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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001095811-01-002029.txt : 20010409
<SEC-HEADER>0001095811-01-002029.hdr.sgml : 20010409
ACCESSION NUMBER: 0001095811-01-002029
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: QUEST SOFTWARE INC
CENTRAL INDEX KEY: 0001088033
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 330231678
STATE OF INCORPORATION: CA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-26937
FILM NUMBER: 1589977
BUSINESS ADDRESS:
STREET 1: 8001 IRVINE CENTER DRIVE
CITY: IRVINE
STATE: CA
ZIP: 92618
BUSINESS PHONE: 9497548000
MAIL ADDRESS:
STREET 1: 8001 IRVINE CENTER DRIVE
CITY: IRVINE
STATE: CA
ZIP: 92618
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a70764e10-k.txt
<DESCRIPTION>FORM 10-K FISCAL YEAR ENDED DECEMBER 31,2000
<TEXT>
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 NO. 000-26937
QUEST SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 33-0231678
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8001 IRVINE CENTER DRIVE
IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 754-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 19, 2001, 87,199,236 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the common stock held by
nonaffiliates of the Registrant as of March 19, 2001 was approximately $668.2
million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, to be delivered to
shareholders in connection with the Registrant's 2001 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 26
SIGNATURES............................................................ 28
FINANCIAL STATEMENTS.................................................. F-1
FINANCIAL STATEMENT SCHEDULE
</TABLE>
i
<PAGE> 3
FORWARD-LOOKING INFORMATION
Some of the matters discussed under the captions "Business," "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" include or may include forward-looking statements within
the meaning of the federal securities laws. We have based these forward-looking
statements on currently available information and our current beliefs,
expectations and projections about future events. All forward-looking statements
contained herein are subject to numerous risks and uncertainties. Our actual
results and the timing of certain events could differ materially from those
projected in the forward looking statements due to a number of factors discussed
under the heading "Risk Factors" in this Report and in our other filings with
the Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should the underlying estimates or assumptions
prove incorrect, actual results or outcomes may vary significantly from those
suggested by forward looking information.
PART I
ITEM 1. BUSINESS
OVERVIEW
Quest Software provides application and database management software
solutions that enhance our customers' return on their information technology
("IT") investments by maximizing availability, improving performance, maximizing
the effectiveness of IT personnel and improving the quality of business critical
applications. Our product families are designed to meet the availability and
performance requirements of our customers' most critical applications. Each
product family consists of an integrated suite of software tools that enable IT
organizations to manage and administer packaged and internally developed
business applications and the databases on which they run. The types of
applications Quest supports with its products include: financial reporting
systems, ERP (enterprise resource planning) systems, CRM (customer relationship
management) systems, B2B (business to business) e-commerce systems, human
resources systems, supply chain management systems and corporate messaging
systems. These applications all run on large, complex and constantly expanding
databases, primarily Oracle, Microsoft SQL Server and IBM's DB2 systems.
Over the course of the last five years, Quest has evolved its leadership
position in the Oracle tools and utilities market into leadership in providing a
wide range of application and information availability solutions. Quest now
provides a broad portfolio of products that are grouped into five solution
categories: High Availability, Application Monitoring, Database Management, SQL
Development, and Report Management. Quest has expanded its product portfolio
significantly through both internal development efforts and strategic
acquisitions. Key developments in 2000 included:
- Our entry into the IBM DB2 market by introducing Quest Central for DB2, a
suite of database management solutions with functionality focused on the
performance monitoring, tuning, space management and administration
elements of database management.
- Our entry into the Windows systems management market by introducing
monitoring and tuning solutions for Microsoft Exchange and SQL Server. In
September 2000, we augmented our internal development efforts for the
Microsoft platforms by acquiring FastLane Technologies, Inc., a provider
of directory management software with solutions for Windows 2000
migration, deployment and management. We believe FastLane's position in
the directory management solutions market will serve as a foundation for
our entry into the Microsoft solutions and systems management market.
- Our introduction of LiveReorg, a unique software solution that provides
users with the ability to perform non-intrusive, downtime-free
maintenance of Oracle databases, and SQLab Vision(TM), a tuning solution
designed to quickly identify and resolve performance problems in
mission-critical, Oracle-based applications.
- Our entry into the market for management and monitoring of heterogeneous,
multi-platform customer environments by acquiring Foglight Software,
Inc., a developer of application monitoring solutions. We
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<PAGE> 4
have significantly added or enhanced the core Foglight solutions by
adding diagnostic, tuning and load testing capabilities. In addition, we
have dedicated significant development resources to creating versions of
Foglight for a variety of applications and database platforms.
- Our strengthening and expansion of our performance and information
availability solutions for leading ERP and CRM applications, e-commerce
and Web applications and the underlying databases that support these
applications.
INDUSTRY BACKGROUND
Organizations are constantly seeking ways to use information and technology
to gain competitive advantages. To compete more effectively, organizations must
deliver relevant information and provide increasingly sophisticated and
time-sensitive services to a rapidly expanding audience, including employees,
customers, suppliers and partners both inside and outside of the traditional
enterprise. Today, a growing number of organizations are using the Internet to
conduct business electronically. In embracing this e-business model, enterprises
are attempting to maximize the value of and extend their IT infrastructure to
directly reach a large number of geographically dispersed end-users. The
fundamental changes brought on by the increasing reliance on information
technology, including today's rapidly expanding e-business initiatives, are
introducing new complexities and transforming business practices:
- Decisions need to be made in real-time by personnel at all levels both
within and outside the enterprise;
- Internal end-users and customers demand relevant information immediately
and without interruption, and have increasingly high expectations
regarding response time;
- New software applications must be developed, and existing applications
need to be modified frequently to cope with changes in the business
environment; and
- Organizations must deploy new applications and technologies at an
increasingly rapid pace.
Underlying each of these requirements is the importance of effective
management and distribution of information. While raising the strategic
importance of real-time, dynamic information, today's e-business initiatives
have heightened the challenges of developing and managing the systems to deliver
it. For example, if an electronic commerce application fails, the relationship
between the organization and the customer is jeopardized, giving new meaning to
the term "mission critical." As a result, organizations must assure that their
systems provide:
- Application availability -- uninterrupted and high performance access to
applications under widely varying conditions; and
- Information availability -- broad distribution of critical business
information from underlying applications to decision makers throughout
the entire enterprise.
Application Availability
The challenge of today's competitive environment is to provide users with
the ability to immediately execute transactions and access information, without
regard to the underlying complexities inherent in the disparate systems that run
business applications. Since the emergence of e-business has allowed consumers
to directly communicate with an organization's systems, it is more important
than ever before to maximize application performance and minimize downtime.
Furthermore, as e-business, ERP, CRM and other applications are deployed to a
wider audience, rapid and unpredictable spikes in the number of users can
dramatically increase the likelihood of performance degradation and system
failure. Not only must organizations have adequate back-up systems in place, but
they also need solutions that will enable them to proactively monitor, identify
and resolve issues that can adversely affect application performance. Finally,
to ensure true application availability, organizations need solutions that will
enable them to quickly and accurately develop and deploy new applications and
modifications to existing applications.
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<PAGE> 5
Information Availability
In addition to assuring the availability of applications, the imperatives
of e-business require organizations to make the strategic information within
these applications readily available to the users who need it. The Internet has
created a platform for distributing critical, dynamic business information, such
as inventory levels, requisitions, billing statements, manufacturing data and
sales reports to a broad range of employees, partners and suppliers, many of
whom may be located in geographically remote locations and connected through
multiple, non-integrated systems. Organizations must be able to leverage this
platform to reach customers and provide continuous access to valuable
information, including customer support and current account information. The
challenge, however, is effectively extracting, publishing and disseminating
large volumes of information to thousands of employees, customers, partners and
suppliers over the Internet without massive amounts of application
reengineering.
Need for a Comprehensive Solution
The effectiveness of an organization's information delivery system is
dependent on the reliability and constant availability of its applications. An
application is useless if it is not available to end-users. This criticality
becomes increasingly acute as networked computing, fueled by the Internet,
proliferates. Customers and employees require and expect full time access to a
company's IT systems. A user's ability to access information is linked to the
performance and reliability of the underlying application. Historically,
organizations have relied on a combination of manual processes and a
heterogeneous assortment of software tools to manage the performance and
reliability of their application infrastructure and to enable the distribution
of information throughout the enterprise. However, the requirements of today's
e-business initiatives have stretched the capabilities of these traditional
solutions. This dynamic environment has created the need for a comprehensive
solution that will address the breadth of these application and information
availability requirements:
- Deliver data from multiple, heterogeneous sources, scale to thousands of
users and deliver information across all environments, quickly and
cost-effectively;
- Provide high performance and reliability for 24 X 7 X 365 access, and
minimize the strain on existing systems and personnel;
- Enable organizations to support an increasing number of business
applications without adding significant new technical staff;
- Be easy to use and deploy without requiring in-depth technical expertise;
- Adapt to accommodate rapidly changing business needs;
- Provide an architecture to realize immediate value for Web-based
applications; and
- Address these requirements across the entire Web, packaged application
and database environments.
THE QUEST SOLUTION
Quest Software is a leading provider of application management solutions
designed to maintain the integrity of mission-critical business transactions and
maximize the performance of enterprise applications. Our solutions address the
needs of today's around-the-clock businesses where demands on the information
technology infrastructure are high and tolerance for downtime is low. The
Internet has propagated the expectation of instant access to information, and
Quest delivers the solutions necessary to meet this demand.
One of the most significant benefits afforded by Quest solutions is derived
from their ease of use and implementation. Software that is difficult to
implement or use often does not deliver the value promised. A primary design
goal for Quest products is to provide a quick return on investment. We believe
our products
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<PAGE> 6
can, in many cases, allow for more efficient and productive use of employee and
IT resources. Key elements of our solution include:
Application Availability
We offer a family of products that enhance the reliability and performance
of software applications. Our application availability products enable the
development of efficient and reliable Internet-enabled applications; accurately
deploy database and application changes; provide replication solutions for
fail-over capability, data distribution and distributing load across multiple
systems; and proactively monitor, diagnose and resolve database and system
performance issues before they are noticed by the end-user. Our products are
designed to maintain the continuous availability of applications to the
enterprise, not only in terms of uptime, but also in terms of providing adequate
performance under a wide range of operating conditions. As a result, information
technology personnel are able to efficiently and proactively enhance the
performance and reliability of critical business applications.
Extend the Reach of Information
We enable enterprises to deliver information internally and externally via
the Internet to reach employees, customers and partners throughout large and
geographically dispersed organizations. Our Web-based information availability
solutions enable access to a greater number of users, minimize the delay in
publishing information and reduce manual printing and delivery costs associated
with paper-based report distribution. For example, these solutions can integrate
with corporate portals to allow for delivery of personalized information to a
user's desktop through a Web browser. We optimize the storage and distribution
of information by publishing information once from disparate applications to a
centralized repository. This repository serves as a common platform to capture
and distribute information without taxing the application systems or the
network. Our solution is designed to empower decision-makers by providing
relevant, dynamic information, more quickly and more cost-effectively than
previously possible.
Leverage the Web
Our products allow organizations to leverage the functionality and
flexibility of the Internet to address the high-performance demands of
e-business environments. Specifically, our products are designed to adapt to the
varying bandwidth and response times encountered on the Internet with efficient
and fault-tolerant architectures; employ Java-based interfaces to deliver
transparent Web access to business information; and ensure the security and
integrity of Web-based access to applications.
Maximize Investment in Existing Technology
We enable organizations to enhance the capabilities and extend the benefits
of their existing information technology infrastructure. Our products enable
existing enterprise and custom applications to reach throughout and beyond the
enterprise without requiring re-engineering. Additionally, we enable our
customers to improve the reliability and performance of existing information
technology infrastructure to cost-effectively and predictability support the
increasing number of users and large volumes of transactions required by today's
e-business applications.
Easy to Deploy and Use
Our products are easy to deploy and use, thereby minimizing implementation,
training and support costs. We designed our products to be installed quickly by
the customer, typically without the need for on-site assistance. Our products
contain specific integration modules for SAP R/3, PeopleSoft and Oracle
Financials, enabling rapid deployment in these environments, minimizing the need
for customization and reducing ongoing maintenance requirements.
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Architected to Scale
Our products are well-suited for large, enterprise-wide deployments. We
designed our products to effectively scale when implemented in large and rapidly
expanding environments without compromising system performance. Our products
support heterogeneous networks, manage large quantities of information and
support thousands of users while at the same time minimizing the consumption of
network and computing resources. Our Java user interfaces significantly reduce
the need for client-side software management, effectively leveraging today's
wide deployment of Internet browser technology.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products and services worldwide to end users
primarily through our direct sales organization. At December 31, 2000, we had
333 direct sales representatives. Our direct sales force is multi-tiered,
ranging from named account enterprise sales representatives to a large telesales
organization that concentrates on lower price point products. We invested
significantly in our direct sales organization in 2000, both in headcount and in
expansion of offices. We opened six new field offices domestically in 2000 as
well as international offices in France, Spain, Sweden, Denmark, Norway, Brazil,
Mexico, Calgary, Nova Scotia and Ottawa. We are now actively supplementing this
direct sales organization with indirect sales channels such as resellers, value
added resellers, and systems integrators and are investing significantly in
building out this channel in 2001. We also market products through independent
distributors in international territories not covered by our direct sales
organization.
Our domestic sales organization is headquartered in Irvine, California. We
have additional sales offices located in the metropolitan areas of Atlanta,
Boston, Chicago, Dallas, New York, San Francisco and Washington D.C. We also
have international sales offices in the metropolitan areas of Frankfurt, Munich,
Paris, Stockholm, Amsterdam, London and Melbourne. We are continuing to expand
our sales organization and establish additional sales offices domestically and
internationally. We also sell certain of our products through our Web site,
which allows our customers to conveniently download our products for evaluation
and direct purchase.
Our sales and marketing approach is designed to help customers understand
both the business and technical benefits of our products. Much of our sales
activity involves cost-free product trials for a limited period, typically 30
days, during which a customer can experience the benefits of our products. We
complement the efforts of our sales organization with a pre-sale customer
support organization that is responsible for addressing technical questions
related to our products. The sales team for each customer is responsible for
maintaining appropriate contacts with key information technology personnel who
have planning and purchasing responsibility within the customer's organization.
Since a number of our products affect systems and employees throughout the
enterprise, our sales effort typically involves technology presentations and
pilot implementations, and many times involve numerous decision makers. As a
result, a key feature of our sales efforts is to establish relationships at all
appropriate levels in our customers' organizations. While the sales cycle varies
substantially from customer to customer, the typical sales cycle for our Vista
Plus and SharePlex products has ranged from three to nine months.
Focusing on our target markets, our marketing efforts are designed to
create awareness for our products and generate sales leads. To achieve these
goals, we promote our technical leadership, participate in industry trade shows,
technical conferences and technology seminars, publish technical and educational
articles in industry journals and engage in a variety of other marketing
activities, including direct mailings and print and Web-based advertising.
Our professional services organization complements our direct sales
organization by providing customers with a full range of support services,
including pre-sales demonstrations, evaluations, implementations, consulting
services, training and ongoing technical support. We believe that professional
services are becoming important to customer satisfaction and the development of
customer relationships.
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CUSTOMER SERVICE AND SUPPORT
A high level of customer service and support is critical to the successful
marketing and sale of our products and the development of long-term customer
relationships. We have a reputation for providing the highest level of customer
support and believe this is a competitive differentiator. Our customer support
group provides ongoing technical support to our customers after implementation
of the product under support agreements entered into at the time of the initial
sale. Our base level of e-mail-, Internet-, fax-, and telephone-based support
includes ongoing support during normal business hours; and software maintenance
and upgrade releases. For an additional fee, we provide support on a 24 X 7
basis as well as training and other services.
Customer support is provided domestically through our offices in Irvine and
internationally through our offices in Europe and Australia. In 2000 we
implemented a packaged CRM application to help maintain our high quality of
service as we continue to grow. We plan to hire additional support personnel
and, as needed, establish additional support sites domestically and
internationally to meet our customers' needs.
Our services contracts are generally of 12 months' duration and are
renewable at the customer's option. Service contracts are generally priced at
approximately 20% of the amount of licenses and the customer is invoiced
annually in advance.
RESEARCH AND DEVELOPMENT
We believe that strong research and product development capabilities are
essential to enhancing our core technologies and developing additional products
that combine ease of use and enhance return on IT infrastructure investments.
Highly innovative product design and strong product engineering are Quest
hallmarks. Our commitment to ongoing product development is reflected in our
level of investment in research and development, which we believe is at the high
end of the range for our peer companies. Research and development expenditures
were $8.0 million, $16.0 million and $39.7 million for the years ended December
31, 1998, 1999 and 2000, respectively. We have actively recruited key software
engineers and developers with expertise in the areas of Oracle technologies,
Java, Microsoft development technologies, ERP and CRM systems, IBM database
technologies and document management. Our engineers include several of the
industry's leading database management authorities. Complementing these
individuals, our senior management has extensive background in the database,
network infrastructure and enterprise and system software industries.
Our research and development efforts focus on designing and developing
reliable products that solve application and information availability problems
for our customers. Since our inception in 1987, we have made substantial
investments in research and development through both internal development and
technology acquisitions. Our products utilize a number of advanced technologies
including the log analysis component of SharePlex that allows quick and accurate
determination of the database structural and data changes with minimal overhead.
Another example is our Vista Plus product line which contains highly
sophisticated postscript and PCL parsing technology that allows these products
to understand complex output data streams, enabling search, transformation and
extraction from graphics-intensive output.
COMPETITION
The market for application and information availability solutions is
emerging rapidly, and, as a result, is intensely competitive and characterized
by rapidly changing technology and evolving standards. We expect competition to
continue to increase both from existing competitors and new market entrants. We
believe that our ability to effectively compete depends on many factors,
including:
- the ease of use, performance, features, price and reliability of our
products as compared to those of our competitors;
- the timing and market acceptance of new products and enhancements to
existing products developed by us and our competitors;
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- the quality of our customer support; and
- the effectiveness of our sales and marketing efforts.
Companies currently offering competitive products vary in the scope and
breadth of the products and services offered and include:
- providers of enterprise report management products such as Computer
Associates, Hewlett-Packard, IBM and Mobius;
- providers of hardware and software replication tools such as EMC and
Veritas;
- providers of database and database management products such as BMC,
Compuware, Oracle, Computer Associates, Embarcadero and Precise; and
- providers of Windows NT management and migration tools, such as NetIQ and
BindView.
Some of our competitors and potential competitors have greater name
recognition, a larger installed customer base company-wide and significantly
greater financial, technical, marketing, and other resources than we do. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the
development, promotion and sale of their products than we can. In addition,
because there are relatively low barriers to entry in the software market, we
may encounter additional competition as other established and emerging companies
enter our field and introduce new products and technologies.
In addition, providers of database platforms such as Oracle, Microsoft and
IBM currently produce database management tools and may in the future enhance
their products to include functionality that is currently provided by our
products. The inclusion of the functionality of our software as standard
features of the underlying database solution or application supported by our
products could render our products obsolete and unmarketable, particularly if
the quality of such functionality were comparable to that of our products. Even
if the functionality provided as standard features by these system providers is
more limited than that of our software, there can be no assurance that a
significant number of customers would not elect to accept more limited
functionality in lieu of purchasing additional software. Moreover, there is
substantial risk that the mere announcements of competing products by large
competitors such as Oracle could result in the delay or cancellation of customer
orders for our products in anticipation of the introduction of such new
products.
In addition to the competition that we may face because of the internal
development efforts of our competitors, current and potential competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties, thereby increasing their ability to address
the needs of our current or prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could also
materially adversely affect our ability to sell our products or to obtain
maintenance and support renewals for existing licenses on terms favorable to us.
There can be no assurance that we will be able to compete successfully
against current and future competitors. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could materially affect our business, operating
results or financial condition.
PROPRIETARY RIGHTS
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology. We currently hold several
trademark registrations and have numerous trademark applications in the United
States and certain foreign countries. We seek to protect our source code for our
software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed or shrink-wrap
license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to avoid disclosure of our
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intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code.
EMPLOYEES
As of December 31, 2000, we employed 1,431 full-time employees, including
658 in sales and marketing, 492 in research and development, 104 in customer
service and support and 177 in general and administrative. We believe that our
future success will depend in large part upon our continuing ability to attract
and retain highly skilled managerial, sales, marketing, customer support and
research and development personnel. Like other software companies, we face
intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can
be no assurance that we will be successful in attracting, assimilating and
retaining other qualified personnel in the future. We are not subject to any
collective bargaining agreement and we believe that our relationships with our
employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of our executive officers and other information about them are
shown below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Vincent C. Smith............ 37 Chief Executive Officer and Chairman of the Board
David M. Doyle.............. 40 President, Secretary and Director
M. Brinkley Morse........... 43 Vice President, Finance and Operations
Eyal M. Aronoff............. 37 Chief Technical Officer, DB Tools
Douglas F. Garn............. 42 Vice President, Worldwide Sales
Marshall I. Senk............ 37 Vice President, Marketing
</TABLE>
Set forth below is certain information regarding the business experience
during the past five years of each of the above-named persons.
Vincent C. Smith has served as our Chief Executive Officer since 1997 and a
director since 1995. Mr. Smith became Chairman of the Board in 1998. In 1994,
Mr. Smith was Director of Open Systems at BMC Software, where he managed its
sales operations. From 1992 to 1994, Mr. Smith co-founded Patrol Software North
America and served as its Vice President of Worldwide Sales and Marketing.
Patrol Software merged with BMC in 1994. Mr. Smith worked at Oracle Corporation
from 1987 to 1992 in a variety of sales management positions. Mr. Smith is a
director of Emergent Information Technologies Inc.
David M. Doyle is our President, Secretary, founder and a director. Mr.
Doyle has been President and a director since the formation of Quest in 1987 and
has been our Secretary since June 1999. Mr. Doyle was the primary designer and
developer of our products during the initial four years after the founding of
Quest. Prior to the founding of Quest, Mr. Doyle served as a consultant to a
variety of industries, specializing in the areas of system design and
application performance, and co-founded American Data Industries.
M. Brinkley Morse is our Vice President, Finance and Operations. Mr. Morse
has held this position since January 2001. Before joining Quest, Mr. Morse
served as Senior Vice President, Corporate Development and Secretary of BMC
Software from September 1998 to August 2000, and he served as General Counsel
and Secretary of BMC from November 1988 to September 1998.
Eyal M. Aronoff is our Chief Technical Officer, DB Tools, and has held this
position since September 2000. From March 1996 to September 2000, Mr. Aronoff
was our Vice President of Technology and Engineering. Mr. Aronoff founded R*Tech
Systems, a database management company, in 1992 and served as its President from
1992 to 1996, when we acquired this company. Prior to this, Mr. Aronoff worked
for John Bryce Ltd., an Oracle distributor in Israel, and served in the Israeli
Defense Force.
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<PAGE> 11
Douglas F. Garn is the Vice President of Worldwide Sales. Mr. Garn has held
this position since January 1998. From March 1996 to January 1998, Mr. Garn was
Vice President of North American Sales for Peregrine Systems, Inc. From July
1995 until April 1996, Mr. Garn was Vice President of Sales with Syntax, Inc., a
networking software company. From November 1993 until July 1995, Mr. Garn was
Regional Sales Manager with BMC.
Marshall I. Senk is our Vice President of Marketing. Prior to joining Quest
Software in August 2000, Mr. Senk spent five years as managing director and
senior research analyst covering the e-business software sector for Robertson
Stephens. Previous to Robertson Stephens, Mr. Senk held a number of positions at
Oracle Corporation over the span of six years, most recently director of product
management for the desktop product line as well as positions in corporate
marketing and application development.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support and research and
development facilities are currently located in approximately 132,500 square
feet of space in Irvine, California. One of these facilities is under a six-year
lease which includes an option to renew this lease for an additional five-year
term. The other facility is under a 3 1/2 year lease.
We also lease sales offices in several major metropolitan areas of the
U.S., including Atlanta, Boston, Chicago, Dallas, New York, San Francisco and
Washington, D.C. Our Canadian subsidiaries currently operate from three leased
facilities in Calgary, Alberta; Ottawa, Ontario and Halifax, Nova Scotia. Our
German subsidiary currently operates from two facilities in Frankfurt and
Dusseldorf. Our Australian subsidiary operates from two leased facilities in
Melbourne which total approximately 10,000 square feet. Our UK subsidiary leases
a 5,300 square-foot office in the London metropolitan area.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in a variety of legal and administrative
proceedings and claims which arise in the ordinary course of business. While the
outcome of these claims can not be predicted with certainty, we do not believe
that the outcome of any currently pending legal matters will have a material
adverse effect on Quest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
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<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our common stock has been listed on the Nasdaq National Market since August
13, 1999 under the symbol "QSFT." The following table sets forth the high and
low sale prices on the Nasdaq National Market for our common stock for the
periods indicated. All prices are adjusted to reflect our two-for-one stock
split effected in March 2000.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMMON STOCK
----------------
HIGH LOW
------ ------
<S> <C> <C>
1999:
Third Quarter (from August 13)........................... $26.19 $16.28
Fourth Quarter........................................... 58.25 27.94
2000:
First Quarter............................................ $98.13 $36.50
Second Quarter........................................... 60.63 23.63
Third Quarter............................................ 69.56 43.50
Fourth Quarter........................................... 64.38 25.63
</TABLE>
On March 19, 2001, the closing price of our common stock on the Nasdaq
National Market was $20.06 per share. As of March 19, 2001, there were 355
holders of record of our common stock (not including beneficial holders of
shares held in "street name").
Prior to our conversion to a C corporation for tax purposes in January
1997, we paid distributions to our S corporation shareholders in amounts
generally consistent with their tax liabilities arising from their allocable
share of S corporation earnings. Since becoming a C corporation, we have not
declared or paid any cash dividends on our common stock and do not expect to do
so in the foreseeable future. We currently intend to retain all available funds
for use in the operation and expansion of our business. Any future determination
to pay dividends will be at the discretion of our board of directors and will
depend on our results of operations, financial conditions, contractual and legal
restrictions and other factors the board deems relevant.
