter be executed in any amount for which the Real Property or any portion thereof or interest therein is specified as security (each, an "Encumbrance"); provided that such prior interest shall recognize Tenant's rights hereunder so long as Tenant complies with the terms and conditions of this Lease. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated to this Lease any such ground leases, underlying leases or liens. If any ground lease or underlying lease terminates for any reason or any mortgage or other security instrument is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall attorn to and become the tenant of the successor-in-interest to Landlord at the option of such successor-in-interest provided that such successor-in-interest shall recognize and agree to be bound by the terms of this lease. The provisions of this Section shall be self-operative and no further instrument shall be required to effect the provisions of this Section. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver, within ten (10) days after demand by Landlord and in the form reasonably requested by Landlord, any additional documents evidencing the foregoing. 12.2 Notice to Mortgagee. Tenant agrees to give any holder of any Encumbrance covering any part of the Real Property ("Mortgagee"), by registered mail, a copy of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of notice of assignment of rents and leases, or otherwise) of the address of such Mortgagee. If Landlord shall have failed to cure such default within thirty (30) days from the effective date of such notice of default, then the Mortgagee shall have an additional thirty (30) days within which to cure such default or if such default cannot be cured within that time of if possession is required to effect any such cure, then such additional time as may be necessary to cure such default, including any period of time required for the Mortgagee to obtain possession of the Premises by a receiver or other summary remedy; provided that the Mortgagee is diligently prosecuting the cure thereof to completion and this Lease shall not be terminated so long as such remedies are being diligently pursued. 13. Surrender. Upon the expiration or termination of this Lease, Tenant shall surrender the Premises and all tenant improvements and Alterations to Landlord broom-clean; provided, however, that, except as provided in Section 9.3 above, prior to the expiration or termination of this Lease, Tenant shall remove all telephone and other cabling installed in the Building by Tenant and remove from the Premises all Tenant's personal property and any trade fixtures and all Alterations that Landlord has elected to require Tenant to remove as provided in Section 9, and repair any damage caused by such removal. If such removal is not completed before the expiration or termination of the Term, Landlord shall have the right (but no obligation) to remove the same, and Tenant shall pay Landlord on demand for all costs of removal and storage thereof and for the rental value of the Premises for the period from the end of the Term through the end of the time reasonably required for such removal. Landlord shall also have the right to retain or dispose of all or any portion of such property if Tenant does not pay all such costs and retrieve the property within thirty (30) days after notice from Landlord (in which event title to all 18 19 such property described in Landlord's notice shall be transferred to and vest in Landlord). Tenant waives all Claims (as defined in Section 20.2) against Landlord for any damage or loss to Tenant resulting from Landlord's removal, storage, retention, or disposition of any such property. Upon expiration or termination of this Lease or of Tenant's possession, whichever is earliest, Tenant shall surrender keys to the Premises or any other part of the Building and shall deliver to Landlord keys for or make known to Landlord the combination of locks on all safes, cabinets and vaults that may be located in the Premises. Tenant's obligations under this Section shall survive the expiration or termination of this Lease. 14. Destruction. 14.1 Repair. In the event of any casualty, damage or destruction ("Casualty") to any portion of the Premises and subject to the provisions of Sections 14.3 and 14.4 below, (i) if the Premises can, in Landlord's reasonable opinion, be repaired within one (1) year of the date of such Casualty, and if the portion of the Premises destroyed constitutes no more than forty thousand (40,000) rentable square feet, such casualty, damage or destruction shall be deemed a "Minor Casualty," (ii) if the portion of the Premises destroyed is less than forty thousand (40,000) rentable square feet, but in the Landlord's reasonable opinion such casualty cannot be repaired in less than one year from the date of such Casualty such Casualty, shall be deemed a "Medium Casualty." Any Casualty that is not a Minor or Medium Casualty shall be deemed a "Major Casualty." In the event of a Minor Casualty, or in the event of a Medium or Major Casualty with respect to that portion of the Premises, if any, for which the Lease is not terminated, Landlord shall proceed promptly to make the necessary repairs in accordance with Section 14.4 below. Landlord's opinion regarding time to repair shall be delivered to Tenant within sixty (60) days after the date of the damage in the case of any Casualty. In all cases repairs shall cover all common areas and paths of travel and, if required to repair, Landlord shall proceed diligently to commence and complete such repairs. All of the calculations of percentage of destruction shall be done on the basis of square footage destroyed. 14.2 Tenant's Right to Terminate. (a) In the event of a Medium Casualty, Tenant shall have the right to terminate the Lease as to the portion of the Premises destroyed by such Medium Casualty by delivery of written notice to Landlord within thirty (30) days after Tenant receives Landlord's notice of its opinion of the time required to repair. Upon termination, Base Rent and Additional Charges pursuant to Article 5 shall be apportioned as of the date of the damage, unless Tenant has used and occupied the portion of the Premises affected by such Medium Casualty after the date of damage, in which case the Base Rent and Additional Charges shall be apportioned as of the date Tenant vacates the applicable portion of the Premises. (b) In the event of a Major Casualty Tenant shall have the right to terminate the Lease by delivery of written notice to Landlord within thirty (30) days after Tenant receives Landlord's notice of its opinion of the time required to repair. Upon termination, Base Rent and Additional Charges pursuant to Article 5 shall be apportioned as of the date of the damage, unless Tenant has used and occupied the Premises after the date of damage, in which case the 19 20 Base Rent and Additional Charges shall be apportioned as of the date Tenant vacates the Premises. 14.3 Landlord's Right to Terminate. In the event (i) the uninsured portion of any damage to or destruction of the Real Property equals or exceeds twenty-five percent (25%) of the replacement cost of the Building; (ii) the Term will expire within one (1) year from the date of any material damage to or destruction of the Premises and Tenant fails to extend the term in accordance with any right expressly granted in this Lease within thirty (30) days after the date of damage; (iii) in the reasonable judgment of Landlord, adequate proceeds (excluding any deductible amounts) are not, for any reason other than Landlord's gross negligence or willful misconduct, made available to Landlord from Landlord's insurance policies (and/or from Landlord's funds made available for such purpose, at Landlord's sole option) to make the required repairs; or (iv) in the reasonable judgment of Landlord, the Premises and the Real Property cannot be substantially repaired and restored under applicable laws within one (1) year from the date of the casualty, Landlord may elect to terminate this Lease (or in the case of a Medium Casualty the Lease as to the portion of the Premises destroyed by such Medium Casualty) as hereinafter provided. Landlord may terminate this Lease for the reason stated in this Section 14.3, by delivery of written notice to Tenant within sixty (60) days after the date of damage or destruction. 14.4 Extent of Repair Obligations. If this Lease is not terminated pursuant to Section 14.2 or 14.3 above, Landlord shall repair the structure of the Building and, to the extent of available insurance proceeds, all improvements in the Premises except for Alterations made in the Premises by Tenant, which are more extensive or costly in any substantial respect from the tenant improvements existing in the Initial Premises; provided that Landlord shall not have any obligation to replace the tenant improvements for any computer rooms. All such repairs shall be performed in a good and workmanlike manner and shall restore the items repaired to substantially the same or better usefulness, design and construction as existed immediately before the damage. All work by Tenant shall be performed in accordance with the requirements of Section 10.3 above. The Base Rent and Additional Charges payable by Tenant shall abate in proportion to the portion of the Premises rendered untenantable or reasonably unusable. In the event of any termination of this Lease, the proceeds from any insurance paid by reason of damage to or destruction of the Real Property or any portion thereof shall belong to and be paid to Landlord, except for proceeds payable under Tenant's insurance policies, to the extent such proceeds relate to damage or destruction to Tenant's personal property. 14.5 Waiver of Subrogation. As long as their respective insurers so permit, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties. Each party shall apply to their insurers to obtain said waivers. Each party shall obtain any special endorsements, if required by their insurer to evidence compliance with such waiver. 14.6 Non-Application of Certain Statutes. The provisions of this Lease constitute an express agreement between Landlord and Tenant with respect to any and all 20 21 damage to, or destruction of, all or any part of the Premises, or any other portion of the Real Property. Any statute or regulation of the State of California or any other governmental authority or body, including, without limitation, Sections 1932(2), 1933(4), 1941 and 1942 of the California Civil Code, with respect to any rights or obligations concerning any such damage or destruction, shall have no application to this Lease or any damage or destruction to all or any part of the Premises or any other portion of the Building. 15. Insurance. 15.1 Insurance on Tenant's Property. Tenant shall during the Term provide insurance coverage for all risks of physical loss or damage insuring the full replacement value of Tenant's Alterations, Tenant's trade fixtures, furnishings, equipment and all other items of personal property of Tenant. 15.2 Tenant's Liability Insurance. Tenant shall during the Term of the Lease provide broad form commercial general liability insurance, and automobile liability insurance, each with a minimum combined single limit of liability of at least Five Million Dollars ($5,000,000), and statutory worker's compensation insurance with a Five Million Dollar ($5,000,000) employer's liability limit covering all of Tenant's employees. Notwithstanding the foregoing in the event of any permitted assignment or sublease of all or a portion of the Premises, such assignee or sublessee shall only be required to provide insurance of the type required by this Section 15.2 in the amount of Two Million Dollars ($2,000,000). Tenant's liability insurance policy or policies shall: (i) include premises and operations liability coverage, products and completed operations liability coverage, broad form property damage coverage including completed operations, blanket contractual liability coverage including, to the maximum extent possible, coverage for the indemnification obligations of Tenant under this Lease, fire legal liability insurance, and personal and advertising injury coverage; (ii) provide that the insurance company has the duty to defend all insureds under the policy; (iii) provide that defense costs are paid in addition to and do not deplete any of the policy limits; and (iv) cover liabilities arising out of or incurred in connection with Tenant's use or occupancy of the Premises or the Real Property; (v) extend coverage to cover liability for the actions of Tenant's agents, contractors, employees and invitees. Each policy of liability insurance required by this Section shall: (i) contain a cross liability endorsement or separation of insureds clause; (ii) provide that any waiver of subrogation rights or release prior to a loss does not void coverage; (iii) provide that it is primary to and not contributing with, any policy of insurance carried by Landlord covering the same loss; (iv) provide that any failure to comply with the reporting provisions shall not affect coverage provided to Landlord, its partners, property managers and Mortgagees; and (v) name Landlord, its partners, the property manager of the Real Property (the "Property Manager"), and such other parties in interest as Landlord may from time to time reasonably designate to Tenant in writing, as additional insureds. Such additional insureds shall be provided at least the same extent of coverage as is provided to Tenant under such policies. All endorsements effecting such additional insured status shall be at least as broad as additional insured endorsement form number CG 20 11 11 85 promulgated by the Insurance Services Office. 15.3 Form of Policies. All insurance policies required to be carried by Tenant 21 22 under this Lease shall (i) be written by companies having rating classifications of "A" or better and financial size category ratings of "VII" or better according to the latest edition of the A.M. Best Key Rating Guide and authorized to do business in California, (ii) name Landlord, and any other parties designated by Landlord as additional insureds, (iii) as to liability coverages, be written on an "occurrences" basis, (iv) provide that Landlord shall receive thirty (30) days' notice from the insurer before any cancellation or change in coverage, and (v) contain a provision that no act or omission of Tenant shall affect or limit the obligation of the insurer to pay the amount of any loss sustained. Each such policy shall contain a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance. Any deductible amounts under any insurance policies required hereunder shall be subject to Landlord's prior written approval (which shall not be unreasonably withheld) and in any event Tenant shall be liable for payment of same in the event of any casualty; provided that in no event shall such deductible be less than five thousand dollars ($5,000) nor more than fifty thousand dollars ($50,000), provided that such deductible shall be subject to reasonable adjustment by Landlord depending on the financial condition of PeopleSoft. Tenant shall deliver reasonably satisfactory evidence of such insurance to Landlord on or before the Commencement Date, and thereafter at least thirty (30) days before the expiration dates of expiring policies; and, in the event Tenant shall fail to procure such insurance or to deliver reasonably satisfactory evidence thereof within five (5) business days after written notice from Landlord of such failure, Landlord may, at its option and in addition to Landlord's other remedies in the event of a default by Tenant hereunder, procure such insurance for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Charges. Notwithstanding the foregoing, if any such insurance expires without having been renewed by Tenant, Landlord shall have the option, in addition to Landlord's other remedies, to procure such insurance for the account of Tenant immediately and without notice to Tenant, and the cost thereof shall be paid to Landlord as Additional Charges. 15.4 Landlord's Insurance. During the Term, Landlord shall insure the Building (including all tenant improvements, excluding Alterations, except for Alterations constructed by Tenant at the commencement of Tenant's occupancy of a particular space and excluding any property which Tenant is obligated to insure) for, at least, ninety percent (90%) of its full replacement cost, excluding land, foundations, footings and underground installations, subject to a deductible amount to be agreed upon between Landlord and Tenant but which shall not be less than five thousand dollars ($5,000) nor more than twenty five thousand dollars ($25,000) other than with respect to earthquake coverage, against damage with All-Risk insurance (including earthquake coverage to the extent available on commercially reasonable terms and with a deductible amount as would be customary for similar properties) and Commercial General Liability Insurance. The Commercial General Liability Insurance shall be in the amount of not less than Two Million Dollars ($2,000,000). Landlord may, but shall not be obligated to, obtain and carry any other form or forms of insurance as Landlord and Tenant may mutually agree in writing or as Landlord may be required to carry by any mortgagee under any mortgage encumbering the Building or the Premises. 15.5 Compliance with Insurance Requirements. Tenant shall not do anything, or suffer or permit anything to be done, in or about the Premises that shall invalidate or be in 22 23 conflict with the provisions of any fire or other insurance policies covering the Building or any property located therein. Tenant, at Tenant's expense, shall comply with, and shall cause all occupants of the Premises to comply with, all applicable customary rules, orders, regulations or requirements of any board of fire underwriters or other similar body. 15.6 Updating Coverage. Tenant shall increase the amounts of insurance as reasonably required by any Mortgagee, and, not more frequently than once every three (3) years, as recommended by Landlord's insurance broker, if, in the commercially reasonable opinion of either of them, the amount of insurance then required under this Lease is not comparable to that required by similar owners on similar properties in the Pleasanton-San Ramon area. Any limits set forth in this Lease on the amount or type of coverage required by Tenant's insurance shall not limit the liability of Tenant under this Lease. 15.7 Certificates of Insurance. Prior to the Commencement Date, and not less than thirty (30) days prior to expiration of any policy thereafter, Tenant shall furnish to Landlord a copy of a certificate of insurance reflecting that the insurance required by this Section is in force, accompanied by an endorsement showing the required additional insureds satisfactory to Landlord in substance and form. 16. Eminent Domain. 16.1 Effect of Taking. If fifty percent (50%) or more of the Premises is permanently condemned or taken (or any transfer is made in lieu thereof) before or during the Term for public or quasi-public use, (each of which events shall be referred to as a "taking"), this Lease shall automatically terminate as of the date of the vesting of title. If less than fifty percent (50%) of the Premises is so taken, this Lease shall automatically terminate as to the portion of the Premises so taken as of the date of the vesting of title as a result of such taking. If fifty percent (50%) or more of the Real Property is taken as to render the Building incapable of economically feasible operation as reasonably determined by Landlord, this Lease may be terminated by Landlord, as of the date of the vesting of title as a result of such taking, by written notice to Tenant within sixty (60) days following notice to Landlord of the date on which said vesting will occur. If any portion of the Premises is permanently taken as to render the Premises or the remaining portion thereof unusable by Tenant for the normal operation of Tenant's business or the Premises, this Lease may be terminated by Tenant as of the date of the vesting of title as a result of such taking, by written notice to Landlord within sixty (60) days following notice to Tenant of the date on which said vesting will occur. If this Lease is not terminated as a result of any taking, Landlord shall restore the Building to an architecturally whole unit; provided, however, that Landlord shall not be obligated to expend on such restoration more than the amount of condemnation proceeds actually received by Landlord nor do more work than that described in Section 14.3, unless Tenant pays to Landlord in advance the difference between the cost of such restoration and the amount of the condemnation proceeds received by Landlord. In no event shall Landlord have any obligation to repair or replace any of Tenant's personal property, trade fixtures, or Alterations. 16.2 Award. Landlord shall be entitled to the entire award for any taking, 23 24 including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in any taking; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in any separate award made to Tenant for its relocation expenses, the taking of personal property and fixtures belonging to Tenant, the unamortized value of improvements made or paid for by Tenant or the interruption of or damage to Tenant's business, provided that such separate award does not diminish, in any way, Landlord's award on account of such taking. 16.3 Adjustment of Rent. In the event of a partial taking that does not result in a termination of this Lease as to the entire Premises, the Base Rent and Additional Charges shall be adjusted in proportion to the portion of the Premises taken or rendered untenantable by such taking. Tenant hereby waives and releases its rights under Sections 1265.120 and 1265.130 of the California Code of Civil Procedure or any similar statute now or hereafter in effect. 17. Assignment. 17.1 Consent Required. Notwithstanding the provisions of Section 28.2 below, neither Tenant nor any sublessee or assignee of Tenant shall, directly or indirectly, voluntarily or by operation of law, sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any part of the Premises or Tenant's leasehold estate hereunder (each such act is herein referred to as an "Assignment"), or sublet the Premises or any portion thereof or permit the Premises to be occupied by anyone other than Tenant (each such act is herein referred to as a "Sublease"), without Landlord's prior written consent in each instance, which consent shall not be unreasonably withheld; provided that Landlord may withhold its consent in Landlord's sole and absolute discretion to any proposed Assignment or Sublease to any governmental agency. Tenant acknowledges and agrees that, among other circumstances for which Landlord could reasonably withhold consent to a proposed Assignment or Sublease, it shall be reasonable for Landlord to withhold consent where (i) the proposed transferee does not intend itself to occupy the entire portion of the Premises assigned or sublet, (ii) Landlord reasonably disapproves of the proposed transferee's business operating ability or history, reputation or creditworthiness or the character of the business to be conducted by the proposed transferee at the Premises, (iii) the proposed transfer would violate any "exclusive" rights of any tenants in the Building, (iv) the proposed transferee is an existing tenant of the Building and the Building has available for rent space that would be competing with the space proposed for the Assignment or Sublease, (v) the use by the proposed transferee would increase the parking requirements for the Building under applicable zoning and land use laws or applicable covenants relating to the Building, or (vi) Landlord otherwise reasonably determines that the proposed Assignment or Sublease would have the effect of decreasing the value of the Building or increasing the expenses associated with operating, maintaining and repairing the Building. In no event may Tenant publicly offer or advertise all or any portion of the Premises for assignment or sublease at a rental less than that then sought by Landlord for a direct lease (non-sublease) of comparable space in the Building. Notwithstanding anything contained herein to the contrary, Tenant shall have the right, without Landlord's consent and without releasing Tenant from any liability hereunder, to effect an Assignment of this Lease to any entity that is owned or controlled to the extent of more than fifty 24 25 percent (50%), whether directly or indirectly, by Tenant (each of the foregoing a "Permitted Assignee") or to Sublease all or any part of the Premises to any entity that is a direct or indirect parent or subsidiary of Tenant, to any entity in which any such parent or direct or indirect subsidiary is a partner, shareholder or member, or to any entity with which Tenant has a written strategic alliance; provided that any subleases to entities with which Tenant has a written strategic alliance shall not exceed five thousand (5,000) rentable square feet for each such strategic alliance entity or thirty thousand (30,000) rentable square feet for all such strategic alliance entities. In addition, so long as the stock of Tenant is publicly traded on any nationally recognized exchange, a transfer of all or any part of such stock in Tenant shall not be deemed an assignment of this Lease. Any Assignment or Sublease that is not in compliance with this Article 17 shall be void. The acceptance of Base Rent or Additional Charges by Landlord from a proposed assignee, sublessee or occupant of the Premises shall not constitute consent to such Assignment or Sublease by Landlord. 17.2 Recapture Right. (a) In the event that Tenant desires to Assign or Sublease all or portion of the Premises pursuant to an Assignment or Sublease that requires Landlord's consent hereunder, Tenant shall give notice to Landlord (the "Assignment or Sublease Notice") of (i) the space to be Assigned or Subleased (the "Proposed Assignment or Sublease Space"), and (ii) the proposed terms and conditions, including without limitation rent and similar charges, at which Tenant proposes to offer the Proposed Assignment or Sublease Space for Assignment or Sublease. Landlord shall notify Tenant as soon as possible but in any event within thirty (30) days of the Assignment or Sublease Notice regarding whether Landlord desires to terminate this Lease as to the Proposed Assignment or Sublease Space or whether Landlord desires to allow Tenant to proceed to attempt to Assign or Sublease such the Proposed Assignment or Sublease Space. In the event that Landlord notifies Tenant within such thirty (30) day period that Landlord desires to terminate this Lease as to the Proposed Assignment or Sublease Space, this Lease shall terminate as to the Proposed Assignment or Sublease Space on the date for commencement of the term therefor as set forth in the Assignment or Sublease Notice. In the event that Landlord notifies Tenant within such thirty (30) day period that Landlord does not want to terminate this Lease as to the Proposed Assignment or Sublease Space or in the event Landlord fails to give Tenant any notice within such thirty (30) days period, then Tenant shall be free to seek an assignee or sublessee thereof subject to Landlord's consent to the extent required hereunder. (b) In the event that at the time of the receipt of the Assignment or Sublease Notice, Landlord currently has space available for lease, or expects to have space available for lease in the next six (6) months (nine (9) months for blocks of space in excess of 20,000 square feet), in the Building that may reasonably be considered equivalent or competitive to the Proposed Assignment or Sublease Space, in terms of size, location, contiguity, term and similar matters, then Landlord shall not be required to exercise, if Landlord so desires, the recapture right described above, until Tenant gives Landlord the notice of specific Assignment or Sublease pursuant to Section 17.3 below; provided that in such event the time period for Landlord's response to Tenant's notice shall, in each instance, be ten (10) days and not the thirty (30) days provided in (a) above. 25 26 17.3 Notice. Any request by Tenant for Landlord's consent to a specific Assignment or Sublease shall include (a) the name of the proposed assignee, sublessee or occupant, (b) the nature of the proposed assignee's, sublessee's or occupant's business to be carried on in the Premises, (c) a copy of the proposed Assignment or Sublease, and (d) such financial information and such other information as Landlord may reasonably request concerning the proposed assignee, sublessee or occupant or its business. Landlord shall respond in writing, (i) exercising the recapture right described in Section 17.2 above, if applicable, (ii) giving approval to the proposed Assignment or Sublease, or (iii) stating the reasons for any disapproval of the proposed Assignment or Sublease, within ten (10) business days after receipt of all information reasonably necessary to evaluate the proposed Assignment or Sublease. 17.4 No Release. No consent by Landlord to any Assignment or Sublease by Tenant, and no specification in this Lease of a right of Tenant's to make any Assignment or Sublease, shall relieve Tenant of any obligation to be performed by Tenant under this Lease. The consent by Landlord to any Assignment or Sublease shall not relieve Tenant or any successor of Tenant from the obligation to obtain Landlord's express written consent to any other Assignment or Sublease. 