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<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes thereto appearing elsewhere in this Report. The following selected
consolidated statement of operations data for the years ended December 31, 1998,
1999 and 2000, and the consolidated balance sheet data at December 31, 1999 and
2000, have been derived from audited consolidated financial statements included
elsewhere in this Report. The consolidated data presented below for the years
ended December 31, 1996 and 1997, and at December 31, 1996, 1997 and 1998, are
derived from audited consolidated financial statements that are not included in
this Report. The data presented below do not include pro forma adjustments to
reflect the income tax provision as if we were a C corporation in fiscal year
1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses................................................ $ 9,316 $12,158 $24,901 $54,269 $126,767
Services................................................ 3,546 6,157 9,889 16,599 38,820
------- ------- ------- ------- --------
Total revenues................................... 12,862 18,315 34,790 70,868 165,587
Cost of revenues:
Licenses................................................ 950 1,307 3,433 2,998 3,571
Services................................................ 1,467 1,972 2,507 4,195 10,695
Amortization of purchased intangible assets............. -- -- -- -- 5,038
------- ------- ------- ------- --------
Total cost of revenues........................... 2,417 3,279 5,940 7,193 19,304
Gross profit.............................................. 10,445 15,036 28,850 63,675 146,283
Operating expenses:
Sales and marketing..................................... 4,328 5,845 11,836 32,078 77,641
Research and development................................ 2,995 4,293 8,047 15,980 39,747
General and administrative.............................. 3,494 3,450 5,278 9,906 17,679
Other compensation costs and goodwill amortization...... -- -- -- 1,243 41,092
------- ------- ------- ------- --------
Total operating expenses......................... 10,817 13,588 25,161 59,207 176,159
------- ------- ------- ------- --------
Income (loss) from operations............................. (372) 1,448 3,689 4,468 (29,876)
Interest income........................................... 17 72 372 1,501 13,535
Other income (expense), net............................... 372 (209) (36) (299) (1,932)
------- ------- ------- ------- --------
Income (loss) before income tax provision................. 17 1,311 4,025 5,670 (18,273)
Income tax provision...................................... 1 1,022 1,679 2,273 6,805
------- ------- ------- ------- --------
Net income (loss)......................................... 16 289 2,346 3,397 (25,078)
Preferred stock dividends(1).............................. -- -- -- 590 --
------- ------- ------- ------- --------
Net income (loss) applicable to common shareholders....... $ 16 $ 289 $ 2,346 $ 2,807 $(25,078)
======= ======= ======= ======= ========
Basic net income (loss) per common share.................. $ 0.00 $ 0.00 $ 0.03 $ 0.04 $ (0.29)
Diluted net income (loss) per common share................ $ 0.00 $ 0.00 $ 0.03 $ 0.03 $ (0.29)
Weighted-average common shares outstanding:
Basic................................................... 76,700 80,746 88,522 75,354 85,332
Diluted................................................. 76,700 81,234 88,918 83,600 85,332
</TABLE>
- ---------------
(1) Represents cash dividends paid in 1999 to holders of shares of Series B
Redeemable Preferred Stock, all of which were redeemed in connection with
our initial public offering in August 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ -- $ 2,096 $ 8,981 $39,643 $ 25,155
Short-term marketable securities.......................... -- -- -- 11,000 8,587
Working capital........................................... 553 374 2,771 38,670 29,887
Total assets.............................................. 6,408 9,713 19,645 99,149 534,172
Long-term obligations..................................... -- -- -- 403 6,422
</TABLE>
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes to those statements included elsewhere in this Report.
OVERVIEW
We provide application management software solutions that enhance our
customers' return on IT investment dollars by maximizing availability, improving
performance, maximizing the effectiveness of IT personnel and improving the
quality of business critical applications. Our product families are designed to
meet the availability and performance requirements of our customers' most
critical applications. Each product family consists of an integrated suite of
software tools that enable personnel to manage and administer complex database
systems and business applications, both packaged and custom developed. These
applications can include ERP (enterprise resource planning) systems, CRM
(customer relationship management) systems, B2B (business to business)
e-commerce systems, corporate messaging and Internet and web-based applications.
We enable organizations to leverage IT infrastructure investments by maximizing
the performance and availability of enterprise applications with solutions for
High Availability, Application Monitoring, Database Management, SQL Development,
and Report Management.
Our acquisitions of Foglight Software, Inc. (Foglight) and FastLane
Technologies, Inc. (FastLane) were highlights of 2000, a year in which we
experienced significant growth in our sales, support, professional services and
research and development headcount and expanded our executive management and
administrative team to meet the needs of our customers and employees worldwide.
Our integration activities relative to these acquisitions during 2000 has been
primarily dedicated to modifying, enhancing, testing, documenting and otherwise
integrating acquired technologies into our product offerings. We have dedicated
significant development resources to create versions of Foglight for a variety
of applications and database platforms, and have used FastLane's position in the
directory management solutions market as a platform on which to promote our
entry into the Microsoft solutions and systems management market. We believe
these integration activities, together with our internal research and
development efforts, will help us position Quest as the leading provider of
application management solutions, with a comprehensive set of software solutions
supporting the leading database platform vendors with specific solutions for
leading business-critical applications.
All of our acquisitions in 2000 were accounted for under the purchase
method of accounting, and our operating results reflect the activities of
acquired business only from their respective acquisition dates. As a result of
our acquisitions in 2000, we recorded goodwill and purchased intangible assets
of approximately $285.4 million in total. These assets are being amortized over
their estimated useful lives, and will result in charges to operations of at
least $15.0 million per quarter through the second quarter of 2003. For the year
ended December 31, 2000, we incurred a net loss due to the amortization of
goodwill and purchased intangible assets related to these acquisitions. These
acquisitions also contributed to increases in all operating expense categories,
and the impact of acquisitions on operating expenses may be greater in 2001,
which will reflect a full year of operations. Due to the integration that has
taken place to date, it is not possible to quantify the portion of increases in
revenues or operating expenses attributable to these acquisitions.
We derive our revenues primarily from the sale of software licenses and
related annual maintenance fees. Our total revenues have increased over each of
the past five fiscal years, from $12.9 million in 1996 to $165.6 million in
2000. Pricing of our software licenses is based on the number of servers,
workstations and/or users of our products. Services consist primarily of annual
maintenance contracts for technical support and product enhancements, and
consulting services.
We recognize software license revenues when a non-cancelable license
agreement has been signed with a customer, delivery of the software has
occurred, the fees are fixed and determinable, no significant post-delivery
vendor obligations remain and collection is deemed probable. Maintenance
revenues are recognized ratably over the contract term, which is typically one
year. Revenues for consulting services are recognized as such services are
performed. See Note 1 of the notes to our consolidated financial statements.
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<PAGE> 15
International revenues from licenses and services sold to customers outside
of North America were $2.7 million in 1998, $15.3 million in 1999 and $28.7
million in 2000. We intend to expand our international sales activities as part
of our business strategy. All of our current international revenues are derived
from the operations of our wholly owned international subsidiaries, which
consist of both direct sales and sales through distributors. Our international
subsidiaries conduct business in the currency of the country in which they
operate (with the exception of Mexico and Brazil where the U.S. Dollar is used),
exposing us to currency fluctuations and currency transaction losses or gains
which are outside of our control. Historically, fluctuations in foreign currency
exchange rates have not had a material effect on our business. We have not, to
date, conducted any hedging transactions to reduce our risk to currency
fluctuations.
In the development of new products and enhancements of existing products,
the technological feasibility of the software is not established until
substantially all product development is complete. Historically, our software
development costs eligible for capitalization have been insignificant, and all
costs related to internal research and development have been expensed as
incurred.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenues:
Licenses.................................................. 71.6% 76.6% 76.6%
Services.................................................. 28.4 23.4 23.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Licenses.................................................. 9.9 4.2 2.2
Services.................................................. 7.2 5.9 6.5
Amortization of purchased intangible assets............... -- -- 3.0
----- ----- -----
Total cost of revenues............................ 17.1 10.1 11.7
----- ----- -----
Gross profit................................................ 82.9 89.9 88.3
Operating expenses:
Sales and marketing....................................... 34.0 45.3 46.9
Research and development.................................. 23.1 22.6 24.0
General and administrative................................ 15.2 14.0 10.7
Other compensation costs and goodwill amortization........ -- 1.8 24.8
----- ----- -----
Total operating expenses.......................... 72.3 83.7 106.4
----- ----- -----
Income (loss) from operations............................... 10.6 6.2 (18.1)
Interest income............................................. 0.9 2.1 8.2
Other expense, net.......................................... (0.0) (0.4) (1.2)
----- ----- -----
Income (loss) before income tax provision................... 11.5 7.9 (11.1)
Income tax provision........................................ 4.8 3.2 4.1
----- ----- -----
Net income (loss)........................................... 6.7% 4.7% (15.2)%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
REVENUES
Revenues were $34.8 million, $70.9 million and $165.6 million in 1998, 1999
and 2000, respectively, representing increases of $36.1 million, or 103.7%, from
1998 to 1999, and $94.7 million, or 134%, from 1999 to 2000. International
revenues accounted for 7.8%, 21.6% and 17.4% of total revenues for 1998, 1999
and 2000, respectively. No single customer accounted for more than 10% of total
revenues in 1998, 1999 or 2000.
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<PAGE> 16
Licenses -- Licenses were $24.9 million, $54.3 million and $126.8 million
in 1998, 1999 and 2000, respectively, representing increases of $29.4 million,
or 118.1%, from 1998 to 1999, and $72.5 million, or 134%, from 1999 to 2000.
Licenses represented 71.6%, 76.6% and 76.6% of total revenues in 1998, 1999 and
2000, respectively. International licenses accounted for 5.8%, 23.4% and 19.0%
of total licenses in 1998, 1999 and 2000, respectively. The increase in licenses
from 1998 to 1999 was due to expansion of our worldwide sales force, as well as
the introduction of new products in 1999. The increase in licenses from 1999 to
2000 was due to continued expansion of our worldwide sales force, as well as
increased market acceptance of our software products and introduction of new
products.
Services -- Services were $9.9 million, $16.6 million and $38.8 million in
1998, 1999 and 2000, respectively, representing increases of $6.7 million, or
67.7%, from 1998 to 1999, and $22.2 million, or 134% from 1999 to 2000. Services
represented 28.4%, 23.4% and 23.4% of total revenues in 1998, 1999 and 2000,
respectively. The increases in services reflect an increase in the number of
software licenses sold with maintenance agreements and renewals of maintenance
agreements on existing licenses, as well as increased consulting and training
revenues. International services accounted for 12.7%, 16.0% and 12.0% of total
services in 1998, 1999 and 2000, respectively.
COST OF REVENUES
Cost of Licenses -- Cost of licenses was $3.4 million, $3.0 million and
$3.6 million in 1998, 1999 and 2000, respectively, representing a decrease of
$0.4 million, or 11.8%, from 1998 to 1999, and an increase of $0.6 million, or
20%, from 1999 to 2000. Cost of licenses as a percentage of license revenue was
13.8%, 5.5% and 2.8% for 1998, 1999 and 2000, respectively. The decrease in cost
of licenses from 1998 to 1999 was due to decreases for both royalties and
amortization as a result of reaching several royalty maximums and completion of
amortization of certain purchased technology. The increase in cost of licenses
from 1999 to 2000 was principally a result of an increase in product media,
duplication and printing costs. The decreases in cost of licenses as a
percentage of license revenues in 2000 resulted from increased license revenues
without a corresponding increase in amortization of acquired software licenses,
which does not vary by the number of licenses sold.
Cost of Services -- Cost of services was $2.5 million, $4.2 million and
$10.7 million in 1998, 1999 and 2000, respectively, representing increases of
$1.7 million, or 68.0%, from 1998 and 1999, and $6.5 million, or 155%, from 1999
to 2000. Cost of services as a percentage of service revenues was 25.4%, 25.3%
and 27.6% for 1998, 1999 and 2000, respectively. The increases in cost of
services in these periods are primarily due to the increase in the number of
technical support personnel required to manage and support our growing customer
base as well as increased product offerings. We also formed a professional
services consulting organization during the first half of 2000, which did not
exist in 1998 or 1999. Our gross margins on services revenues could fluctuate in
the future, reflecting the timing differences between increasing our
organization investments and the corresponding revenue growth that we expect as
a result. We expect the cost of services to increase in absolute dollars for the
foreseeable future as additional customer support and consulting personnel are
hired.
Amortization of Purchased Intangible Assets -- Amortization of purchased
intangible assets was $5.0 million in 2000, which includes amortization of the
fair value of acquired technology, workforce and customer lists associated with
the acquisitions made during 2000. There were no similar costs during 1998 and
1999.
OPERATING EXPENSES
Sales and Marketing -- Sales and marketing expenses were $11.8 million,
$32.1 million and $77.6 million in 1998, 1999 and 2000, respectively,
representing increases of $20.3 million, or 172.0%, from 1998 to 1999, and $45.5
million, or 142%, from 1999 to 2000. The increases reflect our increasing
investment in our sales and marketing organization, which from 1998 to 1999
included an increase in salaries and related expenses of $8.9 million, a $4.3
million increase in commissions and a $0.6 million increase in marketing
communications expenses. The increases from 1999 to 2000 included an increase in
salaries and related expenses of $20.3 million, a $8.9 million increase in
commissions, $5.3 million increase in travel and related costs, and a
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<PAGE> 17
$1.6 million increase in promotional, conference and tradeshow expenses. We
intend to continue to expand our sales and marketing infrastructure in 2001 and,
as a result, expect sales and marketing expenses to increase in absolute
dollars.
Research and Development -- Research and development expenses were $8.0
million, $16.0 million and $39.7 million in 1998, 1999 and 2000, respectively,
representing increases of $8.0 million, or 100.0%, from 1998 to 1999, and $23.7
million, or 148%, from 1999 to 2000. The increases for these periods were
primarily related to a 138-person increase from 1998 to 1999, and a 268-person
increase from 1999 to 2000 in the number of software developers and quality
assurance personnel. We believe significant investments in research and
development are required to remain competitive, and expect these expenses to
continue to increase in absolute dollars in 2001.
General and Administrative -- General and administrative expenses were $5.3
million, $9.9 million and $17.7 million in 1998, 1999 and 2000, respectively,
representing an increase of $4.6 million, or 86.8%, from 1998 to 1999, and $7.8
million, or 78%, from 1999 to 2000. The most significant expense increases
during both periods were for salaries and related expenses, rent and
depreciation, which were the result of increased number of related personnel. We
expect general and administrative expenses to increase in absolute dollars as we
continue to enhance our infrastructure and support expansion of our operations.
Other Compensation Costs and Goodwill Amortization -- Other compensation
costs and goodwill amortization was $1.2 million in 1999 and $41.1 million in
2000. Included in 1999 was $0.7 million related to the severance package
provided to one of our founders and a director, which will be paid out over a
three-year period, $0.4 million of compensation costs related to the grant of
stock options at less than fair market value and $0.1 million of goodwill
amortization related to acquisitions. In 2000, these costs consisted of $36.0
million of goodwill amortization related to the various acquisitions primarily
made during 2000, and $5.1 million in compensation costs primarily related to
the grant of stock options at less than fair market value. The majority of the
option grants at less than fair market value were made in 1999.
Interest Income -- Interest income was $0.4 million, $1.5 million and $13.5
million in 1998, 1999 and 2000, respectively. The increases in 1999 and 2000
reflected higher cash and short-term investments, which accelerated after the
receipt of the net proceeds of our initial public offering in August 1999 and
our secondary offering in March 2000.
Other Expense, Net -- Other expense, net was ($36,000) in 1998, $(0.3)
million in 1999 and $(1.9) million. Increases in other expense, net are
primarily the result of increased interest expense and foreign currency
translation losses.
Provision for Income Taxes -- Provision for income taxes was $1.7 million,
$2.3 million and $6.8 million in 1998, 1999 and 2000, respectively, representing
increases of $0.6 million, or 35.3%, from 1998 to 1999, and $4.5 million, or
199%, from 1999 to 2000. The effective income tax rate was 41.7%, 40.1% and
(37.2)% in 1998, 1999 and 2000, respectively. Excluding amortization of
purchased intangible assets and other compensation costs and goodwill
amortization, the effective income tax rate for 2000 was 40%. See Note 6 of the
notes to our consolidated financial statements.
INFLATION
Inflation has not had a significant effect on our results of operations or
financial position for the years ended December 31, 1998, 1999 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our business, to date, primarily from cash generated by our
operations, net proceeds of $64.9 million from our initial public offering in
August 1999 and net proceeds of $253.5 million from our secondary offering in
March 2000. Our sources of liquidity as of December 31, 2000 consisted
principally of cash and cash equivalents of $25.2 million, and $126.7 million in
both short-and long-term high grade corporate and government marketable
securities.
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<PAGE> 18
Net cash provided by operating activities was $8.2 million, $11.4 million
and $25.9 million in 1998, 1999 and 2000, respectively. The increases were
primarily due to increases in net income after excluding non-cash depreciation
and amortization expense and increases in income taxes payable and deferred
revenue, offset by increases in accounts receivable and deferred income taxes.
Net cash used in investing activities was $1.3 million, $24.1 million and
$241.8 million in 1998, 1999, and 2000, respectively. The increase in cash used
in investing activities in 2000 was primarily related to net purchases of
marketable securities of $111.0 million, acquisitions of $82.1 million and
capital expenditures of $39.2 million. See note 2 to the consolidated financial
statements for discussion on acquisitions. Capital expenditures primarily
consisted of equipment and related purchases to support our worldwide expansion
and related infrastructure needs.
Financing activities used $8,000 in 1998, and generated $43.6 million and
$201.1 million in 1999 and 2000, respectively. In April 1999, we raised $25.0
million through the sale of preferred stock and an additional $10.0 million in
term debt from a commercial bank in order to purchase shares of common stock
from a shareholder and founder for $35.0 million. See Note 4 of the notes to our
consolidated financial statements. In August 1999, we raised net proceeds of
$64.9 million from our initial public offering. A portion of the proceeds was
utilized to retire debt of $10.9 million and redeem the outstanding Series B
Preferred Stock for $10.0 million. In March 2000, we raised net proceeds of
$253.6 million from a secondary public offering of 8.4 million shares of our
common stock at a price of $70.00 per share. Of the shares sold in the offering
3.8 million shares were sold by the Company and 4.6 million shares were sold by
existing shareholders. The Company did not receive any proceeds from the shares
sold by the selling shareholders.
In December 2000, the Board of Directors authorized a stock repurchase
program under which the Company may purchase up to two million shares of its
common stock. Under the repurchase program, the Company may purchase shares from
time to time at varying prices in open market or private transactions. As of
December 31, 2000, the Company had repurchased 1.7 million shares for $57.4
million under the plan.
We believe that our existing cash, cash equivalents and investment balances
and cash flows from operations will be sufficient to finance our working capital
and capital expenditure requirements through at least the next 12 months. We may
require additional funds to support our working capital requirements, or for
other purposes, and may seek to raise additional funds through public or private
equity or debt financing or from other sources. If additional financing is
needed, we cannot assure you that such financing will be available to us on
commercially reasonable terms or at all.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended, is
effective for all fiscal years beginning after June 15, 2000, and establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative which would be required
to be reported as assets or liabilities and carried at fair value. The Company
adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did
not have a significant impact on the financial position, results of operations,
or cash flows of the Company.
On December 6, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 is effective for the fourth quarter in fiscal year 2000. The adoption of SAB
No. 101 did not have a material impact on the Company's financial statements, as
the Company believes its revenue recognition policies comply with SAB No. 101.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of
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<PAGE> 19
an employee for purposes of applying Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. The provisions of FIN 44 change the
accounting for an exchange of unvested employee stock options and restricted
stock awards in a purchase business combination. The new rules require the
intrinsic value of the unvested awards be allocated to deferred compensation and
recognized as non-cash compensation expense over the remaining future vesting
period. The adoption of FIN 44 did not have a material impact on the Company's
financial statements, other than the effect of the application of FIN 44 as it
relates to the Company's acquisitions as described in Note 2.
RISK FACTORS
An investment in our shares involves risks and uncertainties. You should
carefully consider the factors described below before making an investment
decision in our securities. The risks described below are the risks that we
currently believe are material risks of business and the industry in which we
compete.
Our business, financial condition and results of operations could be
adversely affected by any of the following risks. If we are adversely affected
by such risks, then the trading price of our common stock could decline, and you
could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE IN FUTURE PERIODS AND, AS A
RESULT, WE MAY FAIL TO MEET EXPECTATIONS OF INVESTORS AND ANALYSTS, CAUSING OUR
STOCK PRICE TO FLUCTUATE OR DECLINE
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors. These factors include the following:
- the size and timing of customer orders. See "-- The size and timing of
our customer orders may vary significantly from quarter to quarter which
could cause fluctuations in our revenues."
- the unpredictability of the timing and level of sales through our
indirect sales channel;
- the timing of revenue recognition for sales of software products and
services;
- the extent to which our customers renew their maintenance contracts with
us;
- the possibility that our customers may cancel or defer purchases as a
result of reduced IT budgets or in anticipation of new products or
product updates by us or by our competitors;
- the possibility of an economic slowdown generally;
- the amount and timing of expenditures related to expansion of our
operations;
- our ability to attain market acceptance of new products and services and
enhancements to our existing products;
- lack of order backlog;
- changes in our pricing policies or the pricing policies of our
competitors;
- the relative growth rates of the Windows NT and UNIX markets, as well as
the rate of adoption of Microsoft's release of Windows 2000 by users;
- costs related to acquisitions of technologies or businesses, including
amortization of goodwill and purchased intangible assets; and
- the timing of releases of new versions of third-party software products
that our products support.
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<PAGE> 20
Fluctuations in our results of operations are likely to affect the market
price of our common stock that may not be related to our long-term performance.
THE SIZE AND TIMING OF OUR CUSTOMER ORDERS MAY VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER WHICH COULD CAUSE FLUCTUATIONS IN OUR REVENUES
In any given quarter, sales of some of our products have involved large
financial commitments from a relatively small number of customers, and
cancellation or deferral of these large contracts would reduce our revenues. In
addition, the sales cycles for certain of our software products, such as Vista
Plus and SharePlex, can last from three to nine months and often require
pre-purchase evaluation periods and customer education. These relatively long
sales cycles may cause significant periodic variation in our license revenues.
Also, we have often booked a large amount of our sales in the last month or
weeks of each quarter and delays in the closing of sales near the end of a
quarter could cause quarterly revenue to fall short of anticipated levels.
Finally, while a portion of our revenues each quarter is recognized from
previously deferred revenue, our quarterly performance will depend primarily
upon entering into new contracts to generate revenues for that quarter.
MANY OF OUR PRODUCTS ARE DEPENDENT ON ORACLE'S TECHNOLOGIES; IF ORACLE'S
TECHNOLOGIES LOSE MARKET SHARE OR BECOME INCOMPATIBLE WITH OUR PRODUCTS, THE
DEMAND FOR OUR PRODUCTS COULD SUFFER
We believe that our success has depended in part, and will continue to
depend in part for the foreseeable future, upon our relationship with Oracle and
our status as a complementary software provider for Oracle's database and
application products. Many versions of our products, including SharePlex, SQLab
Vision, and SQL Navigator, are specifically designed to be used with Oracle
databases. Although a number of our products work with other environments, our
competitive advantage consists in substantial part on the integration between
our products and Oracle's products, and our extensive knowledge of Oracle's
technology. Currently, a significant portion of our total revenues are derived
from products that specifically support Oracle-based products. If Oracle for any
reason decides to promote technologies and standards that are not compatible
with our technology, or if Oracle loses market share for its database products,
our business, operating results and financial condition would be materially
adversely affected.
MANY OF OUR PRODUCTS ARE VULNERABLE TO DIRECT COMPETITION FROM ORACLE
We currently compete with Oracle in the market for database management
solutions. We expect that Oracle's commitment to and presence in the database
management product market will increase in the future and therefore
substantially increase competitive pressures. We believe that Oracle will
continue to incorporate database management technology into its server software
offerings, possibly at no additional cost to its users. We believe that Oracle
will also continue to enhance its database management technology. Furthermore,
Oracle could attempt to increase its presence in this market by acquiring or
forming strategic alliances with our competitors, and Oracle may be in better
position to withstand and respond to the current factors impacting this
industry. Oracle has a longer operating history, a larger installed base of
customers and substantially greater financial, distribution, marketing and
technical resources than we do. In addition, Oracle has well-established
relationships with many of our present and potential customers. As a result, we
may not be able to compete effectively with Oracle in the future, which could
materially adversely affect our business, operating results and financial
condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS THAT
ACHIEVE WIDESPREAD MARKET ACCEPTANCE
Our future success depends on our ability to address the rapidly changing
needs of our customers by developing and introducing new products, product
updates and services on a timely basis, by extending the operation of our
products on new platforms and by keeping pace with technological developments
and emerging industry standards. In order to grow our business, we are
committing substantial resources to developing software products and services
for the applications management market. If this markets does not continue to
develop as anticipated, or demand for our products in these markets does not
materialize or occurs
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<PAGE> 21
more slowly that we expect, or if our development efforts are delayed or
unsuccessful, we will have expended substantial resources and capital without
realizing sufficient revenue, and our business and operating results could be
adversely affected.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION
We have in the past made and we expect to continue to make acquisitions of
complementary companies, products or technologies. If we make any additional
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may subject us to liabilities and risks that are not
known or identifiable at the time of the acquisition or may cause disruptions in
our operations and divert management's attention from day-to-day operations,
which could impair our relationships with our current employees, customers and
strategic partners. We may have to incur debt or issue equity securities to pay
for any future acquisitions. The issuance of equity securities for any
acquisition could be substantially dilutive to our shareholders. In addition,
our profitability may suffer because of acquisition-related costs or
amortization costs for acquired goodwill and other intangible assets. In
consummating acquisitions, we are also subject to risks of entering geographic
and business markets in which we have no or limited prior experience. If we are
unable to fully integrate acquired businesses, products or technologies with our
existing operations, we may not receive the intended benefits of acquisition.
OUR ABILITY TO INCREASE OUR REVENUES DEPENDS ON OUR ABILITY TO EXPAND OUR
INDIRECT SALES CHANNELS
We intend to aggressively pursue expansion of our indirect sales channels
through arrangements with resellers, systems integrators and distributors. In
certain domestic and international markets we may miss sales opportunities if we
are unable to enter into successful relationships with locally based resellers.
We may become more dependent on these type of relationships. There can be no
assurance that we will successfully develop these relationships or that the
expansion of indirect sales distribution methods will increase revenues.
OUR PAST AND FUTURE GROWTH MAY STRAIN OUR MANAGEMENT, ADMINISTRATIVE,
OPERATIONAL AND FINANCIAL INFRASTRUCTURE
We have recently experienced a period of rapid growth in our operations
that has placed and will continue to place a strain on our management,
administrative, operational and financial infrastructure. During this period, we
have experienced an increase in the number of our employees, increasing demands
on our operating and financial systems and personnel, and an expansion in the
geographic coverage of our operations. The number of our full-time employees
increased from 123 as of December 31, 1997 to 257 as of December 31, 1998, to
654 as of December 31, 1999 and to 1,431 as of December 31, 2000. Our ability to
manage our operations and growth requires us to continue to improve our
operational, financial and management controls, and reporting systems and
procedures. We may need to expand our facilities or relocate some or all of our
employees or operations from time to time to support growth. These relocations
could result in temporary disruptions of our operations or a diversion of
management's attention and resources. In addition, we will be required to hire
additional management, financial and sales and marketing personnel to manage our
expanding operations. If we are unable to manage this growth effectively, our
business, operating results and financial condition may be materially adversely
affected.
WE MAY NOT GENERATE INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS, WHICH COULD
SLOW OUR REVENUE GROWTH IN THE FUTURE
Most of our customers initially make a purchase of our products for a
single department or location. Many of these customers may choose not to expand
their use of our products. If we fail to generate expanded business from our
current customers, our business, operating results and financial condition could
be materially adversely affected. In addition, as we deploy new modules and
features for our existing products or introduce new products, our current
customers may choose not to purchase this new functionality or these new
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<PAGE> 22
products. Moreover, if customers elect not to renew their maintenance
agreements, our service revenues would be materially adversely affected.
WE EXPECT TO INCUR SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES IN THE
FORESEEABLE FUTURE, WHICH MAY AFFECT OUR FUTURE PROFITABILITY
We intend to substantially increase our operating expenses for the
foreseeable future as we continue to:
- increase our sales and marketing activities, including expanding our
direct sales and telesales forces;
- increase our research and development activities;
- expand our general and administrative activities; and
- expand our customer support organizations.
Accordingly, we will be required to significantly increase our revenues in order
to maintain profitability. These expenses will be incurred before we generate
any revenues by this increased spending. If we do not significantly increase
revenues from these efforts, our business and operating results would be
negatively impacted.
OUR INTERNATIONAL OPERATIONS AND OUR PLANNED EXPANSION OF OUR INTERNATIONAL
OPERATIONS EXPOSES US TO CERTAIN RISKS
Substantially all of our current international revenues are derived from
the operations of three of our wholly-owned subsidiaries in Australia, the
United Kingdom and Germany. Revenues from licenses and services to customers
outside of North America were $5.8 million in 1998, representing 16.7% of total
revenues, $15.3 million in 1999, representing 21.6% of total revenues, and $28.7
million in 2000, representing 17.3% of total revenues. As a result, we face
increasing risks from doing business on an international basis, including, among
others:
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- seasonal reductions in business activity in Europe;
- increased financial accounting and reporting burdens and complexities;
- potentially adverse tax consequences;
- potential loss of proprietary information due to piracy, misappropriation
or weaker laws regarding intellectual property protection;
- delays in localizing our products;
- compliance with a wide variety of complex foreign laws and treaties; and
- licenses, tariffs and other trade barriers.
In addition, because our international subsidiaries conduct business in the
currency of the country in which they operate, we are subject to currency
fluctuations and currency transaction losses or gains which are outside of our
control.
We plan to expand our international operations as part of our business
strategy. The expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources and will place additional burdens on our management,
administrative, operational and financial infrastructure. We cannot be certain
that our investments in establishing facilities in other countries will produce
desired levels of revenue or profitability. In addition, we have sold our
products internationally for only a few years and we have limited experience in
developing localized versions of our products and marketing and distributing
them internationally. As our international operations expand, our exposure to
exchange rate fluctuations will increase as we use an increasing number of
foreign currencies. We have not yet entered into any hedging transactions to
date to mitigate our expense to currency fluctuations.
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<PAGE> 23
OUR RECENTLY-IMPLEMENTED STRATEGY OF INVESTING IN DEVELOPMENT STAGE COMPANIES
INVOLVES A NUMBER OF RISKS AND UNCERTAINTIES
We have and may continue to make investments in development-stage companies
that we believe provide strategic opportunities for Quest. Each of these
investments involves a number of risks and uncertainties, including diversion of
management attention, inability to identify strategic opportunities, inability
to value investments appropriately, inability to manage investments effectively
and loss of cash invested. We intend that these investments will complement our
own research and development efforts, provide access to new technologies and
emerging markets, and create opportunities for additional sales of our products
and services. However, we cannot assure you that this initiative will have the
above mentioned desired results, or even that we will not lose all or any part
of these investments.
FAILURE TO DEVELOP STRATEGIC RELATIONSHIPS COULD HARM OUR BUSINESS BY DENYING US
SELLING OPPORTUNITIES AND OTHER BENEFITS
Our current collaborative relationships may not prove to be beneficial to
us, and they may not be sustained. We also may not be able to enter into
successful new strategic relationships in the future, which could have a
material adverse effect on our business, operating results and financial
condition. From time to time, we have collaborated with other companies,
including Hewlett-Packard and Oracle and certain of the national accounting
firms that provide system integration services, in areas such as product
development, marketing, distribution and implementation. We could lose sales
opportunities if we fail to work effectively with these parties. Moreover, we
expect that maintaining and enhancing these and other relationships will become
a more meaningful part of our business strategy in the future. However, many of
our current partners are either actual or potential competitors with us. In
addition, many of these third parties also work with competing software
companies and we may not be able to maintain these existing relationships, due
to the fact that these relationships are informal or, if written, are terminable
with little or no notice.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED, AND THERE IS RISK OF
INFRINGEMENT CLAIMS OR INDEPENDENT DEVELOPMENT OF COMPETING TECHNOLOGY THAT
COULD HARM OUR COMPETITIVE POSITION
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of trademark, trade secret, copyright law and contractual restrictions to
protect the proprietary aspects of our technology.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any such
resulting litigation could result in substantial costs and diversion of
resources.
Our means of protecting our proprietary rights may prove to be inadequate
and competitors may independently develop similar or superior technology.
Policing unauthorized use of our products is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. We also believe that, because of the
rapid rate of technological change in the software industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of our employees, frequent product enhancements and the
timeliness and quality of customer support services.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. Third parties
may claim infringement by us of their intellectual property rights. In the event
of a successful claim of product infringement against us and our failure or
inability to either license the infringed or similar technology or develop
alternative technology on a timely basis, we may incur substantial licensing
fees, be liable for infringement damage, or be unable to market our products.
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<PAGE> 24
OUR BUSINESS WILL SUFFER IF OUR SOFTWARE CONTAINS ERRORS
The software products we offer are inherently complex. Despite testing and
quality control, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of our products after commencement of
commercial shipments. Significant technical challenges also arise with our
products because our customers purchase and deploy our products across a variety
of computer platforms and integrate it with a number of third-party software
applications and databases. If new or existing customers have difficulty
deploying our products or require significant amounts of customer support, our
operating margins could be harmed. Moreover, we could face possible claims and
higher development costs if our software contains undetected errors or if we
fail to meet our customers' expectations. As a result of the foregoing, we could
experience:
- loss of or delay in revenues and loss of market share;
- loss of customers;
- damage to our reputation;
- failure to achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
- legal actions by customers against us which could, whether or not
successful, increase costs and distract our management; and
- increased insurance costs.
In addition, a product liability claim, whether or not successful, could
harm our business by increasing our costs and distracting our management.
WE INCORPORATE SOFTWARE LICENSED FROM THIRD PARTIES INTO SOME OF OUR PRODUCTS
AND ANY SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OF THESE THIRD-PARTY
SOFTWARE PRODUCTS OR DEFECTS IN THESE PRODUCTS COULD REDUCE THE DEMAND FOR, OR
PREVENT THE SHIPPING OF, OUR PRODUCTS
Certain of our software products contain components developed and
maintained by third-party software vendors. We expect that we may have to
incorporate software from third-party vendors in our future products. We may not
be able to replace the functionality provided by the third-party software
currently offered with our products if that software becomes obsolete, defective
or incompatible with future versions of our products or is not adequately
maintained or updated. Any significant interruption in the availability of these
third-party software products or defects in these products could harm our sales
unless and until we can secure an alternative source. Although we believe there
are adequate alternate sources for the technology licensed to us, such alternate
sources may not provide us with the same functionality as that currently
provided to us.
NATURAL DISASTERS OR POWER OUTAGES COULD DISRUPT OUR BUSINESS
A substantial portion of our operations are located in California, and we
are subject to risks of damage and business disruptions resulting from
earthquakes, floods and similar events, as well as from power outages. We have
recently experienced limited and temporary power losses in our California
facilities due to power shortages, and we expect in the future to experience
additional power losses. While the impact to our business and operating results
has not been material, we cannot assure you that power losses will not adversely
affect our business in the future, or that the cost of acquiring sufficient
power to run our business will not increase significantly. Since we do not have
sufficient redundancy in our networking infrastructure, a natural disaster or
other unanticipated problem could have an adverse effect on our business,
including both our internal operations and our ability to communicate with our
customers or sell and deliver our products.
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<PAGE> 25
RISKS RELATED TO OUR INDUSTRY
THE DEMAND FOR OUR PRODUCTS WILL DEPEND ON OUR ABILITY TO ADAPT TO RAPID
TECHNOLOGICAL CHANGE
Our future success will depend on our ability to continue to enhance our
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and satisfy increasingly
sophisticated customer requirements. Rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer demands and evolving industry standards characterize the market for
our products. The introduction of products embodying new technologies and the
emergence of new industry standards can render our existing products obsolete
and unmarketable. As a result of the complexities inherent in today's computing
environments and the performance demanded by customers for embedded databases
and Web-based products, new products and product enhancements can require long
development and testing periods. As a result, significant delays in the general
availability of such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on our
business, operating results and financial condition. We may not be successful
in:
- developing and marketing, on a timely and cost-effective basis, new
products or new product enhancements that respond to technological
change, evolving industry standards or customer requirements;
- avoiding difficulties that could delay or prevent the successful
development, introduction or marketing of these products; or
- achieving market acceptance for our new products and product
enhancements.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN PERSONNEL
Our future success depends on the continued service of our executive
officers and other key administrative, sales and marketing and support
personnel, many of whom have recently joined our company. In addition, the
success of our business is substantially dependent on the services of our Chief
Executive Officer and our President and Chief Technical Officer. We intend to
hire a significant number of additional sales, support, marketing,
administrative and research and development personnel over at least the next 12
months. There has in the past been and there may in the future be a shortage of
personnel that possess the technical background necessary to sell, support and
develop our products effectively. Competition for skilled personnel is intense,
and we may not be able to attract, assimilate or retain highly qualified
personnel in the future. Our business may not be able to grow if we cannot
attract qualified personnel. Hiring qualified sales, marketing, administrative,
research and development and customer support personnel, is very competitive in
our industry, particularly in Southern California, where Quest is headquartered.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY HEDGING INSTRUMENTS
We transact business in various foreign currencies. Accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
This exposure is primarily related to revenues and operating expenses in
Australia, the United Kingdom and Germany denominated in the respective local
currency. To date, we have not used hedging contracts to hedge our
foreign-currency fluctuation risks. We will assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis. We also do not use
derivative financial instruments for speculative trading purposes.
INTEREST RATE RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We place our investments with
high-quality issuers and, by policy, limit the amount of credit exposure to any
one issuer. Our investments in marketable securities consist primarily of
high-grade corporate and government securities with maturities of
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<PAGE> 26
less than two years. Investments purchased with an original maturity of three
months or less are considered to be cash equivalents. We classify all of our
investments as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. At December 31, 2000, the net gain on
available-for-sale securities of $132,000 comprises 48 positions, of which 41
positions have unrealized gains and seven positions have unrealized losses.
The following table provides information about our investment portfolio at
December 31, 2000. For investment securities, the table presents principal cash
flows and related weighted average interest rates by expected maturity dates
(dollars in thousands).
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 25,155
Average interest rate....................................... 4.63%
Short-term marketable securities, available-for-sale........ $ 8,587
Average interest rate....................................... 6.72%
Long-term marketable securities, available-for-sale
(maturing in 2001)........................................ $118,084
Average interest rate....................................... 6.97%
Total portfolio............................................. $151,826
Average interest rate....................................... 6.57%
</TABLE>
We consider the carrying value of our investment securities to approximate
their fair value due to the relatively short period of time between origination
of the investments and their expected realization. Accordingly, changes in the
market interest rate would not have a material effect on the fair value of such
investments.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union introduced a new
currency, the euro, on January 1, 1999. The new currency is in response to the
European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange, and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the euro.
Our transactions are recorded in both U.S. dollars and foreign currencies.
Future transactions may be recorded in the euro. We have not incurred and do not
expect to incur any significant costs from the continued implementation of the
euro. However, the currency risk of the euro could harm our business.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included in Part IV,
Item 14 of this Form 10-K and are presented beginning on page F-1.
The following table sets forth certain unaudited quarterly financial data
for the fiscal years ended December 31, 1999 and 2000. This information has been
prepared on the same basis as the Consolidated Financial Statements and all
necessary adjustments have been included in the amounts stated below to present
fairly the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and Notes thereto. Historical quarterly
financial results and trends may not be indicative of future results.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $12,839 $15,450 $18,308 $24,271 $28,725 $36,654 $44,122 $56,085
Gross profit.......................... 11,251 13,896 16,420 22,108 25,563 32,431 39,093 49,197
Income (loss) before income tax
provision........................... 1,632 641 902 2,495 (5,213) (1,868) (4,434) (6,757)
Net income (loss)..................... 943 31 272 1,561 (5,685) (4,409) (6,259) (8,724)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net income (loss)
per share........................... $ 0.01 $ 0.00 $ 0.00 $ 0.02 $ (0.07) $ (0.05) $ (0.07) $ (0.10)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors as required by this item will
be included in the Company's definitive proxy statement, to be delivered to
shareholders in connection with the Company's 2001 annual meeting. Such
information is incorporated herein by reference.
Information with respect to executive officers may be found in Part I, Item
1, under the heading "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be included in the section captioned
"Executive Compensation" appearing in the Company's definitive proxy statement,
to be delivered to shareholders in connection with the Company's 2001 annual
meeting of shareholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be included in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the Company's definitive proxy statement, to be delivered to shareholders in
connection with the Company's 2001 annual meeting of shareholders. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item will be included in the section captioned
"Related Party Transactions" appearing in the Company's definitive proxy
statement, to be delivered to shareholders in connection with the Company's 2001
annual meeting of shareholders. Such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
2. Financial Statement Schedules
The following financial statement schedule should be read in conjunction
with the consolidated financial statements of Quest Software, Inc. filed as part
of this Report:
- Schedule II -- Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since they are
either not required or not applicable or because the information required is
included in the consolidated financial statements included elsewhere herein or
the notes thereto.
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3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
3.1* Second Amended and Restated Articles of Incorporation.
3.2** Second Amended and Restated Bylaws, as amended.
3.3*** Certificate of Amendment of Second Amended and Restated
Articles of Incorporation.
4.1* Form of Registrant's Specimen Common Stock Certificate.
10.1*++ Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2*++ Registrant's 1999 Stock Incentive Plan.
10.3*++ Registrant's 1999 Employee Stock Purchase Plan.
10.4* Form of Directors' and Officers' Indemnification Agreement.
10.5*+ Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.6*+ OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
10.7* Office Space Lease dated as of June 17, 1999 between The
Irvine Company and Quest Software, Inc.
10.8** Office Lease between The Northwestern Mutual Life Insurance
Company (Landlord) and Quest Software, Inc. (Tenant) dated
as of September 30, 1999.
10.9***+ Inxight/Resolute Software: Software Distribution and License
Agreement -- Inxight Technology dated September 30, 1998
between Resolute Software, Inc. and Inxight Software, Inc.
10.10 Office lease, dated June 2000, between Fund VIII and Fund IX
Associates and Quest Software, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
- ---------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1 and all amendments thereto (File No. 333-80543).
** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 and all amendments thereto (File No. 333-30816).
*** Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2000.
+ Confidential treatment requested and received as to certain portions of
this agreement.
++ Indicates a management contract or compensatory arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Quest Software, Inc. during the
quarter ended December 31, 2000.
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUEST SOFTWARE, INC.
Dated: March 30, 2001 By: /s/ DAVID M. DOYLE
------------------------------------
David M. Doyle
President and Secretary
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ VINCENT C. SMITH Chief Executive Officer March 30, 2001
- ----------------------------------------------------- (principal executive officer)
Vincent C. Smith and Chairman of the Board
/s/ DAVID M. DOYLE President, Secretary and March 30, 2001
- ----------------------------------------------------- Director
David M. Doyle
/s/ M. BRINKLEY MORSE Vice President, Finance and March 30, 2001
- ----------------------------------------------------- Operations
M. Brinkley Morse (principal financial officer)
/s/ KEVIN E. BROOKS Corporate Controller March 30, 2001
- ----------------------------------------------------- (principal accounting officer)
Kevin E. Brooks
/s/ DORAN G. MACHIN Director March 30, 2001
- -----------------------------------------------------
Doran G. Machin
/s/ JERRY MURDOCK, JR Director March 30, 2001
- -----------------------------------------------------
Jerry Murdock, Jr.
/s/ RAYMOND J. LANE Director March 30, 2001
- -----------------------------------------------------
Raymond J. Lane
</TABLE>
28
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Quest Software, Inc.
We have audited the accompanying consolidated balance sheets of Quest
Software, Inc. and subsidiaries (the Company) as of December 31, 1999 and 2000,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Quest Software, Inc. and its
subsidiaries at December 31, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
January 30, 2001
F-1
<PAGE> 32
QUEST SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 2000
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $39,643 $ 25,155
Short-term marketable securities.......................... 11,000 8,587
Accounts receivable, net.................................. 18,771 38,443
Prepaid expenses and other current assets................. 3,244 11,390
Income taxes receivable................................... -- 1,558
Deferred income taxes..................................... 2,089 14,833
------- --------
Total current assets.............................. 74,747 99,966
Property and equipment, net................................. 7,179 46,840
Long-term marketable securities............................. 4,484 118,084
Goodwill and purchased intangible assets, net............... 11,452 255,858
Deferred income taxes....................................... 415 3,001
Other assets................................................ 872 10,423
------- --------
Total assets...................................... $99,149 $534,172
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,436 $ 5,503
Accrued compensation...................................... 4,966 9,350
Other accrued expenses.................................... 7,062 22,491
Income taxes payable...................................... 2,030 --
Deferred revenue.......................................... 18,583 32,052
------- --------
Total current liabilities......................... 36,077 69,396
Long-term liabilities and other............................. 403 6,422
Commitment and contingencies (Note 9)
Shareholders' equity:
Preferred stock, no par value, 10,000 shares authorized;
no shares issued
or outstanding......................................... -- --
Common stock, no par value, 150,000 shares authorized;
77,810 and 86,710 shares issued and outstanding at
December 31, 1999 and 2000............................. 63,946 500,324
Retained earnings (deficit)............................... 1,864 (23,214)
Accumulated other comprehensive (loss) income............. (26) 132
Notes receivable from sale of common stock................ (3,115) (18,888)
------- --------
Total shareholders' equity........................ 62,669 458,354
------- --------
Total liabilities and shareholders' equity........ $99,149 $534,172
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 33
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Revenues:
Licenses.................................................. $24,901 $54,269 $126,767
Services.................................................. 9,889 16,599 38,820
------- ------- --------
Total revenues.................................... 34,790 70,868 165,587
Cost of revenues:
Licenses.................................................. 3,433 2,998 3,571
Services.................................................. 2,507 4,195 10,695
Amortization of purchased intangible assets............... -- -- 5,038
------- ------- --------
Total cost of revenues............................ 5,940 7,193 19,304
------- ------- --------
Gross profit................................................ 28,850 63,675 146,283
Operating expenses:
Sales and marketing....................................... 11,836 32,078 77,641
Research and development.................................. 8,047 15,980 39,747
General and administrative................................ 5,278 9,906 17,679
Other compensation costs and goodwill amortization........ -- 1,243 41,092
------- ------- --------
Total operating expenses.......................... 25,161 59,207 176,159
------- ------- --------
Income (loss) from operations............................... 3,689 4,468 (29,876)
Interest income............................................. 372 1,501 13,535
Other expense, net.......................................... (36) (299) (1,932)
------- ------- --------
Income (loss) before income tax provision................... 4,025 5,670 (18,273)
Income tax provision........................................ 1,679 2,273 6,805
------- ------- --------
Net income (loss)........................................... 2,346 3,397 (25,078)
Preferred stock dividends................................... -- 590 --
------- ------- --------
Net income (loss) applicable to common shareholders......... $ 2,346 $ 2,807 $(25,078)
======= ======= ========
Net income (loss) per common share:
Basic..................................................... $ 0.03 $ 0.04 $ (0.29)
======= ======= ========
Diluted................................................... $ 0.03 $ 0.03 $ (0.29)
======= ======= ========
Weighted-average common shares:
Basic..................................................... 88,522 75,354 85,332
Diluted................................................... 88,918 83,600 85,332
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 34
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
NOTES DISTRIBUTION
ACCUMULATED RECEIVABLE IN EXCESS OF
COMMON STOCK RETAINED OTHER AND ACCRUED BASIS IN TOTAL
------------------ EARNINGS COMPREHENSIVE INTEREST FROM COMMON SHAREHOLDERS'
SHARES AMOUNT (DEFICIT) INCOME (LOSS) SHAREHOLDERS STOCK EQUITY
------- -------- --------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998.......... 86,994 $ 3,425 $ 1,645 $ -- $ (2,234) $ -- $ 2,836
Issuance of common stock.......... 132 66 -- -- -- -- 66
Notes receivable from shareholder
for purchase of common stock.... 1,950 750 -- -- (750) -- --
Accrued interest receivable from
shareholders.................... -- -- -- -- (174) -- (174)
Net income........................ -- -- 2,346 -- -- -- 2,346
------- -------- -------- ---- -------- -------- --------
BALANCE, December 31, 1998........ 89,076 4,241 3,991 -- (3,158) -- 5,074
Exercise of stock options,
including tax benefit of $168... 68 201 -- -- -- -- 201
Payment of notes receivable from
shareholders for purchase of
common stock.................... -- -- -- -- 230 -- 230
Accrued interest receivable from
shareholders.................... -- -- -- -- (187) -- (187)
Repurchase of common stock........ (29,640) (2) (4,934) -- -- (30,064) (35,000)
Conversion of Series A Redeemable
Preferred Stock to common
stock........................... 8,000 15,000 -- -- -- -- 15,000
Issuance of common stock in the
initial public offering, net.... 10,120 64,856 -- -- -- -- 64,856
Compensation expense associated
with stock option grants........ -- 432 -- -- -- -- 432
Common stock issued for an
acquisition..................... 186 9,282 -- -- -- -- 9,282
Dividends on Series B Redeemable
Preferred Stock................. -- -- (590) -- -- -- (590)
Unrealized loss on
available-for-sale securities... -- -- -- (26) -- -- (26)
Reclassification of capital
distribution in excess of basis
in common stock................. -- (30,064) -- -- -- 30,064 --
Net income........................ -- -- 3,397 -- -- -- 3,397
--------
Comprehensive income.............. -- -- -- -- -- -- 3,371
------- -------- -------- ---- -------- -------- --------
BALANCE, December 31, 1999........ 77,810 63,946 1,864 (26) (3,115) -- 62,669
Exercise of stock options,
including tax benefit of
$28,786......................... 2,493 33,151 -- -- -- -- 33,151
Notes receivable and accrued
interest from shareholders for
purchase of common stock........ 339 15,773 -- -- (15,773) -- --
Repurchase of common stock........ (1,718) (57,964) -- -- -- -- (57,964)
Issuance of common stock in the
secondary public offering,
net............................. 3,808 253,469 -- -- -- -- 253,469
Common stock issued for employee
stock purchase plan............. 288 3,438 -- -- -- -- 3,438
Compensation expense associated
with stock option grants........ -- 3,441 -- -- -- -- 3,441
Common stock issued for
acquisitions.................... 3,690 185,070 -- -- -- -- 185,070
Unrealized gain on
available-for-sale securities... -- -- 158 -- -- 158
Net loss.......................... -- -- (25,078) -- -- -- (25,078)
--------
Comprehensive loss................ -- -- -- -- -- -- (24,920)
------- -------- -------- ---- -------- -------- --------
BALANCE, December 31, 2000........ 86,710 $500,324 $(23,214) $132 $(18,888) $ -- $458,354
======= ======== ======== ==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 35
QUEST SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 2,346 $ 3,397 $ (25,078)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,893 2,107 47,246
Compensation expense associated with stock option
grants................................................. -- 432 3,441
Accrued interest receivable from shareholders........... (174) (187) (611)
Deferred income taxes................................... (643) (1,667) (19,404)
Provision for bad debts................................. 319 352 457
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................... (2,947) (11,793) (17,841)
Income taxes receivable............................... 122 -- --
Prepaid expenses and other current assets............. (620) (2,527) (6,860)
Other assets.......................................... 5 (288) (660)
Accounts payable...................................... 941 1,974 942
Accrued compensation.................................. 1,162 2,544 3,828
Other accrued expenses................................ 1,141 5,366 4,403
Income taxes payable.................................. -- 2,218 25,227
Deferred revenue...................................... 4,636 9,449 11,359
Other liabilities..................................... -- -- (561)
------- -------- ---------
Net cash provided by operating activities............. 8,181 11,377 25,888
Cash flows from investing activities:
Purchases of property and equipment....................... (1,231) (7,143) (39,167)
Purchases of software licenses............................ (57) (350) (1,265)
Cash paid for acquisitions, net of cash acquired.......... -- (1,094) (82,138)
Purchases of equity investments........................... -- -- (8,166)
Purchases of marketable securities........................ -- (15,510) (293,852)
Sales and maturities of marketable securities............. -- -- 182,824
------- -------- ---------
Net cash used in investing activities................. (1,288) (24,097) (241,764)
Cash flows from financing activities:
Proceeds from note payable................................ -- 10,000 --
Repayment of notes payable................................ -- (10,918) (1,939)
Repayment of capital lease obligations.................... -- (36) (867)
Proceeds from issuance of preferred stock................. -- 25,000 --
Redemption of Series B Redeemable Preferred Stock......... -- (10,000) --
Repurchase of common stock................................ -- (35,000) (57,353)
Net proceeds from the sale of common stock................ -- 64,856 253,469
Proceeds from the exercise of stock options............... -- 33 4,365
Proceeds from employee stock purchase plan................ -- -- 3,438
Repayment of note payable to related party................ (8) (8) --
Payment on notes receivable from shareholders for purchase
of common stock......................................... -- 230 --
Cash dividend paid on Series B Redeemable Preferred
Stock................................................... -- (590) --
------- -------- ---------
Net cash (used in) provided by financing activities... (8) 43,567 201,113
Effect of exchange rate changes on cash and cash
equivalents............................................... -- (185) 275
------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ $ 6,885 $ 30,662 $ (14,488)
Cash and cash equivalents, beginning of period.............. 2,096 8,981 39,643
------- -------- ---------
Cash and cash equivalents, end of period.................... $ 8,981 $ 39,643 $ 25,155
======= ======== =========
Supplemental disclosure of consolidated cash flow
information:
Cash paid for interest.................................... $ 5 $ 240 $ 32
======= ======== =========
Cash paid (received) for income taxes..................... $ 2,054 $ 1,874 $ (59)
======= ======== =========
Supplemental schedule of noncash investing and financing
activities:
Note receivable from shareholders for purchase of common
stock................................................... $ 750 $ 15,773
======= =========
Conversion of Series A Redeemable Preferred Stock to
Common Stock............................................ $ 15,000
========
Tax benefit related to stock option exercises............. $ 168 $ 28,786
======== =========
Unrealized (loss) gain on available-for-sale securities... $ (26) $ 158
======== =========
</TABLE>
See Note 2 for details of assets acquired and liabilities assumed in purchase
transactions.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 36
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation -- Quest Software, Inc., a
California corporation (the Parent) and its subsidiaries (collectively the
Company) provide application and information availability software solutions
that enhance the performance and reliability of an organization's e-business,
packaged and custom applications, and enable the delivery of information across
the entire enterprise. The Company also provides consulting, training, and
support services to its customers. The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States and include the accounts of the Parent and its
wholly owned subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
Stock Split -- On March 9, 2000, the Company's Board of Directors approved
a 2-for-1 stock split of the Company's common stock. All share, per share and
conversion amounts relating to common stock, preferred stock, and stock options
included in the accompanying consolidated financial statements and footnotes
have been restated to reflect the effect of such stock split for all periods
presented.
Foreign Currency Translation -- In accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the United
States dollar is considered to be the functional currency for the Company's
foreign subsidiaries, as such subsidiaries act as sales offices for the Parent.
The Company translates assets and liabilities related to its foreign sales to
U.S. Dollars at rates of exchange in effect at the end of the year. Revenues and
expenses are translated at the average rates of exchange for the year.
Therefore, gains or losses from translation adjustments are included in other
income in the Company's consolidated statements of operations. Translation
adjustments were not material for the years ended December 31, 1998, 1999 and
2000.
Fair Value of Financial Instruments -- The Company's consolidated balance
sheets include the following financial instruments: cash and marketable
securities, accounts receivable, investments, accounts payable, and accrued
liabilities. The Company considers the carrying value of all financial
instruments in the consolidated financial statements to approximate fair value
because of the relatively short period of time between origination of the
instruments and their expected realization, or because they are carried at fair
value.
Cash and Cash Equivalents -- Cash equivalents include short-term, highly
liquid investments with original maturities of three months or less. Interest
income, included in other income in the accompanying consolidated statements of
operations, was, $372,000, $1.5 million and $13.5 million for the years ended
December 31, 1998, 1999 and 2000, respectively.
Concentration of Credit Risk -- Financial instruments that potentially
expose the Company to credit risk include cash and cash equivalents, investments
and accounts receivable. The Company invests cash and cash equivalents through
high-credit quality financial institutions. The Company performs periodic
valuations of the relative credit standing of these financial institutions and
limits the amount of its credit exposure with any one institution. At December
31, 2000, the Company's cash and cash equivalents were principally invested with
three major financial institutions. Trade receivables potentially subject the
Company to concentrations of credit risk. The Company closely monitors
extensions of credit and has not experienced significant credit losses in the
past. The Company maintains reserves for potential credit losses and sales
returns and such reserves have historically been within management's
expectations. No single customer accounted for 10% or more of total revenues in
1998, 1999 or 2000.