17.5 Cost of Processing Request. Tenant shall pay to Landlord the reasonable amount of Landlord's cost of processing every proposed Assignment or Sublease and the reasonable amount of all direct and indirect expenses incurred by Landlord arising from any assignee, occupant or sublessee taking occupancy; provided, however, such amount payable to Landlord under this Section 17.4 shall not exceed one thousand dollars ($1,000) for each proposed Assignment or Sublease. 17.6 Assumption of Obligations. Each assignee or other transferee of Tenant's interest hereunder, other than Landlord, shall assume all applicable obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of Base Rent and Additional Charges, to the extent applicable, and for the performance of all applicable terms, covenants, conditions and agreements herein contained on Tenant's part to be performed for the Term. Prior to the date on which any assignment or sublease (whether or not requiring Landlord's consent) becomes effective, Tenant shall deliver to Landlord a counterpart of the fully executed transfer document and Landlord's standard form of Consent to Assignment or Consent to Sublease executed by Tenant and the Transferee in which each of Tenant and the assignee or sublessee confirms its applicable obligations pursuant to this Lease. Failure or refusal of an assignee or sublessee to execute any such instrument shall not release or discharge the assignee or sublessee from liability as provided herein. 17.7 Profit Split. In the event Landlord approves any Assignment or Sublease for which Landlord's consent is required, fifty percent (50%) of the excess, after deducting leasing commissions and tenant improvement costs applicable to such Sublease or Assignment, amortized over the term of such Sublease or Assignment, of the total amount of rent and other consideration paid under or in consideration for any such Sublease or Assignment over the Base Rent and Additional Charges payable hereunder, shall be payable to Landlord as Additional Charges. 26 27 17.8 Assignment of Sublease Rents. Tenant hereby absolutely and irrevocably assigns to Landlord any and all rights to receive rent and other consideration from any sublease and agrees that Landlord, as assignee or as attorney-in-fact for Tenant for purposes hereof, or a receiver for Tenant appointed on Landlord's application may (but shall not be obligated to) collect such rents and other consideration and apply the same toward Tenant's obligations to Landlord under this Lease; provided, however, that Landlord grants to Tenant at all times prior to occurrence of any breach or default by Tenant a revocable license to collect such rents (which license shall automatically and without notice be and be deemed to have been revoked and terminated immediately upon any Event of Default). 18. Utilities and Services. 18.1 Landlord to Furnish. Landlord shall furnish during the Term, subject to reimbursement pursuant to Article 5 above, (a) heating, ventilation and air conditioning to the Premises during the hours of 7:00 a.m. until 6:00 p.m. Monday through Friday (excluding holidays), (b) automatic elevator service to the floor or floors where the Premises are located at all times, (c) electric power consistent with Tenant's usage in the Premises as of the date hereof at the Building electrical panels of each floor (excluding power for HVAC, lighting and Building emergency systems), (d) hot and cold water at all current points of supply in the Initial Premises and reasonable future points of supply, (e) janitorial service five (5) nights per week (except labor holidays) pursuant to the janitorial specifications attached hereto as Exhibit D, (f) replacement of all building standard fluorescent tubes, (g) basic recycling at central collection points on each floor, (h) at the request of Tenant, guard service at designated entrances and exits on a twenty four (24) hour a day, seven (7) days a week basis, and (i) refilling of soap, towel and tissue containers in the restrooms in the Premises. All services provided by Landlord hereunder shall be provided at a level and in a manner commensurate with other first class office buildings in the same geographic area. Notwithstanding anything to the contrary in this Section 18.1. Landlord shall not be obligated to provide any janitorial service to the computer rooms and storage space in the Parking Garage or the Building. Landlord shall at all times provide on-site property management consistent with similar buildings in the Pleasanton-San Ramon area. For so long as Tenant leases at least seventy five percent (75%) of the rentable area of the Building, Tenant shall have the right to approve, which consent shall not be unreasonably withheld, conditioned or delayed, the property management company for the Building and the individual manager for the Building. William Wilson & Associates is approved as a property management company. 18.2 Excess Usage. Tenant shall be entitled to after hours HVAC service upon reasonable telephonic or verbal notice to Landlord at a cost of twenty dollars ($20.00) per hour per floor, provided that such cost shall be billed in a minimum of three (3) hour increments. Said twenty dollars ($20.00) per hour per floor cost may be reasonably increased upon any increase in the costs of the components thereof. If Tenant uses excess electric power beyond the quantity specified in Section 18.1(c), calculated on a square footage basis, Tenant shall pay for the actual and reasonable cost of such excess power and the cost of installing any additional risers or other facilities that may be necessary to furnish such excess power to the Premises. In the event Tenant uses excess janitorial, water or other services for weekend cleaning or in connection with 27 28 any cafeteria or other specialized use maintained by Tenant, Tenant shall pay for the actual and reasonable cost of such excess services. In the event that Tenant has requested guard service in excess of the hours specified below in this sentence, Tenant shall pay to Landlord as a direct reimbursement for the cost of such excess guard service, all sums incurred by Landlord for such excess guard service that are in excess of the greater of (i) the cost of such guard service Monday through Friday from 8:00 a.m. to 12:00 midnight and Saturday and Sunday from 8:00 a.m. to 4:00 p.m., or (ii) one hundred and four thousand dollars ($104,000) per year. 18.3 Interruption of Service. Landlord reserves the right to stop the Building Systems when reasonably necessary, provided, however, that (i) Landlord give Tenant as much notice as reasonably possible in connection with any interference with or disruption of and take all reasonable efforts to minimize interference with the Building Systems that service Tenant's computer rooms or the related chillers, and (ii) Landlord shall give Tenant advance notice of any such interruption of services when reasonably possible, and shall restore such services as soon as practical and in a manner so as to cause as little interference with Tenant's use of the Premises as is practical and Landlord shall perform such work before or after Tenant's business hours when reasonably possible. In addition, Landlord reserves the right to limit services or utilities serving the Premises or the Building, in compliance with the requirements or requests of federal, state or local governmental agencies or utilities suppliers in reducing energy or other resources consumption and to make all alterations to the Real Property reasonably necessary therefor. Any such actions by Landlord under this Section 18.3, or any other interruption of services provided for herein (unless caused by Landlord's gross negligence or willful misconduct) shall not (a) constitute an actual or construction eviction, in whole or in part, (b) entitle Tenant to any abatement or diminution of Base Rent or Additional Charges, (c) relieve Tenant from any of its obligations under this Lease or (d) impose any liability on Landlord or its agents by reason of inconvenience or annoyance to Tenant or by reason of injury to or interruption of Tenant's business, or otherwise. Tenant hereby waives and releases its right to terminate this Lease under Section 1932(1) and Sections 1941 and 1942 of the California Civil Code or any other similar laws, statutes or ordinances now or hereafter in effect. Tenant shall cooperate reasonably with any voluntary energy conservation program initiated by Landlord in cooperation with the efforts of federal, state or local governmental agencies or utilities suppliers in reducing the consumption of energy or other resources. In the event of an interruption in, or failure or inability to provide any of the services or utilities described in Section 18.1 (a "Service Failure"), such Service Failure shall not, regardless of its duration, constitute an eviction of Tenant, constructive or otherwise, or impose upon Landlord any liability whatsoever, including, but not limited to, liability of consequential damages or loss of business by Tenant or, except as provided herein, entitle Tenant to an abatement of rent or to terminate this Lease. (a) If any Service Failure not caused by Tenant or its agents, contractors, employees, or invitees, prevents Tenant from reasonably using a material portion of the Premises and (i) Tenant in fact ceases to use such portion of the Premises, and (ii) Landlord has rental interruption insurance for any of the circumstances set forth herein, Tenant shall be entitled to an abatement of Base Rent and Additional Charges with respect to the portion of the Premises that Tenant is prevented from using by reason of such Service Failure if such Service Failure has not been remedied within ten (10) business days following the occurrence of the Service Failure, and 28 29 such failure has persisted and continuously prevented Tenant from using a material portion of the Premises during that period, the abatement of rent shall commence on the eleventh business day following the Service Failure and continue until Tenant is no longer so prevented from using such portion of the Premises. In the event that any Service Failure described in the preceding sentence (exclusive of clause (ii)) continues in any material manner for one (1) year following the occurrence of the Service Failure and such failure has prevented Tenant from using a material portion of the Premises during that period, Tenant shall have the right to terminate this Lease at any time after the expiration of such one (1) year period. (b) If a Service Failure is caused by Tenant or its agents, contractors, employees, or invitees, Landlord shall nonetheless remedy the Service Failure, at the expense of Tenant, pursuant to Landlord's maintenance and repair obligations, but Tenant shall not be entitled to an abatement of rent or to terminate this Lease as a result of any such Service Failure. (c) Notwithstanding Tenant's entitlement to rent abatement under the preceding provisions, Tenant shall continue to pay Tenant's then current rent until such time as Landlord and Tenant agree on the amount of the rent abatement. If Landlord and Tenant are unable to agree on the amount of such abatement within ten (10) business days of the date they commence negotiations regarding the abatement, then either party may submit the matter to binding arbitration pursuant to Section 28.21 hereof. 18.4 Waiver. Tenant hereby waives the provisions of California Civil Code Section 1932(1) or any other applicable existing or future law, ordinance or governmental regulation permitting the termination of this Lease due to such interruption, failure or inability. 18.5 Security Systems and Programs. The Landlord shall have no liability for any safety or security devices or services in the Premises or the Building. The risk that any safety or security device, service or program may not be effective, or may malfunction or be circumvented, is assumed by Tenant with respect to Tenant's property and interests except to the extent such ineffectiveness, malfunction or circumvention is due to the gross negligence or willful misconduct of Landlord. Tenant shall obtain insurance coverage to the extent Tenant desires protection against criminal acts and other losses. Tenant agrees to cooperate with any reasonable safety or security program developed by Landlord or required by law. 19. Default. 19.1 Events of Default. The occurrence of any one or more of the following events shall constitute a default or breach of this Lease by Tenant: (a) Failure of Tenant to pay any installment of Base Rent or Additional Charges within five (5) days after receipt of notice from Landlord. (b) Tenant abandons the Premises. (c) Tenant violates the restrictions on Assignment and Subletting set forth in Section 17. 29 30 (d) Tenant fails to deliver an estoppel certificate within the time periods provided in Section 24. (e) Failure of Tenant to perform any of the provisions of this Lease to be performed by Tenant, other than as described in Section 19.1(a)-(d), where such failure shall continue for twenty (20) days after notice of such failure by Landlord to Tenant; provided however, that if the nature of Tenant's default is such that more than twenty (20) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within such twenty (20) day period and thereafter diligently proceeds with, all actions necessary to cure such failure as soon as reasonably possible but in all events within ninety (90) days of such notice; provided, however, that if Landlord in Landlord's reasonable judgment determines that such failure cannot or will not be cured by Tenant within such ninety (90) days, then such failure shall constitute a default immediately upon such notice to Tenant. (f) The filing by or against Tenant of any action or proceeding under any federal or state insolvency, reorganization, bankruptcy or other debtor relief statute now or hereafter existing, (unless in the case of such action taken against Tenant, the same is dismissed within sixty (60) days); or the appointment of a trustee or receiver over or the attachment of Tenant's leasehold estate in the Premises or Tenant's assets at the Premises that is not dismissed within thirty (30) days after the filing thereof. (g) Tenant ceases doing business as a going concern; makes an assignment for the benefit of creditors; is adjudicated an insolvent, files a petition (or files an answer admitting the material allegations of a petition) seeking relief under any state or federal bankruptcy or other statute, law or regulation affecting creditors' rights; all or substantially all of Tenant's assets are subject to judicial seizure or attachment and are not released within 30 days, or Tenant consents to or acquiesces in the appointment of a trustee, receiver or liquidator for Tenant or for all or any substantial part of Tenant's assets. 19.2 Remedies. Upon the occurrence of a default by Tenant under this Lease that is not cured by Tenant after receipt of written notice and within the grace periods specified in Section 19.1, Landlord shall have the following rights and remedies in addition to all other rights and remedies available to Landlord at law or in equity: (a) Landlord may terminate Tenant's right to possession of the Premises at any time by written notice to Tenant. Tenant expressly acknowledges that in the absence of such written notice from Landlord, no other act of Landlord, including re-entry into the Premises, efforts to relet the Premises, reletting of the Premises for Tenant's account, storage of Tenant's personal property and trade fixtures, acceptance of keys to the Premises from Tenant or exercise of any other rights and remedies under this Section, shall constitute an acceptance of Tenant's surrender of the Premises or constitute a termination of this Lease or of Tenant's right to possession of the Premises. Upon such termination in writing of Tenant's right to possession of the Premises, as herein provided, this Lease shall terminate and Landlord shall be entitled to recover damages from Tenant as provided in California Civil Code Section 1951.2 and any other applicable existing or future Law providing for recovery of damages for such breach, including 30 31 the worth at the time of award of the amount by which the rent which would be payable by Tenant hereunder for the remainder of the Term after the date of the award of damages, including Additional Charges as reasonably estimated by Landlord, exceeds the amount of such rental loss as Tenant proves could have been reasonably avoided, discounted at the discount rate published by the Federal Reserve Bank of San Francisco for member banks at the time of the award plus one percent (1%). (b) Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations). (c) Landlord may remove all Tenant's property from the Premises, and such property may be stored by Landlord in a public warehouse or elsewhere at the sole cost and for the account of Tenant. If Landlord does not elect to store any or all of Tenant's property left in the Premises, Landlord may consider such property to be abandoned by Tenant, and Landlord may thereupon dispose of such property in any manner deemed appropriate by Landlord. Any proceeds realized by Landlord on the disposal of any such property shall be applied first to offset all expenses of storage and sale, then credited against Tenant's outstanding obligations to Landlord under this Lease, and any balance remaining after satisfaction of all obligations of Tenant under this Lease shall be delivered to Tenant. (d) The right to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises, and to apply any rental collected from the Premises. (e) The right to specific performance of any or all of Tenant's obligations hereunder, and to damages for delay in or failure of such performance. 19.3 Remedies Cumulative. The exercise of any remedy provided by law or the provisions of this Lease shall not exclude any other remedies unless they are expressly excluded by this Lease. Tenant hereby waives any right of redemption or relief from forfeiture following termination of, or exercise of any remedy by Landlord with respect to, this Lease. 20. Fees and Expenses; Indemnity; Payment. 20.1 Landlord's Right to Remedy Defaults. If Tenant shall default in the performance of any of its obligations under this Lease after notice and expiration of the applicable cure period, Landlord may remedy such default at Tenant's expense, without thereby waiving any other rights or remedies of Landlord with respect to such default. Notwithstanding the foregoing, Landlord shall have the right to cure any failure by Tenant to perform any of its obligations under this Lease without notice to Tenant if such failure results in an immediate threat to life or safety of any person, or impairs the Building or its operation. If Landlord pays any sum or incurs any expense in curing the default, Tenant shall reimburse Landlord upon demand for the amount of such payment or expense with interest at the Interest Rate from the date the sum is paid or the expense is incurred until Landlord is reimbursed by Tenant. 31 32 20.2 Tenant's Indemnity. Except to the extent caused by the negligence or willful misconduct of Landlord, Tenant shall indemnify Landlord, all partners of any partnership constituting Landlord, and their respective officers, directors, shareholders, employees, and agents (sometimes collectively referred to herein as "Related Entities") against and save Landlord and Related Entities harmless from and defend Landlord and Related Entities through attorneys selected by Landlord and reasonably satisfactory to Tenant from and against any and all claims, losses, costs, liabilities, damages and expenses (collectively "Claims") including, without limitation, reasonable attorneys' fees, to the extent incurred in connection with or arising from (a) any default by Tenant in the observance or performance of any of the terms, covenants, conditions or other obligations of this Lease after the expiration of the applicable grace period, or the failure of any representation made by Tenant in this Lease, or (b) the acts or omissions of Tenant, its agents, contractors or employees while on the Real Property, or (c) any construction or other work undertaken by Tenant on the Premises (including any design defects), or (d) any loss, injury or damage, howsoever and by whomsoever caused, to any person or property, occurring in or about the Premises during the Term, excepting only Claims described in this clause (d) to the extent they are caused by the willful misconduct or grossly negligent acts or omissions of Landlord or its authorized representatives. 20.3 Landlord's Indemnification. Landlord shall be responsible for, shall insure against, and shall defend (through attorneys selected by Tenant and reasonably satisfactory to Landlord), protect and indemnify Tenant, and Tenant's officers, directors, shareholders, agents and employees, and hold them harmless from, any and all liability for any claims, loss, damage, liabilities or injury to a person or property occurring in, on or about the Building to the extent the liability is the result of the gross negligence or willful misconduct of Landlord or Landlord's agents or employees. Landlord's obligation to indemnify tenant and tenant's officers, directors, shareholders, agents and employees hereunder shall include the duty to defend against any claims asserted by reason of any loss, damage or injury, and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Landlord's indemnity shall survive the expiration or earlier termination of this Lease. 20.4 Interest on Past Due Obligations. Unless otherwise specifically provided herein, any amount due from Tenant to Landlord under this Lease which is not paid within five (5) days from the date when due shall bear interest from the due date until paid at the rate (the "Interest Rate") that is the lesser of the highest rate then permitted by law or fifteen percent (15%) per annum between the date such amount was due and the date such payment was received. The payment of such interest shall not alone excuse or cure any default under this Lease. 20.5 Tenant's Property. Except as otherwise specifically provided herein, Landlord shall not be liable to Tenant for any loss, injury or other damage to Tenant or to Tenant's property in or about the Premises or the Building from any cause (including defects in the Building or in any equipment in the Building; fire, explosion or other casualty; bursting, rupture, leakage or overflow of any plumbing or other pipes or lines, sprinklers, tanks, drains, drinking fountains or washstands in, above, or about the Premises or the Building; or acts of other tenants in the Building). Except as otherwise specifically provided herein, Tenant hereby 32 33 waives all claims against Landlord for any such loss, injury or damage and the cost and expense of defending against claims relating thereto, including any loss, injury or damage caused by Landlord's negligence (active or passive) or willful misconduct. Notwithstanding any other provision of this Lease to the contrary, in no event shall Landlord be liable to Tenant for any punitive or consequential damages or damages for loss of business by Tenant. 21. Access to Premises. 21.1 Landlord's Right to Enter. Landlord reserves for itself and its agents, employees and independent contractors the right to enter the Premises, subject to Tenant's reasonable requirements for maintaining secure areas, at all reasonable times and upon twenty-four (24) hours notice, to inspect the Premises, to supply any service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers, mortgagees, beneficiaries or tenants (during the last twelve (12) months of the Term with regard to all of the Premises, at any time that Tenant has given a Give Back Notice under Section 28.16 with regard to the portion of the Premises subject to such notice, at any time that Tenant has given an Assignment and Sublease Notice with regard to the space subject to such notice, and at any time with respect to a portion of the Premises with respect to which Landlord intends to exercise its right of relocation under Section 28.20), to post notices of nonresponsibility, to determine whether Tenant is complying with its obligations under this Lease, and to alter, improve or repair the Premises or any other portion of the Building. If Landlord has entered the Premises to make alterations, additions, improvements or repairs, Landlord shall perform such work before or after Tenant's business hours when reasonably possible. Landlord shall use commercially reasonable efforts to minimize disruption to Tenant's operation of its business. In the event of an emergency, Landlord shall have the right to enter the Premises at any time without notice. Landlord shall have the right to use any and all means that Landlord may deem necessary or proper to open doors in an emergency, in order to obtain entry to any portion of the Premises. 22. Notices. 22.1 Except as otherwise expressly provided in this Lease, any payment required to be made and any bills, statements, notices, demands, requests or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing, sent by personal delivery or registered or certified mail, return receipt requested, or by overnight courier service or by facsimile transmission with a following copy by first class mail, addressed (a) to Tenant at the address set forth in the Basic Lease Information, (b) to Landlord at the address set forth in the Basic Lease Information or (c) to such other address as either Landlord or Tenant may designate as its new address in California for such purpose by notice given to the other in accordance with the provisions of this Section 23.1. Any such bill, statement, notice, demand, request or other communication shall be deemed to have been rendered or given on the date of receipt or refusal to accept delivery. 23. No Waiver. 23.1 No provision of this Lease may be waived, and no breach thereof shall be waived, except by a written instrument signed by the party against which the enforcement of the 33 34 waiver is sought. No failure by Landlord to insist upon the strict performance of any obligation of Tenant under this Lease, no course of conduct between Landlord and Tenant, and no acceptance of the keys or to possession of the Premises before the termination of the Term by Landlord or any employee or representative of Landlord shall constitute a waiver of any breach or a waiver or modification of any term, covenant or condition of this Lease. No payment by Tenant of a lesser amount than the aggregate of all Base Rent and Additional Charges then due under this Lease shall be deemed to be other than on account of the first items of such Base Rent and Additional Charges then accruing or becoming due, unless Landlord elects otherwise. 24. Tenant's Certificates. 24.1 Tenant, at any time and from time to time, within fifteen (15) days after written request, shall execute, acknowledge and deliver to Landlord, addressed (at Landlord's request) to any prospective purchaser, ground or underlying lessor or mortgagee or beneficiary of any part of the Real Property, an estoppel certificate in form and substance reasonably designated by Landlord. In the event Tenant fails to provide the estoppel certificate within such fifteen (15) day period, Landlord shall make an additional written request to Tenant for the execution, acknowledgement and delivery of such estoppel certificate to Landlord within five (5) days. 25. Rules and Regulations. 25.1 Tenant shall before and during the Term faithfully observe and comply with, and shall cause all occupants of the Premises to observe and comply with, the rules and regulations attached to this Lease as Exhibit E and all reasonable modifications thereof and additions thereto from time to time put into effect by Landlord (the "Rules and Regulations"). Notwithstanding the foregoing, in the event of a conflict between the Rules and Regulations and this Lease, the Lease shall control. 26. Tenant's Taxes. 26.1 In addition to all other sums to be paid by Tenant under this Lease, Tenant shall pay, before delinquency, any and all taxes levied or assessed during the Term, whether or not now customary or within the contemplation of the parties hereto, (a) upon, measured by or reasonably attributable to Tenant's equipment, furniture, fixtures and other personal property located in the Premises, including without limitation Tenant's Alterations, (b) upon or measured by Base Rent or Additional Charges, or both, payable under this Lease, including without limitation any gross income tax or excise tax levied by the City of Pleasanton and County of Alameda, the State of California, the Federal Government or any other governmental body with respect to the receipt of such rental; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 27. Corporate Authority. 27.1 If either party signs as a corporation or partnership, each of the persons 34 35 executing this Lease on behalf of such party does hereby covenant and warrant that such party is a duly authorized and existing entity, that such party has and is qualified to do business in California, that the entity has full right and authority to enter into this Lease, and that each and both of the persons signing on behalf of the entity are authorized to do so. 28. Miscellaneous. 28.1 Successors and Assigns. The terms, covenants and conditions contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided herein, their respective personal representatives and successors and assigns. 28.2 Severability. If any provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall remain in effect and shall be enforceable to the full extent permitted by law. 28.3 Construction. This Lease shall be governed by and construed in accordance with the laws of the State of California. 