Investments -- The Company has classified all debt securities with original
maturities of greater than three months as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity net of
applicable income taxes. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income. The cost basis for realized gains and losses on available-for-sale
securities is determined on a specific identification basis. The Company has
classified available-for-sale securities as current or long-term based primarily
on the maturity date of the related securities.
F-6
<PAGE> 37
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also has certain other minority equity investments in
non-publicly traded companies. These investments are included in other assets on
the Company's consolidated balance sheet at December 31, 2000 and are carried at
cost. The Company monitors these investments for impairment and has concluded
that no impairment exists at December 31, 2000.
The following table summarizes the Company's investments (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 2000
Euro dollar bonds..................................... $ 32,904 $ 49 $ -- $ 32,953
Asset-backed securities (semi-annual)................. 4,489 1 -- 4,490
Medium and short-term notes........................... 12,445 26 -- 12,471
Asset-backed securities (monthly)..................... 6,812 9 -- 6,821
Corporate bonds....................................... 59,643 110 -- 59,753
Commercial paper...................................... 5,158 -- -- 5,158
U.S. government agencies -- coupon.................... 5,000 25 -- 5,025
-------- ---- ---- --------
Total....................................... $126,451 $220 $ -- $126,671
======== ==== ==== ========
Reported As:
Short-term marketable securities......................................................... $ 8,587
Long-term marketable securities.......................................................... 118,084
--------
Total............................................................................ $126,671
========
DECEMBER 31, 1999
Tax free auction securities........................... $ 8,900 $ -- $ -- $ 8,900
Municipal bonds....................................... 4,510 -- (26) 4,484
Tax advantaged auction securities..................... 1,500 -- -- 1,500
Fixed income.......................................... 600 -- -- 600
-------- ---- ---- --------
Total....................................... $ 15,510 $ -- $(26) $ 15,484
======== ==== ==== ========
Reported As:
Short-term marketable securities......................................................... $ 11,000
Long-term marketable securities.......................................................... 4,484
--------
Total............................................................................ $ 15,484
========
</TABLE>
Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not impairment to such value has
occurred. At December 31, 1999 and 2000, there was no impairment of long-lived
assets based on the Company's most recent analysis.
Property and Equipment -- Property and equipment are stated at cost, less
accumulated depreciation and amortization. Maintenance and repairs are expensed
as incurred. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives ranging from three to seven years.
Leasehold
F-7
<PAGE> 38
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
improvements are amortized over the shorter of the estimated useful lives of the
improvements or the term of the related lease. Repair and maintenance costs are
expensed as incurred.
Goodwill and Purchased Intangible Assets -- Goodwill arising from
acquisitions (Note 2) is recorded as the excess of the purchase price over the
fair value of assets acquired and amortized over a useful life of five years.
Accumulated goodwill amortization was $94,000 and $35.2 million at December 31,
1999 and 2000, respectively. Purchased intangible assets are recorded at the
appraised value of technology, workforce and customer lists acquired and
amortized using the straight-line method over estimated useful lives of three
years to six years. Accumulated amortization of purchased intangible assets was
at $5.9 million at December 31, 2000. The net carrying amount of goodwill and
purchased intangible assets was considered recoverable at December 31, 1999 and
2000, based on the undiscounted future cash flows expected to be realized from
continued sales of the related software products.
Other Assets -- Other assets include software licenses, prepaid royalties
and other long-term investments. Software licenses are recorded at cost and are
amortized over the shorter of the estimated useful lives of the related products
or the term of the license, generally three years.
Capital Distribution in Excess of Basis in Common Stock -- In connection
with the repurchase of common stock in April 1999 from a major shareholder (Note
4), the excess of the repurchase price over the original cost of the shares has
been recorded as a capital distribution in excess of the basis of the common
stock in the accompanying consolidated financial statements. The Company
reclassified the capital distribution in excess of basis in common stock against
common stock effective December 31, 1999.
Revenue Recognition -- The Company records revenue in accordance with
Financial Accounting Standards Board (FASB) Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended.
Software Licenses, Services, and Post-Contract Customer Support -- Revenues
from sales of software licenses, which generally do not contain multiple
elements, are recognized upon delivery of the related product if the
requirements of SOP 97-2, as amended, are met. If the requirements of SOP 97-2,
including evidence of an arrangement, customer acceptance, a fixed or
determinable fee, collectibility or vendor-specific objective evidence about the
value of an element are not met at the date of delivery, revenue recognition is
deferred until such items are known or resolved. Amounts recorded at December
31, 1999 and 2000 for deferred license revenue represent sales in which the
Company has received some payments but all of the requirements of SOP 97-2 have
not been met. Revenue from post-contract customer support is deferred and
recognized ratably over the term of the contract. Revenue from consulting and
training services are recognized as the services are performed.
Software Development Costs -- Costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs are capitalized in accordance with SFAS No. 86, Accounting for the Costs
of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the
Company believes that its current process for developing software is essentially
completed concurrently with the establishment of technical feasibility, no
software development costs have been capitalized as of December 31, 1999 and
2000.
Other Compensation Costs -- The Company records compensation expense for
options to purchase the Company's common stock granted at below fair market
value. The expense equals the difference between the fair market value of the
Company's common stock on the grant date and the exercise price of the stock
options and is recognized ratably over the vesting period of the stock options,
which is currently four to five years. The following table shows the allocation
to Cost of Services Revenues, Sales and Marketing, Research and
F-8
<PAGE> 39
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Development and General and Administrative expenses of such costs based on the
related headcount (in thousands):
<TABLE>
<CAPTION>
COMPENSATION
AS REPORTED EXPENSE TOTAL
----------- ------------ -------
<S> <C> <C> <C>
Year Ended December 31, 1999
Sales and marketing............................ $32,078 $ 389 $32,467
Research and development....................... 15,980 24 16,004
General and administrative..................... 9,906 19 9,925
Year Ended December 31, 2000
Cost of services revenues...................... $10,695 $ 214 $10,909
Sales and marketing............................ 77,641 1,229 78,870
Research and development....................... 39,747 1,739 41,486
General and administrative..................... 17,679 259 17,938
</TABLE>
There were no related compensation costs in 1998.
Advertising Expenses -- The Company expenses all advertising costs as
incurred, and such costs were $594,000, $1.0 million, and $1.8 million for the
years ended December 31, 1998, 1999 and 2000, respectively.
Income Taxes -- The Company accounts for its income taxes under the
provisions of SFAS No. 109, Accounting for Income Taxes. Deferred taxes on
income result from temporary differences between the reporting of income for
financial statements and tax reporting purposes. Measurement of the deferred
items is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the Company's
assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Net Income (Loss) Per Share -- The Company computes net income (loss) per
share in accordance with SFAS No. 128, Earnings per Share. Basic earnings (loss)
per share is computed by dividing net income (loss) available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings (loss) per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
in the weighted-average number of common shares outstanding for a period, if
dilutive. For the year ended December 31, 2000, all potential common stock
equivalents have been excluded from the computation of diluted net loss per
share because the effect would be anti-dilutive.
The table below sets forth the reconciliation of the denominator of the
earnings (loss) per share calculation (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Shares used in computing basic net income per share......... 88,522 75,354 85,332
Conversion of Series A Preferred Stock...................... -- 2,476 --
Dilutive effect of stock options............................ 396 5,770 --
------ ------ ------
Shares used in computing diluted net income per share....... 88,918 83,600 85,332
====== ====== ======
</TABLE>
F-9
<PAGE> 40
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The diluted shares for the year ended December 31, 2000 excludes 5.8
million incremental shares related to stock options. These shares are excluded
due to their antidilutive effect as a result of the Company's loss during 2000.
There were no antidilutive shares in 1998 or 1999.
The conversion of the Series A Preferred Stock into common stock reflects
the weighted average of such shares per SFAS No. 128.
Comprehensive Income (Loss) -- There was no difference between net income
and comprehensive net income for the year ended December 31, 1998. The
difference between net income (loss) and comprehensive net income (loss) was an
unrealized loss on available-for-sale securities of $26,000 for the year ended
December 31, 1999 and an unrealized gain on available-for-sale securities of
$158,000 for the year ended December 31, 2000.
Use of Estimates -- The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Risks and Uncertainties -- The Company is subject to risks and
uncertainties in the normal course of business, including customer acceptance of
its products, rapid technological changes, delays in introducing and market
acceptance of new products, competition, e-business developments, international
expansion, ability to attract and retain qualified personnel, ability to protect
its intellectual property, and other matters inherent in the software industry.
Reclassifications -- Certain prior year amounts have been reclassified in
order to conform with current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS:
In September 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended, is effective for
all fiscal years beginning after June 15, 2000, and establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
No. 133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative which would be required to be reported as
assets or liabilities and carried at fair value. The Company adopted SFAS No.
133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
On December 6, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB No. 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB No.
101 is effective for the fourth quarter in fiscal year 2000. The adoption of SAB
No. 101 did not have a material impact on the Company's financial statements, as
the Company believes its revenue recognition policies comply with SAB No. 101.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting
for Certain Transactions Involving Stock Compensation -- an interpretation of
APB Opinion No. 25. FIN 44 clarifies the definition of an employee for purposes
of applying Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, the criteria for determining whether a plan qualifies
as a noncompensatory plan, the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and the accounting for
an exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000 but certain conclusions in this
Interpretation cover specific events that
F-10
<PAGE> 41
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
occur after either December 15, 1998 or January 12, 2000. The provisions of FIN
44 change the accounting for an exchange of unvested employee stock options and
restricted stock awards in a purchase business combination. The new rules
require the intrinsic value of the unvested awards be allocated to deferred
compensation and recognized as non-cash compensation expense over the remaining
future vesting period. The adoption of FIN 44 did not have a material impact on
the Company's financial statements, other than the effect of the application of
FIN 44 as it relates to the Company's acquisitions as described in Note 2.
2. ACQUISITIONS
During 1999, the Company completed the acquisition of MBR Technologies,
Inc. for an aggregate purchase price of $10.8 million. The purchase price
consisted of stock valued at $9.3 million and cash of $1.3 million, and direct
acquisition costs were $112,000.
During 2000, the Company completed a total of eight acquisitions for an
aggregate purchase price of $270.3 million. The aggregate purchase price
consisted of stock valued at $182.6 million and cash of $85.3 million, and
direct acquisition costs of $2.4 million. The Company excluded from the purchase
prices the aggregate intrinsic value of unvested stock options of $5.3 million,
which has been allocated to deferred compensation and will be recognized as
non-cash compensation expense over the remaining future vesting period of two
and one-half years. The Company, acting as escrow agent, has withheld an
aggregate of $2.3 million in cash for indemnification obligations of the former
principal shareholders of certain of the companies acquired.
Significant acquisitions in 2000 were of Foglight Software, Inc.
(Foglight), acquired on January 7, 2000, and FastLane Technologies, Inc.
(FastLane), acquired on September 11, 2000. Foglight was acquired in exchange
for 2.4 million shares of the Company's common stock valued at $101.8 million,
cash payments of approximately $500,000 (including $400,000 in direct
acquisition costs) and the assumption of unvested Foglight stock options valued
at $2.2 million. FastLane was acquired in exchange for 1.1 million shares of the
Company's common stock valued at $63.1 million, cash payments of $34.1 million
(including $600,000 in direct acquisition costs) and the assumption of FastLane
stock options valued at $7.3 million (excluding intrinsic value of unvested
options of $5.3 million).
The acquisitions in 1999 and 2000 were accounted as purchase business
combinations, and the results of each acquisitions' operations are included in
the Company's consolidated statements of operations from the date of
acquisition. The purchase prices of these acquisitions were allocated as follows
(in thousands):
<TABLE>
<CAPTION>
TOTAL
CURRENT FIXED ASSETS OTHER ASSUMED DEFERRED PURCHASE
ASSETS AND OTHER GOODWILL INTANGIBLES LIABILITIES TAXES PRICE
------- ------------ -------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
MBR Technologies, Inc................... $ 308 $ 123 $ 11,534 $ -- $ (1,554) $ 339 $ 10,750
====== ====== ======== ======= ======== ======= ========
Year Ended December 31, 2000
Foglight Software, Inc.................. $ 637 $ 893 $ 99,285 $ 5,860 $ (5,728) $ 3,542 $104,489
FastLane Technologies, Inc.............. 3,781 1,672 102,673 12,477 (10,639) (5,469) 104,495
Others.................................. 2,733 377 58,065 7,067 (4,345) (2,546) 61,351
------ ------ -------- ------- -------- ------- --------
$7,151 $2,942 $260,023 $25,404 $(20,712) $(4,473) $270,335
====== ====== ======== ======= ======== ======= ========
</TABLE>
F-11
<PAGE> 42
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The results of operations of the acquired companies are included in the
consolidated financial statements from the dates of acquisition. The pro forma
statement of operations data below assumes that each of the companies had been
acquired at the beginning of fiscal 1999. This pro forma data includes
amortization of goodwill and identified intangibles from that date. This pro
forma data is presented for informational purposes only, and is not necessarily
indicative of the results of future operations or the results that would have
been achieved had the acquisitions taken place at the beginning of fiscal 1999
(in thousands):
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues.................................................... $ 82,558 $175,419
Net loss.................................................... (55,430) (56,227)
Net loss per share -- basic and diluted..................... $ (0.70) $ (0.66)
</TABLE>
The Company has entered into performance agreements with certain former
shareholders of companies acquired whereby the Company is required to pay these
individuals up to 3% of net sales of the acquired company's products over
periods of up to three years from the date of acquisition, provided they are
still employed by the Company. To date, expenses related to these agreements
have not been material.
3. PROPERTY AND EQUIPMENT
Net property and equipment consist of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Furniture and fixtures...................................... $ 2,262 $ 6,911
Machinery and equipment..................................... 758 26,576
Computer equipment.......................................... 5,311 15,085
Computer software........................................... 692 3,823
Leasehold improvements...................................... 407 2,161
------- -------
9,430 54,556
Less accumulated depreciation and amortization.............. (2,251) (7,716)
------- -------
Property and equipment, net................................. $ 7,179 $46,840
======= =======
</TABLE>
4. RELATED-PARTY TRANSACTIONS
During 1997, the Company received a full recourse note receivable from an
officer of the Company for the purchase of 7.8 million shares of the Company's
common stock at $0.28 per share. The note receivable plus accrued interest is
due April 2002 and bears interest at 6.2%. The note receivable and accrued
interest is secured by the common stock.
During 1998, the Company received a full-recourse note receivable from
another officer of the Company for the purchase of 1.9 million shares of the
Company's common stock at $0.39 per share. The note receivable plus accrued
interest is due April 2003 and bears interest at 5.7%. Up to 25% of the unpaid
principal and accrued interest may be repaid in each year during the four-year
term of the note. The Company has the option to repurchase any shares at the
original issuance price associated with the unpaid principal balance if the
officer ceases to be employed by the Company. All of the outstanding unpaid
principal and interest may be prepaid at any time when the current Chief
Executive Officer of the Company ceases to be employed or immediately prior to a
sale of substantially all of the assets of the Company or a merger in which the
Company is not the surviving entity. The note receivable and accrued interest is
secured by the common stock and is deemed fully collectible at December 31,
2000.
F-12
<PAGE> 43
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In April 1999, the Company repurchased and cancelled 29.6 million shares of
common stock from a shareholder of the Company at a price of $1.18 per share.
The Company also entered into a severance agreement with the shareholder whereby
the shareholder will receive $200,000 per year through 2001 and provides for use
of a company car and related expenses and medical benefits. The Company recorded
approximately $700,000 of expense related to the agreement in April 1999, which
is included in compensation and other costs in the accompanying consolidated
financial statements.
In August 2000, the Company received a full-recourse note receivable from
an officer of the Company for the purchase of 339,000 shares of the Company's
common stock at $46.50 per share. The note receivable plus accrued interest is
due August 2007 and bears interest at 6.33% per annum. The note receivable and
accrued interest is secured by the common stock and is deemed fully collectible
at December 31, 2000.
5. LONG-TERM DEBT
In connection with the repurchase of common stock from a shareholder in
April 1999 (Note 4), the Company borrowed $10.0 million under a term note with a
bank. The Company repaid the note after its initial public offering in August
1999.
In conjunction with an acquisition, the Company assumed a $4.4 million
zero-interest loan related to a research and development funding arrangement
with the Province of Nova Scotia. The Company has imputed interest on the loan
of $1.2 million, which will be amortized to interest expense over the term of
the loan. The repayments have been fixed at $1.2 million in each of July 2001,
2002 and 2003, with the balance repayable in 2004.
6. INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------ ------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $1,819 $ 2,763 $ 21,434
State............................................... 425 402 4,516
Foreign............................................. 78 808 109
------ ------- --------
2,322 3,973 26,059
Deferred:
Federal............................................. (568) (1,391) (15,080)
State............................................... (75) (309) (4,277)
Foreign............................................. (165) (122) 103
------ ------- --------
(808) (1,822) (19,254)
Change in valuation allowance....................... 165 122 --
------ ------- --------
Total income tax provision.................. $1,679 $ 2,273 $ 6,805
====== ======= ========
</TABLE>
F-13
<PAGE> 44
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of the U.S. federal statutory rate to the effective
income tax rate for the years ended December 31, 1998, 1999 and 2000, is as
follows:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
Tax provision (benefit) at U.S. federal statutory rates..... 35.0% 35.0% (35.0)%
State taxes................................................. 5.7 1.1 0.8
Amortization................................................ -- 0.6 67.6
Foreign taxes and foreign losses without tax benefit........ 6.0 8.3 8.1
Research and development credits............................ (4.6) (4.7) (5.6)
Other....................................................... (0.4) (0.2) 1.3
---- ---- -----
41.7% 40.1% 37.2%
==== ==== =====
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes as of December 31, 1999 and 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 2000
------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable and sales returns reserves............ $ 871 $ 1,709
Accrued liabilities....................................... 892 1,884
Foreign net operating loss carryforwards.................. 127 10,136
U.S. net operating loss carryforwards..................... 339 9,330
Intangibles............................................... 453 --
Stock compensation........................................ 184 1,655
Tax credits............................................... -- 5,306
Deferred revenue.......................................... -- 11,313
Other..................................................... -- 313
------- --------
Total gross deferred assets................................. 2,866 41,646
Deferred tax liabilities:
Cash to accrual adjustment................................ (150) --
Intangibles............................................... -- (7,853)
State taxes............................................... (47) (1,961)
Fixed assets.............................................. (38) (323)
------- --------
Total gross deferred liabilities............................ (235) (10,137)
Valuation allowance......................................... (127) (13,675)
------- --------
Net deferred income taxes................................... $ 2,504 $ 17,834
Less current portion........................................ (2,089) (14,833)
------- --------
$ 415 $ 3,001
======= ========
</TABLE>
At December 31, 2000, the Company has recorded a valuation allowance of
$13.7 million on its deferred tax assets. Based on the weight of available
evidence, the Company believes that it is more likely than not that these
deferred tax assets will not be realized. Approximately $8.9 million of the
change in the Company's valuation allowance relates to acquired deferred tax
assets. If these acquired deferred tax assets are realized in the future, the
tax benefit will be credited to goodwill. In addition, approximately $3.4
million of the change in valuation allowance relates to net operating losses
from stock option exercises. If these deferred tax assets are realized in the
future, the tax benefit will be credited to stockholder's equity.
F-14
<PAGE> 45
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2000 the Company has federal, state, and foreign net
operating loss carryforwards of $19.0 million, $32.0 million, and $23.0 million
which begin to expire in 2018, 2005, and 2002, respectively. Approximately $12.7
million of the federal and $12.0 million of the state net operating loss
carryforwards relate to acquired companies and are subject to limitations on
their utilization.
At December 31, 2000 the Company had federal and state tax credit
carryforwards of $3.2 million and $1.7 million, respectively, which begin to
expire in 2018.
Tax benefits associated with the exercise of stock options of $200,000 and
$28.8 million in 1999 and 2000 respectively, were credited to shareholders'
equity.
Undistributed earnings of the Company's foreign subsidiaries were
immaterial as of December 31, 2000. Those earnings are considered to be
permanently reinvested. Accordingly, no provision for U.S. federal or state
income tax has been provided thereon.
7. SHAREHOLDERS' EQUITY
In April 1999, the Company issued 2.7 million shares of Series A Preferred
Stock for $15.0 million, and 1.8 million shares of Series B Redeemable Preferred
Stock for $10.0 million. In connection with the Company's initial public
offering in August 1999, all outstanding shares of Series A Preferred Stock were
converted into 8.0 million shares of common stock and all outstanding shares of
the Series B Redeemable Preferred Stock shares were redeemed for $10.0 million
plus dividends of $590,000.
In August 1999, the Company completed an initial public offering of 8.8
million shares of its common stock. The Company received net proceeds of $64.9
million after deducting underwriting and offering expenses.
In March 2000, the Company and certain selling shareholders sold 8.4
million shares of its common stock as part of a secondary offering. Of the
shares sold in the offering, 3.8 million shares were sold by the Company and 4.6
million shares were sold by selling shareholders. The Company's net proceeds
from its sale of stock were $253.5 million, after underwriting and offering
expenses. The Company did not receive any proceeds from the shares sold by
selling shareholders.
In December 2000, the Board or Directors authorized a stock repurchase
program under which the Company may purchase up to 2 million shares of its
common stock. Under the repurchase program, the Company may purchases shares
from time to time at varying prices in open market or private transactions. As
of December 31, 2000, the Company had repurchased 1.7 million shares for
approximately $57.4 million. During 2000, the Company also repurchased
approximately 1,000 shares issued to former shareholders of an acquisition for
approximately $600,000. All shares repurchased have been cancelled and returned
to the status of authorized and unissued.
8. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
The Company's stock option plans provide for the issuance of stock options
to employees, directors and consultants of the Company. The options are
generally granted at the fair market value of the Company's common stock at the
grant date, expire ten years from the date of grant, and ratably vest over a
four- to five-year period. As of December 31, 2000, the Company has authorized
17.5 million shares for issuance under the plans, of which 4.6 million are
available for future grant.
F-15
<PAGE> 46
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has chosen to continue to account for its stock-based compensation plans
under APB Opinion No. 25 and provide the expanded disclosures specified in SFAS
No. 123. Had compensation cost been determined using the provisions of SFAS No.
123, the Company's net income (loss) available to common shareholders would have
been adjusted to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999 2000
------ ------ --------
<S> <C> <C> <C>
Net income (loss) available to common shareholders:
As reported.......................................... $2,346 $2,807 $(25,078)
====== ====== ========
Pro forma............................................ $2,177 $ 202 $(47,691)
====== ====== ========
Basic net income (loss) per share:
As reported.......................................... $ 0.03 $ 0.04 $ (0.29)
====== ====== ========
Pro forma............................................ $ 0.02 $ 0.00 $ (0.56)
====== ====== ========
Diluted net income (loss) per share:
As reported.......................................... $ 0.03 $ 0.03 $ (0.29)
====== ====== ========
Pro forma............................................ $ 0.02 $ 0.00 $ (0.56)
====== ====== ========
</TABLE>
For purposes of estimating the compensation cost of the Company's option
grants in accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following weighted-average assumptions used for grants in 1998 as a
private company: expected volatility of zero; risk-free interest rate of 6%; and
expected lives of ten years. Weighted-average assumptions for 1999 were:
expected volatility of 221%; risk-free interest rates of 6%; and expected lives
of five years. Weighted-average assumptions for 2000 were: expected volatility
of 122%; risk-free interest rates of 6%; and expected lives of five years.
A summary of the status of the Company's stock option plans as of December
31, 1998, 1999 and 2000, and changes during the years ending on those dates is
presented below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1999 2000
------------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period.................. 1,950 $0.39 6,734 $0.60 10,512 $ 3.44
Granted................... 6,766 $0.60 4,782 $7.03 4,142 $29.42
Exercised................. -- $ -- (68) $0.50 (2,493) $ 1.81
Canceled.................. (1,982) $0.39 (936) $1.60 (1,520) $13.03
------ ------ ------
Balance, end of period.... 6,734 $0.60 10,512 $3.44 10,641 $12.56
====== ===== ====== ===== ====== ======
Exercisable, end of
period.................. -- $ -- 1,406 $1.03 1,684 $ 4.13
====== ===== ====== ===== ====== ======
Weighted-average fair
value of options granted
during the year......... $0.27 $6.71 $30.90
===== ===== ======
</TABLE>
Certain of the options to purchase the Company's common stock have been
granted at below fair market value. Included in compensation and other costs in
the accompanying consolidated financial statements is $3.4 million of expense
recorded during the year ended December 31, 2000 associated with such option
grants. The expense equals the difference between the fair market value of the
Company's common stock on the grant date and the exercise price of the stock
options, and is recognized ratably over the vesting period of the stock options,
which is currently four to five years. The Company will record future
compensation expense of
F-16
<PAGE> 47
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$12.7 million relating to these options granted during the years ended December
31, 1999 and 2000, to purchase 1.7 million shares of common stock.
The following tables summarizes information about stock options outstanding
at December 31, 2000 (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50 - 0.50 2,851 7.49 $ 0.50 849 $ 0.50
$ 0.59 - 0.97 792 7.76 $ 0.59 195 $ 0.59
$ 1.19 - 1.19 1,231 7.81 $ 1.19 257 $ 1.19
$ 1.89 - 5.17 1,114 8.43 $ 2.71 140 $ 2.35
$ 6.00 - 25.38 1,447 8.91 $18.15 132 $12.83
$26.50 - 26.50 1,856 9.28 $26.50 -- $ --
$27.00 - 42.00 1,062 9.32 $35.85 110 $37.61
$46.50 - 53.63 288 9.61 $47.73 1 $53.42
------ -----
10,641 $12.56 1,684 $ 4.13
====== ====== ===== ======
</TABLE>
Options to purchase 214,000 shares of common stock at exercise prices of
$0.50 to $25.38 per share were exercised in January 2001.
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1999 Employee Stock Purchase Plan, the Company is
authorized to issues up to 1.2 million shares of common stock to eligible
employees and the employees of participating subsidiaries. Individuals who are
scheduled to work more than 20 hours per week for more than five calendar months
per year are eligible to participate in the plan. A participant may contribute
up to 15% of their cash earnings, and the accumulated payroll deductions will be
applied to the purchase of shares on semi-annual purchase dates. The purchase
price per share will be equal to 85% the fair market value of the common stock
on the start date of the purchase period or, if lower, the fair market value on
the semi-annual purchase date. Semi-annual purchase dates will occur on the last
business day of January and July each year.
At December 31, 2000, 1.2 million shares of common stock were reserved for
issuance. In January 2000, 238,000 shares of common stock were purchased under
the plan at $5.95 per share, and 50,000 shares of common stock were purchased
under the plan in July 2000 at $40.42 per share. At December 31, 2000, $2.9
million was recorded in accrued liabilities that employees had deposited for
purchases of common stock under the plan for the current offering period, which
expires on January 31, 2001.
EMPLOYEE 401(K) PLAN
The Company sponsors the Quest Software, Inc. 401(k) Plan (the Plan)
covering substantially all employees. As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Employees may contribute from 1% to 15% of their annual
compensation to the Plan, limited to a maximum annual amount as set periodically
by the Internal Revenue Service. The Plan provides for discretionary
contributions as determined by the Board of Directors. Such contributions to the
Plan are allocated among eligible participants in the proportion of their
salaries to the total salaries of all participants. Participant contributions
vest immediately. Discretionary contributions made by the Company vest over a
three-year period. The Company's discretionary contributions to the Plan totaled
$466,000, $929,000 and $1.0 million for the years ended December 31, 1998, 1999
and 2000.
F-17
<PAGE> 48
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
various operating leases. A majority of these leases are non-cancelable and
obligate the Company to pay costs of maintenance, utilities, and applicable
taxes. The leases on most of the office facilities contain escalation clauses
and renewal options. Total rent expense was $1,038, $2,593 and $6,453, for the
years ending December 31, 1998, 1999, and 2000.
Minimum lease commitments under non-cancelable operating leases as of
December 31, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
2001............................................... $ 7,864
2002............................................... 7,388
2003............................................... 6,605
2004............................................... 4,991
2005............................................... 4,495
Thereafter......................................... 3,683
-------
$35,026
=======
</TABLE>
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of such claims and legal actions may
adversely affect the Company. However, it is the opinion of management that the
ultimate disposition of these matters will not materially affect the Company's
results of operations or financial position.
10. GEOGRAPHIC AND SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
The Company's reportable operating segments include Licenses and Services.
The Software Licenses operating segment develops and markets the Company's
software products. The Services segment provides after-sale support for software
products, and fee-based training and consulting services related to the
Company's products.
The Company does not separately allocate operating expenses to these
segments, nor does it allocate specific assets to these segments. Therefore,
segment information reported includes only revenues, cost of sales and gross
profit, as this information and the geographic information described below is
the only separate segment information provided to the chief operating
decision-maker.
F-18
<PAGE> 49
QUEST SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating segment data for the three years in the period ended December 31,
2000, was as follows (in thousands):
<TABLE>
<CAPTION>
LICENSES SERVICES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1998:
Revenues.................................................. $ 24,901 $ 9,889 $ 34,790
Cost of revenues.......................................... 3,433 2,507 5,940
-------- ------- --------
Gross profit...................................... $ 21,468 $ 7,382 $ 28,850
======== ======= ========
Year ended December 31, 1999:
Revenues.................................................. $ 54,269 $16,599 $ 70,868
Cost of revenues.......................................... 2,998 4,195 7,193
-------- ------- --------
Gross profit...................................... $ 51,271 $12,404 $ 63,675
======== ======= ========
Year ended December 31, 2000:
Revenues.................................................. $126,767 $38,820 $165,587
Cost of revenues.......................................... 8,609 10,695 19,304
-------- ------- --------
Gross profit...................................... $118,158 $28,125 $146,283
======== ======= ========
</TABLE>
Revenues are attributed to geographic areas based on the location of the
entity to which the products or services were sold. Revenues, gross profit,
income (loss) from operations and long-lived assets concerning principal
geographic areas in which the Company operates are as follows (in thousands):
<TABLE>
<CAPTION>
NORTH OTHER
AMERICA(1) EUROPE INTERNATIONAL TOTAL
---------- ------- ------------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues..................................... $ 32,090 $ 2,349 $ 351 $ 34,790
Gross profit................................. 26,495 2,120 235 28,850
Income (loss) from operations................ 3,737 (435) 387 3,689
Long-lived assets............................ 1,073 128 187 1,388
Year ended December 31, 1999:
Revenues..................................... $ 55,532 $13,213 $ 2,123 $ 70,868
Gross profit................................. 55,389 6,862 1,424 63,675
Income from operations....................... 3,270 498 700 4,468
Long-lived assets............................ 17,682 411 538 18,631
Year ended December 31, 2000:
Revenues..................................... $136,847 $25,901 $ 2,839 $165,587
Gross profit................................. 132,195 13,732 356 146,283
Loss from operations......................... (20,070) (264) (9,542) (29,876)
Long-lived assets............................ 302,120 1,202 1,360 304,682
</TABLE>
- ---------------
(1) Principally represents operations in the United States.
F-19
<PAGE> 50
QUEST SOFTWARE, INC.
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
<TABLE>
<CAPTION>
BALANCE AT CHARGES BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- --------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts and sales returns.... $ 783 $1,116 $ (847) $1,052
Year ended December 31, 1999:
Allowance for doubtful accounts and sales returns.... $1,052 $5,451 $(3,264) $3,239
Year ended December 31, 2000:
Allowance for doubtful accounts and sales returns.... $3,239 $9,990 $(3,253) $9,976
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have been
omitted because they are not required under the related instructions or are
inapplicable, or because the information has been provided in the Consolidated
Financial Statements or Notes thereto.
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C>
3.1* Second Amended and Restated Articles of Incorporation.
3.2** Second Amended and Restated Bylaws, as amended.
3.3*** Certificate of Amendment of Second Amended and Restated
Articles of Incorporation.
4.1* Form of Registrant's Specimen Common Stock Certificate.
10.1*++ Registrant's 1998 Stock Option/Stock Issuance Plan.
10.2*++ Registrant's 1999 Stock Incentive Plan.
10.3*++ Registrant's 1999 Employee Stock Purchase Plan.
10.4* Form of Directors' and Officers' Indemnification Agreement.
10.5*+ Agreement, dated February 19, 1999, between Quest Software,
Inc. and INSO Chicago Corporation, dba INSO Corporation.
10.6*+ OEM Agreement, dated March 3, 1998, by and between Quest
Software, Inc. and Artifex Software Inc.
10.7* Office Space Lease dated as of June 17, 1999 between The
Irvine Company and Quest Software, Inc.
10.8** Office Lease between The Northwestern Mutual Life Insurance
Company (Landlord) and Quest Software, Inc. (Tenant) dated
as of September 30, 1999.
10.9***+ Inxight/Resolute Software: Software Distribution and License
Agreement -- Inxight Technology dated September 30, 1998
between Resolute Software, Inc. and Inxight Software, Inc.
10.10 Office lease, dated June 2000, between Fund VIII and Fund IX
Associates and Quest Software, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
- ---------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1 and all amendments thereto (File No. 333-80543).
** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 and all amendments thereto (File No. 333-30816).
*** Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 2000.
+ Confidential treatment requested and received as to certain portions of this
agreement.
++ Indicates a management contract or compensatory arrangement.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10
<SEQUENCE>2
<FILENAME>a70764ex10-10.txt
<DESCRIPTION>EXHIBIT 10.10
<TEXT>
<PAGE> 1
Exhibit 10.10
OFFICE LEASE
FUND VIII AND FUND IX ASSOCIATES, a
Georgia joint venture partnership
as Landlord
and
QUEST SOFTWARE, INC.,
a California corporation
as Tenant
Dated as of: June ___, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 REAL PROPERTY, BUILDING AND PREMISES 1
ARTICLE 2 LEASE TERM 1
ARTICLE 3 BASE RENT 2
ARTICLE 4 ADDITIONAL RENT 2
ARTICLE 5 USE OF PREMISES 6
ARTICLE 6 SERVICES AND UTILITIES 6
ARTICLE 7 REPAIRS 6
ARTICLE 8 CONDITIONS AND ALTERATIONS 7
ARTICLE 9 COVENANT AGAINST LIENS 8
ARTICLE 10 INSURANCE 9
ARTICLE 11 DAMAGE AND DESTRUCTION 11
ARTICLE 12 NONWAIVER 13
ARTICLE 13 CONDEMNATION 13
ARTICLE 14 ASSIGNMENT AND SUBLETTING 13
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES 16
ARTICLE 16 HOLDING OVER 16
ARTICLE 17 ESTOPPEL CERTIFICATES 17
ARTICLE 18 SUBORDINATION 17
ARTICLE 19 DEFAULTS; REMEDIES 17
ARTICLE 20 COVENANT OF QUIET ENJOYMENT 19
ARTICLE 21 FORCE MAJEURE 19
ARTICLE 22 ATTORNEYS' FEES 20
ARTICLE 23 SIGNS 20
ARTICLE 24 COMPLIANCE WITH LAW 21
ARTICLE 25 LATE CHARGES 21
ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT 21
ARTICLE 27 ENTRY BY LANDLORD 22
ARTICLE 28 INTENTIONALLY OMITTED 22
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 29 MISCELLANEOUS PROVISIONS 22
</TABLE>
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
Exhibit A Legal Description of Land
Exhibit B Tenant Improvements
Exhibit C Direct Expenses Exclusions
Exhibit D Rules and Regulations
Exhibit E List of All Recorded Covenants, Conditions and Restrictions
Exhibit F Form of Tenant's Estoppel Certificate
Exhibit G Building Signage
</TABLE>
<PAGE> 4
SUMMARY OF BASIC LEASE INFORMATION
The undersigned hereby agree to the following terms of this Summary of Basic
Lease Information (the "Summary"). This Summary is hereby incorporated into and
made a part of the attached Office Lease (this Summary and the Office Lease to
be known collectively as the "Lease") which pertains to the office building (the
"Building")located on the real property described in Exhibit A which real
property is in the City of Irvine, California. Each reference in the Office
Lease to any term of this Summary shall have the meaning as set forth in this
Summary for such term. In the event of a conflict between the terms of this
Summary and the Office Lease, the terms of the Office Lease shall prevail. Any
capitalized terms used herein and not otherwise defined herein shall have the
meaning as set forth in the Office Lease.
<TABLE>
<CAPTION>
TERMS OF LEASE DESCRIPTION
- -------------- -----------
<S> <C> <C>
1. Dated as of: June ___,2000
2. Landlord: FUND VIII AND FUND IX ASSOCIATES,
a Georgia joint venture partnership
3. Address of Landlord 6200 The Corners Parkway, Suite 250
(Section 29.16): Norcross, Georgia 30092-2295
4. Tenant: QUEST SOFTWARE, INC.,
a California corporation
5. Address of Tenant 8001 Irvine Center Drive
(Section 29.16): Irvine, California 92618
Attn: Susan Twellman
6. Premises (Article 1): See Exhibit A
7. Term (Article 2): Beginning on the date hereof and ending on
the last day of the month in which the 42nd
monthly anniversary of the Rent Commencement
Date occurs
8. Base Rent (Article 3) $1.65 per "rentable square feet" per month
Rent Commencement
Date: The Rent Commencement Date shall be the
first to occur of (i) the date Tenant
commences business in the Premises, (ii)
issuance of a certificate of occupancy or
(iii) August 1, 2000, provided that for the
six month period beginning with the Rent
Commencement Date, Base Rent shall be
calculated on the basis of 33,000 "rentable
square feet"
9. Brokers (Section 29.20): Julien J. Studley, Inc. and Cushman & Wakefield
</TABLE>
<PAGE> 5
OFFICE LEASE
This Office Lease, which includes the preceding Summary of Basic Lease
Information (the "Summary") attached hereto and incorporated herein by this
reference (the Office Lease and Summary to be known sometimes collectively
hereafter as the "Lease"), dated as of the date set forth in Section 1 of the
Summary, is made by and between FUND VIII AND FUND IX ASSOCIATES, a Georgia
joint venture partnership ("Landlord"), and QUEST SOFTWARE, INC., a California
corporation ("Tenant").
ARTICLE 1
REAL PROPERTY, BUILDING AND PREMISES
1.1 Real Property, Building and Premises. Upon and subject to the
terms, covenants and conditions hereinafter set forth in this Lease, Landlord
hereby leases to Tenant and Tenant hereby leases from Landlord all of the land
described in Exhibit A hereto (the "Real Property") and all of the improvements
thereon (the "Improvements"), including the building having an address of 15253
Bake Parkway, Irvine, California (the "Building"), the Real Property,
Improvements and Building being sometimes referred to herein as the "Premises."
1.2 Rentable Square Feet of Premises and Building. For purposes of
this Lease, "rentable square feet" shall be deemed to be 65,006 for the
Premises.
1.3 Delivery of the Building and Premises; Tenant Improvement
Allowance. Landlord will deliver to and Tenant will accept the Premises "as is,
where is, with all faults". Landlord agrees to provide a tenant improvement
allowance of $11.00 times the "rentable square feet" in the Building in
accordance with and subject to the terms and conditions set forth in Exhibit B
hereto (the "Tenant Improvements").
ARTICLE 2
LEASE TERM
2.1 Initial Term. The terms and provisions of this Lease shall be
effective as of the date of this Lease except for the provisions of this Lease
relating to the payment of Rent. The term of this Lease and any validly
exercised option (the "Lease Term") shall be as set forth in Section 7 of the
Summary and Section 2.2 below and shall commence on the date (the "Lease
Commencement Date") set forth in Section 7 of the Summary, and shall terminate
on the date (the "Lease Expiration Date") set forth in Section 7 of the Summary,
unless this Lease is sooner terminated or extended as hereinafter provided. For
purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve
(12) month period, commencing on the Lease Commencement Date unless the context
requires otherwise, during the Lease Term.
2.2 Option Terms.
2.2.1 Option Rights. Landlord hereby grants Tenant two (2)
options to extend the Lease Term for all and not less than all of the Premises
for a period of one year each, provided that the second option term shall expire
on December 31, 2005 (the "Option Terms"), which option shall be exercisable
only by written notice delivered by Tenant to Landlord as provided below,
provided that, as of the date of delivery of each of such notices there is not
an outstanding Event of Default by Tenant. Upon the proper exercise of an option
to extend, the Lease Term, as it then applies to the Premises, shall be extended
for a period of one year if the extension relates to the first option period or
until December 31, 2005, if it relates to the second option period. The rights
contained in this Section 2.2 may only be exercised by Tenant, its "Affiliates"
(as defined in Section 14.5 below) or an assignee of Tenant to whom an
assignment of this Lease has been made in accordance with Article 14 (and not
any sublessee or other transferee of Tenant's interest in this Lease).
2.2.2 Option Rent. The Base Rent payable by Tenant during the
Option Term (the "Option Rent") shall be calculated at the rate of $1.75 per
"rentable square feet" per month.
2.2.3 Exercise of Option. The options contained in this Section
2.2 shall be exercised by Tenant, if at all, and only in the following manner:
Tenant shall deliver written notice to Landlord (the "Option Notice") not more
than 12 months or less than nine months prior to the expiration of the initial
Lease Term or the initial Option Term, as applicable, stating that Tenant is
exercising its option. Notwithstanding the foregoing, Tenant may extend the time
within which it must deliver the Option Notice to the date which is six months
prior to the expiration
<PAGE> 6
of the initial Lease Term or the initial Option Term, as applicable, provided
Tenant shall have on or before the date which is nine months prior to such
expiration date delivered to Landlord notice that Tenant is electing to extend
such date by as many as three months in which event the expiration of the
initial Lease Term or Option Term, as applicable, shall be automatically
extended by the same number of months.
ARTICLE 3
BASE RENT
Commencing on the Rent Commencement Date set forth in Section 8 of the
Summary, Tenant shall pay, without notice or demand, to Landlord or Landlord's
agent at the address set forth in Section 3 of the Summary, or at such other
place in the continental United States as Landlord may from time to time
designate in writing, by check drawn upon a bank located in the United States of
America (for currency which, at the time of payment, is legal tender for private
or public debts in the United States of America), base rent ("Base Rent") as set
forth in Section 8 of the Summary, payable in equal monthly installments as set
forth in Section 8 of the Summary in advance on or before the first day of each
and every month during the Lease Term, without any setoff or deduction
whatsoever, except as otherwise expressly provided in this Lease. If any rental
payment date (including any Rent Commencement Date) falls on a day of the month
other than the first day of such month or if any rental payment is for a period
which is shorter than one month, then the rental for any such fractional month
shall be a proportionate amount of a full calendar month's rental based on the
proportion that the number of days in such fractional month bears to the number
of days in the calendar month during which such fractional month occurs. All
other payments or adjustments required to be made under the terms of this Lease
that require proration on a time basis shall be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
4.1 Additional Rent. In addition to paying the Base Rent specified in
Article 3 of this Lease, beginning on the Rent Commencement Date, Tenant shall
pay as additional rent for each "Expense Year," as that term is defined in
Section 4.2.3 of this Lease, all of the annual "Direct Expenses," as that term
is defined in Section 4.2.2 of this Lease, as if Tenant occupied the entire
Premises. Such additional rent, together with any and all other amounts payable
by Tenant to Landlord pursuant to the terms of this Lease, shall be hereinafter
collectively referred to as the "Additional Rent." The Base Rent and Additional
Rent are herein collectively referred to as the "Rent." All amounts payable
under this Article 4 as Additional Rent shall be payable for the same periods
and in the same manner and place as the Base Rent. Without limitation on other
obligations which shall survive the expiration of the Lease Term, the
obligations of Tenant and Landlord provided for in this Article 4 shall survive
the expiration of the Lease Term.
4.2 Definitions. As used in this Article 4, the following terms shall
have the meanings hereinafter set forth:
4.2.1 "Calendar Year" shall mean each calendar year in which any
portion of the Lease Term falls, through and including the calendar year in
which the Lease Term expires.
4.2.2 "Direct Expenses" shall mean "Operating Expenses" and "Tax
Expenses."
4.2.3 "Expense Year" shall mean each Calendar Year.
4.2.4 "Operating Expenses" shall mean all direct and indirect
costs, expenses, and assessments charged to the Real Property with respect to
its efficient and economical operation (including insurance premiums for the
insurance policies described in Sections 10.2, 10.3 and 10.5 below), management,
use, maintenance and repair, other than those which are set forth in Section 6.1
below. Operating Expenses shall not include those items set forth on the
Operating Expense Exclusion list attached hereto as Exhibit C.
4.2.5 "Tax Expenses" shall mean all federal, state, county, or
local governmental or municipal taxes, fees or other impositions of every kind
and nature, whether general, special, ordinary or extraordinary, (including,
without limitation, real estate taxes, general and special assessments, transit
taxes, leasehold taxes or taxes based upon the receipt of rent, including gross
receipts or sales taxes applicable to the receipt of rent, unless required to be
paid by Tenant, personal property taxes imposed upon the fixtures, machinery,
equipment, apparatus,
<PAGE> 7
systems and equipment, appurtenances, furniture and other personal property used
in connection with the Building), which are allocable to a particular Expense
Year (without regard to any different fiscal year used by such governmental or
municipal authority) in connection with the ownership, leasing and operation of
the Real Property or Landlord's interest therein.
4.2.5.1 Tax Expenses shall include, without limitation:
(i) Any governmental tax on Landlord's rent, right to rent or
other income from the Real Property or as against Landlord's business of leasing
any of the Real Property;
(ii) Any assessment, tax, fee, levy or charge in addition to,
or in substitution, partially or totally, of any assessment, tax, fee, levy or
charge previously included as of the date hereof within the definition of real
property tax, it being acknowledged by Tenant and Landlord that Proposition 13
was adopted by the voters of the State of California in the June 1978 election
("Proposition 13") and that assessments, taxes, fees, levies and charges may be
imposed by governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants, and,
in further recognition of the decrease in the level and quality of governmental
services and amenities as a result of Proposition 13, Tax Expenses shall also
include any governmental assessments or contribution towards a governmental
cost-sharing agreement for the purpose of augmenting or improving the quality of
services and amenities normally provided by governmental agencies. It is the
intention of Tenant and Landlord that all such new and increased assessments,
taxes, fees, levies and charges and all similar assessments, taxes, fees, levies
and charges be included within the definition of Tax Expenses for purposes of
this Lease;
(iii) Any governmental assessment, tax, fee, levy, or charge
allocable to or measured by the area of the Premises or the rent payable
hereunder, including, without limitation, any gross income tax with respect to
the receipt of such rent; and
(iv) Any assessment, tax, fee, levy or charge, upon this
transaction or any document to which Tenant is a party, creating or transferring
an interest or an estate in the Premises.
4.2.5.2 With respect to any assessment otherwise
includable within Tax Expenses that may be levied against or upon the Real
Property and that under the laws then in force may be evidenced by improvement
or other bonds, or may be paid in annual installments, there shall be included
within the definition of Tax Expenses with respect to any tax fiscal year only
the amount currently payable on such bonds, including interest, for such tax
fiscal year, or the current annual installment for such tax fiscal year, in each
case utilizing the payment or installment method which will minimize the amount
of Tax Expenses.
4.2.5.3 If the method of taxation of real estate
prevailing at the time of execution hereof shall be, or has been, altered so as
to cause the whole or any part of the taxes now, hereafter or heretofore levied,
assessed or imposed on real estate to be levied, assessed, or imposed upon
Landlord, wholly or partially, as a capital levy or otherwise, or on or measured
by the rents received therefrom, then such new or altered taxes attributable to
the Real Property shall be included within the term "Tax Expenses" except that
the same shall not include any enhancement of said tax attributable to other
income of Landlord.
4.2.5.4 Landlord may in good faith protest any Tax
expenses with the appropriate governing authorities, and any reasonable expenses
reasonably incurred by Landlord in attempting to protest, reduce or minimize Tax
Expenses shall be included in Tax Expenses in the Expense Year such expenses are
paid, provided that such expenses shall not exceed the savings which may
reasonably be expected to be realized as a result of such action. Landlord shall
endeavor to notify Tenant of any proposed increases in the assessed value of the
Property, and if Landlord elects not to protest any such increase, Tenant shall
have the right to do so.
4.2.5.5 Tax refunds shall be deducted from Tax Expenses in
the Expense Year to which the same are attributable.
4.2.5.6 Subject to the terms of this Section 4.2.5, if Tax
Expenses for any period during the Lease Term or any extension thereof are
increased after payment thereof by Landlord for any reason, including, without
limitation, error or reassessment by applicable governmental or municipal
authorities, such increase shall be included in Tax Expenses in the Expense Year
to which such increase is attributable, and Tenant shall pay Landlord
<PAGE> 8
Tenant's share of such increased Tax Expenses to the extent there exists an
excess for such Expense Year.
4.2.5.7 Notwithstanding anything to the contrary contained
in this Lease, there shall be excluded from Tax Expenses (i) all excess profits
taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and
succession taxes, estate taxes, federal and state income taxes, and other taxes
to the extent applicable to Landlord's general or net income, (ii) any items
included as Operating Expenses, and (iii) any items paid by Tenant under Section
4.4 of this Lease.
4.3 Calculation and Payment of Additional Rent.
4.3.1 Payment of Direct Expenses. For any Expense Year
ending or commencing within the Lease Term, Tenant shall pay directly, or, as
applicable, to Landlord, in the manner set forth in Section 4.3.2, below, and as
Additional Rent, an amount equal to the Direct Expenses for such Expense Year.
4.3.2 Statement of Actual Direct Expenses and Payment by
Tenant. Landlord shall endeavor to give to Tenant on or before the first day of
April (and must deliver by July 1) following the end of each Expense Year, a
statement (the "Statement"), certified by an appropriate official of Landlord,
which shall state that portion of the Direct Expenses not directly paid by
Tenant, and which portion is allocable to such preceding Expense Year. Tenant
shall pay, within thirty (30) days after receipt of the Statement, the full
amount of the Landlord-billed Direct Expenses for such Expense Year, less the
amounts, if any, paid during such Expense Year as an "Estimated Payment," as
that term is defined in Section 4.3.3, below. In the event the amount paid by
Tenant as an Estimated Payment exceeds the amount of the Landlord-billed Direct
Expenses, Tenant shall receive a credit against the next payment of Additional
Rent due under this Lease. The failure of Landlord to timely furnish the
Statement for any Expense Year shall not prejudice either party from enforcing
its rights under this Article 4; provided, however, that except with regard to
the recalculation of those items of Direct Expenses which are not under
Landlord's reasonable control, specifically including Tax Expenses and public
utility charges, Landlord shall not be permitted to add to Direct Expenses or
bill for the first time any portion of Direct Expenses more than 13 months
following the last day of the Expense Year to which such Direct Expenses relate.
Subject to the provisions of this Lease, even though the Lease
Term has expired and Tenant has vacated the Premises, when the final
determination is made of the Direct Expenses for the Expense Year in which this
Lease terminates, (i) if Tenant has not paid all of the Direct Expenses for such
Expense Year, Tenant shall pay to Landlord, within thirty (30) days after
receipt of a reasonably detailed bill therefor, an amount as calculated pursuant
to the provisions of Section 4.3.1 of this Lease, and (ii) if Tenant has made an
overpayment of Additional Rent, Landlord shall pay the same to Tenant within
thirty (30) days of such determination. The provisions of this Section 4.3.2
shall survive the expiration or earlier termination of the Lease Term.
4.3.3 Statement of Estimated Direct Expenses. In addition,
Landlord shall endeavor to give Tenant a yearly expense estimate statement (the
"Estimate Statement") on or before the Rent Commencement Date and thereafter
within one hundred twenty (120) days and no later than one hundred eighty (180)
days after the commencement of each new Expense Year, which Estimate Statement
shall set forth Landlord's reasonable estimate (the "Estimate") of what the
total amount of Landlord-billed Direct Expenses for the then-current Expense
Year shall be (the "Estimated Payment"). The failure of Landlord to timely
furnish the Estimate Statement for any Expense Year shall not preclude Landlord
from enforcing its rights to collect any Estimated Payment under this Article 4.
Tenant shall pay, within thirty (30) days of Tenant's receipt of such Estimate
Statement, a fraction of the Estimated Payment for the then-current Expense Year
(reduced by any amounts paid pursuant to the last sentence of this Section
4.3.3). Such fraction shall have as its numerator the number of months which
have elapsed in such current Expense Year to the month of such payment, both
months inclusive, and shall have twelve (12) as its denominator. Until a new
Estimate Statement is furnished, Tenant shall pay monthly, with the monthly Base
Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated
Payment set forth in the previous Estimate Statement delivered by Landlord to
Tenant.
4.4 Taxes and Other Charges for Which Tenant Is Responsible.
Tenant shall reimburse Landlord, within thirty (30) days of Tenant's receipt of
a reasonably detailed written demand accompanied by appropriate supporting
evidence (but in any case prior to delinquency), for any and all taxes or
assessments required to be paid by Landlord (except to the extent included in
Tax Expenses by Landlord), excluding state, local and federal personal or
corporate income taxes measured by the net income of Landlord from all sources
and estate and inheritance taxes, whether or not now customary or within the
contemplation of the parties hereto, when said taxes
<PAGE> 9
are required to be paid by Tenant and said taxes are measured by or reasonably
attributable to the cost of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises, or by the cost of all leasehold
improvements made in or to the Premises by or for Tenant.
4.5 Landlord's Books and Records; Tenant's Audit Rights.
Tenant or Tenant's authorized representatives (the "Outside Agent") may, after
reasonable notice to Landlord and at reasonable times, examine, inspect, audit,
and copy the records of Landlord regarding each Statement at Landlord's office
in the continental United States during normal business hours within one (1)
year after the furnishing of the Statement. The Outside Agent shall be a
nationally or regionally recognized firm of certified public accountants ("CPA")
and shall be engaged on a non-contingency fee basis. Unless Tenant takes written
exception to any item within two (2) years after the furnishing of that
Statement (or any corrected Statement), the Statement shall be considered as
final and accepted by Tenant except that Landlord may, at any time during that
two-year period, submit a corrected Statement to Tenant if Operating Expenses
and Tax Expenses on the original Statement were overstated or understated.
The payment of the amounts shown on the Statement by Tenant shall
not preclude Tenant from questioning the correctness of any item of the
Statement subject to the rights in this Section 4.5, and Tenant shall continue
to pay the amounts reflected on the Statement pending a final determination of
the correctness of the items shown thereon. Tenant and/or its Outside Agent
shall have the right, at Tenant's cost and on no less than ten (10) days' prior
written notice to Landlord and during Landlord's normal business hours, to audit
Landlord's records regarding Operating Expenses and Tax Expenses. Such an Audit
shall be performed in Landlord's office in the continental United States.
To facilitate an audit by Tenant, Landlord shall keep its books
and records applicable to Operating Expenses and Tax Expenses available to
Tenant on a reasonable basis for the longer of (a) two (2) years after the Lease
Expiration Date or (b) one (1) year after the resolution of any dispute
concerning Operating Expenses and Tax Expenses. Any audit of Operating Expenses
and Tax Expenses for any calendar year must be begun within two (2) years after
Landlord's delivery of the Statement for that year, or the right to audit
Operating Expenses and Tax Expenses for that year shall be deemed waived.