28.4 Integration. The terms of this Lease (including, without limitation, the Exhibits hereto) are intended by the parties as a final expression of their agreement with respect to such terms as are included in this Lease and may not be contradicted by evidence of any prior or contemporaneous agreement, arrangement, understanding or negotiation (whether oral or written). 28.5 Quiet Enjoyment. Upon Tenant paying the Base Rent and Additional Charges and performing all of Tenant's obligations under this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term as against all persons or entities claiming by or through Landlord; subject, however, to the provisions of this Lease and to any mortgages or deeds of trust or ground or underlying leases referred to in Article 12. 28.6 Holding Over. If Tenant (directly or through any assignee, sublessee or other successor-in-interest of Tenant) remains in possession of the Premises after the expiration or termination of this Lease, Tenant's continued possession shall be, at Landlord's election, on the basis of a tenancy at the sufferance of Landlord, subject to the adjustment of Rent as set forth in this Section 28.6. No act or omission by Landlord, other than its specific written consent, shall constitute permission for Tenant to continue in possession of the Premises, and if such consent is given or declared to have been given by a court judgment, Landlord may terminate Tenant's holdover tenancy at any time upon fifteen (15) days written notice. In such event, Tenant shall continue to comply with or perform all the terms and obligations of Tenant under this Lease, except that the monthly Base Rent shall be as follows: (i) for the first thirty (30) days of such holdover, one hundred ten percent (110%) of the Base Rent payable during the final full lease year (exclusive of abatements, if any), provided that Tenant shall have given Landlord at least ninety (90) days notice of such holdover, (ii) for the next sixty (60) days of such holdover one hundred twenty five percent (125%) of the Base Rent payable during the final full lease year 35 36 (exclusive of abatements, if any), provided that Tenant shall have given Landlord at least ninety (90) days notice of such holdover, or (iii) if the Tenant has not given the requisite ninety (90) days notice specified in clauses (i) and (ii) above, then for the first thirty (30) days of such holdover period one hundred twenty five percent (125%) of the Base Rent payable during the final full lease year (exclusive of abatements, if any) and (iv) upon the expiration of any periods applicable under (i)-(iii) above, one hundred fifty percent (150%) of the Base Rent payable during the final full lease year (exclusive of abatements, if any), in each case together with an amount reasonably estimated by Landlord for the monthly Additional Charges payable under this Lease. Notwithstanding the foregoing, in the event that any holdover as described above occurs at the end of the first one hundred twenty (120) months of the Lease Term, the Base Rent for such holdover period shall be one hundred twenty five percent (125%) of the Base Rent payable during the final full lease year (exclusive of abatements, if any) together with an amount reasonably estimated by Landlord for the monthly Additional Charges payable under this Lease. Acceptance by Landlord of rent after such termination shall not constitute a renewal or extension of this Lease; and nothing contained in this provision shall be deemed to waive Landlord's right of re-entry or any other right hereunder or at law. Tenant shall indemnify, defend and hold Landlord harmless from and against all Claims arising or resulting directly from Tenant's failure to timely surrender the Premises, including (i) any rent payable by or any loss, cost, or damages claimed by any prospective tenant of the Premises, and (ii) Landlord's direct, but not consequential, damages as a result of such prospective tenant rescinding or refusing to enter into the prospective lease of the Premises by reason of such failure to timely surrender the Premises. 28.7 Time of Essence. Time is of the essence of each and every provision of this Lease. 28.8 Broker's Commissions. Each party represents and warrants to the other that it has not entered into any agreement or incurred or created any obligation which might require the other party to pay any broker's commission, finder's fee or other commission or fee relating to the leasing of the Premises. Each party shall indemnify, defend and hold harmless the other and the other's constituent partners and their respective officers, directors, agents and employees from and against all claims for any such commissions or fees made by anyone claiming by or through the indemnifying party. 28.9 Recovery Against Landlord. Tenant shall look solely to Landlord's interest in the Real Property for the recovery as provided under applicable law of any judgment against Landlord. Landlord, or if Landlord is a partnership, its partners whether general or limited, or if Landlord or any constituent partner of Landlord is a corporation, its directors, officers and shareholders, shall never be personally liable for any such judgment. In the event that any Landlord hereunder sells or conveys its interest in the Building, all liabilities and obligations on the part of such Landlord under this Lease accruing thereafter shall terminate and all such liabilities and obligations shall be binding upon the new owner. 28.10 Amendments. No amendments or modifications of this Lease or any agreements in connection therewith shall be valid unless in writing duly executed by both 36 37 Landlord and Tenant. No amendment to this Lease shall be binding on any mortgagee or beneficiary of Landlord (or purchaser at any foreclosure sale) unless such mortgagee or beneficiary shall have consented thereto in writing. 28.11 Attorneys' Fees. If either party commences an action against the other party arising out of or in connection with this Lease, or institutes any proceeding in a bankruptcy or similar court which has jurisdiction over the other party or any or all of its property or assets, the prevailing party shall be entitled to have and recover from the losing party reasonable attorneys' fees and court costs. The fees recoverable, as provided above, shall include fees incurred on appeal and any other post-judgment proceeding. 28.12 Parking. (a) Tenant's Parking Rights. Landlord shall provide Tenant, on an unassigned and non-exclusive basis, for use by Tenant and Tenant's agents, contractors, employees and invitees, at the users' sole risk, a minimum of four (4) parking spaces per one thousand (1000) rentable square feet in the Premises, in the surface parking areas serving the Building (the "Parking Areas"). If Tenant leases additional office space pursuant to this Lease, Landlord shall provide Tenant, also on an unassigned, non-exclusive and unlabelled basis, one (1) additional parking space in the Parking Areas for each two hundred and fifty (250) rentable square feet of additional office space leased to Tenant. The amount of parking allocated to the Tenant shall be similarly decreased in the event that the area of the Premises decreases. In addition to the unassigned parking spaces to be made available to Tenant in the Parking Areas, Landlord shall provide Tenant, for use by Tenant and Tenant's agents, contractors, employees and invitees, at the users' sole risk, Tenant's Share of the total parking spaces in the parking garage serving the Building (the "Parking Garage"; the Parking Areas and the Parking Garage are referred to collectively herein as the "Parking Facility") on a reserved basis. In the event that Landlord is unable to provide the required number of parking spaces in the Parking Garage as of the date hereof, Landlord shall provide Tenant with Tenant's Share of the available parking spaces in the Parking Garage up to the stated maximum, as such become available. The parking spaces to be made available to Tenant hereunder may contain a reasonable mix of spaces for compact cars and up to ten percent (10%) of the unassigned spaces may also be designated by Landlord as Building visitors' parking. All parking shall be provided free of charge during the first one hundred twenty (120) months of the Lease Term; provided that if after the first one hundred twenty (120) months of the Lease Term, a majority of landlords in similar buildings in the Pleasanton-San Ramon area are charging for such parking, Landlord shall be entitled to charge a market rate for parking in the Parking Facility. (b) Availability of Parking Spaces. Landlord shall take reasonable actions to ensure the availability of the parking spaces leased by Tenant, but Landlord does not guarantee the availability of those spaces at all times against the actions of other tenants of the Building and users of the Parking Facility. Access to the Parking Facility may, at Landlord's option, be regulated by card, pass, bumper sticker, decal or other appropriate identification issued by Landlord. Landlord retains the right to revoke the parking privileges of any user of the Parking Facility who violates the rules and regulations governing use of the Parking Facility (and Tenant 37 38 shall be responsible for causing any employee of Tenant or other person using parking spaces allocated to Tenant to comply with all parking rules and regulations). (c) Assignment and Subletting. Notwithstanding any other provision of the Lease to the contrary, Tenant shall not assign its rights to the parking spaces or any interest therein, or sublease or otherwise allow the use of all or any part of the parking spaces to or by any other person, except in connection with any Assignment or Sublease permitted or allowed under Section 17 above. 28.13 Signage. Throughout the Term, provided Tenant remains the largest tenant in the Building, Tenant shall have exclusive rights to signage on the exterior of the Building, all monument signs and the Building name shall continue as "PeopleSoft Plaza;" provided that Landlord shall have the right to provide comparable monument signage to any tenant of the Building occupying over forty thousand (40,000) square feet. Tenant shall maintain such signage good maintenance and repair, in compliance with all applicable laws and the requirements of the HBPOA, at Tenant's sole cost and expense. During the Term, unless required by applicable law, Tenant shall have no obligation to remove or modify any Building signage existing as of the date of this Lease and Landlord hereby approves the signage described in Exhibit F, subject to compliance with all applicable governmental regulations; provided, however, that Tenant, if so directed by Landlord, shall remove all of its signage on or about the Building at the expiration of the Term and restore any damage resulting from such removal, at Tenant's sole cost and expense. No Rent shall be payable by Tenant for the signage rights granted pursuant to this Section 28.13. 28.14 Use of Roof. Tenant shall have a nonexclusive right to install, at Tenant's sole cost and expense, communications equipment reasonably related to Tenant's permitted use of the Premises on the roof of the Building for Tenant's personal, nonprofit use. Tenant's rights under this Section 28.14: (a) are personal to Tenant and not assignable without Landlord's express written consent, which consent shall not be unreasonably withheld provided the assignee is a permitted sublessee or assignee of Tenant's rights under the Lease and provided further that Tenant shall be entitled to exercise the rights provided for in this Section 28.14 by contracting with a third party for the installation and maintenance of all such rooftop equipment; (b) shall terminate on the Expiration Date; (c) are subject to the rights of other tenants; and (d) are subject to the approval of all governmental entities with jurisdiction of such equipment. Landlord hereby grants to Tenant a nonexclusive license to use existing and common area passageways in the Building for ingress to and egress from the roof in connection with the installation and maintenance of the communications equipment, provided that Tenant coordinates ingress to the roof with Landlord. Tenant shall obey all reasonable requirements imposed by Landlord for the protection of the roof and shall, at Tenant's sole cost and expense, obtain all necessary governmental licenses and permits required for, and comply with all legal requirements (including recorded covenants and restrictions) in connection with, the installation and use of the communications equipment, including, without limitation, the rules and regulations of the Federal Communications Commission. The communications equipment shall be deemed to be Tenant's personal property for all purposes under this Lease, and upon termination of this Lease, Tenant shall remove all of the communications equipment and related wiring and conduit in 38 39 accordance with the provisions of this Lease and repair any damage to the roof. Tenant shall (a) prevent its communications equipment and the equipment's transmission and frequency from interfering with the transmissions and frequencies of any other antennas or communications systems located on or in the Building or the Real Property, (b) screen the equipment from view as reasonably required by Landlord, and (c) cooperate with Landlord or third parties in maximizing the use of the roof area not used by Tenant. Landlord shall not be responsible for Tenant's equipment or any interference with its equipment's transmission, frequency, operation or use. Tenant shall not install any other facilities or equipment on the roof or make any alteration to the roof without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Tenant shall be solely responsible for and shall pay and indemnify Landlord against all costs and expenses incurred in connection with the installation, removal and use of the communications equipment. 28.15 Force Majeure. If Landlord or Tenant is delayed, interrupted or prevented from performing any of its obligations under this Lease, and such delay, interruption or prevention is due to fire, act of God, governmental act or failure to act, labor dispute, unavailability of materials or any cause outside the reasonable control of such party, then the time for performance of the affected obligations of such party shall be extended for a period equivalent to the period of such delay, interruption or prevention. The provisions of this Section shall not apply to Section 18.3 or any obligation of either party to pay money under this Lease. 28.16 Cancellation Rights. Commencing after the forty eighth (48th) month of the Term through the sixtieth (60th) month of the Term, Tenant may terminate this Lease with respect to up to one hundred percent of the Four Year Space, in accordance with the terms of this Section 28.16. Commencing after the sixtieth (60th) month of the Term and up to the one hundred twentieth (120th) month of the Term, Tenant may terminate this Lease with respect to the entire Premises in accordance with the terms of this Section 28.16. If Tenant elects to terminate any of the Premises under this Section, the exercise of such termination right will be referred to as a "Give Back" of the Premises and the date of the termination of the Lease with respect to such portion of the Premises shall be referred to as the "Termination Date." Tenant shall only exercise any right to Give Back in connection with a move by Tenant of the personnel or equipment using such space to a building or facility of which Tenant owns or controls more than thirty three percent (33%) of the fee interest (or a facility owned or controlled by an entity in which Tenant has not less than a thirty three percent (33%) interest in capital and profits) or in connection with a reduction in Tenant's overall space requirements in the Pleasanton/Dublin area. Notwithstanding the foregoing, if an uncured event of default exists and is continuing under this Lease at the time Tenant exercises the Give Back right or at the applicable Termination Date, Landlord shall have, in addition to all of Landlord's other rights and remedies under this Lease, the right to cancel unilaterally Tenant's exercise of such Give Back right. All rights in this Section 28.16 shall be personal to PeopleSoft, Inc. and its Permitted Assignees. (a) Subject to the terms and conditions contained herein, Tenant shall deliver to Landlord written notice (the "Give Back Notice") not less than nine (9) months prior to the Termination Date (or twelve (12) months to the Termination Date if the space in question is greater than forty thousand (40,000) rentable square feet) for the "Give Back" of any portion of 39 40 the Premises other than portions of the Premises into which Tenant has expanded pursuant to its exercise of its rights under Section 28.18. Taking into account the limitations regarding Tenant's right to terminate pursuant to this Section 28.16 set forth in the first two sentences of the preceding paragraph and the notice periods required by the preceding sentence, the first date on which any Give Back Notice could be given would be nine (9) months prior to the commencement of the forty ninth (49th) month of the Term (or twelve (12) months prior to the forty ninth (49th) month if the space in question is greater than forty thousand (40,000) rentable square feet). Any Give Back Notice shall be irrevocable. If Tenant elects to Give Back a portion of the Premises by providing such Give Back Notice, Tenant shall not be entitled to provide Landlord with another Give Back Notice for any other part of the Premises until the Termination Date of the Premises referred to in the prior Give Back Notice. In addition, if Tenant exercises its rights under Section 28.18 to expand the Premises, Tenant shall not be entitled to deliver to Landlord a Give Back Notice with respect to any part of the Premises until the Expansion Premises Commencement Date for such Expansion Premises (six (6) months after the Expansion Premises Commencement Date if such Expansion Premises is larger than twenty thousand (20,000) rentable square feet). Under no circumstances shall a Give Back Notice apply to less than five thousand (5,000) rentable square feet. Any Give Back Notice must be either a full floor or separately demised space accessible by a common area corridor and must comply with all legal ingress and egress requirements. Tenant will use its reasonable best efforts to make any space subject to a Give Back Notice contiguous, to the greatest extent possible. Tenant shall pay the cost of all demising walls and corridors necessary to separate such space from the remaining Premises and to provide access to such space via a common corridor. Upon the exercise of any cancellation right specified in this Section 28.16, the parties shall execute an amendment to this Lease to evidence the revised Premises, Rent and other changes as a result thereof. (b) If total rentable square footage of the portion of the Premises subject to any Give Back Notice is greater than forty thousand 40,000 rentable square feet, Tenant shall pay a termination fee (the "Termination Fee") equal to the applicable Termination Fee Rate set forth in Section 28.16(c) below multiplied by the product of (x) the total number of months (whole and partial) remaining in the first one hundred twenty (120) months of the Lease Term as of the Termination Date multiplied by (y) the total rentable area of the Premises subject to the Give Back Notice. Tenant shall pay the Termination Fee to Landlord prior to the Termination Date for the portion of the Premises subject to the Give Back Notice. Notwithstanding anything to the contrary contained in this Lease there shall be no Termination Fee for any Give Back Notice applicable to (i) less than forty thousand 40,000 rentable square feet at any time, (ii) up to fifty percent (50%) of the remaining Premises at any time after the eighty forth (84th) month of the Term, or (iii) all of the Premises at any time after the ninety sixth (96th) month of the Term. (c) The Termination Fee Rate used to determine the Termination Fee is as follows:
Area of Premises Subject to Give Back Notice Termination Fee Rate 40,001-80,000 rentable square feet $.10 per rentable square foot
40 41 80,001-160,000 rentable square feet $.20 per rentable square foot 161,001 rentable square feet and over $.30 per rentable square foot
(d) None of the provisions of this Section 28.16 that relate to (i) the maximum or minimum square footage of space subject to any Give Back Notice, (ii) whether any space subject to a Give Back Notice is a whole floor or separately demised space, (iii) Tenant's percentage ownership in other space to be occupied by Tenant, (iv) the period within which Tenant is entitled to deliver a Give Back Notice if Tenant has previously exercised any Expansion Option and the period within which an Expansion Option can be exercised if Tenant has delivered a Give Back Notice, (v) the obligation of Tenant to pay for demising the space subject to a Give Back Notice or constructing any corridors in connection with the Give Back of such space, or (vi) the payment of any Termination Fee, shall not apply to any space in the Parking Garage or any storage space. Nor shall the Give Back of any space in the Parking Garage or any storage space be included in any calculation of square footage under this Section 28.16. In addition to the foregoing and notwithstanding any other provision of this Lease, at any time after the thirty sixth (36th) month of the Lease Term, Tenant may terminate this Lease as to all or any portion of the space occupied by Tenant in the Parking Garage upon not less than ninety (90) days written notice to Landlord, which notice may be given at any time after the thirty third (33rd) month of the Lease Term, and no termination fee shall be payable in connection with such termination. 28.17 Property Management. So long as Tenant occupies at least seventy-five percent (75%) of the Building, Tenant shall have the right to reasonably approve any changes in the entity providing property management for the Premises. 28.18 Expansion Rights. Tenant shall have the option (the "Expansion Option") to expand into all space (the "Expansion Premises") that becomes available in the Building, subject to the rights of existing tenants as of the date of this Lease and the rights of any future tenants pursuant to the leases executed by such tenants at the time they occupy space in the Building, (excluding any space in the Building which was "Given Back" to Landlord pursuant to Tenant's exercise of its rights under Section 28.16, above), during the first one hundred twenty (120) months of the Lease Term. If Landlord learns of the unconditional availability of Expansion Premises, Landlord shall deliver to Tenant written notice of such availability as soon as possible, but no less than three (3) months, nor more than six (6) months, prior to the date on which Landlord anticipates such Expansion Premises shall become available, if such Expansion Premises is less than or equal to fifteen thousand (15,000) rentable square feet, or, not less than six (6) months, nor more than twelve (12) months prior to the date on which Landlord anticipates such Expansion Premises shall become available, if such Expansion Premises is greater than fifteen thousand (15,000) rentable square feet. Notwithstanding the foregoing, if any Expansion Premises is Early Termination Space, Landlord shall notify Tenant of such Expansion Premises as soon as possible after Landlord becomes aware that such Early Termination Space may be available, but in no event earlier than ninety (90) days and no less than thirty (30) days prior to the date such Early Termination Space becoming unconditionally available for lease; provided that in the case of Early Termination Space that is being voluntarily returned to Landlord, Landlord shall be obligated to give such notice when Landlord reasonably determines that such 41 42 space will become available but in no event less that thirty (30) days prior to the date on which such space will become available. The notice from Landlord shall designate the available Expansion Premises, the rentable area thereof, and the projected date on which the Expansion Premises will be delivered to Tenant by Landlord (the "Expansion Premises Commencement Date") but otherwise the terms and conditions for the Expansion Premises, including, without limitation, the Base Rent and Additional Charges, and parking allocation shall be the same as for the Initial Premises. Tenant shall have ten (10) business days from the date of receipt of such notice in which to deliver written notice to Landlord of its election to exercise the Expansion Option with respect to all of such Expansion Premises. During such ten (10) business day period, Landlord shall provide Tenant with a reasonable opportunity to walk through the proposed space to review its suitability for Tenant. Any such notice by Tenant shall be irrevocable. In no event shall Tenant be entitled to take less than all of such Expansion Premises. If Tenant elects to exercise the Expansion Option, the Expansion Premises shall be delivered in "as-is" condition, subject to the obligations of the Landlord under Section 6. The Expansion Premises Commencement Date shall be the date that Landlord tenders possession of the Expansion Premises to Tenant. Tenant shall have sixty (60) days (ninety (90) days in the event of Early Termination Space) following delivery of the Expansion Premises to Tenant to perform tenant improvements which shall be completed at its sole cost and expense and during such period no Base Rent or Additional Charges hereunder shall be due on the Expansion Premises. In the event there shall be less than thirty-six (36) months remaining in the first one hundred twenty (120) months of the Lease Term on the Expansion Premises Commencement Date, Tenant must exercise its Renewal Option pursuant to Section 28.19 as a condition precedent to the effectiveness of Tenant's exercise of the Expansion Option. Notwithstanding the foregoing, if an event of default exists under this Lease and all applicable grace periods have expired at the time Tenant exercises the Expansion Option or at the applicable Expansion Premises Commencement Date, Landlord shall have, in addition to all of Landlord's other rights and remedies under this Lease, the right to cancel unilaterally Tenant's exercise of such Expansion Option. In addition, if Tenant exercises its rights to Give Back space pursuant to Section 28.16, (a) Landlord shall not be obligated to notify Tenant of any Expansion Premises and Tenant shall have no expansion right with respect to any Expansion Premises until the date twenty-four (24) months after the date on which Tenant last gave Landlord a Give Back Notice under Section 28.16, and (b) after the expiration of such twenty-four (24) month period, Landlord shall be obligated to notify Tenant of any Expansion Premises and Tenant shall be entitled to exercise its expansion right with respect to such Expansion Premises only if such Expansion Premises is equal to or greater than the greater of (i) ten thousand (10,000) rentable square feet more than the space terminated pursuant to such Give Back notice, or (ii) more than one hundred twenty five percent (125%) of the rentable square footage of the space terminated pursuant to such Give Back notice. The rights under this Section 28.18 shall be personal to PeopleSoft, Inc. and its Permitted Assignees. Upon the exercise of any Expansion Option the parties shall execute an amendment to this Lease to evidence the portion of the Premises added by such Expansion Option. 28.19 Renewal Option. (a) Provided the Tenant exercises the Four Year Space Option and/or the Five 42 43 Year Space Option, Landlord grants to Tenant the option to extend the Term as to all or a part of the Premises (provided that each such Renewal Option may not be exercised for less than fifty thousand (50,000) rentable square feet, all of which shall be in not more than three reasonably contiguous blocks, and may not be exercised for more than the entire Premises subject to this Lease as of the commencement date of the Renewal Term) for two sequential five (5) year periods (such renewal options are referred to herein individually as the "Renewal Option" and collectively as the "Renewal Options"). The first Renewal Option shall run from the expiration of the first one hundred and twenty (120) months of the Lease Term, for one period of five (5) years and the second Renewal Option shall run from the expiration of the first Renewal Option for a period of five (5) years (individually and collectively the "Renewal Term"). Each Renewal Option shall be exercised, if at all, by notice (the "Renewal Notice") to Landlord at any time prior to the date nine (9) months (twelve (12) months if Tenant then occupies more than 100,000 rentable square feet in the Building) prior to the Expiration Date of the then applicable Term, which notice shall be irrevocable by Tenant. Notwithstanding the foregoing, if an event of default exists under this Lease and all applicable grace periods have expired at the time Tenant exercises the Renewal Option or at the commencement of the Renewal Term, Landlord shall have, in addition to all of Landlord's other rights and remedies under this Lease, the right to terminate the applicable Renewal Option and to cancel unilaterally Tenant's exercise of such Renewal Option, in which event the Expiration Date of this Lease shall be and remain the then scheduled Expiration Date, and Tenant shall have no further rights under this Lease to renew or extend the Term. The provisions of this Section 28.19 shall be personal to PeopleSoft, Inc. and its Permitted Assignees. (b) Each Renewal Term shall be upon and subject to all of the terms, covenants and conditions of this Lease; provided, however, that, effective as of the first day of the applicable Renewal Term, the Base Rent for the Renewal Term shall be equal to (y) for the first Renewal Term ninety five percent (95%), and (z) for the second Renewal Term one hundred percent (100%), of the Prevailing Market Rental for space comparable to the Premises in Class A buildings comparable to the Building in the Pleasanton-San Ramon area as of the date of commencement of the applicable Renewal Term. The term "Prevailing Market Rental" shall mean the base annual rental for such comparable space (recognizing that there will be differences between office space, garage space and storage space), taking into account any additional rental and all other monetary payments and escalations by tenants under leases of such comparable space, and any tenant improvements, parking and other concessions, or the lack thereof, granted to tenants under leases of such comparable space and, for the second Renewal Term, deducting therefrom the economic value of the fact that the Landlord will not pay any brokerage commission in connection with such renewal. Such Base Rent shall be reasonably and in good faith determined by Landlord and notice thereof shall be given to Tenant not later than six (6) months prior to the commencement of the applicable Renewal Term. If Tenant disputes Landlord's determination of the Prevailing Market Rental for the applicable Renewal Term, Tenant shall send to Landlord a notice, within twenty (20) business days after the date of Landlord's notice setting forth the Prevailing Market Rental for the applicable Renewal Term, which notice shall state that Tenant either (x) agrees with Landlord's determination of Prevailing Market Rental for the applicable Renewal Term or (y) disagrees with Landlord's determination of Prevailing Market Rental for the applicable Renewal Term and elects to resolve the 43 44 disagreement as provided below in Section 28.19(c). If Tenant does not send to Landlord a notice as provided in the previous sentence, Landlord's determination of the Prevailing Market Rental shall apply until the disagreement is resolved as provided below, Tenant's monthly payments of Base Rent shall be in an amount not less than the Base Rent payable for the twelve (12) month period immediately preceding the commencement of the applicable Renewal Term. Within ten (10) business days following the resolution of such dispute by the parties or the decision of the brokers, as applicable, Tenant shall pay to Landlord or Landlord shall refund to Tenant, as the case may be, the amount of any deficiency or overpayment in the Base Rent theretofore paid. Tenant shall in any event pay all applicable additional charges with respect to the Premises, in the manner and at the times provided in this Lease, effective upon the commencement of the Renewal Term, and notwithstanding any dispute regarding the Base Rent for the Renewal Term. (c) Any disagreement regarding the Prevailing Market Rental as defined in this Section shall be resolved as follows: (i) Within the twenty (20) day period after Tenant's response to Landlord's notice to Tenant of the Prevailing Market Rental, Landlord and Tenant shall meet no less than two (2) times, at a mutually agreeable time and place, to attempt to resolve any such disagreement using their reasonable and good faith efforts. (ii) If, within the twenty (20) day consultation period, Landlord and Tenant cannot reach an agreement as to the Prevailing Market Rental, they shall each select one broker to determine the Prevailing Market Rental and the two brokers so selected shall select a third broker (the "Neutral Broker"). Each of the first two brokers shall arrive at independent determinations of the Prevailing Market Rental and submit their conclusions in writing to the Neutral Broker within thirty (30) days after the expiration of the twenty (20) day consultation period. (iii) If only one determination is submitted within the requisite time period, it shall be deemed to be the Prevailing Market Rental. If both determinations are submitted within such time period the Neutral Broker shall determine in writing which determination of the Prevailing Market Rate is correct or closest to being correct, and such determination shall be the Prevailing Market Rate. The determination of the Neutral Broker shall be conclusive and binding on the parties. All brokers specified pursuant to this Section shall be real estate brokers licensed and in good standing with the State of California with not less than ten (10) years experience in commercial property leasing in the Pleasanton-San Ramon area. The party that selected the broker whose determination of the Prevailing Market Rental is not selected pursuant to the procedures of this Section shall pay the cost of all brokers, including the Neutral Broker, selected pursuant to this Section and any other costs reasonably incurred by such brokers in resolving the disagreement pursuant to this Section. Upon the exercise of any Renewal Option and the establishment of the Base Rent therefore, the parties shall execute an amendment to the Lease to evidence such facts. 28.20 Relocation Right. 44 45 In the event that Tenant occupies less than forty percent (40%) of the rentable square feet on any floor (other than the first or second floors) of any of the individual towers of the Building (or less than 10,000 square feet on the first or second floors of the Building) and Landlord desires to relocate all of that portion of the Premises on such floor to accommodate the leasing of such floor to a tenant taking the entire floor (or twenty five percent (25%) of the floor in the case of the first or second floors of the Building), Landlord may relocate that portion of the Premises to another portion of the Building on not less than sixty (60) days notice (the "Relocation Notice"), provided that each of the following conditions are met: (i) the rentable and usable area of the alternative space offered for relocation in the Relocation Notice shall be of equivalent size to the existing Premises, subject to a variation of up to ten percent (10%) (the Base Rent and Additional Charges for the alternative space shall not be any greater than the original space, if the alternative space, is larger and shall be appropriately reduced if the alternative space is smaller than the original space), and (ii) Landlord shall pay all reasonable out-of-pocket costs of Tenant incurred in such relocation, including without limitation, the cost of tenant improvements necessary to configure the alternative space in substantially the same configuration and with substantially the same level of tenant improvements as the original space, all costs of moving expenses, wiring and cabling, replacement stationary, if applicable, and installation of computer and telephone equipment. The Relocation Notice shall designate the space to which Tenant is to be relocated and the timing of the relocation. Upon receiving the Relocation Notice, Tenant shall have the option of notifying Landlord within ten (10) days of the receipt of the Relocation Notice that Tenant elects to cancel this Lease as to the portion of the Premises that Landlord proposes to relocate in which case this Lease shall terminate as to such portion of the Premises as of the proposed relocation date specified in the Relocation Notice, which shall not be less than sixty (60) days from the date of such notice; provided, however, that if Landlord, within ten (10) days after receiving written notice of such election to terminate from Tenant, elects to rescind its Relocation Notice by so notifying Tenant in writing, Tenant's election to terminate shall be deemed automatically rescinded and of no force or effect; provided that Landlord shall have no further right to relocate the particular space in question. In the event of any such relocation, Landlord and Tenant shall execute an amendment to this Lease to evidence such relocated space. Landlord shall build all tenant improvements in the alternative space and shall give Tenant not less than ten (10) days notice of when such alternative space will be ready for occupancy. 28.21 Arbitration. (a) Arbitration Panel. In the event that any provision of this Lease calls for arbitration of any dispute or matter the provisions of this Section 28.21 shall apply to such arbitration, however, this Section 28.21 shall only apply to those Sections that specifically so provide. Within ninety (90) days after delivery of written notice ("Notice of Dispute") of the existence and nature of any dispute given by any party to the other party, and unless otherwise provided herein in any specific instance, Landlord and Tenant shall each: (i) appoint one (1) lawyer actively engaged in the licensed and full-time practice of law, specializing in real estate, in the County of Alameda and/or San Francisco for a continuous period immediately preceding the date of delivery ("Dispute Date") of the Notice of Dispute of not less than ten (10) years, but who has at no time ever represented or acted on behalf of Landlord or Tenant, and (ii) deliver 45 46 written notice of the identity of such lawyer and a copy of his or her written acceptance of such appointment and acknowledgment of and agreement to be bound by the time constraints and other provisions of this Section ("Acceptance") to the other parties hereto. The party who selects the lawyer may not consult with such lawyer, directly or indirectly, to determine the lawyer's position on the issue which is the subject of the dispute. In the event that any party fails to so act, such arbitrator shall be appointed pursuant to the same procedure that is followed when agreement cannot be reached as to the third arbitrator. Within ten (10) business days after such appointment and notice, such lawyers shall appoint a third lawyer (together with the first two (2) lawyers, "Arbitration Panel") of the same qualifications and background and shall deliver written notice of the identity of such lawyer and copy of his or her written Acceptance of such appointment to each of the parties. In the event that agreement cannot be reached on the appointment of a third lawyer within such period, such appointment and notification shall be made as quickly as possible by any court of competent jurisdiction, by any licensing authority, agency or organization having jurisdiction over such lawyers, by any professional association of lawyers in existence for not less than ten (10) years at the time of such dispute or disagreement and the geographical membership boundaries of which extend to the County of Alameda and/or San Francisco or by any arbitration association or organization in existence for not less than ten (10) years at the time of such dispute or disagreement and the geographical boundaries of which extend to the County of Alameda and/or San Francisco, as determined by the party giving such Notice of Dispute and simultaneously confirmed in writing delivered by such party to the other party. Any such court, authority, agency, association or organization shall be entitled either to directly select such third lawyer or to designate in writing, delivered to each of the parties, an individual who shall do so. In the event of any subsequent vacancies or inabilities to perform among the Arbitration Panel, the lawyer or lawyers involved shall be replaced in accordance with the provisions of this Section 28.21 as if such replacement was an initial appointment to be made under this Section 28.21 within the time constraints set forth in the Section 28.21, measured from the date of notice of such vacancy or inability, to the person or persons required to make such appointment, with all the attendant consequences of failure to act timely if such appointed person is a party hereto. (b) Duty. Consistent with the provisions of this Section 28.21, the members of the Arbitration Panel shall utilize their utmost skill and shall apply themselves diligently so as to hear and decide, by majority vote, the outcome and resolution of any dispute or disagreement submitted to the Arbitration Panel as promptly as possible, but in any event on or before the expiration of thirty (30) days after the appointment of the members of the Arbitration Panel. None of the members of the Arbitration Panel shall have any liability whatsoever for any acts or omissions performed or omitted in good faith pursuant to the provisions of this Section 28.21. (c) Authority. The Arbitration Panel shall (i) enforce and interpret the rights and obligations set forth in the Lease to the extent not prohibited by law, (ii) fix and establish any and all rules as it shall consider appropriate in its sole and absolute discretion to govern the proceedings before it, including any and all rules of discovery, procedure and/or evidence, and (iii) make and issue any and all orders, final or otherwise, and any and all awards, as a court of competent jurisdiction sitting at law or in equity could make and issue, and as it shall consider appropriate in its sole and absolute discretion, including the awarding of monetary damages (but 46 47 shall not award consequential damages to either party and shall not award punitive damages except in situations involving fraud), the awarding of reasonable attorneys' fees and costs to the prevailing party as determined by the Arbitration Panel and the issuance of injunctive relief. (d) Appeal. The decision of the Arbitration Panel shall be final and binding, may be confirmed and entered by any court of competent jurisdiction at the request of any party and may not be appealed to any court of competent jurisdiction or otherwise except upon a claim of fraud on the part of the Arbitration Panel, or on the basis of a mistake as to the applicable law. The Arbitration Panel shall retain jurisdiction over any dispute until its award has been implemented, and judgment on any such award may be entered in any court having appropriate jurisdiction. (e) Compensation. Each member of the Arbitration Panel (i) shall be compensated for any and all services rendered under this Section 28.21 at such parties normal 47 48 hourly rate, plus reimbursement for any and all expenses incurred in connection with the rendering of such services, payable in full promptly upon conclusion of the proceedings before the Arbitration Panel. Such compensation and reimbursement shall be borne by the non-prevailing party or by both parties as determined by the Arbitration Panel in its sole and absolute discretion. 28.22 Interpretation. The provisions of this Lease shall be construed in accordance with the fair meaning of the language used and shall not be strictly construed against either party, even if such party drafted the provision in question. When required by the context of this Lease, the singular includes the plural. Wherever the term "including" is used in this Lease, it shall be interpreted as meaning "including, but not limited to" the matter or matters thereafter enumerated. The captions contained in this Lease are for purposes of convenience only and are not to be used to interpret or construe this Lease. This Lease may be signed in counterparts and all such counterparts taken together shall constitute an original hereof. [Signatures follow on next page] 48 49 IN WITNESS WHEREOF, Landlord and Tenant have each caused their duly authorized representatives to execute this Lease on their behalf as of the date first above written. LANDLORD: HACIENDA PLAZA ASSOCIATES, LLC, a California limited liability company WWA Investors, LLC a California limited liability company Manager By: William Wilson Manager TENANT: PEOPLESOFT, INC., a Delaware corporation By: -------------------------- Albert J. Castino Vice President 49 50 EXHIBIT A PREMISES 51 EXHIBIT B DEFINITIONS
DEFINED TERM LOCATION - ------------ -------- As Is Section 6 as-is Section 28.18 Acceptance Section 28.21(a) Additional Charges Section 4.2 Alterations Section 9.1(a) Arbitration Panel Section 28.21(a) Assignment Section 17.1 Assignment or Sublease Notice Section 17.2(a) Building Systems Section 8.3 Casualty Section 14.1 Claims Section 20.2 Common Areas Section 2.1 Comparison Year Section 5.1(d) Dispute Date Section 28.21(a) Early Termination Space Section 4.1 Encumbrance Section 12.1 Excess Expenses Section 5.1(g) Excess Taxes Section 5.1(f) Expansion Option Section 28.18 Expansion Premises Section 28.18 Expansion Premises Commencement Date Section 28.18 Expenses Section 5.1(b) Expiration Date Section 3.2(b) GAAP Section 5.1(b) Give Back Section 28.16 Give Back Notice Section 28.16(a) Given Back Section 28.18 Five Year Space Section 3.2(a) Five Year Space Option Section 3.2(c) Five Year Space Option Notice Section 3.2(c) Four Year Space Section 3.2(a) Four Year Space Option Section 3.2(b) Four Year Space Option Notice Section 3.2(b) Hazardous Materials Section 8.4 Initial Premises Section 2.1 Interest Rate Section 20.4 Landlord's Statement Section 5.3
51 52 Laws Section 8.3 Mandatory Capital Improvements Section 10.1 Mortgagee Section 12.2 Neutral Broker Section 28.19(c)(ii) Notice of Dispute Section 28.21(a) Parking Areas Section 28.12(a) Parking Facility Section 28.12(a) Parking Garage Section 28.12(a) PeopleSoft Plaza Section 28.13 Permitted Assignee Section 17.1 Premises Section 2.1 Prevailing Market Rental Section 28.19(b) Property Manager Section 15.2 Proposed Assignment or Sublease Space Section 17.2(a) Real Estate Taxes Section 5.1(a) Real Property Section 2.1 Related Entities Section 20.2 Relocation Notice Section 28.20 Renewal Notice Section 28.19(a) Renewal Option Section 28.19(a) Renewal Options Section 28.19(a) Renewal Term Section 28.19(a) Rent Section 4.4 Rules and Regulations Section 25.1 Service Failure Section 18.3 Tenant's Share Section 5.1(e) Term Section 3.1 Termination Date Section 28.16 Termination Fee Section 28.16(b)
52 53 EXHIBIT E OFFICE LEASE Rules and Regulations 1. The sidewalks, exits, entrances, elevators, malls, and stairways of the Building shall not be obstructed by Tenant or any of Tenant's agents or used by it or any of them for any purpose other than for ingress to or egress from the Premises. Tenant and its employees and invitees shall not go upon the roof of the Building, except in areas that Landlord may designate from time to time or accept as permitted by the Lease. 2. No awning canopy or other projection of any kind over or around the windows or entrances of the Premises shall be installed by Tenant, and only such window coverings as are Building standard shall be used in the Premises 3. Except as provided in the Lease, the Premises shall not be used for lodging or sleeping, and no cooking shall be done or permitted by Tenant on the Premises, except that the preparation of food in microwave ovens and coffee, tea, hot chocolate and similar items for Tenant and its employees shall be permitted. 4. Landlord will furnish Tenant with two (2) keys per floor of the Premises, free of charge. Tenant shall not have any new keys made. Landlord may make a reasonable charge equal to Landlord's cost for any additional keys. No additional locking devices shall be installed without the prior written consent of Landlord. Landlord may make reasonable charges for the removal of any additional lock or any bolt installed on any door of the Premises without the prior consent of Landlord. Tenant shall in each case furnish Landlord with a key for any such lock. Tenant, upon the termination of its tenancy, shall deliver to Landlord all keys to doors in the Building and the Premises. 5. Landlord shall have the right to prescribe the method of reinforcement or weight distribution (as Landlord shall determine in its sole discretion) for all equipment, materials, supplies, furniture or other property brought into the Building that will impose a load of more than seventy (70) pounds per square foot. Landlord will not be responsible for loss of or damage to any such property from any cause (except to the extent resulting from the gross negligence or willful misconduct of Landlord or its agents, employees or contractors), and all damage done to the Building by moving or maintaining Tenant's property shall be repaired at the reasonable expense of Tenant. 6. Tenant shall not use or suffer to be used or kept in the Premises or the Building any kerosene, gasoline or flammable or combustible fluids or materials except as customarily used in offices or use any method of heating or air conditioning other than that supplied by Landlord. 7. Tenant shall use reasonable efforts to ensure that all doors and windows of the Premises 53 54 are closed and securely locked and all water faucets, water apparatus and utilities are shut off at such time as Tenant's employees leave the Premises. 8. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, no foreign substance of any kind whatsoever shall be deposited therein, and any damage resulting to such facilities from misuse by Tenant or its employees or invitees shall be paid for by Tenant. 9. Except as permitted in Tenant's Lease, Tenant shall not sell, or permit the sale from the Premises of, or use or permit the use of any sidewalk or mall area adjacent to the Premises for the sale of, newspapers, magazines, periodicals, theater tickets or any other goods, merchandise or service, nor shall Tenant carry on, or permit or allow any employee or other person to carry on, business in or from the Premises for the service or accommodation of occupants of any other portion of the Building, nor shall the Premises be used for manufacturing of any kind, or for any business or activity other than that specifically provided for in Tenant's Lease. 10. Tenant and Tenant's agents shall not use in any space, or in the common areas of the Building, any handtrucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve, and Tenant shall use reasonable efforts to cause its invitees to comply with the provisions of this sentence. No other vehicles of any kind shall be brought by Tenant or its employees or invitees into the Building or kept in or about the Premises. 11. Tenant shall store all its trash and garbage within the Premises until removal. All trash placed in any portion of the Real Property for pick-up shall be placed in locations and containers approved by Landlord. 12. All loading, unloading and delivery of merchandise, supplies, materials, garbage and refuse shall be made only through such entryways and elevators and at such times as Landlord shall reasonably designate. While loading and unloading, Tenant and its employees and invitees shall not obstruct or permit the obstruction of the entryways to the Building or any tenant's space therein. 13. Canvassing, soliciting, peddling or distribution of handbills or any other written material in the Building is prohibited, and Tenant shall cooperate to prevent such acts. 14. Landlord may direct the use of all pest extermination and scavenger contractors to eliminate pests caused or introduced into the Premises by Tenant or any of Tenant's agents at such intervals as Landlord may reasonably require, at Tenant's sole cost and expense. 15. Tenant shall immediately, upon request from Landlord (which request need not be in writing), reduce its lighting in the Premises for temporary periods designated by Landlord (but not more than one-third (1/3) of the total lighting in the Premises for more than two (2) hours in any twenty-four (24) hour period), when required in Landlord's 54 55 judgment to prevent overloads of the mechanical or electrical systems of the Building. 16. The requirements of Tenant will be attended to only upon application in writing or by telephone or in person by Tenant's designated representative at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 17. Except as otherwise provided in the Lease, Landlord reserves the right to select the name of the Building and the buildings therein and to make such change or changes of name as it may deem appropriate from time to time, and Tenant shall not refer to the Building and the buildings therein by any name other than (i) the name as selected by Landlord (as it may be changed from time to time), or (ii) the postal address, approved by the United States Port Office. Tenant shall not use the name of the Building and the buildings therein in any respect other than as an address of its operation in the Building without the prior written consent of the Landlord. 18. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of these Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any Rule or Regulation against any or all of the tenants of the Building. 19. These Rules and Regulations shall not be construed in any way to modify, alter or amend, in whole or part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 20. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order therein. 21. Tenant shall be entitled to its proportionate share (based on rentable area) of listings in the Building lobby directory. All signage, lettering or other writing or decoration on or visible from the exterior of the Premises shall require Landlord's prior written approval, which shall not be unreasonably withheld or delayed. 55 56 BASIC LEASE INFORMATION Building: PeopleSoft Plaza 4301, 4305 and 4309 Hacienda Drive Pleasanton, California 94588 Landlord's Address: Hacienda Plaza Associates, LLC 4301 Hacienda Drive Pleasanton, California 94588 Attn: Property Manager With a copy to: William Wilson & Associates, Inc. 2929 Campus Drive, Suite 450 San Mateo, California 94403 Attention: R. Matthew Moran Telephone: (650) 358-5314 Fax No.: (650) 345-7619 Tenant's Address: 4305 Hacienda Drive Pleasanton, California 94588 Attn: Director of Real Estate Telephone: 925-694-3000 Facsimile: 925-694-7050 With a copy to: 4305 Hacienda Drive Pleasanton, California 94588 Attn: General Counsel Telephone: 925-694-7180 Facsimile: 925-694-7184 56 57 Commencement Date: Initial Premises: Date hereof Committed Expansion Premises: Suite C-400: November 16, 1998 Suite A-550: September 1, 1999 Termination Date: See Section 3.1 Rentable Area of Initial Premises: 192,859 rentable square of office space; 5,169 of usable and rentable square feet of garage computer rooms; 3,003 of usable and rentable square feet of garage storage space. (2.1) Rentable Area of Committed Expansion Premises: Suite C-400: 13,037 rentable square feet Suite A-550: 4,884 rentable square feet Rentable Area of Building: 279,931 rentable square feet Premises: See Exhibit A Base Rent:
Months Office Space Garage computer Garage Storage room 1-60 $2.25 per $2.00 per square $1.00 per square rentable square foot foot foot 61-84 $2.40 per $2.00 per square $1.00 per square rentable square foot foot foot 85-108 $2.50 per $2.00 per square $1.00 per square rentable square foot foot foot 109-120 $2.60 per $2.00 per square $1.00 per square rentable square foot foot foot
(4.1) 57 58 Tenant's Tax Share: 68.90% (192,859 divided by 279,931 (total Rentable Area of Building)) (5.1) Tenant's Expense Share: 68.90% (192,859 divided by 279,931 (total Rentable Area of Building)) (5.1) Base Year: Calendar year 1999 Use: See Section 8.1 Tenant Improvement Contribution for Committed Expansion Premises (payable on applicable Committed Expansion Premises Commencement Date): Suite C-400: $325,000 Suite A-550: $120,000 1. Basic Lease Information. 1 1.1 Basic Lease Information. 1 2. Premises. 1 2.1 Premises Defined. 1 3. Term. 2 3.1 Term Commencement. 2 3.2 Expiration Date. 2 4. Base Rent; Additional Charges. 4 4.1 Annual Rental. 4 4.2 Additional Charges. 4 4.3 Late Charges. 4 4.4 Payment of Rent. 5 5. Expenses and Taxes. 5 5.2 Real Estate Taxes and Expense Gross-Up. 8
58 59 5.3 Payment of Tenant's Share of Additional Charges. 8 5.4 Objections to Statements. 9 6. Acceptance of Premises. 10 7. Common Areas. 10 7.1 Right to Use Common Areas. 10 7.2 Alteration by Landlord. 10 8. Use. 11 8.1 Permitted Use. 11 8.2 No Nuisance. 11 8.3 Compliance with Laws. 11 8.4 Hazardous Materials. 11 8.5 Building Systems 12 9. Alterations and Tenant's Property. 13 9.1 Alterations. 13 9.3 Removal of Property. 15 10. REPAIRS AND OTHER WORK. 16 10.1 Tenant's Obligations. 16 10.2 Landlord's Obligations. 16 10.3 Conditions Applicable to Repairs and Other Work. 17 11. Liens. 17 12. Subordination. 17 12.1 Subordination.
59 60 18 12.2 Notice to Mortgagee. 18 13. Surrender. 18 14. Destruction. 19 14.1 Repair. 19 14.2 Tenant's Right to Terminate. 19 14.3 Landlord's Right to Terminate. 20 14.4 Extent of Repair Obligations. 20 14.5 Waiver of Subrogation. 20 14.6 Non-Application of Certain Statutes. 20 15. Insurance. 21 15.1 Insurance on Tenant's Property. 21 15.2 Tenant's Liability Insurance. 21 15.3 Form of Policies. 22 15.4 Landlord's Insurance. 22 15.5 Compliance with Insurance Requirements. 23 15.6 Updating Coverage. 23 15.7 Certificates of Insurance 23 16. Eminent Domain. 23 16.1 Effect of Taking. 23 16.2 Award. 24 16.3 Adjustment of Rent. 24
60 61 17. Assignment. 24 17.1 Consent Required. 24 17.2 Recapture Right. 25 17.3 Notice. 26 17.4 No Release. 26 17.5 Cost of Processing Request. 26 17.6 Assumption of Obligations. 26 17.7 Profit Split. 26 17.8 Assignment of Sublease Rents. 27 18. Utilities And Services. 27 18.1 Landlord to Furnish. 27 18.2 Excess Usage. 27 18.3 Interruption of Service. 28 18.4 Waiver. 29 18.5 Security Systems and Programs. 29 19. Default. 29 19.1 Events of Default. 29 19.2 Remedies. 30 19.3 Remedies Cumulative. 31 20. Fees And Expenses; Indemnity; Payment. 31 20.1 Landlord's Right to Remedy Defaults. 31 20.2 Tenant's Indemnity.