Tenant agrees diligently to pursue and complete (or to drop) any
audit begun by Tenant, and Landlord agrees it shall not unreasonably interfere
with the execution of Tenant's audit rights. Landlord shall either accept or
reject any such audit within 30 days of the receipt of same. If Landlord shall
reject such audit and the parties cannot otherwise agree on any adjustments,
then Landlord and Tenant shall select a mutually acceptable accounting firm to
conduct such audit, the results of which shall be binding upon the parties. The
cost of such audit shall be borne equally by the parties, and Tenant shall bear
all fees and costs of its audit, unless it is ultimately determined that
Operating Expenses and Tax Expenses taken as a whole for any calendar year were
overstated by four percent (4%) or more. In that event, Landlord shall pay for
the reasonable costs of both audits. Pending resolution of any disputes over
Operating Expenses and Tax Expenses, Tenant shall pay to Landlord any Additional
Rent alleged to be due from Tenant as reflected on Landlord's Statement or any
invoice issued on the basis of Landlord's Statement.
ARTICLE 5
USE OF PREMISES
5.1 Permitted Use. Tenant shall use the Premises for general
office and administrative purposes only.
5.2 Prohibited Uses. Tenant shall not use the Premises or any
part thereof for any use or purpose contrary to the provisions of the Rules and
Regulations listed in Exhibit D and those certain covenants, conditions and
restrictions listed on Exhibit E (the "CC&Rs"). This Lease is subject in all
respects to the CC&Rs and the Bylaws of the "Associations" established under the
CC&Rs. Landlord is not aware of any violations of the CC&Rs. Tenant shall comply
with the recorded covenants, conditions and restrictions now or (so long as no
negative impact affects the Premises or Tenant's occupancy of the Premises or
restricts in any material way its rights under the Lease) hereafter affecting
the Premises and with all reasonable rules adopted from time to time by the
Associations established under the CC&Rs. Tenant shall not use or allow another
person or entity to use any part of the Premises for the storage, treatment,
manufacture or sale of "Hazardous Material" as that term is defined in Section
29.24 of this Lease, other than as may be permitted by, and used in accordance
with, all applicable laws, regulations and ordinances pertaining to the
Premises.
<PAGE> 10
ARTICLE 6
SERVICES AND UTILITIES
6.1 In General. From and after the date of this Lease, Tenant
will be responsible, at its sole cost and expense, for the furnishing of all
services and utilities to the Premises, including, but not limited to heating,
ventilation and air-conditioning, electricity, water, telephone, janitorial and
security services, window washing and landscaping services. Landlord represents
that to the best of its knowledge all such utilities are available to the
Premises and may be utilized by Tenant without the payment of any hook up or
similar charges other than customary deposits.
6.2 Interruption of Use. Tenant agrees that except with respect to
Landlord's gross negligence or intentional acts, Landlord shall not be liable
for damages, by abatement of Rent or otherwise, for failure of Tenant to receive
any service (including telephone and telecommunication services) or utility for
any reason whatsoever, or for any diminution in the quality or quantity thereof,
and such failures or delays or diminution shall never be deemed to constitute an
eviction or disturbance of Tenant's use and possession of the Premises or
relieve Tenant from paying Rent or performing any of its obligations under this
Lease, except as provided in this Lease to the contrary. Furthermore, Landlord
shall not be liable under any circumstances for a loss of, or injury to,
property or for injury to, or interference with, Tenant's business, including,
without limitation, loss of profits, however occurring, through or in connection
with or incidental to any such failure of Tenant to receive any services or
utilities.
6.3 No Obligation. Landlord shall have no obligation to provide any
services or utilities to the Premises including, but not limited to heating,
ventilation and air-conditioning, electricity, water, telephone, janitorial and
security services, window washing and landscaping services. Landlord represents
that to the best of its knowledge all Building systems are in proper working
order.
ARTICLE 7
REPAIRS
7.1 Tenant's Obligations.
7.1.1 Tenant Required Actions. Subject to the provisions of
Section 7.2, Articles 11 and 13 and Section 29.29, Tenant shall, at Tenant's
sole cost and expense, operate, keep, and maintain, and as necessary, repair,
restore, replace, and make any capital improvements to (collectively, the
"Tenant Required Actions") (i) the structural portions of the Building
(excluding the structural skeleton of the Building described in Section 7.2
below), including the ceilings, floor surface, interior walls and wall covering,
shafts, stairs, parking areas, stairwells, elevator cabs, washrooms, and
Building mechanical, electrical and telephone closets (collectively, "Building
Structure"), and (ii) the Building mechanical, electrical, gas, life safety,
plumbing, sprinkler systems, elevators, restrooms, and heating, ventilation and
air-conditioning systems (the "Building Systems"), in good order and repair and
in good and safe working order and condition at all times during the Lease Term,
including any items of the Building Structure or Building Systems included in
the "Tenant Improvements", as that term is defined in Section 1.3, or
"Alterations", as that term is defined in Section 8.1 (collectively, the "Tenant
Maintenance Items"). All repairs and maintenance of the Premises by Tenant as
required under this Lease shall be performed in a good and safe manner by
contractors and other personnel reasonably approved by Landlord, and in
compliance with the provisions of Article 8 below. Notwithstanding the foregoing
or any other provision of this Lease to the contrary, in the event any of the
Tenant Required Actions involve expenditures which would be capitalized under
generally accepted accounting principles, then Landlord shall reimburse Tenant
for such expenditures within 30 days of the request therefor accompanied by
supporting invoices. Tenant shall also be obligated to pay, as an Operating
Expense, the cost of any capital improvements made by Landlord to all or any
portion of the Premises after the Lease Commencement Date which are required for
Tenant's use of the Premises under any governmental law or regulation which was
not applicable as of the date of commencement of construction of the Building by
Landlord or any capital expenditures reimbursed to Tenant pursuant to the
preceding sentence; provided, however, that each such capital expenditure shall
be amortized (including interest on the unamortized cost at Landlord's then
current cost of funds) over its useful life as Landlord shall reasonably
determine, provided, however, that Tenant shall not be responsible for such
amortization payments to the extent that the capital expenditure was for an item
as to which Landlord is solely responsible under the provisions of Section 7.2
below.
7.1.2 Maintenance Contracts. As a part of Tenant's Required Actions,
Tenant shall, at Tenant's sole cost and expense, maintain contracts for the
inspection, maintenance and service of the (i) heating, air conditioning and
<PAGE> 11
ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii)
fire sprinkler and/or standpipe and hose or other automatic fire extinguishing
systems, including fire alarm and/or smoke detection, and (iv) electrical
systems.
7.2 Landlord's Obligations. It is intended by the parties hereto that
Landlord have no obligation, in any manner whatsoever, to take any of the Tenant
Required Actions with respect to the Building Systems or Building Structure,
except as set forth in this Section 7.2, below. It is the intention of the
parties that the terms of this Lease govern the respective obligations of the
parties as to maintenance and repair of the Premises. Tenant waives the right to
make repairs at the expense of Landlord or to terminate this Lease by reason of
any needed repairs under Sections 1941 and 1942 of the California Civil Code, or
any similar law, statute, or ordinance, now or hereafter in effect.
Notwithstanding the foregoing, during the Lease Term, Landlord shall maintain
and repair at its sole cost and expense the structural skeleton of the Building
consisting only of the floor slabs, foundation, roof structure, roof membrane,
exterior walls and exterior glass and mullions ("Landlord Maintenance Items").
ARTICLE 8
CONDITIONS AND ALTERATIONS
8.1 Landlord's Consent to Alterations. Tenant may, without the need
to obtain the consent or approval of Landlord, make any improvements,
alterations, additions or changes to the Premises the cost of which does not
exceed $30,000.00 (exclusive of wall or floor coverings) in the aggregate
(collectively, the "Alterations") desired by Tenant which do not create a Design
Problem, by providing Landlord with written notice not less than six (6)
business days prior to the commencement thereof. For purposes of this Lease,
"Design Problem" shall mean any alteration, repair, modification, or improvement
by Tenant which (a) materially or adversely affects the Building Systems or
Building Structure, (b) is not in compliance with applicable laws, or (c)
affects the exterior appearance of the Building. Tenant may not make any
Alteration which may create a Design Problem (collectively, "Consent
Alterations"), without first procuring the prior written consent of Landlord to
such Alterations, which consent shall be requested by Tenant not less than ten
(10) business days prior to the commencement thereof, and which consent shall
not be unreasonably withheld by Landlord and shall state whether the consent
alterations must be removed on termination of the Lease; provided if the Design
Problem materially or adversely affects the Building System or Building
Structure, then Landlord may condition its consent upon Tenant assuring that the
proposed Alteration complies with applicable Laws and complies with other
conditions that Landlord may reasonably require of Tenant. In the event Tenant
proposes to make a Consent Alteration, Tenant's notice regarding the proposed
Alteration shall include the plans and specifications for the Alterations.
Landlord shall grant or withhold its consent to any Consent Alterations within
ten (10) business days of receipt of Tenant's notice; Landlord's failure to
respond within three (3) business days after receipt by Landlord of a second
notice given after such ten (10) business day period shall be deemed to evidence
Landlord's approval with respect to the same.
8.2 Manner of Construction. In connection with the making of
Alterations, except for minor or purely cosmetic Alterations such as painting or
replacement of wall or floor covering ("Finish Work"), Tenant shall utilize only
contractors and subcontractors who normally and regularly perform similar work
in Comparable Buildings, or which have been otherwise approved by Landlord,
which approval shall not be unreasonably withheld or delayed. Subject to the
terms of Article 24, below, Tenant shall construct all Alterations in
conformance with any and all applicable rules and regulations of any federal,
state, county or municipal code or ordinance and, when required pursuant to
applicable Law, pursuant to a valid building permit issued by the City of
Irvine. Landlord's approval of the plans, specifications and working drawings
for Tenant's Alterations shall create no responsibility or liability on the part
of Landlord for their completeness, design sufficiency, or compliance with all
laws, rules and regulations of governmental agencies or authorities. All work
with respect to any Alterations must be done in a good and workmanlike manner
and diligently prosecuted to completion. Upon completion of any Alterations,
Tenant agrees to cause a Notice of Completion to be recorded in the office of
the Recorder of Orange County in accordance with Section 3093 of the Civil Code
of the State of California or any successor statute, and, except as to Finish
Work, Tenant shall deliver to Landlord a reproducible copy of the construction
set of drawings of the Alterations (or, at Tenant's election, a copy of the
final working drawings for such Alterations, with field changes shown thereon)
within thirty (30) days following completion thereof.
8.3 Construction Insurance. Prior to the commencement of any
Alteration, Tenant shall provide Landlord with reasonable evidence that Tenant
or Tenant's contractors carries "Builder's All Risk" insurance and worker's
compensation insurance in a commercially reasonable amount (but not less than
$1,000,000 of commercial general liability) given the scope of such Alterations,
covering the construction of such Alterations, it being understood and agreed
that all of such Alterations shall be insured by Tenant pursuant to Article 10
of this Lease
<PAGE> 12
immediately upon completion thereof. In addition, Landlord may, in its
discretion, require any "Transferee," as that term is defined in Section 14.1,
below, other than any Affiliate, to obtain a lien and completion bond or some
alternate form of security satisfactory to Landlord in an amount sufficient to
ensure the lien-free completion of such Alterations and naming Landlord as a
co-obligee.
8.4 Landlord's Property. Subject to the terms of this Lease, all
Alterations, improvements, fixtures and/or equipment which may be installed or
placed in or about the Premises, from time to time, shall be at the sole cost of
Tenant and shall be and become the property of Landlord, except that Tenant
shall have the right to remove any such Alterations, not attached or built into
the Premises and trade fixtures which Tenant can reasonably substantiate to
Landlord have not been paid for with any tenant improvement allowance funds
provided to Tenant by Landlord, together with any non-affixed personal property
in the Premises and Tenant's "tele-data" equipment, provided Tenant repairs any
damage to the Premises and Building caused by such removal. Upon the expiration
or early termination of the Lease Term, Landlord may, by written notice to
Tenant, require Tenant at Tenant's expense to remove any improvements in the
Premises, including any cabling and wiring, Alterations and Tenant Improvements
with respect to which Landlord designated, in its approval of the plans and
specifications for such Alterations and Tenant Improvements , that the same are
to be removed at the end of the Term of the Lease, and repair any damage to the
Premises and Building caused by such removal, and leave the Premises in a
broom-clean condition. If Tenant fails to complete such removal and/or to repair
any damage caused by the removal of any such improvement, after notice to Tenant
from Landlord, and a reasonable opportunity (based on the then current
circumstances) for Tenant to complete such removal and/or repair, Landlord may
do so and may charge the cost thereof to Tenant.
ARTICLE 9
COVENANT AGAINST LIENS
Tenant has no authority or power to cause or permit any lien or
encumbrance of any kind whatsoever, whether created by act of Tenant, operation
of law or otherwise, to attach to or be placed upon the Real Property, Building
or Premises, and any and all liens and encumbrances created by Tenant shall
attach to Tenant's interest only. Landlord shall have the right at all times to
post and keep posted on the Premises customary notices of non-responsibility
which it deems necessary for protection from such liens. Tenant covenants and
agrees not to suffer or permit any lien of mechanics or materialmen or others to
be placed against the Real Property, the Building or the Premises with respect
to work or services claimed to have been performed for or materials claimed to
have been furnished to Tenant or the Premises, and, in case of any such lien
attaching or notice of any such lien, Tenant covenants and agrees to cause it to
be immediately released and removed of record or to protest such lien by filing
a bond within ten (10) business days after notice by Landlord, and if Tenant
shall fail to do so Landlord, at its sole option, may, after an additional five
(5) business days notice to Tenant, take all action necessary to release and
remove such lien, without any duty to investigate the validity thereof, and all
sums, costs and expenses, including reasonable attorneys' fees and costs,
incurred by Landlord in connection with such lien shall be deemed Additional
Rent under this Lease and shall be due and payable by Tenant within thirty (30)
days of receipt of an invoice therefor.
ARTICLE 10
INSURANCE
10.1 Indemnification and Waiver.
10.1.1 Waiver. Tenant hereby assumes all risk of damage to
property or injury to persons in or upon the Premises from any cause whatsoever
and agrees that Landlord, its partners and their respective officers, agents,
servants, and employees (collectively, the "Landlord Parties") shall not be
liable for any damage either to person or property or resulting from the loss of
use thereof, which damage is sustained by Tenant or by other persons claiming
through Tenant, except to the extent caused by the gross negligence or wilful
misconduct of the Landlord Parties, subject to the provisions of Section 10.4
hereof.
10.1.2 Tenant's Indemnity. Tenant shall indemnify, defend,
protect, and hold harmless Landlord and the Landlord Parties from any and all
claims, loss, cost, damage, expense and liability (including without limitation
court costs and reasonable attorneys' fees) (collectively, "Claims") incurred in
connection with or arising from (1) any cause in or on the Premises during the
Lease Term or any holdover period and (2) subject to the terms of the last
sentence of Section 10.1.3, below, any acts or omissions or wilful misconduct of
Tenant or any person
<PAGE> 13
claiming by, through or under Tenant, its partners, and their respective
officers agents, servants or employees of Tenant or any such person
(collectively, "Tenant Parties"), in or on or about the Premises or the Real
Property either prior to, during, or after the expiration of the Lease Term,
provided that, except as set forth below, the terms of the foregoing indemnity
shall not apply to the extent such Claims arise from (a) the gross negligence,
intentional acts or wilful misconduct of the Landlord Parties in connection with
the Landlord Parties' activities in, on or about the Real Property, including
the Premises, subject to the provisions of Section 10.4 hereof, or (b)
environmental conditions existing prior to the date hereof. Notwithstanding the
foregoing, because Tenant must carry insurance pursuant to Section 10.3.2,
below, to cover its personal property and all office furniture, trade fixtures,
office equipment and merchandise within the Premises and the Tenant Improvements
and Alterations, Tenant hereby agrees to protect, defend, indemnify and hold
Landlord harmless from any Claim with respect to any such property within the
Premises, to the extent such Claim is covered by Tenant's insurance, even if
resulting from the negligence or wilful misconduct of the Landlord Parties.
10.1.3 Landlord's Indemnity. Landlord shall indemnify, defend,
protect, and hold harmless Tenant and the Tenant Parties from any Claims
incurred in connection with or arising from (1) any cause in or about the Real
Property during the Lease Term (to the extent covered by Landlord's commercial
general liability insurance policies carried pursuant to the terms of Section
10.2 below), or (2) any negligent acts or omissions or wilful misconduct of any
of the Landlord Parties in, on, or about the Premises or the Real Property
(subject to the terms of the last sentence of Section 10.1.2, above), either
prior to, during, or after the expiration of the Lease Term, provided that,
except as set forth below, the terms of the foregoing indemnity shall not apply
to the extent such Claims arise from the negligence or wilful misconduct of the
Tenant Parties in connection with the Tenant Parties' activities in, on, or
about the Real Property. Notwithstanding the foregoing, because Landlord is
required to maintain pursuant to the terms of Section 10.2, below, insurance on
the Building and Real Property and Tenant compensates Landlord for such
insurance as part of Operating Expenses, Landlord hereby agrees to protect,
defend, indemnify and hold Tenant harmless from any Claims with respect to the
Building and Landlord's equipment and property on the Real Property to the
extent such Claim is covered by Landlord's insurance (or would have been covered
by insurance Landlord is obligated to provide hereunder), even if resulting from
the negligent acts or wilful misconduct of the Tenant Parties.
10.1.4 Waiver of Consequential Damages. Notwithstanding any
contrary provision of this Lease, neither Landlord nor Tenant shall be liable to
the other party for any consequential damages for a breach or default under this
Lease (excluding fraud or wilful misconduct), provided that this sentence shall
not be applicable to any consequential damages which may be incurred by the
Landlord Parties relating to or in connection with any holdover by Tenant
following the expiration of the Lease Term, subject to and in accordance with
the provisions of Article 16 hereof.
10.1.5 General Terms. The provisions of this Section 10.1 shall
survive the expiration or sooner termination of this Lease with respect to any
claims or liability occurring prior to such expiration or termination.
10.2 Landlord's Insurance. Landlord shall maintain during the Lease
Term commercial general liability insurance, "all-risk" insurance insuring the
Building against loss or damage due to fire and other casualties covered within
the classification of fire and extended coverage, vandalism coverage and
malicious mischief, sprinkler leakage, water damage, earthquake and special
extended coverage. Such coverage shall be written for one hundred percent (100%)
of the replacement cost value of the Building, without deduction for
depreciation, and shall be from such companies, and on such other terms and
conditions as Landlord may from time to time reasonably determine. Such
insurance coverage shall also include a rental loss endorsement (12 months)and
one or more loss payee endorsements in favor of the holders of any mortgages or
deeds of trust encumbering the interest of Landlord in the Real Property or the
ground or underlying lessors of the Real Property, or any portion thereof. Such
policy shall also contain a "stipulated value" endorsement deleting any
co-insurance provisions. Notwithstanding the foregoing provisions of this
Section 10.2, the coverage and amounts of insurance carried by Landlord in
connection with the Building shall at a minimum be comparable to the coverage
and amounts of insurance which are carried by institutional landlords of
Comparable Buildings. Landlord shall also carry Worker's Compensation and
Employee's Liability coverage as required by applicable law. Upon inquiry by
Tenant, from time to time, Landlord shall inform Tenant of all such insurance
carried by Landlord and provide Tenant with certificates relating thereto.
Tenant shall, at Tenant's expense, comply as to the Premises with all customary
insurance company requirements pertaining to the use of the Premises to the
extent consistent with the insurance company requirements imposed at the
Comparable Buildings. If Tenant's conduct or use of the Premises other than for
the uses permitted under Section 5.1 of this Lease causes any increase in the
premium for such insurance policies, then Tenant shall, following notice from
Landlord either (i) cease such conduct or use, or (ii) reimburse Landlord for
any such increase. Tenant, at Tenant's expense, shall comply with all rules,
orders, regulations or requirements of the
<PAGE> 14
American Insurance Association (formerly the National Board of Fire
Underwriters) and with any similar body to the extent consistent with the rules,
orders, regulations or requirements imposed at the Comparable Buildings.
Landlord may carry earthquake and flood insurance with a deductible of not less
than five percent (5%) of the replacement value of the Building at the time of
loss and not more than the amount of deductible then customarily maintained
under similar insurance with respect to Comparable Projects, and Tenant will
reimburse Landlord for the premium cost thereof.
10.3 Tenant's Insurance. Tenant shall maintain the following coverages
in the following amounts.
10.3.1 Commercial General Liability Insurance covering the
insured against claims of bodily injury, personal injury and property damage
arising out of Tenant's operations or use of the Premises, including a Broad
Form Commercial General Liability endorsement covering the insuring provisions
of this Lease and covering the performance by Tenant of the indemnity agreements
set forth in Section 10.1 of this Lease, for limits of liability not less than:
<TABLE>
<S> <C>
Bodily Injury and $5,000,000 each occurrence
Property Damage Liability $5,000,000 annual aggregate
Personal Injury Liability $5,000,000 each occurrence
$5,000,000 annual aggregate
</TABLE>
10.3.2 "All-Risk" Insurance, with commercially reasonable
deductibles, covering (i) all office furniture, trade fixtures, office
equipment, merchandise and all other items of Tenant's property on the Premises
installed by, for, or at the expense of Tenant, (ii) the Tenant Improvements,
and (iii) all other improvements, alterations and additions to the Premises,
including any improvements, alterations or additions installed at Tenant's
request above the ceiling of the Premises or below the floor of the Premises.
Such insurance shall be written for the full replacement cost value, new,
without deduction for depreciation, of the covered items and in amounts that
meet any co-insurance clauses of the policies of insurance and may include, at
Tenant's sole option, a vandalism and malicious mischief endorsement, and
sprinkler leakage coverage.
10.3.3 Form of Policies. The minimum limits of policies of
liability insurance required of Tenant or Landlord under this Lease shall in no
event limit the liability of Tenant or Landlord under this Lease. Each party's
insurance shall (i) name the other party (including, as to Landlord, the
"Lender," as described in Article 18 below), as an additional insured; (ii)
specifically cover the indemnity obligations of the insuring party set forth in
Section 10.1 of this Lease to the extent customarily and commercially available;
(iii) be issued by an insurance company having a rating of not less than B+/VII
in Best's Insurance Guide or which is otherwise reasonably acceptable to the
named party and licensed to do business in the State of California; (iv) be
primary insurance as to all claims thereunder and provide that any insurance
carried by the named party is not excess and is non-contributing with any
insurance requirement of the insuring party; and (v) contain a cross-liability
endorsement or severability of interest clause acceptable to the named party.
The insuring party shall cause its insurance carrier to provide that said
insurance carrier shall give thirty (30) days' (or ten days' in the event of
nonpayment of the premium) prior written notice to the named party and any
mortgagee or ground or underlying lessor of the named party prior to the date
said insurance is canceled. The parties agree that the insuring party may
satisfy its insurance requirements herein with a "blanket" or "umbrella"
insurance policy covering the Premises and other premises of the insuring party.
The insuring party shall deliver said policy or policies or certificates thereof
to the named party on or before the date that Tenant first enters the Premises
for purposes of performing any work or installing any of its fixtures, equipment
or personal property and at least thirty (30) days before the expiration dates
thereof. In the event the insuring party shall fail to procure such insurance,
or to deliver such policies or certificate at least thirty (30) days before the
expiration dates thereof, the named party may, at its option, if such failure
continues for ten (10) business days following written notice to the insuring
party, procure such policies for the account of the insuring party, and the cost
thereof shall be paid to the named party as Additional Rent within thirty (30)
days after delivery to the insuring party of bills therefor.
10.4 Subrogation. Landlord and Tenant agree to have their respective
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the case
may be. Landlord and Tenant hereby waive any right that either may have against
the other on account of any loss or damage to their respective property to the
extent such loss or damage is insurable under the
<PAGE> 15
types of policies of insurance set forth in Sections 10.2 and 10.3.2, above.
10.5 Additional Insurance Obligations. Tenant shall carry and maintain
during the entire Lease Term, at Tenant's sole cost and expense, such increased
amounts of the insurance required to be carried by Tenant pursuant to this
Article 10, and such other reasonable types of insurance coverage (exclusive, as
to insurance required under the provisions of Section 10.3, of earthquake and
flood insurance) and in such reasonable amounts covering the Premises and
Tenant's operations therein, as may be reasonably requested by Landlord;
provided that such requests shall be consistent with the treatment of comparable
tenants in the Comparable Buildings.
ARTICLE 11
DAMAGE AND DESTRUCTION
11.1 Repair of Damage to Premises by Landlord. Except in the case
where Landlord or its agents are already aware of the same, Tenant shall notify
Landlord of any material damage to the Premises resulting from fire or any other
casualty promptly following the date Tenant becomes aware of such damage. If the
Building or Premises shall be damaged by fire or other casualty, Landlord shall
promptly and diligently, subject to reasonable delays for insurance adjustment
or other matters beyond Landlord's reasonable control, and subject to all other
terms of this Article 11, restore the Building, the Building Structure and
Building Systems, except for those items which were constructed by or for the
benefit of Tenant above and beyond the Tenant Improvement Allowance (the "Base,
Shell and Core") . Such restoration shall be to substantially the same condition
of the Base, Shell and Core prior to the casualty, except for modifications
required by zoning and building codes and other laws. Notwithstanding any other
provision of this Lease, upon the occurrence of any damage to the Premises,
Tenant shall assign to Landlord (or to any party designated by Landlord) all
insurance proceeds payable to Tenant under Tenant's insurance required under
items (ii) and (iii) of Section 10.3.2 of this Lease, and Landlord shall repair
any injury or damage to the property covered by the proceeds being assigned.
Except as provided below with respect to the termination of the Lease, if the
cost of restoration of the Base, Shell and Core shall exceed the amount of
insurance proceeds scheduled to be received by Landlord from Landlord's
casualty, earthquake and/or flood insurance due to the deductible amounts under
such insurance (which deductible amounts shall not be in excess of commercially
reasonable amounts for Comparable Buildings), Tenant shall pay such shortfall
(not to exceed the deductible amounts permitted under this Lease or in the event
of earthquake damage, the first $150,000 of such deductible amount during the
Initial Term or the first $159,000 during any Option Terms) to Landlord prior to
Landlord's repair of the damage to the Base, Shell and Core. If the cost of such
repair to the Tenant Improvements by Landlord is estimated, after review of the
costs by Tenant, to exceed the amount of insurance proceeds scheduled to be
received by Landlord from Tenant's insurance carrier, as assigned by Tenant,
Tenant shall pay any such short fall to Landlord prior to Landlord's repair of
the damage. In the event this Lease shall terminate as a result of such damage,
(i) Tenant shall assign to Landlord the right to receive any insurance proceeds
received from Tenant's insurance carrier related to the Tenant Improvements
constructed utilizing the proceeds of the Tenant Improvement Allowance, and (ii)
Tenant shall retain the insurance proceeds related to those of the Tenant
Improvements which were constructed utilizing funds provided by Tenant over and
above the Tenant Improvement Allowance. Tenant shall retain all insurance
proceeds related to Tenant's personal property, furniture, fixtures and
equipment. In connection with such repairs and replacements, Tenant shall, prior
to the commencement of construction of the Tenant Improvements, submit to
Landlord, for Landlord's review and approval, which approval shall not be
unreasonably withheld, conditioned, or delayed, all plans, specifications and
working drawings relating thereto, and Tenant shall have the right to alter the
design of the previously existing Tenant Improvements, provided that such
redesign shall not delay the repairs and restoration, and Tenant shall select
the contractors to perform such improvement work; provided, however, that
Landlord shall have the right to approve the contractor and the primary
subcontractors relating to the Tenant Improvements, which approval shall not be
unreasonably withheld, conditioned or delayed. Landlord shall not be liable for
any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's
business resulting in any way from such damage or the repair thereof. Rent shall
abate if and to the extent rental loss insurance is being received by Landlord
or would have been so received if Landlord had obtained insurance which it is
required to obtain under this Lease.