61 62 32 20.3 Landlord's Indemnification. 32 20.4 Interest on Past Due Obligations. 32 21. Access To Premises. 33 21.1 Landlord's Right to Enter. 33 22. Notices. 33 23. No Waiver. 34 24. Tenant's Certificates. 34 25. Rules And Regulations. 34 26. Tenant's Taxes. 34 27. Corporate Authority. 35 28. Miscellaneous. 35 28.1 Successors and Assigns. 35 28.2 Severability. 35 28.3 Construction. 35 28.4 Integration. 35 28.5 Quiet Enjoyment. 35 28.6 Holding Over. 35 28.7 Time of Essence. 36 28.8 Broker's Commissions. 36 28.9 Recovery Against Landlord. 36 28.10 Amendments. 37
62 63 28.11 Attorneys' Fees. 37 28.12 Parking. 37 28.13 Signage. 38 28.14 Use of Roof. 38 28.15 Force Majeure. 39 28.16 Cancellation Rights. 39 28.17 Property Management. 41 28.18 Expansion Rights. 41 28.19 Renewal Option. 43 28.20 Relocation Right. 45 28.21 Arbitration. 45 28.22 Interpretation. 48 EXHIBIT A PREMISES 1 EXHIBIT B DEFINITIONS 1 EXHIBIT E OFFICE LEASE 1 EXHIBIT D JANITORIAL SPECIFICATIONS 1 EXHIBIT E RULES AND REGULATIONS 1 EXHIBIT F SIGNAGE 1 EXHIBIT G LOCATION OF CHILLER UNIT 1
63 EX-10.37 4 AGREEMENT AND PLAN OF MERGER 1 AGREEMENT AND PLAN OF MERGER DATED AS OF SEPTEMBER 30, 1998 BY AND AMONG PEOPLESOFT, INC., PEOPLESOFT RETAIL CORPORATION AND INTREPID SYSTEMS, INC. 2 TABLE OF CONTENTS
Page ---- ARTICLE I THE MERGER 1.1. THE MERGER............................................................................. 1 1.2. EFFECTIVE TIME......................................................................... 2 1.3. EFFECT OF THE MERGER................................................................... 3 1.4. EFFECT ON COMPANY CAPITAL STOCK; TREATMENT OF STOCK OPTIONS............................ 3 1.5. ACCOUNTING TREATMENT................................................................... 4 1.6. DISSENTING SHARES...................................................................... 4 1.7. SURRENDER OF CERTIFICATES.............................................................. 5 1.8. NO FURTHER OWNERSHIP RIGHTS IN COMPANY CAPITAL STOCK................................... 6 1.9. LOST, STOLEN OR DESTROYED CERTIFICATES................................................. 6 1.10. TAX CONSEQUENCES....................................................................... 6 1.11. TAKING OF NECESSARY ACTION; FURTHER ACTION............................................. 6 ARTICLE II REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY AND CERTAIN OTHER MATTERS 2.1. ORGANIZATION OF THE COMPANY............................................................ 7 2.2. COMPANY CAPITAL STRUCTURE.............................................................. 7 2.3. SUBSIDIARIES........................................................................... 8 2.4. AUTHORITY.............................................................................. 8 2.5. COMPANY FINANCIAL STATEMENTS........................................................... 9 2.6. NO UNDISCLOSED LIABILITIES............................................................. 9 2.7. NO CHANGES............................................................................. 9 2.8. TAX AND OTHER RETURNS AND REPORTS...................................................... 11 2.9. RESTRICTIONS ON BUSINESS ACTIVITIES.................................................... 15 2.10. TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES................................. 15 2.11. INTELLECTUAL PROPERTY.................................................................. 16 2.12. AGREEMENTS, SCHEDULED CONTRACTS AND COMMITMENTS........................................ 18 2.13. INTERESTED PARTY TRANSACTIONS.......................................................... 20 2.14. COMPLIANCE WITH LAWS................................................................... 20 2.15. LITIGATION............................................................................. 20 2.16. INSURANCE.............................................................................. 21 2.17. MINUTE BOOKS........................................................................... 21 2.18. ENVIRONMENTAL MATTERS.................................................................. 21 2.19. BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES....................................... 22 2.20. EMPLOYEE MATTERS AND BENEFIT PLANS..................................................... 22 2.21. NON-COMPETITION, NON-SOLICITATION AND NON-HIRE AGREEMENTS.............................. 26 2.22. REPRESENTATIONS COMPLETE............................................................... 26 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PEOPLESOFT, INC. 3.1. ORGANIZATION, STANDING AND POWER....................................................... 26 3.2. AUTHORITY.............................................................................. 27
i 3
Page ---- ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1. CONDUCT OF BUSINESS OF THE COMPANY..................................................... 27 4.2. NO SOLICITATION........................................................................ 30 ARTICLE V ADDITIONAL AGREEMENTS 5.1. EMPLOYEE MATTERS....................................................................... 30 5.2. ACCESS TO INFORMATION.................................................................. 31 5.3. EXPENSES............................................................................... 32 5.4. PUBLIC DISCLOSURE...................................................................... 32 5.5. CONSENTS............................................................................... 32 5.6. REASONABLE EFFORTS..................................................................... 32 5.7. NOTIFICATION OF CERTAIN MATTERS........................................................ 33 5.8. ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES............................................ 33 5.9. INDEMNIFICATION........................................................................ 33 5.10. NOTICE TO HOLDERS OF COMPANY PREFERRED STOCK........................................... 33 5.11. GRANT OF STOCK OPTIONS BY THE COMPANY.................................................. 33 5.12. CONFIDENTIALITY........................................................................ 34 ARTICLE VI CONDITIONS TO THE MERGER 6.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER........................... 35 6.2. ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY.................................... 35 6.3. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT..................................... 36 ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES 7.1. INDEMNIFICATION/SURVIVAL OF REPRESENTATIONS AND WARRANTIES............................. 37 7.2. NOTICE AND DETERMINATION OF CLAIMS..................................................... 38 7.3. THIRD PARTY CLAIMS..................................................................... 40 7.4. NO LIMITATIONS ON DAMAGES.............................................................. 40 7.5. EXCLUSIVE REMEDY....................................................................... 40 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.1. TERMINATION............................................................................ 41 8.2. EFFECT OF TERMINATION.................................................................. 42 8.3. AMENDMENT.............................................................................. 42 8.4. EXTENSION; WAIVER...................................................................... 42 ARTICLE IX GENERAL PROVISIONS 9.1. NOTICES................................................................................ 42 9.2. INTERPRETATION......................................................................... 43 9.3. COUNTERPARTS........................................................................... 43 9.4. ENTIRE AGREEMENT; ASSIGNMENT........................................................... 44
ii 4
Page ---- 9.5. SEVERABILITY........................................................................... 44 9.6. OTHER REMEDIES......................................................................... 44 9.7. GOVERNING LAW.......................................................................... 44 9.8. RULES OF CONSTRUCTION.................................................................. 44 9.9. SPECIFIC PERFORMANCE................................................................... 44
iii 5 EXHIBITS
EXHIBIT DESCRIPTION - ------- ----------- Exhibit A Form of Legal Opinion of Counsel to Parent and Acquisition Exhibit B Form of Legal Opinion of Counsel to the Company Exhibit C Forms of Non-Competition, Non-Solicitation and Non-Hire Agreement and Amendment No.1 to Non-Competition, Non-Solicitation and Non-Hire Agreement Exhibit D By-Laws of Surviving Corporation Exhibit E Form of Certificate of Merger Exhibit F Form of Agreement of Merger
iv 6 SCHEDULES
SCHEDULE DESCRIPTION - -------- ----------- 1.1(g) Officers 1.4(b) Outstanding Options 2.2(a) Shareholder List 2.2(b) Options, Warrants, Rights 2.3 Subsidiaries 2.4 Conflicts/Other Filings and Consents 2.5 Company Financials 2.6 Undisclosed Liabilities 2.7 Certain Transactions 2.8(b) Certain Tax Matters 2.8(c) Tax Elections and Returns 2.9 Restrictions on Business Activities 2.10(a) Leases, Lessors, Lease Dates & Amendments 2.10(b) Liens 2.11(b) Software 2.11(c) Certain Intellectual Property Rights 2.11(f) Intellectual Property Assets 2.12(a) Scheduled Contracts 2.12(b) Contract Breach/Default 2.12(c) Ownership Interest of Intellectual Property Assets 2.12(d) Customer Surveys 2.13 Interested Party Transactions 2.15 Litigation 2.16 Insurance 2.20(b) Employee Benefit Plans and Employees 2.20(d) Employee Plan Compliance 2.20(g) Post-Employment Obligations 2.20(j) Employees with Visas 2.20(k) Collective Bargaining Agreements 2.20(l) Employment at Will 3.2 Parent Consents 4.1 Disclosed Actions 5.11 Company Stock Option Grants 6.2(c) Third Party Consents Required of Parent 6.3(c) Third Party Consents Required of Company
v 7 INDEX OF DEFINED TERMS
Defined Term Section Defined - ------------ --------------- "Affiliate" Appendix A "Aggregate Purchase Price" Appendix A "Applicable Law" Appendix A "Agreement" Introduction "Agreement of Merger" Section 1.2. "Balance Sheet" Section 2.5 "Business Day" Appendix A "California Law" Section 1.1 "Certificates" Section 1.7(c) "Certificate of Merger" Section 1.2 "Closing" Section 1.2 "Closing Date" Section 1.2 "Code" Section 1.4(b)(1) "Common Per Share Price" Appendix A "Company" Appendix A "Company Capital Stock" Appendix A "Company Common Stock" Appendix A "Company Preferred Stock" Appendix A "Company Employee Plan" Section 2.20(a)(iii) "Company Financials" Section 2.5 "Company Indemnities" Section 7.1(c)
vi 8
Defined Term Section Defined - ------------ --------------- "Company Option" Section 1.4(b)(1) "Continuing Employee" Section 5.1(b) "Copyrights" Section 2.11(a)(i)(3) "Damages" Appendix A "Delaware Law" Section 1.1 "Development Environments" Section 2.11(m) "Disclosure Schedules" Section 2 "Dissenting Shares" Section 1.6(a) "DOL" Section 2.20(c) "Effective Time" Section 1.2 "Employee" Section 2.20(a)(iv) "Employee Agreement" Section 2.20(a)(v) "Environmental Laws" Appendix A "Environmental Liabilities" Appendix A "ERISA" Section 2.20(a)(ii) "Exchange Act" Section 3.4 "Exchange Agent" Section 1.7(a) "Exchange Ratio" Appendix A "Expiration Date" Section 7.1(c) "GAAP" Appendix A "Governmental Authority" Appendix A "HSR Act" Appendix A "Hazardous Substance" Appendix A "Incentive Plan" Section 5.1(c) "Intellectual Property Assets" Section 2.11(a)(ii)
vii 9
Defined Term Section Defined - ------------ --------------- "Intellectual Property Rights" Section 2.11(a)(i) "IRS" Section 2.20(a)(vi) "ISOs" Section 2.8(c)(xxiv) "Key Employees" Appendix A "Knowledge" Appendix A "Liability" Appendix A "Lien" Appendix A "Marks" Section 2.11(a)(i)(1) "Material Adverse Change" Appendix A "Materials" Section 2.11(m) "Merger" Recitals "Multiemployer Plan" Section 2.20(a)(vii) "Noncompete Agreements" Section 2.22 "Option Plan" Section 1.4(b) "Other Management Employees" Appendix A "Parent" Introduction "Parent Common Stock" Recitals "Parent Employee" Section 5.1(b) "Parent Employee Plans" Section 5.1(b) "Parent Financial Statements" Section 3.4 "Parent Indemnities" Section 7.1(a) "Patents" Section 2.11(a)(i)(2) "Pension Plan" Section 2.20(a)(viii) "Person" Appendix A "Primary Purchase Price" Appendix A
viii 10
Defined Term Section Defined - ------------ --------------- "Proceeding" Appendix A "Return" Section 2.8(a)(ii) "Returns" Section 2.8(a)(ii) "Scheduled Contract" Section 2.12(b) "Section 1103 Certificates" Section 1.2. "Series A Per Share Price" Appendix A "Series B Per Share Price" Appendix A "Series C Per Share Price" Appendix A "Series A Preferred Stock" Appendix A "Series B Preferred Stock" Appendix A "Series C Preferred Stock" Appendix A "Series A Preferred Stock Price" Appendix A "Series B Preferred Stock Price" Appendix A "Series C Preferred Stock Price" Appendix A "SEC" Section 3.4 "SEC Documents" Section 3.4 "Shareholder Vote" Section 5.14(b) "Software" Section 2.11(b) "Subsidiaries" Appendix A "Surviving Corporation" Section 1.1 "Tax" Section 2.8(a)(i) "Taxes" Section 2.8(a)(i) "Technology" Section 2.11(a)(i)(5) "Third Party Expenses" Section 5.3 "Trade Secrets" Section 2.11(a)(i)(4)
ix 11
Defined Term Section Defined - ------------ --------------- "Welfare Plan" Section 2.20(a)(ix)
x 12 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of September 30, 1998, by and among PeopleSoft, Inc., a Delaware corporation ("Parent"), PeopleSoft Retail Corporation, a Delaware corporation and wholly-owned subsidiary of Parent ("Acquisition"), and Intrepid Systems, Inc., a California corporation (the "Company"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in Appendix A hereto, which is incorporated herein by this reference. RECITALS A. Acquisition has no assets, has had no operations and has been formed for the purpose of the transactions contemplated by this Agreement. B. The parties hereto desire that Acquisition be merged into the Company, with the result that each of the issued and outstanding shares of Company Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock be converted into the right to receive the Common Per Share Price, the Series A Per Share Price, the Series B Per Share Price and the Series C Per Share Price, respectively. C. Concurrently with such conversion of outstanding shares of the Company Capital Stock, the outstanding shares of Common Stock of Acquisition shall be converted into shares of Common Stock of the Company such that the Company shall become a wholly-owned subsidiary of Parent, on the terms and conditions set forth herein. D. The Company and Parent desire to make certain representations and warranties and other agreements in connection with the Merger. NOW, THEREFORE, in consideration of the foregoing recitals, the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, intending to be legally bound hereby, the parties agree as follows: ARTICLE I THE MERGER 1.1. The Merger. At the Effective Time (as defined in Section 1.2), the merger of the Company and Acquisition contemplated by this Agreement (the "Merger"), subject to and upon the terms and conditions of this Agreement and the applicable provisions of the Delaware General Corporation Law ("Delaware Law") and the California Corporations Code ("California Law"), shall occur and consist of the following: (a) Acquisition shall merge into the Company; (b) The separate existence of Acquisition shall cease; 13 (c) The outstanding shares of common stock, $.01 par value per share ("Acquisition Common Stock"), of Acquisition shall be converted into 1,000 shares of Company Common Stock; (d) The Company, as the surviving corporation, (the "Surviving Corporation") shall continue to exist as a wholly-owned subsidiary of Parent, but shall be renamed "PeopleSoft Retail Corporation"; (e) The Articles of Incorporation of the Company shall be amended and restated in the manner set forth in the Agreement of Merger filed with the California Secretary of State, the form of which shall be approved by the parties hereto, and the Bylaws attached hereto as Exhibit D shall become the Bylaws of the Company, as the surviving corporation; (f) The director of Acquisition immediately prior to the Merger shall become the director of the Surviving Corporation; (g) The officers of the Surviving Corporation shall be those persons listed on Schedule 1.1(g), each of whom shall hold the office or offices listed opposite his or her respective name; (h) The outstanding shares of Company Common Stock, except for shares of Company Capital Stock canceled pursuant to Section 1.1(j) hereof, shall be converted into the right to receive the Common Per Share Price in accordance with Section 1.4(a)(1); (i) The outstanding shares of Company Preferred Stock, except for shares of Company Capital Stock canceled pursuant to Section 1.1(j) hereof, shall be converted into the right to receive the Series A Per Share Price, Series B Per Share Price, or Series C Per Share Price, as applicable, in accordance with Section 1.4(a)(2) and (j) Each share of Company Capital Stock issued and outstanding immediately prior to the Merger and owned either (A) directly or indirectly by the Company as treasury stock, or (B) owned by Parent, will be canceled and extinguished and no consideration will be delivered in exchange therefor. 1.2. Effective Time. Unless this Agreement is earlier terminated pursuant to Section 8.1, the closing of the Merger (the "Closing") will take place as promptly as practicable, but no later than five (5) Business Days, following satisfaction or waiver of the conditions set forth in Article VI, at the offices of Gibson, Dunn & Crutcher LLP, San Francisco, California, unless another place or time is agreed to by Acquisition, Parent and the Company. The date upon which the Closing actually occurs is herein referred to as the "Closing Date". On the Closing Date, the parties hereto shall cause the Merger to be consummated by (i) executing and filing a Certificate of Merger, substantially in the form of Exhibit E hereto, with the Secretary of State of the State of Delaware (the "Certificate of Merger"), in accordance with the relevant provisions of Delaware Law, (ii) executing and filing with the Secretary of State of the State of California an agreement of merger, substantially in the form of Exhibit F hereto, (the "Agreement of Merger") and the certificates required by Section 1103 of California Law (the 2 14 "Section 1103 Certificates"), in accordance with the relevant provisions of California Law (the time of acceptance by the Secretary of State of the State of California of such filing being referred to herein as the "Effective Time"), and (iii) executing and filing such other documents as shall be necessary or appropriate to effect the Merger. 1.3. Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law and California Law. Without limiting the generality of the foregoing, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Acquisition shall vest in the Company as the surviving corporation of the Merger, and all debts, Liabilities and duties of the Company and Acquisition shall become debts, Liabilities and duties of the Company as the surviving corporation of the Merger. 1.4. Effect on Company Capital Stock; Treatment of Stock Options. (a) Effect on Company Capital Stock. Subject to the terms and conditions of this Agreement, as of the Effective Time, by virtue of the Merger and without any action on the part of Parent, the Company or the holder of any shares of Company Capital Stock, the following shall occur: (1) Conversion of Company Common Stock. Each share of Company Common Stock, except for shares of Company Common Stock canceled pursuant to Section 1.1(j) hereof, issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares (as defined and to the extent provided in Section 1.6(a)) will be canceled and extinguished and be converted automatically into the right to receive an amount equal to the Common Per Share Price, and each holder of Company Common Stock shall be entitled to receive, upon surrender of the certificates set forth on Schedule 2.2(a) evidencing the shares of Company Common Stock held by such shareholder, an aggregate amount equal to the Common Per Share Price multiplied by the number of such shares of Company Common Stock so held by such shareholder. (2) Conversion of Company Preferred Stock. Each share of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, except for shares of Company Preferred Stock canceled pursuant to Section 1.1(j) hereof, issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares (as defined and to the extent provided in Section 1.6(a)) will be canceled and extinguished and be converted automatically into the right to receive an amount equal to the Series A Per Share Price, Series B Per Share Price or Series C Per Share Price, as applicable, and each holder of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock shall be entitled to receive, upon surrender of the certificates set forth on Schedule 2.2(a) evidencing the shares of Preferred Stock held by such shareholder, an aggregate amount equal to the Series A Per Share Price, Series B Per Share Price or Series C Per Share Price, as applicable, multiplied by the number of such shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock, as applicable, so held by such shareholder. 3 15 (b) Treatment of Options. At the Effective Time, subject to Section 5.11 hereof, all options to purchase shares of the Company's Common Stock then outstanding under the Intrepid Systems, Inc. 1992 Stock Option Plan, as amended (the "Option Plan") as set forth on Schedule 1.4(b) shall be assumed by Parent in accordance with the provisions described below. (1) At the Effective Time, each outstanding option to purchase shares of the Company's Common Stock (a "Company Option") under the Option Plan or otherwise, whether vested or unvested, shall be, as a consequence of the Merger, assumed by Parent. Each Company Option so assumed under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Option Plan and/or as provided in the respective option agreements governing such Company Option immediately prior to the Effective Time, except that (i) such Company Option shall be exercisable for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock underlying such Company Option immediately prior to the Effective Time, and the Exchange Ratio, rounded to the nearest whole number of shares of Parent Common Stock, and (ii) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such assumed Company Option shall be equal to the quotient determined by dividing the exercise price per share of Company Common Stock at which such Company Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded to the nearest whole cent; provided, however, that Parent may make but is not required to make such adjustments to the number of shares of Parent Common Stock or the exercise price of such assumed Company Option, as Parent reasonably deems necessary, in order to prevent any such Company Option that is characterized by the Company as an "incentive stock option" immediately prior to Closing from failing to so qualify solely by reason of Sections 424(a)(1) or 424(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code"). (2) Promptly following the Effective Time, Parent shall issue to each holder of an outstanding Company Option a document evidencing the foregoing assumption of such Company Option. (c) Adjustments. The Exchange Ratio, the Vested Unexercised Options and any other similar and related items shall be adjusted to reflect fully the effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Capital Stock occurring after the date hereof and prior to the Effective Time. 1.5. Accounting Treatment. Notwithstanding any provision of this Agreement to the contrary, it is the intention of the parties that the Merger qualify for treatment as, and be accounted for as, a purchase under Accounting Principles Board Opinion No. 16. 1.6. Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, each share of Company Capital Stock held by a holder who has demanded and perfected appraisal or 4 16 dissenters' rights for such shares in accordance with the applicable requirements of California Law, and who, as of the Effective Time, has not effectively withdrawn or lost such appraisal or dissenters' rights ("Dissenting Shares"), shall not be converted into or represent a right to receive the Common Per Share Price, the Series A Per Share Price, the Series B Per Share Price, or the Series C Per Share Price, as applicable, pursuant to Sections 1.4 and 1.7, but the holder thereof shall only be entitled to such rights as are granted by California Law. (b) Notwithstanding the provisions of subsection (a), if any holder of shares of Company Capital Stock who demands appraisal of such shares under California Law shall at any time effectively withdraw or lose (through failure to perfect or otherwise) the right to appraisal, then, as of the later of the Effective Time and the occurrence of such event, each of such holder's shares shall automatically be converted into and represent only the right to receive the Common Per Share Price, the Series A Per Share Price, the Series B Per Share Price or the Series C Per Share Price, as applicable, as provided in Section 1.4, without interest thereon, upon surrender of the certificate representing such shares. (c) The Company shall give Parent (i) prompt notice of any written demands for appraisal of any shares of Company Capital Stock, withdrawals of such demands, and any other instruments served pursuant to California Law and received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under California Law. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisal of Company Capital Stock or offer to settle or settle any such demands. 1.7. Surrender of Certificates. (a) Exchange Agent and Exchange. Prior to the Effective Time, Parent shall designate a bank or trust company reasonably acceptable to the Company to act as exchange agent (the "Exchange Agent") in the Merger. Promptly after the Effective Time, the Exchange Agent shall mail to each holder set forth on Schedule 2.2(a) a letter of transmittal which shall, among other things, specify that delivery of the Certificates shall be effected, and risk of loss and title to certificates representing Company Capital Stock (the "Certificates") shall pass, only upon actual receipt by the Exchange Agent of the Certificates and instructions for use in effecting the surrender of the Certificates in exchange for the Common Per Share Price, the Series A Per Share Price, the Series B Per Share Price or the Series C Per Share Price, respectively, due to such holder for each share of Company Capital Stock held by such holder. Upon surrender of a certificate for cancellation to the Exchange Agent together with such letter of transmittal duly executed, the holder of such certificate shall be entitled to receive promptly in exchange therefor a check in the amount (after giving effect to any required tax withholdings) of the Common Per Share Price, the Series A Per Share Price, the Series B Per Share Price or the Series C Per Share Price due and payable in respect of each of such holder's shares of Company Capital Stock, and the certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on any amount payable upon due surrender of the Certificates. Upon delivery to each shareholder of the Company of the amount specified by this Clause (a), such payment shall be deemed to have been made in full satisfaction of all rights pertaining to such shares of Company Capital Stock, 5 17 all rights of such shareholder pertaining to such Company Capital Stock shall cease, and there will be no further registration of transfers on the stock transfer books of the Company. (b) No Liability. Notwithstanding anything to the contrary in this Section 1.7, none of the Exchange Agent, Parent and the Company shall be liable to a holder of shares of Company Capital Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. (c) Aggregate Purchase Price. The aggregate of (i) the Common Per Share Price multiplied by the number of shares of Company Common Stock outstanding at the Effective Time, not including any such shares owned by PeopleSoft, (ii) the Common Per Share Price multiplied by the number of shares of Company Common Stock issuable pursuant to Vested Unexercised Options, (iii) the Series A Per Share Price multiplied by the number of shares of Series A Preferred Stock outstanding as of the Effective Time, not including any such shares owned by PeopleSoft, (iv) the Series B Per Share Price multiplied by the number of shares of Series B Preferred Stock outstanding as of the Effective Time, not including any such shares owned by PeopleSoft, and (v) the Series C Per Share Price multiplied by the number of shares of Series C Preferred Stock outstanding as of the Effective Time, not including any such shares owned by PeopleSoft, shall not exceed the Aggregate Purchase Price. 1.8. No Further Ownership Rights in Company Capital Stock. The Aggregate Purchase Price shall constitute satisfaction in full of all rights pertaining to such Company Capital Stock. Upon the Effective Time, there shall be no further registration of transfers on the records of Parent or the Company of shares of Company Capital Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to Parent for any reason, they shall be canceled and an amount equal to the number of shares represented by such Certificates multiplied by the Common Per Share Price, the Series A Per Share Price, the Series B Per Share Price or the Series C Per Share Price, as applicable, shall be paid to the holder of such Certificates as provided in this Article I. 1.9. Lost, Stolen or Destroyed Certificates. In the event any Certificates are lost, stolen or destroyed, the Exchange Agent shall pay in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, the proportionate amount of the Aggregate Purchase Price, as may be required pursuant to Section 1.4; provided that, as a condition precedent to the payment thereof, the owner of such lost, stolen or destroyed Certificates shall enter into an indemnification agreement satisfactory to Parent as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.10. Tax Consequences. It is intended by the parties hereto that exchange of the Company Capital Stock by the Company's shareholders pursuant to Section 1.4 hereof shall be a sale of stock of the Company to Parent for income tax purposes. 1.11. Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest in Parent full right and title to and possession of all assets, property, rights, privileges, 6 18 powers and franchises of the Company, the officers and directors of Parent are hereby fully authorized in the name of Parent, the Company and otherwise to take all such lawful action. ARTICLE II REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY AND CERTAIN OTHER MATTERS Subject to such exceptions as are clearly disclosed in the separate Disclosure Schedule of even date herewith ("Disclosure Schedules"), the Company hereby represents and warrants to Parent, as follows: 2.1. Organization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Company has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would result in a Material Adverse Change on the Company. The Company has delivered a true and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, to Parent. 2.2. Company Capital Structure. (a) The authorized capital stock of the Company (exclusive of its Subsidiaries) consists solely of (i) 20,000,000 shares of authorized Company Common Stock, 6,875,007 shares of which are issued and outstanding on the date hereof, and (ii) 1,514,310 shares of authorized preferred stock, of which (w) 525,490 shares of which have been authorized and designated as the Series A Preferred Stock, all of which are issued and outstanding on the date hereof, (x) 747,000 shares of which have been authorized and designated as the Series B Preferred Stock, 502,195 shares of which are issued and outstanding on the date hereof, (y) 241,820 shares of which have been authorized and designated as the Series C Preferred Stock, 146,578 shares of which are issued and outstanding on the date hereof, and (z) no other shares of which have been authorized or designated as a series or are issued and outstanding as of the date hereof. On the date hereof, the Company Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock is held of record and beneficially by the persons, with the addresses of record and in the amounts with the corresponding certificate numbers set forth on Schedule 2.2(a). All outstanding shares of Company Capital Stock are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, the Articles of Incorporation or Bylaws of the Company, any agreement to which the Company is a party or by which it is bound or otherwise. None of the shares of Company Capital Stock is subject to any right of repurchase by the Company. (b) Except as set forth on Schedule 2.2(b) and except as otherwise permitted by the terms of this Agreement, on the date hereof there are not outstanding, and on the Closing Date there will not be outstanding (i) any options, warrants or other rights to purchase from the Company any capital stock or other securities of the Company, (ii) any securities convertible into or exchangeable for shares of such capital stock or securities or (iii) any other commitments or 7 19 rights of any kind for the Company to issue additional shares of capital stock, options, warrants or other securities. Such schedule sets forth a correct and complete list of each of the foregoing as of the date hereof, including the record and beneficial holder thereof, a description of the nature of such security, the amount of securities held, the exercise, conversion or exchange rights relating thereto, including a schedule of vesting, and the type and amount of securities into which such securities are exercisable, convertible or exchangeable. No Company Option shall accelerate solely as a consequence of the Merger or the other transactions contemplated by this Agreement. 2.3. Subsidiaries. Except as set forth on Schedule 2.3, the Company has no Subsidiaries and does not have any ownership interest in any securities of any kind in any Person. Each Subsidiary is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each Subsidiary has the corporate (or other equivalent) power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would result in a Material Adverse Change on such Subsidiary. The Company has delivered a true and correct copy of each Subsidiary's organizational documents, each as amended to date, to Parent. 2.4. Authority. The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The vote required of the Company's shareholders to duly approve the Merger and this Agreement is that number of shares as would constitute a majority of the outstanding shares of each class of the Company Capital Stock. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate and shareholder action on the part of the Company as provided by California Law and the Company's Articles of Incorporation and Bylaws. The Company's Board of Directors has unanimously approved the Merger, this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming due execution and delivery by the Parent and Acquisition, constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, except as such enforceability may be limited by principles of public policy and subject to laws relating to bankruptcy, insolvency and the relief of debtors and to rules of law governing specific performance, injunctive relief and other equitable remedies. Except as set forth on Schedule 2.4, the execution and delivery of this Agreement by the Company does not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit under (i) any provision of the Articles of Incorporation or Bylaws of the Company or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree or Applicable Law applicable to the Company or its respective properties or assets. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, or notice to, any court, administrative agency or commission or other Governmental Authority or any third party is required by or with respect to the Company in connection with the 8 20 execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, (ii) the filing with the Secretary of State of the State of California of the Agreement of Merger and the certificates required by Section 1103 of the California Law, (iii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and (iv) such other consents, waivers, authorizations, filings, approvals and registrations that are set forth on Schedule 2.4. 2.5. Company Financial Statements. Schedule 2.5 sets forth the Company's audited balance sheet as of December 31, 1997 and the related audited statements of operations and cash flows for the year then ended and the Company's unaudited balance sheet as of August 31, 1998 (the "Balance Sheet") and the related unaudited statements of operations and cash flows for the eight-month period then ended (collectively, all such financial statements are referred to as the "Company Financials"). The Company Financials are correct in all material respects and have been prepared in accordance with GAAP applied on a basis consistent throughout the periods indicated and consistent with each other. The Company Financials present fairly the financial condition and operating results of the Company as of the dates and during the periods indicated therein, subject, in the case of the Balance Sheet and other Company Financials for the eight month period ended August 31, 1998, to normal year-end adjustments, which will not be material in amount or significance for such period. 2.6. No Undisclosed Liabilities. Except as set forth in Schedule 2.6, the Company does not have any Liability in excess of Five Thousand Dollars ($5,000) that (i) has not been reflected in the Balance Sheet or (ii) has not arisen in the ordinary course of the Company's business since August 31, 1998, consistent with past practices. Except as disclosed in Schedule 2.6, no customer of the Company has a right of refund or set off from the Company. 2.7. No Changes. Except as set forth in Schedule 2.7 and Schedule 2.12(a), since March 31, 1998, there has not been, occurred or arisen any: (a) material transaction (other than the transactions contemplated by this Agreement) by the Company except in the ordinary course of business as conducted on that date and consistent with past practices; (b) amendments or changes to the Articles of Incorporation or Bylaws of the Company; (c) capital expenditure or commitment by the Company of Twenty-Five Thousand Dollars ($25,000) in any individual case or Seventy-Five Thousand Dollars ($75,000) in the aggregate; (d) destruction of, damage to or loss of any asset, business or customer of the Company (whether or not covered by insurance) that resulted or could reasonably be expected to result in losses to the Company of more than Ten Thousand Dollars ($10,000); 9 21 (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; (f) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company; (g) revaluation by the Company of any of its assets; (h) declaration, setting aside or payment of a dividend or other distribution with respect to the capital stock of the Company, or any direct or indirect redemption, purchase or other acquisition by the Company of any of its capital stock other than pursuant to the exercise of repurchase rights under stock option agreements; (i) increase in the salary or other compensation payable or to become payable by the Company to any of its officers, directors, employees or advisors, or the declaration, payment or commitment or obligation of any kind for the payment, by the Company, of a bonus or other additional salary or compensation to any such person; (j) sale, lease, license or other disposition of any of the assets or properties of the Company, except in the ordinary course of business as conducted on that date and consistent with past practices; (k) amendment or termination of any Scheduled Contract (as defined in Section 2.12); (l) loan by the Company to any person or entity, incurring by the Company of any indebtedness, guaranteeing by the Company of any indebtedness, issuance or sale of any debt securities of the Company or guaranteeing of any debt securities of others except for advances to employees for travel and business expenses in the ordinary course of business, consistent with past practices; (m) waiver or release of any right or claim of the Company, including any write-off or other compromise of any account receivable of the Company, where such waiver, release, write-off or compromise involves an amount in excess of Five Thousand Dollars ($5,000); (n) commencement or notice or threat of commencement of any Proceeding against or investigation of the Company or its affairs; (o) notice of any claim of ownership by a third party of the Company's Intellectual Property Rights (as defined in Section 2.11 below) or of infringement by the Company of any third party's Intellectual Property Rights; (p) issuance or sale by the Company of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities; 10 22 (q) change in pricing or royalties set or charged by the Company to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property to the Company; (r) event or condition of any character, or group of the foregoing, that has or is reasonably likely to have a Material Adverse Change on the Company; (s) mortgage, pledge, Lien, charge, security interest or any other encumbrance or restriction relating to any of the Company's property, business or assets, tangible or intangible; (t) agreement to enter into a strategic alliance, including marketing or distribution arrangements or other similar arrangements, or grant of third party royalty rights or development agreements, or sub-licensing of any rights; or (u) agreement by the Company to do any of the things described in the preceding clauses (a) through (t) (other than negotiations with Parent and Acquisition and their representatives regarding the transactions contemplated by this Agreement). The Company shall not be deemed to be in breach of the representations and warranties of this Section 2.7 for any matters arising after the date hereof so long as such matters are permitted by Section 4.1, and the Company provides Parent with written notice of all such matters at least three (3) Business Days prior to the Closing. 2.8. Tax and Other Returns and Reports. (a) For purposes of this Agreement: (i) the term "Taxes" means (A) all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, value added, intangible, unitary, capital gain, transfer, franchise, profits, license, lease, service, service use, withholding, backup withholding, payroll, employment, estimated, alternative minimum, excise, severance, stamp, occupation, premium, property, environmental, self-dealing, prohibited transactions, windfall or excess profits, customs duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (B) any Liability for payment of amounts described in clause (A) whether as a result of transferee Liability, of being a member of an affiliated, consolidated, combined or unitary or other similar group for any period, or otherwise through operation of Applicable Law and (C) any Liability for the payment of amounts described in clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax allocation agreement or any other express or implied agreement to indemnify any other person; and the term "Tax" means any one of the foregoing Taxes; and (ii) the term "Returns" means all returns, declarations, reports, statements and other documents filed or required to be filed in respect of Taxes; and the term "Return" means any one of the foregoing Returns. 11 23 (b) Schedule 2.8(b) sets forth a list of the taxable years of the Company for which examinations of income or franchise tax returns by the IRS and the state, local or foreign taxing authority have been completed, those years for which examinations by such agencies are presently being conducted, those years for which notice of pending or threatened examination or adjustment has been received. Except to the extent indicated in Schedule 2.8(b), all deficiencies asserted or assessments made as a result of any examinations by the IRS or state, local or foreign Tax authority have been fully paid, or are fully described in Schedule 2.8(b), are being contested in good faith and an adequate reserve therefor has been established and are fully reflected in the Balance Sheet. Except as described in Schedule 2.8(b), there are no Returns that are presently under examination with respect to Taxes, there are no proposed (whether oral or written) or final adjustments, assessments or deficiencies with respect to Taxes currently pending, and there are no outstanding notices of proposed or actual audit, examination or investigation with respect to Taxes. (c) Except as described in Schedule 2.8(c): (i) The Company has properly filed, or has had properly filed on its behalf, on a timely basis, all Returns required to have been filed and all Taxes required to be shown thereon as due have been paid on a timely basis. All such Returns were, when filed, and continue to be, true, complete and correct in all material respects. No Liability for Taxes has been incurred, and no taxable income has been realized, by the Company since January 1, 1997 other than in the ordinary course of business. No director, officer or employee of the Company or any Affiliate or thereof having responsibility for Tax matters is in discussions with Tax authorities or has reason to believe that any Tax authority has valid grounds to claim or assess any additional Tax with respect to the Company materially in excess of the amounts shown on the Balance Sheet for the period ending on such date and amounts incurred in the ordinary course of business since that date; (ii) The Company is not, and has not been at any time, a member of an affiliated group as defined in Section 1504 of the Code. The Company has no Liability for Taxes of any other Person; (iii) With respect to all amounts in respect of Taxes and with respect to all taxable periods or portions of periods ending on or before the Closing, all applicable Tax laws and agreements have been fully complied with, and all amounts required to be paid by the Company to Tax authorities or others have been paid; (iv) None of the Returns contains, or was required to contain (in order to avoid the imposition of a penalty), a disclosure statement under Section 6662 (or any predecessor provision) of the Code, or any similar provision of state, local or foreign law, with respect to the income, gain, loss, deduction or credit of the Company; (v) All amounts that were required to be collected or withheld by or in respect of the Company in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party have been duly collected or withheld, and all 12 24 amounts that were required to be remitted to any Governmental Authority by or in respect of the Company have been duly remitted; (vi) The Company has not requested an extension of time to file any Company Return not yet filed, and has not granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. No power of attorney with respect to Taxes is in force; (vii) The Company has not taken any action not in accordance with past practice that would have the effect of deferring any material Tax Liability of the Company from any taxable period or portion thereof ending on or before Closing to any subsequent taxable period or portion thereof; (viii) There are no actual or deemed elections under Section 338 of the Code, protective carryover basis elections, offset prohibition elections or similar elections applicable to the Company; (ix) The Company is not required to include in its income any adjustment pursuant to Sections 481 or 263A of the Code (or similar provisions of other Applicable Law) by reason of a change in accounting method or otherwise, following the Closing, and to Company's knowledge the IRS (or other Governmental Authority) has not proposed, and is not considering proposing, any such change in accounting method or other adjustment; (x) There are no Liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Company; (xi) The Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code, whether by reason of the Closing or otherwise; (xii) The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country; the Company has not engaged in a trade or business within any foreign country; (xiii) The Company is not party to any joint venture, partnership, or other arrangement or contract that could be treated as a partnership for federal income Tax purposes; (xiv) The Company has never filed an election pursuant to Section 1361 of the Code (or any similar provision for state or local tax purposes). The Company has not filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state, local or foreign income Tax law) or agreed to have 13 25 Section 341(f)(2) of the Code (or any corresponding provision of state, local or foreign income Tax law) apply to any disposition of any asset owned by the Company; (xv) The Company has not participated in an international boycott within the meaning of Section 999 of the Code; (xvi) The Company is not, and has not been, a party to a Tax sharing agreement. The Company has no current or contingent contractual obligation to indemnify any Person with respect to Taxes, other than obligations to indemnify a lessor for property taxes, sales/use taxes or gross receipts taxes (but not income or franchise Taxes) imposed on lease payments arising from terms that are customary for leases of similar property; (xvii) The Company is not a party to or bound by any closing agreement, offer in compromise or other contractual or similar arrangement with any Tax Governmental Authority; (xviii)No material election with respect to Taxes incurred by the Company has been made from and after the date of this Agreement; (xix) [Intentionally Omitted]; (xx) Schedule 2.8(c) sets forth, with respect to the Company, as of December 31, 1997, the tax basis in its assets (by type), and the amount of any net operating loss, net capital loss, and unused tax credit carryovers (and type thereof), for federal and applicable state income tax purposes. (xxi) The Company currently uses the accrual method of accounting for United States federal and state income Tax purposes and has not changed to or from such method of accounting during the preceding five years; (xxii) The Company has provided to representatives of Parent copies of all federal and state income and franchise Returns for all taxable years beginning with the taxable year ended December 31, 1994, and other written correspondence, filed or submitted by the Company with or to the relevant Tax authorities in connection with any audit, examination or accounting method or tax year change, and has produced for Parent's inspection all sales Tax, use Tax, property Tax, and other Tax and information returns filed by the Company; (xxiii)The Company is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code; (xxiv) All outstanding options to acquire equity of the Company that purport to be or were otherwise intended (when issued) to be treated as "incentive stock options" ("ISOs") within the meaning of Section 422 of the Code (and any predecessor provision and any similar provision applicable under state, local or other Tax law) were issued in compliance with such section. All such outstanding options currently qualify for treatment as ISOs, and are held by persons who are employees of the Company; 14 26 (xxv) None of the assets of the Company is property that the Company is required to treat as being owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954, as amended; none of the assets of the Company directly or indirectly secures any debt the interest on which is tax exempt under Section 103(a) of the Code; none of the assets of the Company is "tax-exempt use property" within the meaning of Section 168(h) of the Code; and (xxvi) The Company has not redeemed Company Capital Stock or made an "extraordinary distribution" within the meaning of Treasury Regulation Section 1.368-1T(e)(1)(ii). 2.9. Restrictions on Business Activities. Except as set forth on Schedule 2.9, there is no agreement (noncompete or otherwise), judgment, injunction, order or decree to which the Company is a party or otherwise binding upon the Company that has or is reasonably likely to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company. Without limiting the foregoing, the Company has not entered into any agreement under which the Company is restricted from selling, licensing or otherwise distributing any of its products to any class of customers, in any geographic area, during any period of time or in any segment of the market. 2.10. Title to Properties; Absence of Liens and Encumbrances. (a) The Company owns no real property, nor has it ever owned any real property. Schedule 2.10(a) sets forth a list of all real property currently leased by the Company, the name of the lessor and the date of the lease and each amendment thereto. All such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing material default or event of default (or event which with notice or lapse of time, or both, would constitute a default). Complete and correct copies of such leases have been delivered to Parent. (b) The Company has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its properties and assets, tangible and intangible (including Intellectual Property Assets), real, personal and mixed, used or held for use in its business, free and clear of any Liens, except as reflected in the Company Financials except for Liens for Taxes not yet due and payable and such imperfections of title, if any, that do not materially interfere with the present value of the subject property or as may be reflected in Schedule 2.10(b). 15 27 2.11. Intellectual Property. (a) Certain Definitions. (i) The term "Intellectual Property Rights" means all United States and foreign: (1) fictional business names, trade names, registered and unregistered trademarks and service marks, and applications therefor (collectively, "Marks"); (2) patents, patent rights and patent applications (collectively, "Patents"); (3) copyrights in both published works and unpublished works and all registrations and applications therefor (collectively, "Copyrights"); (4) know-how, trade secrets, confidential information and other proprietary information, including customer lists (collectively, "Trade Secrets"); and (5) rights in and to any and all inventions, discoveries, concepts, ideas, drawings, designs, refinements, extensions, improvements, software (including object and source code), computer software programs or applications (in both source code and object code form), data, databases, mask works, know-how, research and development, techniques, modifications, and other proprietary and intellectual property rights (whether or not patentable or subject to copyright, mask work or trade secret protection) not included in the foregoing subparagraphs (2), (3) or (4) (collectively, "Technology"). (ii) The term "Intellectual Property Assets" means all Intellectual Property Rights owned or licensed by the Company and used or usable in or necessary to the conduct of the Company's business and all further uses of the terms Marks, Patents, Copyrights, Trade Secrets and Technology in this Section shall mean Marks, Patents, Copyrights, Trade Secrets and Technology that are Intellectual Property Assets. 16 28 (b) Ownership of Software. The term "Software" means all of the Company's software, modules, design documents, flow charts and other related development documents, and all patents and copyrights to each of those items and specifically excluding those items prepared for customers in the operation of the Company's business for which the customer contractually has vested title. The Company's Software (excluding software that is available through commercial distributors or in consumer retail stores and are subject to "shrink-wrap" agreements) is listed on Schedule 2.11(b) . The Company has not assigned, transferred or encumbered any of its rights to the Software. (c) Certain Intellectual Property Assets. The Company does not own any Marks or Patents, except as set forth on Schedule 2.11(c). (d) Copyrights. The Company is the owner of all right, title and interest in and to each of the Copyrights in the Software, free and clear of all Liens and other adverse claims. None of the Copyrights has been registered with the U.S. Copyright Office or, if foreign, with the appropriate foreign Governmental Authority. (e) Trade Secrets. The Company has taken all reasonable precautions to protect the secrecy, confidentiality and value of all Trade Secrets relating to the Company's business. (f) Intellectual Property Scheduled Contracts. Schedule 2.11(f) contains a complete and accurate list of all Scheduled Contracts relating to the Intellectual Property Assets to which the Company is a party or by which the Company is bound, except for any license for common publicly retailed software programs that are currently distributed with a value of less than Five Thousand Dollars ($5,000). There are no outstanding and, to the Company's knowledge, no threatened disputes or disagreements with respect to any such Scheduled Contract. (g) Ownership of Intellectual Property Assets. The Company is the owner of all right, title, and interest in and to each of the Intellectual Property Assets, free and clear of all Liens, and has the right to use without payment to a third party all of the Intellectual Property Assets. (h) Employee Agreements. All employees and independent contractors of the Company involved with the development of products or the Software for the Company have executed written agreements with the Company that appropriately protect the Intellectual Property Assets. To the best knowledge of the Company, no employee of the Company has entered into any contract or other agreement with any Person (other than the Company) that restricts or limits in any way the scope or type of work in which the employee may be engaged or requires the employee to transfer, assign, or disclose information concerning the employee's work to anyone other than the Company. (i) Infringement Generally. The Company is not, nor has it during the three (3) years preceding the date of this Agreement been, a party to any Proceeding, nor is any Proceeding threatened, that involves or involved a claim of infringement by the Company or any 17 29 other Person of any Intellectual Property Asset. No Intellectual Property Asset of the Company is subject to any outstanding order, judgment, decree, stipulation or agreement restricting the use thereof by the Company or, in the case of any Intellectual Property Asset licensed to others, restricting the sale, transfer, assignment or licensing thereof by the Company to any Person. To the Company's knowledge, its use of any Intellectual Property Assets does not conflict with, infringe upon or violate any Intellectual Property Right or other right of any Person. (j) Use of Intellectual Property. The Company owns, or is licensed or otherwise possesses legally enforceable rights to use, all Intellectual Property Assets that are used in the business of the Company as currently conducted. (k) Software. The portion of the Software developed by the Company does not contain any Materials or Development Environments (each as defined below) that embody Intellectual Property Rights of any Person other than the Company, except for such Materials or Development Environments obtained by the Company from other Persons who make such Materials or Development Environments generally available to all interested purchasers or end-users on standard commercial terms, other than Intellectual Property Rights obtained from Parent. For purposes of this Agreement, (i) the term "Materials" means computer programming code (including both object code and source code versions thereof), databases, documentation (including user manuals and other written materials that relate to particular code or databases), and other materials useful for design (for example, logic manuals, flow charts, and principles of operation), and (ii) the term "Development Environments" means any device, programming, documentation, media and other objects, including compilers, "workbenches," tools, and higher-level or "proprietary" languages, used by the Company for the development, maintenance and implementation of the Materials, to the extent such objects may be necessary for any subsequent maintenance or enhancement of the same, similar or related Materials by Parent after the Closing or the comprehension by reasonably competent programmers of the operation of such Materials in their business context. 2.12. Agreements, Scheduled Contracts and Commitments. (a) Except as set forth on Schedule 2.12(a), the Company does not have, is not a party to nor is it bound by: (i) any collective bargaining agreements; (ii) any agreements or arrangements that contain any severance pay or post-employment liabilities or obligations; (iii) any bonus, deferred compensation, sales compensation plan, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements or agreements to change any such plans whether written or oral; (iv) any employment or consulting agreement with an employee or individual consultant, or any consulting or sales agreement under which a firm or other organization provides services to the Company; 18 30 (v) any agreement or plan, including any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (vi) any fidelity or surety bond or completion bond; (vii) any lease of personal property having a value individually in excess of Twenty-Five Thousand Dollars ($25,000); (viii) any agreement of indemnification or guaranty other than customary intellectual property indemnifications made in the ordinary course of business; (ix) any agreement pursuant to which the Company has granted or may grant in the future, to any party a source-code license or option or other right to use or acquire source-code, other than the license agreements for "Evolution" (which involve the source code) and "Decisionmaster" (where the source code is escrowed in certain circumstances) (x) any agreement relating to capital expenditures and involving future payments in excess of Twenty-Five Thousand Dollars ($25,000); (xi) any agreement relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of the Company's business; (xii) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, including guaranties referred to in clause (viii) of this Section 2.12; (xiii) any purchase order or contract for the purchase of raw materials or services involving Fifteen Thousand Dollars ($15,000) or more; (xiv) any construction contracts; (xv) any distribution, joint marketing or development agreement; (xvi) any other agreement that involves Twenty-Five Thousand Dollars ($25,000) or more or is not cancelable without penalty within thirty (30) days; and (xvii) each other material agreement or commitment, whether written or oral; without in any way limiting the foregoing, Schedule 2.12(a) lists all agreements, amendments, supplements, addenda, modifications and side letters with Andersen Consulting or any of its affiliates. The Company shall not be deemed to be in breach of the representations and warranties of this Section 2.12(a) for any matters arising after the date hereof so long as such matters are permitted 19 31 by Section 4.1, and the Company provides Parent with written notice of all such matters at least three (3) Business Days prior to the Closing. (b) Except for such alleged breaches, violations and defaults, and events that would constitute a breach, violation or default with the lapse of time, giving of notice, or both, as are all noted in Schedule 2.12(b), the Company has not in any material respect breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any agreement, contract or commitment required to be set forth on Schedule 2.9, Schedule 2.12(a) or Schedule 2.11(f) (any such agreement, contract or commitment, regardless of whether it is set forth on such schedule, a "Scheduled Contract"). Each Scheduled Contract is in full force and effect and, except as otherwise disclosed in Schedule 2.12(b), is not subject to any default thereunder of which the Company has knowledge by any party obligated to the Company pursuant thereto. (c) With respect to the consulting agreements of the Company listed on Schedule 2.12(a), (i) all of the agreements and understandings of the Company and each of the respective third parties are set forth in the copies of such agreements provided to Parent, (ii) there are no other agreements, written or oral, changing the rights or obligations of Parent thereunder and (iii) except as set forth in Schedule 2.12(c), the Company has retained all rights to its Intellectual Property Assets related to such agreements and the third parties do not have any ownership interest, jointly or otherwise, in the Intellectual Property Assets. (d) Schedule 2.12(d) contains a complete and correct list of the serial numbers of the customer surveys returned to the Company in connection with the surveys conducted by Pacific Consulting Group. 2.13. Interested Party Transactions. Except as set forth on Schedule 2.13, to the Company's knowledge, no officer, director or Affiliate of the Company (nor any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an economic interest), has or has had, directly or indirectly, (i) an economic interest in any entity which furnished or sold, or furnishes or sells, services or products that the Company furnishes or sells, or proposes to furnish or sell, or (ii) an economic interest in any entity that purchases from or sells or furnishes to, the Company, any goods or services or (iii) a beneficial interest in any Scheduled Contract; provided, that ownership of no more than one percent (1%) of the outstanding voting stock of a publicly traded corporation shall not be deemed an "economic interest in any entity" for purposes of this Section 2.13. 2.14. Compliance with Laws. The Company has complied in all material respects with, is not in any material respect in violation of, and has not received any notices of violation with respect to, any Applicable Law. 2.15. Litigation. Except as set forth in Schedule 2.15, there is no Proceeding of any nature pending or to the Company's knowledge threatened against the Company, its properties or any of its officers, directors or employees, in their respective capacities as such. Except as set forth in Schedule 2.15, to the Company's knowledge, there is no investigation pending or 20 32 threatened against the Company, its properties or any of its officers, directors or employees by or before any Governmental Authority. Schedule 2.15 sets forth, with respect to any such pending or threatened Proceeding or investigation, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. No Governmental Authority has at any time challenged or questioned the legal right of the Company to manufacture, offer or sell any of its products in the present manner or style thereof. There is no Proceeding pending, or as to which the Company has received any notice of assertion against the Company, that in any manner challenges or seeks, or reasonably could be expected, to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Agreement. 2.16. Insurance. Schedule 2.16 sets forth a list and description of each insurance policy currently in effect where the Company is the beneficiary. Such schedule lists the name of the insurer, policy coverage, coverage amounts and premiums payable. With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company, there is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has no knowledge of any threatened termination of, or premium increase with respect to, any of such policies. The Company does not have any key-man life insurance policies or any other policies under which any shareholder is a beneficiary, other than any policies set forth on Schedule 2.16 under which shareholders may be beneficiaries in their capacities as employees of the Company. 2.17. Minute Books. The minute books of the Company made available to counsel for Parent are the only minute books of the Company and contain a reasonably accurate summary of all actions taken at meetings of directors (or committees thereof) and shareholders or actions by written consent since the time of incorporation of the Company. 2.18. Environmental Matters. (a) No approval, authorization, certificate, consent, license, order, permit and any other similar authorization of any Governmental Authority, or from any other Person, is required under any Environmental Laws applicable to the Company or any of its assets or operations. The Company is in compliance in all material respects with all limitations, restrictions, conditions, standards, requirements, schedules and time tables required or imposed under all Environmental Laws. (b) There is no Proceeding, citation or notice of violation under any Environmental Law actually pending or, to the Company's knowledge, threatened, relating to the Company or any of its assets or operations. (c) There are no past or present events, conditions, circumstances, activities, practices, incidents, actions, omissions or plans that may interfere with or prevent continued 21 33 compliance with any Environmental Law by the Company, or that may give rise to any Environmental Liability to the Company or that otherwise may form the basis of any Proceeding, hearing, study or investigation relating to the Company or any of its assets or operations (1) under any Environmental Law, (2) based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release, of any Hazardous Substance, or (3) resulting from exposure to work place hazards. No survey, analysis or review relating to the Company and any of its assets or operations has been performed or prepared at any time by or for the Company, or of which the Company has a copy, that discuss or relate to any existing or potential Environmental Liability. (d) The Company is not required or obligated to make any capital or other expenditure in excess of Ten Thousand Dollars ($10,000) to comply with any Environmental Law nor is there any reasonable basis on which any Governmental Authority would take any action that would require any such capital or other expenditure. 