11.2 Right To Terminate. Notwithstanding the terms of Section 11.1 of
this Lease, Landlord may elect not to rebuild and/or restore the Premises and/or
Building and/or Real Property and instead terminate this Lease by notifying
Tenant in writing (the "Landlord Termination Notice") of such termination within
sixty (60) days after the date of Landlord's discovery of damage (the "Damage
Date"), such notice to include a termination date giving Tenant ninety (90) days
to vacate the Premises, but Landlord may so elect only if the Premises, Building
and/or Real Property shall be damaged by fire or other casualty or cause,
whether or not the Premises are affected, and one or
<PAGE> 16
more of the following conditions is present: (i) repairs cannot reasonably be
completed within 225 days of the Damage Date (when such repairs are made without
the payment of overtime or other premiums); (ii) the cost of the damage exceeds
$1,000,000.00 or is not covered by Landlord's insurance policies, or (iii) the
holder of any mortgage on the Building or Real Property shall require (based on
such holder's legal right to so require for reasons other than a default by
Landlord under said mortgage) that the insurance proceeds or any portion thereof
be used to retire the mortgage debt and the remaining proceeds are not
sufficient to repair the damage, provided that in such instance, Landlord agrees
to negotiate in good faith with said holder to have the proceeds applied to
restoration. Likewise, Tenant may elect to terminate this Lease by notifying
Landlord in writing of such termination within sixty (60) days after the Damage
Date, such notice to include a termination date effective as of the date of the
notice, but Tenant may so elect only if the Premises, Building and/or Real
Property shall be damaged by fire or other casualty or cause, whether or not the
Premises are affected, and repairs cannot reasonably be completed within 225
days of the Damage Date (when such repairs are made without the payment of
overtime or other premiums).
11.3 Waiver of Statutory Provisions. The provisions of this Lease,
including this Article 11, constitute an express agreement between Landlord and
Tenant with respect to any and all damage to, or destruction of, all or any part
of the Premises, the Building or the Real Property, and any statute or
regulation of the State of California, including, without limitation, Sections
1932(2) and 1933(4) of the California Civil Code, with respect to any rights or
obligations concerning damage or destruction in the absence of an express
agreement between the parties, and any other statute or regulation, now or
hereafter in effect, shall have no application to this Lease or any damage or
destruction to all or any part of the Premises, the Building or the Real
Property.
ARTICLE 12
NONWAIVER
No waiver of any provision of this Lease shall be implied by any failure
of either party to enforce any remedy on account of the violation of such
provision, even if such violation shall continue or be repeated subsequently,
any waiver by either party of any provision of this Lease may only be in
writing, and no express waiver shall affect any provision other than the one
specified in such waiver and that one only for the time and in the manner
specifically stated. No receipt of monies by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Lease Term.
ARTICLE 13
CONDEMNATION
13.1 Permanent Taking. If the whole or any part of the Premises or
Building shall be taken by power of eminent domain or condemned by any competent
authority for any public or quasi-public use or purpose, or if any adjacent
property or street shall be so taken or condemned, or reconfigured or vacated by
such authority in such manner as to require the use, reconstruction or
remodeling of any part of the Premises or Building, or if Landlord shall grant a
deed or other instrument in lieu of such taking by eminent domain or
condemnation (collectively, a "Taking"), and if such Taking involves a Taking of
all or substantially all of the Premises, Landlord shall have the option to
terminate this Lease upon delivery of ninety (90) days' notice. If more than
twenty-five percent (25%) of the rentable square feet of the Premises is taken,
Tenant shall have the option to terminate this Lease upon delivery of ninety
(90) days' notice, provided such notice is given no later than 90 days after the
date of such taking. Landlord shall be entitled to receive the entire award or
payment in connection therewith, except that Tenant shall have the right to
receive an award for its relocation expenses, damages to Tenant's personal
property, trade fixtures, and loss of goodwill. All Rent shall be apportioned as
of the date of such termination, or the date of such taking, whichever shall
first occur. If any part of the Premises shall be taken, and this Lease shall
not be so terminated, the Rent shall be proportionately abated or reduced based
on the number of rentable square feet of the Premises so taken. Tenant hereby
waives any and all rights it might otherwise have pursuant to Section 1265.130
of The California Code of Civil Procedure, or any successor statute.
13.2 Temporary Taking. Notwithstanding anything to the contrary
contained in this Article 13, in the event of a temporary taking of all or any
portion of the Premises for a period of one hundred and twenty (120) days or
less, then this Lease shall not terminate but the Base Rent and the Additional
Rent shall be abated for the period of such taking (commencing on the date of
such taking) in proportion to the ratio that the amount of rentable square feet
of the Premises taken bears to the total rentable square feet of the Premises;
provided that if the remaining portion of the Premises is not sufficient to
allow Tenant to effectively conduct its business therein, and if Tenant does not
conduct its business from such remaining portion, then Base Rent and the
Additional Rent shall be abated
<PAGE> 17
for the entire Premises for such time as Tenant continues to be so prevented
from using, and does not use, the Premises. Landlord shall be entitled to
receive the entire award made in connection with any such temporary taking.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 Transfers. Subject to the provisions of this Article 14, Tenant
shall not, without the prior written consent of Landlord, assign, mortgage,
pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise
transfer, this Lease or any interest hereunder, permit any assignment or other
transfer of this Lease or any interest hereunder by operation of law, sublet the
Premises or any part thereof, or otherwise permit the occupancy or use of the
Premises by any persons other than Tenant, its Affiliates and their employees
(all of the foregoing are hereinafter sometimes referred to collectively as
"Transfers" and any person to whom any Transfer is made or sought to be made is
hereinafter sometimes referred to as a "Transferee"). Any Transfer with respect
to which Landlord's consent is required under this Article 14 and with respect
to which such consent requirement is not exempted under this Article 14 is
referred to herein as a "Consent Transfer." If Tenant desires Landlord's consent
to any Consent Transfer, Tenant shall notify Landlord in writing, which notice
(the "Transfer Notice") shall include (i) the proposed effective date of the
Transfer, which shall not be less than (a) in the case of a sublease of less
than 24,000 rentable square feet, ten (10) business days, (b) in the case of a
sublease of 24,000 square feet or more, fifteen (15) business days, and (c) in
the case of an assignment of this Lease or any other Transfer, twenty (20)
business days after the date of delivery of the Transfer Notice, (ii) a
description of the portion of the Premises to be transferred (the "Subject
Space"), (iii) all of the principal terms of the proposed Transfer and the
consideration therefor, including a calculation of the "Transfer Premium," as
that term is defined in Section 14.3 below, in connection with such Transfer,
the name and address of the proposed Transferee, and a copy of all existing
and/or proposed documentation pertaining to the proposed Transfer, including all
then existing material, executed operative documents to evidence such Transfer
or the agreements incidental or related to such Transfer, (iv) current financial
statements of the proposed Transferee and (v) to the extent reasonably
available, any other reasonable information reasonably and customarily required
by landlords of Comparable Buildings in connection with the review of similar
Transfers. Subject to the terms of this Article 14, any Consent Transfer made
without Landlord's prior written consent shall, at Landlord's option, be null,
void and of no effect. Whether or not Landlord consents to any Consent Transfer,
Tenant shall pay Landlord's review and processing fees, as well as any
reasonable legal fees incurred by Landlord, within thirty (30) days after
written request by Landlord.
14.2 Landlord's Consent. Landlord shall not unreasonably withhold,
delay or condition its consent to any proposed Consent Transfer. Subject to the
provisions of this Section 14.2, the parties hereby agree that it shall be
reasonable under this Lease and under any applicable law for Landlord to
withhold consent to any proposed Consent Transfer where one or more of the
following apply, without limitation as to other reasonable grounds for
withholding consent:
14.2.1 The Transferee is of a character or reputation or engaged
in a business which is materially inconsistent with the quality of the Building;
or
14.2.2 The Transferee intends to use the Subject Space for
purposes which are inconsistent with those permitted under this Lease; or
14.2.3 The Transferee is not a party of reasonable financial
worth and/or financial stability in light of the responsibilities to be
undertaken in connection with the Transfer on the date consent is requested;
provided that the provisions of this Section 14.2. shall be applicable only if
(i) the proposed Transfer is an assignment of Tenant's interest in the Lease,
(ii) the proposed Transfer concerns twenty thousand (20,000) rentable square
feet or more of the Premises, or (iii) upon the consummation of the proposal
Transfer, the Original Tenant and/or its Affiliates will not continue to
directly occupy (i.e., have not subleased or otherwise transferred its space) at
least forty thousand (40,000) rentable square feet of the Premises.
If Landlord consents to any Consent Transfer pursuant to the terms of
this Section 14.2, Tenant may within six months after Landlord's consent, but
not later than the expiration of said six-month period, enter into such Transfer
of the Premises or portion thereof, provided that if there are any material
changes in the terms and conditions from those specified in the Transfer Notice
such that Landlord would initially have been entitled to refuse its consent to
such Transfer under this Section 14.2, Tenant shall again submit the Transfer to
Landlord for its consent under this Article 14.
<PAGE> 18
14.3 Transfer Premium.
14.3.1 Definition of Transfer Premium. Subject to the terms of
this Article 14, if Landlord consents to a Consent Transfer, as a condition
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord one half of any "Transfer Premium," as that term is defined in this
Section 14.3, received by Tenant from such Transferee. "Transfer Premium" shall
mean all rent, additional rent or other consideration payable by such Transferee
in connection with the Transfer in excess of the Rent and Additional Rent
payable by Tenant under this Lease during the term of the Transfer on a per
rentable square foot basis if less than all of the Premises is transferred
(unless all or a portion of the Subject Space is subject to different Rent and
Additional Rent terms, in which case, to the extent applicable, such different
terms shall be applicable), after deducting the actual, out-of-pocket expenses
incurred or to be incurred by Tenant for the following (collectively, the
"Subleasing Costs") (i) any changes, alterations and improvements to the
Premises in connection with the Transfer, (ii) any space planning, architectural
or design fees or expenses incurred in marketing such space or in connection
with such Transfer, (iii) any improvement allowance or other monetary
concessions provided to the Transferee, (iv) any brokerage commissions incurred
by Tenant in connection with the Transfer, (v) legal fees incurred in connection
with the Transfer, including those fees and costs reimbursed to Landlord
pursuant to the last sentence of Section 14.1, (vi) any lease takeover costs
incurred by Tenant in connection with the Transfer, (vii) out-of-pocket costs of
advertising the space which is the subject of the Transfer, and (viii) the
amount of any Base Rent and Additional Rent paid by Tenant to Landlord with
respect to the Subject Space during the period, not to exceed four (4) months,
commencing on the later of (a) the earlier of the date Tenant contracts with a
reputable broker to market the Subject Space or commences negotiations with the
Transferee as evidenced by an exchange of proposals, or (b) the date Tenant
vacates the Subject Space, until the commencement of the term of the Transfer.
"Transfer Premium" shall also include, but not be limited to, key money, bonus
money or other cash consideration paid by Transferee to Tenant in connection
with such Transfer, but shall exclude any payment which is not in excess of fair
market value for (i) services rendered by Tenant to Transferee or (ii) for
assets, fixtures, inventory, equipment, or furniture transferred by Tenant to
Transferee in connection with such Transfer.
14.3.2 Payment of Transfer Premiums. The determination of the
amount of the Transfer Premium shall be made on a monthly basis in accordance
with the terms of this Section 14.3.2, as rent or other consideration is
received by Tenant by under the Transfer. For purposes of calculating the
Transfer Premium, Tenant's Subleasing Costs shall be credited against the first
amounts received by Tenant as a result of the Transfer.
14.4 Effect of Transfer. Subject to the terms of this Article 14, if
Landlord consents to a Consent Transfer, (i) the terms and conditions of this
Lease shall in no way be deemed to have been waived or modified, (ii) such
consent shall not be deemed consent to any further Consent Transfer by either
Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after
execution, an original executed copy of all documentation pertaining to the
Transfer, and (iv) Tenant shall furnish upon Landlord's request a reasonable
statement, certified by an independent certified public accountant, or Tenant's
chief financial officer or other appropriate officer of Tenant, setting forth in
reasonable detail the computation of any Transfer Premium Tenant has derived and
expects to derive from such Transfer. No Transfer relating to this Lease or
agreement entered into with respect thereto, whether with or without Landlord's
consent, shall relieve Tenant from liability under this Lease, including,
without limitation, in connection with the Subject Space, unless Tenant shall
provide evidence acceptable to Landlord, in its sole but reasonable discretion,
to the effect that the Transferee has a net worth in excess of $350,000,000.
Landlord or its authorized representatives shall have the right at all
reasonable times during normal business hours following ten (10) business days
advance notice to audit the books, records and papers of Tenant directly
relating to any Consent Transfer. If the Transfer Premium respecting any Consent
Transfer shall be found understated, or overstated, the appropriate party shall
within thirty (30) days after demand, pay to the other the deficiency or excess,
and if understated by more than ten percent (10%), Tenant shall pay Landlord's
costs of such audit.
14.5 Non-Transfers. Notwithstanding anything to the contrary contained
in this Article 14, an assignment of this Lease or subletting of all or a
portion of the Premises to an entity (an "Affiliate") which is controlled by,
controls, or is under common control with, Tenant or Tenant's parent or any
subsidiary of Tenant or Tenant's parent, or to a resulting entity from a merger
or consolidation of Tenant with another entity, shall not be deemed a Transfer
under this Article 14, and Landlord's consent shall not be required in
connection therewith, provided that Tenant notifies Landlord of any such
assignment or sublease and promptly supplies Landlord with any documents or
information reasonably requested by Landlord regarding such assignment or
sublease or such Affiliate or resulting entity, and further provided that such
assignment or sublease is not a subterfuge by Tenant to avoid its
<PAGE> 19
obligations under this Lease and shall in no way relieve Tenant from any
liability under this Lease. "Control," as used in this Section 14.5, shall mean
the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person or entity, whether through
the ownership of voting securities, by contract or otherwise. As used in this
Section 14.5, "Affiliate" shall also include any entity which is subleasing from
Tenant less than 12,000 square feet of rentable area of the Premises and on a
consolidated basis no more than 36,000 square feet and with respect to which no
demising wall is to be erected, and with the only identification of such
subtenant appearing on the door or doors to the offices, if any, in that portion
or portions of the Premises being occupied by such sublessee.
ARTICLE 15
SURRENDER OF PREMISES; OWNERSHIP
AND REMOVAL OF TRADE FIXTURES
15.1 Surrender of Premises. No act or thing done by Landlord or any
agent or employee of Landlord during the Lease Term shall be deemed to
constitute an acceptance by Landlord of a surrender of the Premises unless such
intent is specifically acknowledged in a writing signed by Landlord. The
delivery of keys to the Premises to Landlord or any agent or employee of
Landlord shall not constitute a surrender of the Premises or effect a
termination of this Lease, whether or not the keys are thereafter retained by
Landlord, and notwithstanding such delivery Tenant shall be entitled to the
return of such keys at any reasonable time upon request until this Lease shall
have been properly terminated. The voluntary or other surrender of this Lease by
Tenant, whether accepted by Landlord or not, or a mutual termination hereof,
shall not work a merger.
15.2 Removal of Tenant Property by Tenant. Upon the expiration of the
Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this Article 15 and Section 8.4 above, quit and surrender
possession of the Premises to Landlord in good order and condition, reasonable
wear and tear, casualty events, damage resulting from the negligence or
misconduct of the Landlord Parties, and repairs which are specifically made the
responsibility of Landlord hereunder excepted. Upon such expiration or
termination, Tenant shall, without expense to Landlord, remove or cause to be
removed from the Premises all debris and rubbish, and such items of
free-standing furniture, equipment, cabinet work, and other personal property
owned by Tenant or installed or placed by Tenant at its expense in the Premises,
and such similar articles of any other persons claiming under Tenant, as
Landlord may, in its sole discretion, require to be removed, and, subject to the
terms of this Lease, Tenant shall repair at its own expense all damage to the
Premises and Building resulting from such removal.
ARTICLE 16
HOLDING OVER
(a) If Tenant holds over after the expiration of the Lease Term
hereof, with or without the express or implied consent of Landlord, such tenancy
shall be from month-to-month only, and shall not constitute a renewal hereof or
an extension for any further term, and in such case Base Rent shall be payable
at a monthly rate equal to one hundred fifty percent (150%) of the Base Rent
applicable during the last rental period of the Lease Term under this Lease.
Such month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein. Nothing contained in this Article 16 shall be
construed as consent by Landlord to any holding over by Tenant, and Landlord
expressly reserves the right to require Tenant to surrender possession of the
Premises to Landlord as provided in this Lease upon the expiration or other
termination of this Lease. Except for the time limitation on Landlord's right to
seek consequential damages set forth in the next sentence (which time limitation
shall also apply to Landlord's rights to seek damages other than by reason of
the following sentence), the provisions of this Article 16 shall not be deemed
to limit or constitute a waiver of any other rights or remedies of Landlord
provided herein or at law. If Tenant fails to surrender the Premises within
sixty (60) days after the termination or expiration of this Lease, then, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from all loss, costs
(including reasonable attorneys' fees) and liability resulting from such
failure, including, without limiting the generality of the foregoing, any claims
made by any succeeding tenant founded upon such failure to surrender, and any
lost profits to Landlord resulting therefrom.
(b) Notwithstanding the foregoing, by written notice to Landlord
given at least 270 days prior to the expiration of the original Term, Tenant
shall have one time right to elect to holdover in the Premises (which holdover
will be deemed to be with Landlord's consent) for one (1), two (2), or three (3)
full months (as specified in Tenant's notice) at a Base Rent of $1.75 per
"rentable square feet" per month and Additional Rent, and such continued
occupancy by Tenant shall be subject to all of the other terms, covenants and
conditions of this Lease, so
<PAGE> 20
far as applicable. The Lease Term will be extended for the period specified in
such notice by Tenant to Landlord and a vacation of the Premises by Tenant prior
to such date will not relieve Tenant of liability for Monthly Base Rent and
Additional Rent accruing under this Lease through the expiration of the Term, as
extended pursuant to Tenant's notice. The provisions of this Subsection 16(b)
will survive the expiration or earlier termination of this Lease.
ARTICLE 17
ESTOPPEL CERTIFICATES
Within fifteen (15) business days following a request in writing by
Landlord, Tenant shall execute and deliver to Landlord an estoppel certificate,
which, as submitted by Landlord, shall be substantially in the form of Exhibit
F, attached hereto, indicating therein any exceptions thereto that may exist at
that time, and shall also contain any other customary factual information
certified to Tenant's knowledge, without a duty of investigation or inquiry by
Tenant, reasonably requested by Landlord or Landlord's mortgagee or prospective
mortgagee. Tenant shall execute and deliver whatever other instruments may be
reasonably required for such purposes. Landlord hereby agrees to provide to
Tenant an estoppel certificate signed by Landlord, containing the same types of
information, and within the same periods of time, as set forth above, with such
changes as are reasonably necessary to reflect that the estoppel certificate is
being granted to Tenant by Landlord, rather than being granted by Tenant to
Landlord or to a lender.
ARTICLE 18
SUBORDINATION
Subject to the terms of this Article 18, this Lease shall be subject and
subordinate to all future ground or underlying leases of the Real Property and
to the lien of any "Lender," which in this Lease shall mean any mortgagee under
a mortgage or beneficiaries under any trust deeds hereafter in force against the
Real Property and the Building, if any, and to all renewals, extensions,
modifications, consolidations and replacements thereof, and to all advances made
or hereafter to be made upon the security of such mortgages or trust deeds,
unless the Lenders or the lessors under such ground lease or underlying leases,
require in writing that this Lease be superior thereto. Landlord's delivery to
Tenant of commercially reasonable non-disturbance agreement(s) in favor of
Tenant from any ground lessors or Lenders, or ground lessors or Lenders who come
into existence at any time prior to the expiration of the Lease Term shall be in
consideration of, and a condition precedent to, Tenant's agreement to be
bound by the terms of this Article 18. Subject to the non-disturbance
agreements described above, Tenant covenants and agrees in the event any
proceedings are brought for the foreclosure (or deed lieu thereof) of any such
mortgage, or if any ground or underlying lease is terminated, to attorn, to the
lien holder or purchaser or any successors thereto upon any such foreclosure
sale (or deed in lieu thereof), or to the lessor of such ground or underlying
lease, as the case may be, if so requested to do so by such purchaser or lessor,
and to recognize such purchaser or lessor as the lessor under this Lease. Tenant
shall, within 10 business days of request by Landlord, execute such further
instruments or assurances as Landlord may reasonably deem necessary, including a
Subordination, Nondisturbance and Attornment Agreement or other similar form
reasonably required by any lender making a loan secured by the Property to
evidence or confirm the subordination or superiority of this Lease to any such
mortgages, trust deeds, ground leases or underlying leases, subject to the terms
of this Article 18.
ARTICLE 19
DEFAULTS; REMEDIES
19.1 Events of Default. The occurrence of any of the following shall
constitute an event of default ("Event of Default") under this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease, or any part thereof, within ten (10)
business days after the due date thereof; or
19.1.2 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed by
Tenant where such failure continues for thirty (30) days after written notice
thereof from Landlord to Tenant; provided that if the nature of such default is
such that the same cannot reasonably be cured within a thirty (30)-day period,
Tenant shall not be deemed to be in default if it commences such cure within
such period and thereafter proceeds to rectify and cure said default with
reasonable diligence; or
19.1.3 The failure by Tenant to observe or perform according to
the provisions of Article 17 or
<PAGE> 21
Article 18 of this Lease where such failure continues for more than ten (10)
business days after notice from Landlord.
All notices to be given pursuant to this Section 19.1 shall be in
addition to and not in lieu of the notice requirements of the California Code of
Civil Procedure Section 1161 et seq.
19.2 Remedies Upon Default. Upon the occurrence of any Event of
Default by Tenant, Landlord shall have, in addition to any other remedies
available to Landlord at law or in equity, the option to pursue any one or more
of the following remedies, each and all of which shall be cumulative and
nonexclusive, without any notice or demand whatsoever.
19.2.1 Terminate this Lease, in which event Tenant shall
immediately surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, subject to due process of law and without prejudice to any other
remedy which it may have for possession or arrearages in rent, enter upon and
take possession of the Premises and expel or remove Tenant and any other person
who may be occupying the Premises or any part thereof; and Landlord may recover
from Tenant the following:
(i) The worth at the time of award of any unpaid rent
which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by
which the unpaid rent for the balance of the Lease Term after the time
of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus
(iv) Any other amount reasonably necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to
perform its obligations under this Lease or which in the ordinary course
of things would be likely to result therefrom, specifically including
but not limited to, brokerage commissions and advertising expenses
incurred, expenses of remodeling the Premises or any portion thereof for
a new tenant, whether for the same or a different use, and any special
concessions made to obtain a new tenant; and
(v) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to
time by applicable law.
The term "rent" as used in this Section 19.2 shall be deemed to be and
to mean all sums of every nature required to be paid by Tenant to Landlord
pursuant to the terms of this Lease. As used in Paragraphs 19.2.1(i) and (ii),
above, the "worth at the time of award" shall be computed by allowing interest
at the rate set forth in Article 25 of this Lease, but in no case greater than
the maximum amount of such interest permitted by law. As used in Paragraph
19.2.1(iii) above, the "worth at the time of award" shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California
Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's
breach and abandonment and recover rent as it becomes due, if lessee has the
right to sublet or assign, subject only to reasonable limitations). Accordingly,
if Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
19.3 Sublessees of Tenant. In the event Landlord elects to terminate
this Lease on account of any Event of Default by Tenant, Landlord shall have the
right to terminate any and all subleases, licenses, concessions or other
consensual arrangements for possession entered into by Tenant and affecting the
Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in
such subleases, licenses, concessions or arrangements. In the event of
Landlord's election to succeed to Tenant's interest in any such subleases,
licenses, concessions or arrangements, Tenant shall, as of the date of notice by
Landlord of such election, have no further right to or interest in the rent or
other consideration receivable thereunder.
<PAGE> 22
19.4 Waiver of Default. No waiver by Landlord or Tenant of any
violation or breach of any of the terms, provisions and covenants herein
contained shall be deemed or construed to constitute a waiver of any other or
later violation or breach of the same or any other of the terms, provisions, and
covenants herein contained. Forbearance by Landlord or Tenant in enforcement of
one or more of the remedies herein provided upon an Event of Default shall not
be deemed or construed to constitute a waiver of such default. The acceptance of
any Rent or other payment hereunder by Landlord or Tenant following the
occurrence of any default, whether or not known to Landlord or Tenant, as the
case may be, shall not be deemed a waiver of any such default, except only a
default in the payment of the Rent or other payment so accepted.
19.5 Efforts to Relet. For the purposes of this Article 19, neither
this Lease nor Tenant's right to possession shall be deemed to have been
terminated by efforts of Landlord to relet the Premises, by its acts of
maintenance or preservation with respect to the Premises, or by appointment of a
receiver to protect Landlord's interests hereunder. The foregoing enumeration is
not exhaustive, but merely illustrative of acts which may be performed by
Landlord without terminating this Lease or Tenant's right to possession.
19.6 Landlord Default. Notwithstanding anything to the contrary set
forth in this Lease, Landlord shall be in default in the performance of any
obligation required to be performed by Landlord pursuant to this Lease if (i)
Landlord is obligated to make a payment of money to Tenant, and Landlord fails
to pay such unpaid amounts within ten (10) days of written notice from Tenant
that the same was not paid when due, or (ii) such failure is other than the
obligation to pay money, and Landlord fails to perform such obligation within
thirty (30) days after the receipt of notice from Tenant specifying in detail
Landlord's failure to perform; provided, however, if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be in default under this Lease if it shall
commence such performance within such thirty (30) day period and thereafter
diligently pursue the same to completion. Upon any such default by Landlord
under this Lease, Tenant may, except as otherwise specifically provided in this
Lease to the contrary, exercise any of its rights provided at law or in equity;
provided that, except as otherwise specifically provided in this Lease to the
contrary, Tenant shall have no right to terminate this Lease. Tenant shall have
the right to terminate this Lease if after giving the notice required above,
Landlord fails timely to pay the Tenant Improvement Allowance or cure a breach
of the covenant of quiet enjoyment.
ARTICLE 20
COVENANT OF QUIET ENJOYMENT
Subject to Landlord's rights following an Event of Default, Landlord
covenants that during the Lease Term Tenant shall peaceably and quietly have,
hold and enjoy the Premises subject to the terms, covenants, conditions,
provisions and agreements hereof without interference by any persons lawfully
claiming by or through Landlord. The foregoing covenant is in lieu of any other
covenant express or implied, except as otherwise expressly provided in this
Lease.
ARTICLE 21
FORCE MAJEURE
Any prevention, delay or stoppage due to strikes, lockouts, labor
disputes, acts of God, inability to obtain services, labor, or materials or
reasonable substitutes therefor after reasonable efforts to do so, governmental
actions, civil commotions, fire or other casualty, and other causes beyond the
reasonable control of the party obligated to perform, except with respect to the
obligations imposed with regard to Rent and other monetary charges to be paid
pursuant to this Lease, and except with regard to the time periods set forth in
Article 11 of this Lease, but preserving the use of this Article in the context
of Article 11 to the extent that the delays described above are on a
"industry-wide" basis and cannot be specifically resolved with respect to the
Premises independent of the industry-wide circumstances (collectively, the
"Force Majeure"), notwithstanding anything to the contrary contained in this
Lease, shall excuse the performance of such party for a period equal to any such
prevention, delay or stoppage and, therefore, if this Lease specifies a time
period for performance of an obligation of either party, that time period shall
be extended by the period of any delay in such party's performance caused by a
Force Majeure.