2.19. Brokers' and Finders' Fees; Third Party Expenses. The Company has not incurred, nor will it incur, directly or indirectly, any Liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.20. Employee Matters and Benefit Plans. (a) Definitions. With the exception of the definition of "Affiliate" set forth in Section 2.20(a)(i) below (such definition shall only apply to this Section 2.20), for purposes of this Agreement, the following terms shall have the meanings set forth below: (i) "Affiliate" shall mean any other person or entity under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations thereunder; (ii) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended; (iii) "Company Employee Plan" shall refer to any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether formal or informal, funded or unfunded, written or unwritten, including each "employee benefit plan," within the meaning of Section 3(3) of ERISA that is or has been maintained, contributed to, or required to be contributed to, by the Company or any Affiliate for the benefit of any "Employee" (as defined below), and pursuant to which the Company or any Affiliate has or may have any Liability contingent or otherwise; (iv) "Employee" shall mean any current, former, or retired employee, officer, or director of the Company or any Affiliate; 22 34 (v) "Employee Agreement" shall refer to each management, employment, severance, consulting, relocation, repatriation, expatriation, visa, work permit or similar agreement or contract between the Company or any Affiliate and any Employee or consultant; (vi) "IRS" shall mean the Internal Revenue Service; (vii) "Multiemployer Plan" shall mean any "Pension Plan" (as defined below) which is a "multiemployer plan", as defined in Section 3(37) of ERISA; and (viii) "Pension Plan" shall refer to each Company Employee Plan which is an "employee pension benefit plan", within the meaning of Section 3(2) of ERISA. (ix) "Welfare Plan" shall refer to each Company Employee Plan which is a welfare plan as defined in ERISA Section 3(1). (b) Schedule. Schedule 2.20(b) contains an accurate and complete list of each Company Employee Plan and each Employee Agreement, together with a schedule of all liabilities, whether or not accrued, under each such Company Employee Plan or Employee Agreement. The Company does not have any stated plan or commitment to establish any new Company Employee Plan or Employee Agreement, to modify any Company Employee Plan or Employee Agreement (except to the extent required by Applicable Law or to conform any such Company Employee Plan or Employee Agreement to the requirements of any Applicable Law or as required by this Agreement), or to enter into any additional Company Employee Plan or Employee Agreement. (c) Documents. The Company has made available to Parent (i) correct and complete copies of all documents embodying or relating to each Company Employee Plan (including a written description of each Company Employee Plan which is not otherwise set forth in writing) and each Employee Agreement (or standard forms thereof which do not differ in any material respect from the final versions of such Employment Agreements) including all amendments thereto and any written communications provided to Employees in connection therewith; (ii) the most recent annual actuarial valuations, if any, prepared for each Company Employee Plan; (iii) the three most recent annual reports (Series 5500 and all schedules thereto), if any, required under ERISA or the Code in connection with each Company Employee Plan or related trust; (iv) if Company Employee Plan is funded, the most recent annual and periodic accounting of Company Employee Plan assets; (v) the most recent summary plan description together with the most recent summary of material modifications, if any, required under ERISA with respect to each Company Employee Plan; (vi) all IRS determination letters and rulings relating to Company Employee Plans and copies of all applications and correspondence to or from the IRS or the Department of Labor ("DOL") with respect to any Company Employee Plan; (vii) all communications material to any Employee or Employees relating to any Company Employee Plan and any proposed Company Employee Plan, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any Liability to the 23 35 Company; and (viii) all registration statements and prospectuses prepared in connection with each Company Employee Plan. (d) Employee Plan Compliance. Except as set forth on Schedule 2.20(d), (i) the Company and its Affiliates have performed in all material respects all obligations required to be performed by it under each Company Employee Plan and each Company Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all Applicable Laws, including ERISA and the Code; (ii) no "prohibited transaction", within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Company Employee Plan; (iii) there are no Proceedings pending, or, to the Knowledge of the Company or its Affiliates, threatened or anticipated (other than routine claims for benefits) against any Company Employee Plan or against the assets of any Company Employee Plan; (iv) each Company Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without Liability to the Company, Parent or any of its Affiliates (other than amounts accrued to be paid to the plan in the Company Financials and ordinary administration expenses incurred in a termination event); (v) there are no inquiries or Proceedings pending or, to the Knowledge of the Company or any Affiliates, threatened by the IRS or DOL with respect to any Company Employee Plan; (vi) neither the Company nor any Affiliate is subject to any penalty or tax with respect to any Company Employee Plan under Section 4975 through 4980 of the Code; and (vii) each Company Employee Plan that is intended to be qualified under Section 401(a) of the Code is and has always been so qualified and has received a favorable determination letter with respect to such status from the IRS, and no act or omission has occurred since the date of the most recent favorable determination issued with respect to a Company Employee Plan which resulted or is likely to result in the revocation of the Company Employee Plan's qualified status. (e) Pension Plans. The Company and its Affiliates do not now, nor have they ever, maintained, established, sponsored, participated in, or contributed to, any Pension Plan that is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (f) Multiemployer Plans. At no time have the Company or its Affiliates contributed to or been requested to contribute to any Multiemployer Plan. (g) No Post-Employment Obligations. Except as set forth in Schedule 2.20(g), no Company Employee Plan provides, or has any Liability to provide, life insurance, medical or other employee welfare benefits to any Employee upon his or her retirement or termination of employment for any reason, except as may be required by statute, benefits the full cost of which are borne by Employees of the Company (or such Employees' beneficiaries or dependents), death or disability benefits under any of the Company Employee Plans, and life insurance benefits for any Employee who dies while in service with the Company. The Company has never represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) that such Employee(s) would be provided with life insurance, medical or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by statute. 24 36 (h) Welfare Plans. With respect to any Welfare Plans maintained by the Company or its Affiliates, whether or not for the benefit of the Company's employees, the Company and its Affiliates have complied in all material respects with the provisions of Sections 4980B and 9801 of the Code. (i) Effect of Transaction. (i) The execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Company Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. (ii) No payment or benefit which will or may be made by the Company or Parent or any of their respective affiliates with respect to any Employee will be characterized as an "excess parachute payment", within the meaning of Section 280G(b)(1) of the Code. (j) Employment Matters. The Company (i) is in compliance in all material respects with all Applicable Laws respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld all amounts required by Applicable Law or by agreement to be withheld from the wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages, commissions, bonuses or any other type of compensation or any taxes or any penalty for failure to comply with any of the foregoing; (iv) is not liable for any payment to any trust or other fund or to any Governmental Authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice) and (v) is not liable for nor has been threatened with any claim for discrimination or sexual harassment. Schedule 2.20(j) sets forth a complete and correct list of all employees holding visas issued by the United States, listing each such employee by name and type of visa. Except as set forth on Schedule 2.20(j), all other employees of the Company are citizens of the United States. With respect to the two immediately preceding sentences, the Company shall not be deemed to be in breach of such representations and warranties for any matters arising after the date hereof so long as such matters are permitted by Section 4.1, and the Company provides Parent with written notice of all such matters at least three (3) Business Days prior to the Closing. (k) Labor. No work stoppage or labor strike against the Company is pending or, to the Knowledge of the Company, threatened. Except as set forth in Schedule 2.20(k), the Company is not involved in or, to the Knowledge of the Company, threatened with, any labor dispute, grievance, or litigation relating to labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in Liability to the Company. Neither the Company nor any of its subsidiaries has engaged in any 25 37 unfair labor practices within the meaning of the National Labor Relations Act which would, individually or in the aggregate, directly or indirectly result in a Liability to the Company. Except as set forth in Schedule 2.20(k), the Company is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contract with respect to Employees and no collective bargaining agreement is being negotiated by the Company. (l) Employment at Will. Except as set forth in Schedule 2.20(l), the Company is not bound by any agreement, nor has it taken or omitted to take any action, that restricts its ability to terminate the employment of any of its employees at any time without payment or other Liability. 2.21. Non-competition, Non-solicitation and Non-hire Agreements. Each Key Employee and Other Management Employee has executed and delivered to Parent a Non-competition, Non-solicitation and Non-hire Agreement as amended by Amendment No. 1 to Non-competition, Non-solicitation and Non-hire Agreement in substantially the form of Exhibit C hereto (the "Noncompete Agreements") with a term of two years, in the case of Key Employees, and one year, in the case of Other Management Employees, and all of the Noncompete Agreements are in full force and effect and are enforceable in accordance with their terms against each Key Employee and each Other Management Employee, except as such enforceability may be limited by principles of public policy and subject to laws relating to bankruptcy, insolvency and the relief of debtors and to rules of law governing specific performance, injunctive relief and other equitable remedies. 2.22. Representations Complete. None of the representations or warranties made by the Company nor any statement made in any Schedule or certificate furnished by the Company pursuant to this Agreement, or furnished in or in connection with documents mailed or delivered to the shareholders in connection with soliciting their consent to this Agreement and the Merger, contains or will contain at the Effective Time, any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PEOPLESOFT, INC. Parent represents and warrants to the Company as follows: 3.1. Organization, Standing and Power. Each of Parent and Acquisition is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of Parent and Acquisition has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified would result in a Material Adverse Change on Parent. 26 38 3.2. Authority. Each of Parent and Acquisition has all requisite corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Acquisition. This Agreement has been duly executed and delivered by Parent and Acquisition and, assuming due execution and delivery by the Company, constitutes the valid and binding obligation of Parent and Acquisition, enforceable in accordance with its terms, except as such enforceability may be limited by principles of public policy and subject to laws relating to bankruptcy, insolvency and the relief of debtors and to rules of law governing specific performance, injunctive relief and other equitable remedies. Except as set forth on Schedule 3.2, the execution and delivery of this Agreement by Parent and Acquisition does not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit under (i) any provision of the Certificate of Incorporation or Bylaws of Parent or Acquisition or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree or Applicable Law applicable to Parent or Acquisition or their properties or assets that could reasonably be expected to have a Material Adverse Change on Parent. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other Governmental Authority or any third party is required by or with respect to Parent or Acquisition in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, (ii) the filing with the Secretary of State of the State of California of the Agreement of Merger and the certificates required by Section 1103 of the California Law, (iii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws, and (iv) such other consents, waivers, authorizations, filings, approvals and registrations that are set forth on Schedule 3.2. ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1. Conduct of Business of the Company. During the period from June 3, 1998, and continuing until the earlier of the termination of this Agreement and the Effective Time, the Company agrees (except to the extent that Parent shall otherwise consent in writing, which consent will not be unreasonably withheld or delayed) to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and Taxes when due, to pay or perform other obligations when due, and, to the extent consistent with such business, to use all reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired its goodwill and ongoing businesses at the Effective Time. The Company 27 39 shall promptly notify Parent of any Material Adverse Change related to the Company or its business. Except as expressly contemplated by this Agreement or disclosed in Schedule 4.1, the Company shall not, without the prior written consent of Parent, which consent will not be unreasonably withheld or delayed: (a) Enter into any commitment or transaction (other than pursuant to or as contemplated by this Agreement) not in the ordinary course of business consistent with past practice. (b) Transfer to any Person any rights to the Intellectual Property Rights, except in the ordinary course of business consistent with past practice; (c) Enter into or amend any agreements pursuant to which any Person is granted marketing, distribution or similar rights of any type or scope or any third party royalty rights with respect to any products of the Company, or enter into or amend any strategic alliance, license or sub-license agreement, or joint development agreement; (d) Amend or otherwise modify, except in the ordinary course of business consistent with past practice, any of the Scheduled Contracts; (e) Violate the terms of any of the Scheduled Contracts in any material manner; (f) Commence any litigation or any binding dispute resolution process (other than in respect of any breach of or claim arising under this Agreement); (g) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its capital stock, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock, except repurchases of unvested shares in connection with terminations of employment in the ordinary course of business consistent with past practice; (h) Issue, grant, deliver or sell or authorize or propose the issuance, grant, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire (including but not limited to Company Options), or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, except (i) the issuance of Company Common Stock upon the exercise of Company Options, and (ii) the grant of Company Options to new hires in the ordinary course of business and in accordance with written guidelines approved by Parent; (i) Cause or permit any amendments to its Articles of Incorporation or Bylaws; 28 40 (j) Acquire or agree to acquire by merging or consolidating with, or by purchasing any assets (other than assets, immaterial in amount, in the ordinary course of business consistent with past practice) or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets; (k) Sell, lease, license or otherwise dispose of any of its properties or assets, except in the ordinary course of business; (l) Incur any indebtedness for borrowed money other than from Parent or guarantee any such indebtedness or issue or sell any debt securities of the Company or guarantee any debt securities of others; (m) Enter into or amend any employment agreements, oral or written, increase the compensation payable or to become payable by it to any of its officers, directors, or consultants over the amount payable as of March 31, 1998, or adopt or amend any employee benefit plan or arrangement (oral or written) (including any amendment to the Option Plan or the agreements thereunder), or increase the salaries or wage rates of its employees, except in the ordinary course of the Company consistent with past practice; (n) Terminate the employment of any executive officer or vice president (including any Key Employee or Other Management Employee) or grant any severance or termination pay (i) to any director or officer or (ii) to any other employee except payments made pursuant to written agreements or other legally binding commitments disclosed to Parent in writing outstanding on the date hereof; (o) Revalue any of its assets, including writing down the value of inventory or writing off notes or accounts receivable, other than in the ordinary course of business; (p) Pay, discharge or satisfy, in an amount in excess of $50,000 (in any one case) or $100,000 (in the aggregate), any Liability, other than the payment, discharge or satisfaction in the ordinary course of business of Liabilities (1) reflected or reserved against in the Company Financial Statements (or the notes thereto) or (2) that arose in the ordinary course of business consistent with past practice subsequent to March 31, 1998 and which are expenses not prohibited by the provisions of this Agreement; (q) Make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any material claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (r) Amend or otherwise take any action that would permit or cause any Company Option to accelerate in contemplation of or as a consequence of the Merger or the other transactions contemplated by this Agreement; 29 41 (s) Enter into or modify any new or existing agreements for the lease or purchase of real property; or (t) Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(a) through (s) above, or any other action that would prevent the Company from performing or cause the Company not to perform its covenants hereunder. 4.2. No Solicitation. Until the earlier of the Effective Time or the date of termination of this Agreement pursuant to the provisions of Section 8.1 hereof, the Company will not (nor will the Company permit any of the Company's officers, directors, employees, agents, representatives or Affiliates to) directly or indirectly, take any of the following actions with any party other than Parent and its designees: (a) solicit, conduct discussions with or engage in negotiations with any person, relating to the possible acquisition of the Company or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its or their capital stock or assets, (b) provide information with respect to it to any Person, other than Parent, relating to the possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its or their capital stock or assets, (c) enter into an agreement with any Person, other than Parent or Acquisition, providing for the acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its or their capital stock or assets or (d) make or authorize any statement, recommendation or solicitation in support of any possible acquisition of the Company or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets or otherwise) or any portion of its or their capital stock or assets by any Person, other than by Parent or Acquisition. In addition to the foregoing, if the Company receives prior to the Effective Time or the termination of this Agreement any offer or proposal relating to any of the above, the Company shall promptly notify Parent thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be, and such other information related thereto as Parent may reasonably request. ARTICLE V ADDITIONAL AGREEMENTS 5.1. Employee Matters. (a) Employees. The parties currently contemplate that substantially all employees of the Company will be offered employment with Parent on terms to be proposed by Parent, subject to execution of Parent's standard forms of offer letters and non-disclosure agreements. All such employees of the Company desirous of becoming employees of Parent will be subject to employment at the will of Parent. Employees who do not receive an offer of employment from Parent shall be eligible for the severance benefits agreed upon in writing by Parent and the Company; provided, however, that in order to be eligible for receipt of such severance benefits, each such employee must first execute a written release, in form and substance reasonably acceptable to Parent releasing Parent from all claims arising out of their 30 42 employment with the Company or with Parent. Notwithstanding the foregoing, nothing contained herein shall be interpreted or construed to create a contract of employment between such employee and Parent. (b) Eligibility for Parent Employee Plans. Upon the Closing, each of the employees of the Company who becomes an employee of Parent upon the Effective Time ("Parent Employee") shall cease to participate in or accrue benefits under the Company Employee Plans (except to the extent contemplated by Section 1.4(b) under the Option Plan) and shall be eligible to participate in the Parent employee benefit plans generally applicable to employees of Parent, and if the Parent determines to be appropriate, such enhanced plans appropriate to such employee's position with Parent (the "Parent Employee Plans"), provided, that upon the Closing, each of the employees of the Company who remains an employee of Surviving Corporation upon the Effective Time ("Continuing Employee") shall continue to participate in or accrue benefits under the Company Employee Plans in accordance with the terms of each such plan and shall not be eligible to participate in the Parent Employee Plans until Parent shall freeze or terminate the Company Employee Plans. Parent shall freeze or terminate the Company Employee Plans on or before January 1, 1999 and at such time such Continuing Employees shall be deemed to be Parent Employees for the purposes of this Agreement. For purposes of the Parent Employee Plans (with the exception of the Parent vision plan) the years of service of each Parent Employee that were recognized by the Company as of the Effective Time of the Merger for a Company Employee Plan shall be recognized by Parent for purposes of each Parent Employee Plan that Parent determines to be a corresponding plan, in each case to the extent allowed under the provisions of each of the applicable Parent Employee Plans. Pursuant to the terms of Parent's 401(k) plan, any matching contributions by Parent under the 401(k) plan for any Parent Employee shall be only with respect to such Parent Employee's contributions after the Effective Time (or, in the case of a Continuing Employee, the time at which such Continuing Employee become eligible to participate in the Parent Employee Plans) and not with respect to contributions made by the Parent Employee to the Company's 401(k) plan prior to the Effective Time(or, in the case of a Continuing Employee, the time at which such Continuing Employee become eligible to participate in the Parent Employee Plans). (c) Eligibility for Parent Incentive Compensation Plans. Parent shall take all actions necessary to cause all Parent Employees whose date of hire by the Company is on or before July 1, 1998 to become eligible to participate in Parent's Employee Incentive Bonus (the "Incentive Plan") commencing on October 1, 1998, and to cause all Parent Employees whose date of hire by the Company is after July 1, 1998 to become eligible to participate in Parent's incentive compensation plan commencing on January 1, 1998. This Section 5.1(c) shall not apply with respect to any Parent Employee who participates in any variable compensation plan of Parent other than the Incentive Plan. 5.2. Access to Information. The Company shall afford to Parent and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (a) all of the Company's properties, books, contracts, agreements and records, and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by Applicable Law) of it as Parent may reasonably 31 43 request. No information or knowledge obtained in any investigation pursuant to this Section 5.2 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. Parent shall provide the Company copies of such publicly available information about Parent as the Company may reasonably request and shall provide the Company with reasonable access to appropriate members of management in this regard. 5.3. Expenses. Whether or not the Merger is consummated, all fees and expenses incurred in connection with the Merger, including all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby ("Third Party Expenses"), shall be the obligation of the respective party incurring such fees and expenses; provided, however, that if the Merger is consummated, the Company shall cause its Third Party Expenses, and any Third Party Expenses incurred on behalf of any shareholders, to be invoiced at or before Closing and not to exceed Two Hundred Ninety-Five Thousand Dollars ($295,000). 5.4. Public Disclosure. Unless otherwise required by Applicable Law (including securities laws) or, as to Parent, by the rules and regulations of the Nasdaq National Market, prior to the Effective Time, Parent and the Company shall consult with each other before making any disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement or the transactions contemplated hereby, and no public announcement or press release regarding the subject matter of this Agreement or the transactions contemplated thereby shall be made by any party hereto unless approved by Parent and the Company prior to release, provided that such approval shall not be unreasonably withheld. Parent and the Company shall cooperate in good faith to prepare and agree upon any press release or other public announcement that either of them may determine is necessary or in its best interests. 5.5. Consents. The Company on the one hand, and Parent, on the other hand, shall cooperate with one another in determining whether any action by or in respect of, or filing with, or notice, to any Governmental Authority is required or reasonably appropriate, or any action, consent, approval or waiver from any party to any Contract is required or reasonably appropriate, in connection with the consummation of the transactions contemplated by this Agreement, and shall take all actions necessary or reasonably requested by the Company or Parent, as the case may be, in connection therewith. 5.6. Reasonable Efforts. Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall use its reasonable efforts to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under Applicable Laws to consummate and make effective the transactions contemplated hereby, to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement and the satisfaction of the conditions herein; provided that Parent shall not be 32 44 required to agree to any divestiture by Parent or the Company or any of Parent's Affiliates of shares of capital stock or of any business, assets or property of Parent or its Affiliates or the Company or its Affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties and stock. 5.7. Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence or non-occurrence of any event or group of the foregoing, the occurrence or non-occurrence of which is likely to cause any representation or warranty of the Company and Parent, respectively, contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time except as contemplated by this Agreement (including the Disclosure Schedules) and (ii) any failure of the Company or Parent, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.7 shall not limit or otherwise affect any remedies available to the party receiving such notice. 5.8. Additional Documents and Further Assurances. Each party hereto, at the request of any other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or reasonably requested for effecting completely the consummation of this Agreement and the transactions contemplated hereby. 5.9. Indemnification. The provisions with respect to indemnification of directors, officers, employees and agents as set forth in the Company's Articles of Incorporation and Bylaws as currently in effect shall not be amended, repealed or otherwise modified in any manner that would adversely affect the rights of the directors, officers, employees and agents of the Company on the date hereof with respect to matters arising prior to the Closing. From and after the Effective Time, Parent shall indemnify, defend and hold harmless the present and former directors and officers of the Company and its subsidiaries against all Damages incurred in connection with any Proceeding, occurring at or prior to the Effective Time to the fullest extent that the Company would have been permitted to indemnify such person under Applicable Law and the Articles of Incorporation and Bylaws of the Company in effect on the date hereof. Notwithstanding the foregoing provisions of this Section 5.9, no such director, officer, employee or agent shall be entitled to any indemnification to the extent any such Damages arise out of facts or circumstances constituting a breach of this Agreement. 5.10. Notice to Holders of Company Preferred Stock. The Company shall provide the required written notice, if any, to each holder of Company Preferred Stock required by Article III, Section B(g) of the Company's Articles of Incorporation. 5.11. Grant of Stock Options by the Company. Prior to the Effective Time, the Company shall grant to each person set forth on Schedule 5.11 hereto, in exchange for the cancellation of the Company Option described on such schedule, a new option to purchase an equivalent number of shares of Company Common Stock at an exercise price equal to the approximate fair market value per share of Company Common Stock. 33 45 5.12 Confidentiality. Each party hereto shall maintain the confidential nature of, and shall not use in any way detrimental to any other party, including directly or indirectly in the conduct of such party's business, all confidential financial, technical, marketing, research, commercial or other information concerning the other parties hereto. In the event of the termination of this Agreement for any reason, upon written request of any party, each party receiving such request agrees to return to the requesting party any and all materials containing any such confidential information relating to such requesting party. The restrictions contained herein and in any Schedules and Exhibits hereto shall not apply to any information that (a) is or becomes generally available to the public other than as a result of a disclosure in violation of the provisions hereof, (b) is or becomes available to such party that has received such request on a non-confidential basis from a source other than the requesting party, (c) is independently derived by the party to whom such information was disclosed, or (d) is derived from information that is not confidential and does not contain any confidential information. In the event that any party hereto receives a request to disclose all or any part of any confidential information under the terms of a subpoena, order, civil investigative demand or similar process issued by a court of competent jurisdiction or by another Governmental Authority, such party agrees to: (i) immediately notify the party to whom such confidential information relates of the existence, terms and circumstances surrounding such request, (ii) consult with such party to whom the information relates on the advisability of taking legally available steps to resist or narrow such request and (iii) if disclosure of such information is required, furnish only that portion of the confidential information that, in the opinion of counsel to the party who has received the request, such party is legally compelled to disclose and advise the party to whom such confidential information relates as far in advance of such disclosure as possible so that such party to whom the confidential information relates may seek an appropriate protective order or other reliable assurance that confidential treatment will be accorded such confidential information. In any event, the party who receives the request shall not oppose actions by the party to whom the confidential information relates to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded such confidential information. 5.13. Company Shareholder Approval. The Company has submitted the form of this Agreement to its shareholders for approval and adoption as provided by California Law and its Articles of Incorporation and Bylaws. The Company shall use its best efforts to solicit and obtain the consent of all of its shareholders to approve the Merger and this Agreement and to enable the Closing to occur as promptly as practicable. The materials submitted to the Company's shareholders shall be subject to reasonable review and approval by Parent and include information regarding the Company, the terms of the Merger and this Agreement and the unanimous recommendation of the Board of Directors of the Company in favor of the Merger and this Agreement. 34 46 ARTICLE VI CONDITIONS TO THE MERGER 6.1. Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) Closing Date. The Closing Date shall be on or before October 31, 1998. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall be in effect. (c) Shareholder Approval. This Agreement and the Merger shall have been approved by the shareholders of the Company by the requisite votes under the California Law. (d) Merger Filings. The Certificate of Merger shall have been accepted for filing by the Secretary of State of the State of Delaware and the Agreement of Merger and the Section 1103 Certificates shall have been accepted for filing by the Secretary of State of the State of California. The Merger shall be effective under the laws of the States of California and Delaware. 6.2. Additional Conditions to Obligations of the Company. The obligations of the Company to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: (a) Representations and Warranties. The representations and warranties of Parent contained in this Agreement shall be true and correct in all material respects as of June 3, 1998, the date hereof and, except for changes contemplated by this Agreement and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct in all material respects as of such date), as of the Closing Date with the same force and effect as if made on and as of the Closing Date; and the Company shall have received a certificate to such effect signed on behalf of Parent by a duly authorized officer of Parent. (b) Agreements and Covenants. Parent shall have performed or complied (which performance or compliance shall be subject to Parent's ability to cure as provided in Section 8.1(e) below) in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and the Company shall have received a certificate to such effect signed on behalf of Parent by a duly authorized officer of Parent. 35 47 (c) Third Party Consents. The Company shall have been furnished with evidence satisfactory to it that Parent has obtained the consents, approvals and waivers set forth in Schedule 6.2(c). (d) Legal Opinion. The Company shall have received a legal opinion from Gibson Dunn & Crutcher LLP, counsel to Parent, in substantially the form attached hereto as Exhibit A. (e) Additional Actions. Parent shall take such additional actions, including the execution of such additional documents, as shall be reasonably requested by the Company in connection with the consummation of the transactions contemplated by this Agreement. 6.3. Additional Conditions to the Obligations of Parent. The obligations of Parent to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by Parent: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of June 3, 1998, the date hereof and, except for changes contemplated by this Agreement (including the Disclosure Schedules) and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct in all material respects as of such date), with the same force and effect as if made on and as of the Closing Date, and Parent shall have received a certificate to such effect signed on behalf of the Company by a duly authorized officer of the Company; provided, however, that any representation or warranty that was complete and correct in all material respects as of June 3, 1998 and the date hereof, but shall no longer be complete and correct in all material respects as of the Closing Date due to facts or circumstances occurring after the date hereof, shall be subject to the Company's ability to cure as provided in Section 8.1(d) below. Notwithstanding the foregoing, in the case of any failure to the foregoing condition to be satisfied as a result of facts and circumstances arising after the date hereof of which the Company has no knowledge on the date hereof, the foregoing condition shall be deemed to be satisfied unless the failure of any representation or warranty, or group of representations or warranties, to be correct would, in Parent's good faith judgment, materially have affected Parent's decision to enter into this Agreement on the date hereof if Parent had been aware of such facts and circumstances; provided, however, that nothing set forth in this sentence shall affect Parent's ability to seek indemnification under Article VII as a result of the failure of any such representation or warranty, or group of representations or warranties, to remain true and correct after the date hereof; (b) Agreements and Covenants. The Company shall have performed or complied (which performance or compliance shall be subject to the Company's ability to cure as provided in Section 8.1(d) below) in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and Parent shall have received a certificate to such effect signed on behalf of the Company by a duly authorized officer of the Company; 36 48 (c) Third Party Consents. Parent shall have been furnished with evidence satisfactory to it that the Company has obtained the consents, approvals and waivers set forth in Schedule 6.3(c) and the Parent shall have obtained the consents, approvals and waivers set forth in Schedule 6.2(c). (d) Legal Opinion. Parent shall have received the legal opinions from Wilson, Sonsini, Goodrich & Rosati, legal counsel to the Company, in substantially the form attached hereto as Exhibit B. (e) Material Adverse Change. There shall not have occurred any Material Adverse Change with respect to the Company after March 31, 1998, provided, however, that for the purposes of this Section 6.3(e), a Material Adverse Change shall not be deemed to have occurred if such change or effect was principally caused by, or as a result of, (1) the execution and delivery of this Agreement, (2) the failure of Parent to approve any action requested by the Company pursuant to Section 4.1 hereof, (3) operational changes approved in writing by Parent, or (4) employee attrition at the Company; provided, however, that the Company represents and warrants to Parent that it is not aware of any employee who intends to terminate his or her employment with Company as a result of the Merger. (f) Dissenters' Rights. Holders of more than ten percent (10%) of the Company Capital Stock shall not have exercised, nor shall they have any continued right to exercise, appraisal, dissenters' or similar rights under Applicable Law with respect to their shares by virtue of the Merger. (g) Intentionally Omitted. (h) Tax Certifications. Parent shall have received from the Company (A) a certification of non-foreign status described in Treasury Regulation Section 1.1445-2(b)(2)(i) and (B) a certification pursuant to Treasury Regulation Section 1.1445-2(c)(3)(i) that the Company Capital Stock is not a U.S. real property interest, in each case in form and substance reasonably satisfactory to Parent. (i) Additional Actions. The Company shall take such additional actions, including the execution of such additional documents, as shall be reasonably requested by Parent in connection with the consummation of the transactions contemplated by this Agreement. ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES 7.1. Indemnification/Survival of Representations and Warranties. (a) Parent and each of its Affiliates (including Acquisition), officers, employees, directors and representatives (collectively, the "Parent Indemnities") shall be indemnified and held harmless by the Company (provided that, at the Effective Time, the Company shall cease to have any indemnity obligations under this Section 7.1(a)), in respect of 37 49 any and all Damages incurred by any Parent Indemnitee as a result of any misrepresentation and/or breach of any representation, warranty, covenant or agreement made by the Company in this Agreement. The Company (subject to the parenthetical in the preceding sentence) shall be liable in full with respect to any such misrepresentation or breach. Nothing set forth in this Section 7.1(a) shall be deemed to prohibit or limit any Parent Indemnitee's right at any time before the Effective Time to seek injunctive or other equitable relief, in lieu of or in addition to Damages, for the failure of the Company to perform any covenant or agreement contained herein. (b) The Company and their respective Affiliates, officers, employees, directors and representatives and shareholders (collectively, the "Company Indemnities") shall be indemnified and held harmless by Parent in respect of any and all Damages reasonably and proximately incurred by any Company Indemnitee as a result of any misrepresentation and/or breach of any representation, warranty, covenant or agreement made by Parent in this Agreement; provided, however, that, at the Effective Time, Parent shall cease to have any indemnity obligations under this Section 7.1(b). Nothing set forth in this Section shall be deemed to prohibit or limit any Company Indemnitee's right at any time before the Effective Time to seek injunctive or other equitable relief, in lieu of or in addition to Damages, for the failure of Parent to perform any covenant or agreement contained herein. (c) All of the representations and warranties in this Agreement shall survive and continue until the Effective Time. (d) The amount of any indemnification payment required to be made pursuant to Section 7.1(a) of this Agreement with respect to a particular claim for indemnification shall be reduced by: (1) the after-tax amount of insurance proceeds or recoveries from third parties actually received as a result of the events giving rise to such claim; provided that if such proceeds or recoveries will be (or are) received after the date on which such indemnification payment is due, such indemnification payment shall be paid when due by the Company, when such proceeds are received, the Parent Indemnities shall pay to the Company, the amount of such proceeds promptly following receipt, and (2) the amount of any tax savings actually realized by the Parent Indemnities prior to the receipt of such indemnification payment, either in the form of a refund of taxes previously paid or a reduction in tax that otherwise would have become payable prior to such time (in each case net of the present value of any tax cost of the indemnification payment and any costs (including but not limited to professional fees) incurred in obtaining such savings). For purposes of this clause (2), tax savings shall only be taken into account to the extent they are not otherwise required to be paid to the Company Indemnities and would not have arisen but for the event giving rise to the indemnification obligation. 7.2. Notice and Determination of Claims. (a) If any Parent Indemnitee or Company Indemnitee (each, an "Indemnitee") shall believe that such Indemnitee is entitled to indemnification pursuant to Section 7.1 , prior to the Closing, from the Company, with respect to a Parent Indemnitee, or from Parent, with respect to a Company Indemnitee, as the case may be (the "Indemnitors"), in respect of any Damages, 38 50 such Indemnitee shall give all potential Indemnitors prompt written notice thereof. Any such notice shall set forth in reasonable detail and, if and to the extent then known, the amount of Damages (or an estimate thereof) arising from such claim and the basis for such claim for indemnification. The failure of such Indemnitee to give notice of any claim for indemnification promptly shall not adversely affect such Indemnitee's right to indemnity hereunder except to the extent that such failure adversely affects the rights of the Indemnitor to assert any reasonable defense to such claim. The Indemnitors shall have fifteen (15) Business Days following their receipt of such notice either (i) to acquiesce in such claim by giving such Indemnitee written notice of such acquiescence or (ii) to object to the claim by giving such Indemnitee written notice of the objection. If any Indemnitor acquiesces in such claim, such Indemnitee shall be entitled to be indemnified by the acquiescing Indemnitor for such Indemnitor's share (which may be the entire amount if so provided in this Agreement) of the Damages incurred by such Indemnitee in respect of such claim. If no such agreement can be reached after good faith negotiation, either Indemnitee or the Indemnitor may, by written notice to the other demand arbitration (the "Demand") of the matter unless the amount of the Damages is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Indemnitee and the Indemnitor shall each select one arbitrator within fifteen (15) Business Days following the Demand, and the two arbitrators so selected shall select a third arbitrator within fifteen (15) Business Days thereafter, each of which arbitrators shall be independent. In the event that either Indemnitee or the Indemnitor fails to appoint an arbitrator within the period prescribed, or such appointed arbitrators fail to appoint the third arbitrator within the period prescribed, any such arbitrators that have not been so appointed shall be appointed by the American Arbitration Association following written request of either Indemnitee or the Indemnitor. The arbitrators shall set a limited time period (not to exceed 90 days) and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys fees and costs, to the same extent as a competent court of law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators as to the validity and amount of any claim shall be binding and conclusive upon the parties to this Agreement. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators. (b) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Alameda County, California under the rules then in effect of the Judicial Arbitration and Mediation Services, Inc. For purposes of this Section 7.2(b), in any arbitration hereunder in which any claim or the amount thereof is at issue, Indemnitee shall be deemed to be the Non-Prevailing Party in the event that the arbitrators award Indemnitee less than the sum of one-half (1/2) of the disputed amount; otherwise, the Indemnitor shall be deemed to be the "Non-Prevailing Party." The "Non-Prevailing Party" to an arbitration shall pay its own expenses, the fees of each arbitrator, the 39 51 administrative costs of the arbitration, and the expenses, including reasonable attorneys' fees and costs, incurred by the other party to the arbitration. 7.3. Third Party Claims. In connection with any claim that may give rise to indemnity under this Section 7 resulting from or arising out of any claim or Proceeding against an Indemnitee by a person that is not a party hereto, the Indemnitors may, upon notice to the relevant Indemnitee, assume the defense of any such claim or Proceeding if the Indemnitors jointly acknowledge in writing to the relevant Indemnitee the right of such Indemnitee to indemnity pursuant hereto in respect of the entirety of such claim and provide written evidence reasonably satisfactory to such Indemnitee that such Indemnitors have the financial wherewithal to defend and pay such claim in full. If the Indemnitors assume the defense of any such claim or Proceeding, the Indemnitors shall select counsel reasonably acceptable to such Indemnitee to conduct the defense of such claim or Proceeding, shall take all steps necessary in the defense or settlement thereof and shall at all times diligently and promptly pursue the resolution thereof. If the Indemnitors shall have assumed the defense of any claim or Proceeding in accordance with this Section 7.3, the Indemnitors shall be authorized to consent to a settlement of, or the entry of any judgment arising from, any such claim or Proceeding, without the prior written consent of such Indemnitee; provided, however, that the Indemnitors shall have paid or caused to be paid all amounts arising out of such settlement or judgment concurrently with the effectiveness thereof; provided further, that the Indemnitors shall not be authorized to encumber any of the assets of any Indemnitee or to agree to any restriction that would apply to any Indemnitee or to the conduct of such Indemnitee's business; and provided further, that a condition to any such settlement shall be a complete release of such Indemnitee with respect to such claim. Such Indemnitee shall be entitled to participate in (but not control) the defense of any such action, with its own counsel and at its own expense. Each Indemnitee shall, and shall cause each of its Affiliates and representatives to, cooperate fully with the Indemnitors in the defense of any claim or Proceeding being defended by the Indemnitors pursuant to this Section 7.3. If the Indemnitors do not assume the defense of any claim or Proceeding resulting therefrom in accordance with the terms of this Section 7.3, such Indemnitee may defend against such claim or Proceeding in such manner as it may deem appropriate, including settling such claim or Proceeding after giving notice of the same to the Indemnitors, on such terms as such Indemnitee may deem appropriate. If the Indemnitors seek to question the manner in which such Indemnitee defended such claim or Proceeding or the amount of or nature of any such settlement, the Indemnitors shall have the burden to prove by a preponderance of the evidence that such Indemnitee did not defend such claim or Proceeding in a reasonably prudent manner. 7.4. No Limitations on Damages. Nothing herein shall limit the Liability of the Company to any Parent Indemnitee for any breach of any representation, warranty or covenant if the Merger does not close. 7.5. Exclusive Remedy. The remedies provided for in this Section 7 are exclusive and shall be in lieu of all other remedies for breach of this Agreement; provided, however, that the foregoing clause of this sentence shall not be deemed a waiver by any party of any right to specific performance or injunctive relief, or any remedy arising by reason of any claim of fraud with the respect to this Agreement. 40 52 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.1. Termination. Except as provided in Section 8.2 below, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) by mutual written consent of the Company and Parent; (b) by Parent or the Company if: (i) the Closing has not occurred by October 31, 1998 (provided that the right to terminate this Agreement under this clause 8.1(b)(i) shall not be available to any party whose failure to fulfill any obligation hereunder has been the cause of, or resulted in, the failure of the Closing to occur on or before such date); (ii) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Authority that would make consummation of the Merger illegal; (c) by Parent if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger, by any Governmental Authority that would: (i) prohibit Parent's or the Company's ownership or operation of any material portion of the business of the Company or (ii) compel Parent or the Company to dispose of or hold separate, as a result of the Merger, any material portion of the business or assets of the Company or Parent; (d) by Parent if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company and as a result of such breach the conditions set forth in Section 6.3(a) or 6.3(b), as the case may be, would not then be satisfied; provided, however, that if such breach is curable by the Company within thirty (30) days through the exercise of its commercially reasonable efforts, then for so long as the Company continues to exercise such commercially reasonable efforts Parent may not terminate this Agreement under this Section 8.1(d) unless such breach is not cured within thirty (30) days (but no cure period shall be required for a breach which by its nature cannot be cured); (e) by the Company if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Parent and as a result of such breach the conditions set forth in Section 6.2(a) or 6.2(b), as the case may be, would not then be satisfied; provided, however, that if such breach is curable by Parent within thirty (30) days through the exercise of its commercially reasonable efforts, then for so long as Parent continues to exercise such commercially reasonable efforts the Company may not terminate this Agreement under this Section 8.1(e) unless such breach is not cured within thirty (30) days (but no cure period shall be required for a breach which by its nature cannot be cured); and 41 53 (f) by Parent, in its sole and absolute discretion, if the conditions set forth in Section 6.3(i) hereof are not satisfied. 8.2. Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no Liability or obligation on the part of Parent or the Company, or their respective officers, directors or shareholders under this Agreement, provided that each party hereto shall remain liable for any Damages arising out of any breaches of this Agreement prior to such termination or for the wrongful termination of this Agreement. Without limiting the generality of the foregoing, to the extent that any such termination results from the breach by any party hereto of any of its representations, warranties, or covenants set forth in this Agreement, the non-breaching party shall be entitled to receive from the breaching party all of its Third Party Expenses, any expenses incurred in connection with any dispute arising from such willful breach and any other Damages incurred as a result of such breach. Notwithstanding the foregoing, the provisions of Section 5.3, 5.12 and Article IX of this Agreement shall remain in full force and effect and survive any termination of this Agreement (but the arbitration provisions of Article VII shall not). 8.3. Amendment. This Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. 8.4. Extension; Waiver. At any time prior to the Effective Time, Parent, on the one hand, and the Company, on the other, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE IX GENERAL PROVISIONS 9.1. Notices. All notices and other communications pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the addresses set forth below or to such other address as the party to whom notice is to be given may have furnished to the other parties hereto in writing in accordance herewith. Any such notice or communication shall be deemed to have been delivered and received (A) in the case of personal delivery or delivery by telecopier, on the date of such delivery, (B) in the case of a nationally-recognized overnight courier, on the next business day after the date when sent and (C) in the case of mailing, on the third business day following that on which the piece of mail containing such communication is posted: 42 54 (a) IF TO PARENT OR, AFTER THE EFFECTIVE TIME, TO THE COMPANY, TO: PeopleSoft, Inc. 4440 Rosewood Drive Pleasanton, California 94588 Attention: Ronald E.F. Codd, Chief Financial Officer Telephone No.: (925) 694-7114 Facsimile No.: (925) 694-7184 with a copy to: Gibson, Dunn & Crutcher LLP One Montgomery Street Suite 2600 San Francisco, California 94104 Attention: Kenneth R. Lamb Telephone No.: (415) 393-8200 Facsimile No.: (415) 986-5309 (b) IF TO THE COMPANY IF PRIOR TO THE EFFECTIVE TIME, TO: Intrepid Systems, Inc. 1301 Harbor Bay Parkway Alameda, California 94502 Attention: Richard White, President Telephone No.: (510) 769-4887 Facsimile No.: (510) 769-5128 with a copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Michael J. Danaher Telephone No.: (650) 493-9300 Facsimile No.: (650) 493-6811 9.2. Interpretation. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The word "agreement" when used herein shall be deemed in each case to mean any contract, commitment or other agreement, whether oral or written, that is legally binding. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.3. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one 43 55 or more counterparts have been signed by each of the parties and delivered to each of the other parties, it being understood that all parties need not sign the same counterpart. 9.4. Entire Agreement; Assignment. This Agreement, the schedules and exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other Person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided, except that Parent may assign its rights but not delegate its obligations hereunder to a wholly-owned subsidiary of Parent. 9.5. Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other Persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 9.6. Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each of the parties hereto agrees that process may be served upon them in any manner authorized by the laws of the State of California for such Persons and waives and covenants not to assert or plead any objection that they might otherwise have to such jurisdiction and such process. 9.8. Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 9.9. Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state 44 56 having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 45 57 IN WITNESS WHEREOF, Parent, Acquisition, and the Company have caused this Agreement to be signed by their duly authorized respective officers, all as of the date first written above. PEOPLESOFT, INC. INTREPID SYSTEMS, INC. BY: BY: -------------------------- ---------------------------- NAME: RONALD E.F. CODD NAME: RICHARD WHITE TITLE: SENIOR VICE PRESIDENT AND TITLE: PRESIDENT CHIEF FINANCIAL OFFICER BY: BY: -------------------------- ---------------------------- NAME: ROBERT FINNELL NAME: JON BOND TITLE: ASSISTANT SECRETARY TITLE: SECRETARY 46 58 PEOPLESOFT RETAIL CORPORATION BY: -------------------------- NAME: RONALD E.F. CODD TITLE: PRESIDENT BY: -------------------------- NAME: ROBERT FINNELL TITLE: SECRETARY 47 59 APPENDIX A DEFINITIONS The following terms, as used in the Agreement, have the following meanings: "Affiliate" means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under direct or indirect common control with such other Person. "Aggregate Purchase Price" means Thirty-Three Million Eight Hundred Forty-Four Thousand Nine Hundred Eighty-Four Dollars ($33,846,849). "Applicable Law" means, with respect to any Person, any domestic or foreign, federal, state or local statute, law, ordinance, rule, regulation, order, writ, injunction, judgment, decree or other requirement of any Governmental Authority existing as of the date hereof or as of the Closing Date applicable to such Person or any of its respective properties, assets, officers, directors, employees, consultants or agents. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in San Francisco, California are authorized or required by law to close. "Common Per Share Price" means an amount equal to (a) the Primary Purchase Price less the sum of (x) Series A Preferred Stock Price, (y) Series B Preferred Stock Price, and (z) Series C Preferred Stock Price, divided by (b) sum of (1) the number of shares of Company Common Stock outstanding as of the Effective Time, and (2) the number of shares of Company Common Stock issuable upon exercise of the Vested Unexercised Options. "Company" means Intrepid Systems, Inc. and each of its Subsidiaries. "Company Capital Stock" means, collectively, the Company Common Stock and the Company Preferred Stock. "Company Common Stock" means the series of the Company's capital stock designated as its Common Stock, no par value. "Company Preferred Stock" means, collectively, the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock. "Damages" means all demands, claims, actions or causes of action, assessments, losses, damages, costs, expenses, liabilities, judgments, awards, fines, sanctions, penalties, charges and amounts paid in settlement, including (y) interest on cash disbursements in respect of any of the foregoing at a rate per annum equal to the prime rate as published by Bank of America, NT&SA, compounded quarterly, from the later to occur of (i) ninety (90) days from the date of demand for payment hereunder, or (ii) the date each such cash disbursement is made until the Person incurring the same shall have been indemnified in respect thereof and (z) reasonable costs, fees and expenses of attorneys (including allocation costs of in house counsel), experts, accountants, appraisers, consultants, witnesses, investigators and any other agents of such Person. 48 60 "Environmental Laws" means all Applicable Laws relating to the protection of human health, safety or the environment from Hazardous Substances including: (i) all requirements pertaining to reporting, licensing, permitting, controlling, investigating or remediating emissions, discharges, releases or threatened releases of Hazardous Substances, chemical substances, pollutants, contaminants or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature, into the air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances, chemical substances, pollutants, contaminants or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature; and (ii) all requirements pertaining to the protection of the health and safety of employees or the public from exposure to Hazardous Substances. "Environmental Liabilities" means all Liabilities of a Person, whether such Liabilities are owed by such Person to Governmental Authorities, third parties or otherwise, whether presently in existence or arising hereafter, that arise under or relate to any Environmental Law. "Exchange Ratio" means the fraction obtained where the numerator is the Common Per Share Price at the Effective Time and the denominator is the closing price for Parent Common Stock on the Closing Date. "GAAP" means generally accepted accounting principles. "Governmental Authority" means any foreign, domestic, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Hazardous Substance" means any chemical substance: (i) the presence of which requires investigation or remediation under any Environmental Law; (ii) which is defined as a "hazardous waste" or "hazardous substance" under any Environmental Law; (iii) that is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic or otherwise hazardous and is regulated by any Governmental Authority having or asserting jurisdiction over the business or any assets of the Company; or (iv) without limitation, that contains gasoline, diesel fuel or other petroleum hydrocarbons, polychlorinated biphenols (PCBs) or asbestos. "Key Employees" means Richard White, Jim Kelly and Brian Kelly. "Knowledge" or "knowledge" means (i) with respect to the Company, at any given date of determination, the knowledge of all executive officers, vice presidents and members of the Board of Directors, including all Key Employees and Other Management Employees of the Company, and (ii) with respect to Parent, at any given date of determination, the knowledge of any executive officer or director of Parent. For purposes hereof, a Person shall be deemed to 49 61 have knowledge of the contents of all books and records with respect to which such Person has reasonable access and all facts and circumstances to which such Person reasonably should have been aware after due inquiry or was aware in the performance of such Person's duties as an employee, officer or director. "Liability" means, with respect to any Person, any liability or obligation of, or claims against, such Person of any kind, character or description, absolute or contingent, known or unknown, accrued or unaccrued, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise and whether or not the same is required to be accrued on the financial statements of such Person. "Lien" means, with respect to any asset, any mortgage, title defect or objection, lien, pledge, charge, easement, security interest, hypothecation, encumbrance, adverse claim or charge of any kind in respect of such asset. "Material Adverse Change" means, with respect to any entity, a change in, or effect on, the operations, affairs, prospects, financial condition, assets, Liabilities, reserves or any other aspect of such entity that results, or will result, in a material adverse effect on, or a material adverse change in, such entity or its operations. Any loss in net income for the Company for any quarter after the quarter ended March 31, 1998, shall not be deemed a Material Adverse Change in the Company unless such loss exceeds the Company's loss for the quarter ended March 31, 1998. "Other Management Employees" means Lee Kunkle and Jack Harbaugh. "Person" means an individual, corporation, partnership, association, trust, limited liability company, limited liability partnership, estate or other entity or organization, including a Governmental Authority. "Primary Purchase Price" means Thirty-Seven Million Five Hundred Thousand Dollars ($37,500,000). "Proceeding" means any action, suit, hearing or arbitration, investigation or other proceeding (whether public or private). "Series A Per Share Price" means the amount of the distribution required to be delivered, as set forth in the Company's Articles of Incorporation, to a holder of a share of Series A Preferred Stock upon consummation of the Merger. "Series B Per Share Price" means the amount of the distribution required to be delivered, as set forth in the Company's Articles of Incorporation, to a holder of a share of Series B Preferred Stock upon consummation of the Merger. 50 62 "Series C Per Share Price" means the amount of the distribution required to be delivered, as set forth in the Company's Articles of Incorporation, to a holder of a share of Series C Preferred Stock upon consummation of the Merger. "Series A Preferred Stock" means the series of the Company's capital stock designated as its Series A Preferred Stock. "Series B Preferred Stock" means the series of the Company's capital stock designated as its Series B Preferred Stock. "Series C Preferred Stock" means the series of the Company's capital stock designated as its Series C Preferred Stock. "Series A Preferred Stock Price" means an amount equal to the product of (a) Series A Per Share Price and (b) the number of shares of Series A Preferred Stock outstanding as of the Effective Time. "Series B Preferred Stock Price" means an amount equal to the product of (a) Series A Per Share Price and (b) the number of shares of Series B Preferred Stock outstanding as of the Effective Time. "Series C Preferred Stock Price" means an amount equal to the product of (a) Series A Per Share Price and (b) the number of shares of Series C Preferred Stock outstanding as of the Effective Time. "Subsidiary" means a corporation, partnership, joint venture, limited liability company or other Person the majority of the shares of the capital stock or other equivalent ownership interests of which are directly or indirectly owned of record or beneficially by the Company, or any corporation, partnership, joint venture, limited liability company or other Person for which the Company has the ability to direct or control voting with respect to fifty percent (50%) or more of the capital stock or other equivalent ownership interests. "Vested Unexercised Options" means all options to purchase Company Common Stock, to the extent such options will have vested prior to September 1, 1998. 51 63 SCHEDULE 1.1(G) OFFICERS OF THE SURVIVING CORPORATION AFTER THE MERGER Ronald E.F. Codd: President Steven Hill: Chief Financial Officer Robert Finnell: Secretary 64 SCHEDULE 3.2 PARENT CONSENTS Consents will be required from third parities under the following agreement(s): Participation Agreement, dated as of December 4, 1996, among Parent, Lease Plan North America, Inc., ABN Amro Bank N.V., and San Francisco International Branch. 2 65 SCHEDULE 6.2(C) THIRD PARTY CONSENTS REQUIRED OF PARENT Consents will be required from third parities under the following agreement(s): Participation Agreement, dated as of December 4, 1996, among Parent, Lease Plan North America, Inc., ABN Amro Bank N.V., and San Francisco International Branch. 3 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED IN THIS FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 474,905 150,974 384,830 33,218 0 1,055,608 282,633 112,236 1,306,106 609,907 0 0 0 2,502 615,631 1,306,106 0 949,501 0 774,913 0 29,130 145 188,905 71,784 117,121 0 0 0 117,121 .51 .45
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