<PAGE> 23
ARTICLE 22
ATTORNEYS' FEES
If either party commences an action against the other for the specific
performance of this Lease, for damages for the breach hereof or otherwise for
enforcement of any remedy hereunder, the parties hereto agree that the
prevailing party shall be entitled to recover from the other party such costs
and reasonable attorneys' fees as may have been incurred, including any and all
costs incurred in enforcing, perfecting and executing such judgment.
ARTICLE 23
SIGNS
23.1 Monument Signage.
23.1.1 Design and Approval. Subject to the provisions of this
Section 23.1, and any applicable governmental requirements, Tenant shall have
the exclusive right to have a "Tenant Name" as that term is defined below,
placed upon a monument sign (the "Monument Sign") located in front of the
Building.
23.1.2 Tenant Name. Tenant shall have the right at Tenant's
expense, to designate from time to time during the Lease Term, including any
Option Term, as the "Tenant Name", either (i) the name and/or logo of Tenant, or
(ii) the name and/or logo of a Transferee of Tenant properly approved by
Landlord pursuant to the terms of Article 14, and which Transferee occupies at
least fifty percent (50%) of the Premises, provided that such Tenant Name shall
not be an "Objectionable Name" as that term is defined in this Section 23.1.2,
below. The term "Objectionable Name" shall mean any name which relates to an
entity which is of a character or reputation, or is associated with a political
orientation or faction, which is inconsistent with the quality of the Real
Property, or which would otherwise reasonably offend a landlord of a Comparable
Building.
23.1.3 Repair and Maintenance; Government Approval. Tenant shall
be responsible for the cost of the design, permitting, construction and
installation of the Monument Sign and Tenant Name (the "Sign Cost"), and shall
also be responsible for the repair and maintenance during the Lease Term of the
Monument Sign. Tenant shall also be responsible for the cost and expense of the
removal of its name from and restoration of the Building, if affected by the
Monument Sign (or from the sign itself, but without restoration obligations) as
of the expiration or earlier termination of the Lease. Tenant acknowledges and
agrees that the Monument Sign shall be subject to all necessary approvals and
permits from governmental agencies and shall comply with the CC&Rs.
23.2 Building Signage. Tenant shall have the exclusive right, during
the Lease Term, at Tenant's sole cost and expense, to install a sign, with the
specifications as set forth on Exhibit G, attached hereto, on the exterior of
the Building containing the Tenant Name (the "Building Signage"), provided that
such Building Signage shall be subject to all of the terms of the CC&Rs and any
applicable governmental requirements. Except as provided in this Lease, Tenant
shall be responsible, at Tenant's sole cost and expense, to repair and maintain
the Building Signage in first class condition during the Lease Term. In addition
Tenant shall be responsible for the cost and expense of the removal of the
Building Signage as of the termination or earlier expiration of the Lease Term,
and for the cost of repair of any damage to the Building resulting from such
removal.
23.3 Prohibited Signage and Other Items. Except as approved elsewhere
in this Lease, any signs, notices, logos, pictures, names or advertisements
which are installed and visible from the exterior of the Premises and/or
Building and that have not been individually approved by Landlord may be removed
without notice by Landlord at the sole expense of Tenant. Any signs, window
coverings, or blinds (even if the same are located behind the Landlord approved
window coverings for the Building), or other items visible from the exterior of
the Premises or Building are subject to the prior approval of Landlord, in its
sole but reasonable discretion. Landlord shall have the right to refer to the
Tenant Name in connection with its ownership and operation of the Building,
including its sales and promotional materials and regulatory filings.
ARTICLE 24
COMPLIANCE WITH LAW
Neither Landlord nor Tenant shall do anything in or about the Premises
which will in any way conflict with any law, statute, ordinance or other
governmental rule, regulation or requirement now in force or which may hereafter
be enacted or promulgated (collectively, "Laws"). To the best of Landlord's
knowledge, the Premises comply with all Laws as of the date hereof. Should any
Laws now or hereafter be imposed on Landlord or Tenant
<PAGE> 24
by a state, federal or local governmental body charged with the establishment,
regulation and enforcement of occupational, health or safety standards for
employers, employees or tenants, then (i) Tenant agrees, at its sole cost and
expense, to comply promptly with such Laws if they relate to any of the Tenant
Maintenance Items, the Tenant Improvements or the Alterations or Tenant's use
and occupancy of the Premises and to make all alterations to the Premises,
Building, and/or Real Property as are required to comply with such Laws and (ii)
Landlord shall comply with and all other Laws, including those which relate to
the Landlord Maintenance Items, unless such compliance obligations are triggered
by the construction of the Tenant Improvements or Alterations, in which event
such compliance obligations to the Landlord Maintenance Items shall be at
Tenant's sole cost and expense.
ARTICLE 25
LATE CHARGES
Any Rent or other amounts payable to Landlord under this Lease, if not
paid by the fifth day after the due date, shall incur a late charge of five
percent (5%) for Landlord's administrative expense in processing such delinquent
payment and in addition thereto shall bear interest at the rate of fifteen
percent (15%) per annum from and after the due date for such payment. In no
event shall the rate of interest payable on any late payment exceed the legal
limits for such interest enforceable under applicable law. The interest shall
accrue from the date such payment was due until the date such payment is
received. Such late charge and interest shall be payable immediately to Landlord
as Additional Rent hereunder. Acceptance of such late charge by Landlord shall
in no event constitute a waiver of Tenant's default with respect to such overdue
amount, or prevent Landlord from exercising any of the other rights and remedies
granted hereunder. Nothing contained in this paragraph, however, shall be
construed to require Landlord to accept a late payment from Tenant. If Landlord
does accept a late payment from Tenant, then Tenant shall remain in default
under this lease until Tenant pays all late charge(s) and interest provided for
in this paragraph. There will also be a charge should any check be returned by a
bank for insufficient funds.
ARTICLE 26
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
26.1 Landlord's Cure. Except as otherwise specifically set forth in
this Lease, all covenants and agreements to be kept or performed by Tenant under
this Lease shall be performed by Tenant at Tenant's sole cost and expense and
without any reduction of Rent. If Tenant shall fail to perform any of its
obligations under this Lease within a reasonable time after such performance is
required by the terms of this Lease, Landlord may, but shall not be obligated
to, after thirty (30) days prior notice to Tenant (or in the case of an
emergency, after such notice as is reasonable under the circumstances), make any
such payment or perform any such act on Tenant's part without waiving its right
based upon any default of Tenant and without releasing Tenant from any
obligations hereunder.
26.2 Tenant's Reimbursement. Except as may be specifically provided to
the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15)
days after delivery by Landlord to Tenant of statements therefor, sums equal to
expenditures reasonably made and obligations reasonably incurred by Landlord in
connection with the remedying by Landlord of Tenant's defaults pursuant to the
provisions of Section 26.1. Tenant's obligations under this Section 26.2 shall
survive the expiration or sooner termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Subject to the provisions of this Lease, and provided Landlord uses
commercially reasonable efforts to minimize any interference with Tenant's
business, Landlord reserves the right during the hours 9:00 A.M. to 5:00 P.M.,
Monday through Friday (other than a holiday) or at other times when Tenant is
open for business and upon reasonable notice to the Tenant (or in the case of an
emergency upon such notice as is reasonable under the circumstances, including
such attempts as may be reasonable under the circumstances to reach Tenant by
telephone) to enter the Premises to (i) inspect them; (ii) show the Premises to
prospective purchasers, mortgagees or tenants, ground or underlying lessors or
insurers (provided that such right shall not extend to prospective tenants until
twelve (12) months prior to the Lease Expiration Date); (iii) post notices of
nonresponsibility; or (iv) alter, improve or repair the Premises or the Building
if necessary to comply with Laws, or for alterations, repairs or improvements to
the Landlord Maintenance Items. Notwithstanding anything to the contrary
contained in this Article 27, and subject to the notice requirements set forth
in Section 19.1.2, above, and Landlord's compliance with the terms of
<PAGE> 25
Section 26.1, Landlord may enter the Premises at any time to perform any
covenants of Tenant which Tenant fails to perform. Except as otherwise expressly
provided in this Lease, any such entries shall be without the abatement of Rent
and shall include the right to take such reasonable steps as required to
accomplish the stated purposes. Tenant hereby waives any claims (not including
claims for physical property damages (subject to Section 10.4 hereof) or
personal injury damages) for any injuries or inconvenience to or interference
with Tenant's business or lost profits, occasioned thereby. For each of the
above purposes, Landlord shall at all times have a key with which to unlock all
the doors in the Premises, excluding Tenant's vaults, safes and special security
areas designated in advance by Tenant. In an emergency, Landlord shall have the
right to use any means that Landlord may in good faith deem proper to open the
doors in and to the Premises. Subject to the provisions of this Lease, any entry
into the Premises by Landlord in the manner hereinbefore described shall not be
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or an actual or constructive eviction of Tenant from any portion of the
Premises. Notwithstanding the foregoing, as reasonably necessary in connection
with Tenant's business use of the Premises, Tenant may designate certain secure
areas, and on prior written notice to Landlord of these areas, Tenant may deny
Landlord access to such areas except in an emergency or when Landlord is
accompanied by Tenant. Subject to the provisions of this Lease, no provision of
this Lease shall be construed as obligating Landlord to perform any repairs,
alterations or decorations except as otherwise expressly agreed to be performed
by Landlord herein.
ARTICLE 28
INTENTIONALLY OMITTED
ARTICLE 29
MISCELLANEOUS PROVISIONS
29.1 Terms. The necessary grammatical changes required to make the
provisions hereof apply either to corporations or partnerships or individuals,
men or women, as the case may require, shall in all cases be assumed as though
in each case fully expressed.
29.2 Binding Effect. Each of the provisions of this Lease shall extend
to and shall, as the case may require, bind or inure to the benefit not only of
Landlord and of Tenant, but also of their respective successors or assigns,
provided this clause shall not permit any assignment by Tenant contrary to the
provisions of Article 14 of this Lease.
29.3 No Air Rights. No rights to any view or to light or air over any
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease.
29.4 Modification of Lease. Should any prospective mortgagee or ground
lessor for the Building or Real Property require a modification or modifications
of this Lease, which modification or modifications will not directly or
indirectly cause an increased cost or expense to Tenant under this Lease or in
connection with Tenant's business operations, or have any negative economic
impact, or any other material negative impact, on the Premises or Tenant's
occupancy of the Premises or in any other way adversely change the rights and
obligations of Tenant hereunder including, without limitation, all rights and
obligations of Tenant with respect to renewal, assignment and subletting,
insurance proceeds and Tenant's rights to terminate this Lease, or receive
abatement of Rent, then and in such event, Tenant agrees that this Lease may be
so modified at Landlord's sole cost and expense (including Tenant's reasonable
attorneys' fees for review of the same), and agrees to execute whatever
reasonable documents are required therefor and deliver the same to Landlord
within thirty (30) days following the request therefor. Should Landlord or any
such prospective mortgagee or ground lessor require execution of a short form of
Lease for recording, containing, among other customary provisions, the names of
the parties, a description of the Premises and the Lease Term, Tenant agrees to
execute such short form of Lease and to deliver the same to Landlord within
fifteen (15) business days following Tenant's receipt of written request
therefor.
29.5 Transfer of Landlord's Interest. Tenant acknowledges that
Landlord has the right to transfer all or any portion of its interest in the
Real Property and Building and in this Lease. Tenant agrees that in the event of
a transfer of fee title and provided that such transferee is a bona fide
purchaser and agrees in writing to perform all of Landlord's obligations
thereafter accruing, Landlord shall automatically be released from all liability
under this Lease thereafter accruing and Tenant agrees to look solely to such
transferee for the performance of Landlord's obligations hereunder arising or
accruing after the date of transfer upon agreement by such transferee to fully
assume and be liable for all obligations of this Lease to be performed by
Landlord which first accrue or arise after the date of the conveyance, and
Tenant shall attorn to such transferee. Tenant further acknowledges that
Landlord
<PAGE> 26
may assign its interest in this Lease to a mortgage lender as additional
security and agrees that such an assignment shall not release Landlord from its
obligations hereunder and that unless and until such mortgage lender succeeds to
Landlord's interest and obligations hereunder, Tenant shall continue to look to
Landlord for the performance of its obligations hereunder.
29.6 Prohibition Against Recording. A memorandum of this Lease may be
recorded by Tenant provided Landlord may first require Tenant's agreement to
deliver to Landlord an executed, recordable, memorandum of termination of the
same, within ten (10) business days after the expiration or earlier termination
of this Lease and provided Tenant will pay all costs of such recordation.
29.7 Landlord's Title. Subject to and except for the rights of Tenant
expressly set forth in this Lease, Landlord's title is and always shall be
paramount to the title of Tenant, and nothing herein contained shall empower
Tenant to do any act which can, shall or may encumber the title of Landlord.
29.8 Captions. The captions of Articles and Sections are for
convenience only and shall not be deemed to limit, construe, affect or alter the
meaning of such Articles and Sections.
29.9 Relationship of Parties. Nothing contained in this Lease shall be
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant.
29.10 Time of Essence. Time is of the essence of this Lease and each of
its provisions.
29.11 Partial Invalidity. If any term, provision or condition contained
in this Lease shall, to any extent, be invalid or unenforceable, the remainder
of this Lease, or the application of such term, provision or condition to
persons or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
29.12 No Warranty. Except as otherwise expressly set forth in this
Lease, in executing and delivering this Lease, Tenant has not relied on any
representation, including, but not limited to, any representation whatsoever as
to the amount of any item comprising Additional Rent or the amount of the
Additional Rent in the aggregate or that Landlord is furnishing the same
services to other tenants, at all, on the same level or on the same basis, or
any warranty or any statement of Landlord which is not set forth herein or in
one or more of the exhibits attached hereto.
29.13 Landlord Exculpation. It is expressly understood and agreed that,
notwithstanding anything in this Lease to the contrary, the liability of
Landlord or the Landlord Parties to Tenant for performance of Landlord's
obligation under the Lease shall be (i) limited solely and exclusively to an
amount which is equal to the interest of Landlord in the Building and Real
Property and to the proceeds of any insurance (the cost of which is included in
Operating Expenses) or condemnation awards received by Landlord pursuant to the
items of Article 13 of this Lease and (ii) subject to the waiver of
consequential damages set forth in Section 10.1, above. Neither Landlord, nor
any of the Landlord Parties shall have any personal liability therefor, and
Tenant hereby expressly waives and releases such personal liability on behalf of
itself and all persons claiming by, through or under Tenant; provided, however,
if Landlord incurs any liability to Tenant under this Lease which liability is
reduced to a judgment against Landlord, then Tenant shall be entitled to deduct
the amount of such judgment from Rent payable by Tenant under this Lease. The
limitations of liability contained in this Section 29.13 shall inure to the
benefit of Landlord's and the Landlord Parties' present and future partners,
beneficiaries, officers, directors, trustees, shareholders, agents and
employees, and their respective partners, heirs, successors and assigns.
29.14 Entire Agreement. It is understood and acknowledged that there
are no oral agreements between the parties hereto affecting this Lease and this
Lease supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties hereto or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease. This Lease
(including all exhibits attached hereto), and any side letter or separate
agreement executed by Landlord and Tenant in connection with this Lease and
dated of even date herewith contain all of the terms, covenants, conditions,
warranties and agreements of the parties relating in any manner to the rental,
use and occupancy of the Premises, shall be considered to be the only agreement
between the parties hereto and their representatives and agents, and none of the
terms, covenants, conditions or provisions of this Lease can be modified,
<PAGE> 27
deleted or added to except in writing signed by the parties hereto. All
negotiations and oral agreements acceptable to both parties have been merged
into and are included herein. There are no other representations or warranties
between the parties, and all reliance with respect to representations is based
totally upon the representations and agreements contained in this Lease.
29.15 Intentionally Omitted.
29.16 Notices. All notices, demands, statements, designations,
approvals or other communications (collectively, "Notices") given or required to
be given by either party to the other hereunder or by law shall be in writing,
and shall be delivered personally or by nationally recognized overnight courier
service or sent by United States certified or registered mail, postage prepaid,
return receipt requested (i) to Tenant at the appropriate addresses set forth in
Section 5 of the Summary, or to such other place in the continental United
States as Tenant may from time to time designate in a Notice to Landlord; or
(ii) to Landlord at the addresses set forth in Section 3 of the Summary, or to
such other firm or to such other place in the continental United States as
Landlord may from time to time designate in a Notice to Tenant. Any Notice will
be deemed given on the date it is received as provided in this Section 29.16 or
upon the date personal delivery is made. If Tenant is notified of the identity
and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall
give to such mortgagee or ground or underlying lessor at the address set forth
in such notice a written notice of any default by Landlord under the terms of
this Lease and allow such mortgagee or ground or underlying lessor 30 days
within which to cure such default.
29.17 Authority. If either party is a corporation or partnership, each
individual executing this Lease on behalf of such party hereby represents and
warrants that such party is a duly formed and existing entity and that such
party has full right and authority to execute and deliver this Lease and that
each person signing on behalf of such party is authorized to do so.
29.18 Governing Law. This Lease shall be construed and enforced in
accordance with the laws of the State of California.
29.19 Submission of Lease. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or an
option for lease, and it is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.
29.20 Brokers. Landlord and Tenant hereby warrant to each other that
they have had no dealings with any real estate broker or agent in connection
with the negotiation of this Lease, excepting only the real estate brokers
specified in Section 9 of the Summary (the "Brokers"), to whom Landlord shall be
obligated to pay a commission pursuant to separate brokerage agreements (the
"Brokerage Agreements"), and that they know of no other real estate broker or
agent who is entitled to a commission in connection with this Lease. Each party
agrees to indemnify and defend the other party against and hold the other party
harmless from any and all claims, demands, losses, liabilities, lawsuits,
judgments, and costs and expenses (including without limitation reasonable
attorneys' fees) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of the indemnifying party's dealings
with any real estate broker or agent other than the Broker.
If at the time of renewal or extension of the term of this Lease, the
Brokerage Agreements between Landlord and Brokers provide that Landlord is not
obligated to pay a commission to Broker if Tenant presents to Landlord and/or
Broker a written exclusive listing agreement with another broker, then in the
event that (i) Landlord or its successor in interest is otherwise obligated to
pay a commission to Brokers pursuant to the terms of the Brokerage Agreement as
the result of any renewal or extension of the term of this Lease, and (ii)
Tenant uses a broker other than Brokers in connection with such renewal or
extension of the term of this Lease and such use is not pursuant to such written
exclusive listing agreement with another broker, then Tenant shall be obligated
to pay any fee, commission or other compensation to such broker and Tenant's
indemnity obligation to Landlord, as set forth in this Section 29.20, shall
apply with regard to such broker.
29.21 Independent Covenants. If Landlord fails to perform its
obligations set forth herein, Tenant shall not, except as expressly provided in
this Lease to the contrary, be entitled (i) to make any repairs or perform any
acts hereunder at Landlord's expense or (ii) to any setoff of the Rent or other
amounts owing hereunder against Landlord; provided, however, that the foregoing
shall in no way impair the right of Tenant to commence a separate action against
Landlord for any violation by Landlord of the provisions hereof so long as, to
the extent required in this Lease, notice is first given to Landlord and an
opportunity is granted to Landlord to correct such violations as
<PAGE> 28
provided in Section 19.5 above.
29.22 Intentionally Omitted.
29.23 Transportation Management. To the extent required by Laws, Tenant
shall fully comply with all present or future programs intended to manage
parking, transportation or traffic in and around the Building.
29.24 Hazardous Material.
29.24.1 Definition. As used herein, the term "Hazardous Material"
means any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the State of California or the
United States Government. The term "Hazardous Material" includes, without
limitation, any material or substance which is (i) defined as a "hazardous
waste," "extremely hazardous waste" or "restricted hazardous waste" under
Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140 of the
California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste
Control Law), (ii) defined as a "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous
Materials Release Response Plans and Inventory), (iii) defined as a "hazardous
substance" under Section 25281 of the California Health and Safety Code,
Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances), (iv)
petroleum, (v) asbestos or asbestos containing materials, (vi) listed under
Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11
of Title 22 of the California Administrative Code, division 4, Chapter 20, (vii)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. Section 1317), (viii) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. Section 6902 et seq. (42 U.S.C. 6903), or (ix)
defined as a "hazardous substance" pursuant to Section 101 of the Compensation
and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. 9601).
29.24.2 Operating Expenses. Tenant acknowledges that Landlord may
incur costs for complying with laws, codes, regulations or ordinances relating
to Hazardous Material, including, without limitation, the following: (i)
Hazardous Material present in soil or ground water; (ii) Hazardous Material that
migrates, flows, percolates, diffuses or in any way moves onto or under the Real
Property, (iii) Hazardous Material present on or under the Real Property as a
result of any discharge, dumping or spilling (whether accidental or otherwise)
on the Real Property by persons or entities other than Landlord and Tenant; and
(iv) material which becomes Hazardous Material due to a change in laws, codes,
regulations or ordinances which relate to hazardous or toxic material,
substances or waste. Tenant agrees that the costs incurred by Landlord with
respect to, or in connection with, the Project for complying with laws, codes,
regulations or ordinances relating to Hazardous Material shall be paid by Tenant
if such costs are a result of a violation by Tenant of its covenant and
agreement in Section 5.2 of this Lease, and shall be an Operating Expense only
if such costs qualify (x) under this Section 29.24 to the extent that such
compliance does not relate to Hazardous Materials which exist on or under the
Project prior to the commencement of the Lease Term, and (y) under clause (iv)
so long as such cost and compliance with said clause (iv) is amortized over a
seven-year period with Tenant only being responsible for such costs to the
extent that the term of this Lease is included within such seven-year
amortization period, unless the cost of such compliance, as between Landlord and
Tenant, is made the responsibility of Tenant under this Lease. To the extent
such Operating Expense relating to Hazardous Material is subsequently recovered
or reimbursed through insurance, or recovery from responsible third parties, or
other action, Tenant shall be entitled to a proportionate recovery of such
Operating Expense to which such recovery or reimbursement relates.
29.24.3 Landlord's Representation. Tenant acknowledges receipt of
that certain Report of Phase I Environmental Site Assessment prepared by
Law/Crandall, Inc., dated April 16, 1996. Landlord hereby represents to Tenant
that to the best of Landlord's knowledge and except as otherwise disclosed in
said report, on execution of this Lease, there will be no Hazardous Materials
located in, on or under the Building, the Real Property or the Premises, and
there has been no violation thereon of any law governing Hazardous Materials.
29.24.4 Third Parties. Tenant and Landlord agree to share equally
any costs directly attributable to Hazardous Substances in, on, under, at or
about the Premises which arise following the Lease Commencement Date and are
caused by a party other than Landlord and Tenant and their respective agents,
contractors, licensees, invitees or employees (it being agreed that each of
Landlord and Tenant shall be solely responsible for costs directly attributable
to Hazardous substances in, on, under, at or about the Premises caused by its
agents, contractors, licensees, invitees or employees.
<PAGE> 29
29.25 Rules and Regulations. Tenant shall comply with the Rules and
Regulations set forth in Exhibit D, together with any reasonable changes thereto
which may be made by Landlord from time to time.
29.26 Reasonable Consent. Except for matters for which there is a
standard of consent or approval specifically set forth in this Lease, in which
case the express standard shall control, and except for matters which could (i)
adversely affect the Systems and Equipment, (ii) adversely affect the Building
structure, or (iii) affect the exterior appearance of the Building, in which
case Landlord shall have the right to act in its sole and absolute discretion
(but at all times in good faith) as to the matters described in items (i), and
(ii) and (iii) above, any time the consent or approval of Landlord or Tenant is
required under this Lease, such consent or approval shall not be unreasonably
withheld, conditioned or delayed. Subject to the foregoing, and except for
matters pertaining to the exercise by either party of any remedies in the event
of a default by the other party, in the event this Lease grants Landlord or
Tenant the right to take action, exercise discretion, establish rules and
regulations or make an allocation or other determination, Landlord and Tenant
shall act reasonably and in good faith.
29.27 Counterparts. This Lease may be executed in counterparts, each of
which shall be deemed an original, but such counterparts, when taken together
shall constitute one agreement.
29.28 Building Security. Tenant, at its sole expense, shall be
permitted to install its own security system (which may be a card-key security
system) in the Building and any portion thereof.
29.29 Telecommunications Equipment and Other Appurtenances.
29.29.1 Installation. At any time during the Lease Term, Tenant
shall have the exclusive right, so long as Tenant is the sole lessee of all
non-common areas of the Building and thereafter a non-exclusive right, to
install at Tenant's sole cost and expense, satellites, microwave dishes and any
other type of telecommunications or communications device ("Communications
Equipment") upon the roof of the Building at a location designated by Tenant,
which location as well as Tenant's plans and specifications relating to the
installation of Tenant's Communications Equipment shall be subject to Landlord's
reasonable approval, without the payment of operating expenses; provided,
however, Tenant shall pay all cost of such Communications Equipment, including,
without limitation, the utilities and maintenance necessary to Tenant's
operation of the Communications Equipment and liability insurance for such
Communications Equipment, and Landlord may require Tenant to install screening
around such Communications Equipment, at Tenant's sole cost and expense, as
reasonably designated by Landlord or as required by applicable law. The
Communications Equipment shall comply with all governmental laws and ordinances
and with the CC&R's. Tenant shall also have the right to use the Building
shafts, risers and/or conduits within the Building (including the roof) for the
installation and maintenance of conduits, cables, ducts, flues, pipes and other
devices for communications, data processing devices, supplementary HVAC (if
necessary) and other facilities consistent with Tenant's use of the Building and
the Premises. Tenant shall also have the right to install and maintain a back-up
generator and enclosure for support of its communications and data systems.
29.29.2 Maintenance and Repair. Tenant shall maintain, repair or
replace Communications Equipment, at Tenant's sole cost and expense. During the
Lease Term, Tenant shall have the obligation to repair all damage to the
Building rooftop caused by the installation, repair, maintenance and use of the
Communications Equipment. Further, Tenant shall have the obligation to repair
any damage to the Building rooftop caused by Tenant's Communications Equipment,
reasonable wear and tear, casualty and repairs which are specifically made the
responsibility of Landlord hereunder excepted.
29.29.3 Termination. Tenant shall be entitled at any time to
terminate such use of space on the roof, in which case Tenant shall be relieved
of all of its obligations to pay any utilities and/or maintenance charges
attributable to the operation of Tenant's Communications Equipment upon removal
of all such equipment from the roof of the Building by Tenant. Upon Tenant's
termination of the use of space on the roof and removal of its Communications
Equipment therefrom, Tenant shall have the obligation to repair all damage to
the Building rooftop caused by such removal of the Communications Equipment,
reasonable wear and tear, casualty and repairs which are specifically made the
responsibility of Landlord under this Lease excepted.
Remainder of page is intentionally left blank.
<PAGE> 30
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed
the day and date first above written.
Landlord:
Fund VIII and Fund IX Associates,
a Georgia joint venture
By: Wells Real Estate Fund IX, L.P.,
a Georgia limited partnership, general partner
By: Wells Capital, Inc.,
a Georgia corporation, general partner
By: /s/ DOUGLAS P. WILLIAMS
---------------------------
Name: Douglas P. Williams
Title: Senior Vice President
Tenant:
QUEST SOFTWARE, INC.
By: /s/ DAVID M. DOYLE
------------------------
Name: David M. Doyle
------------------------
Title: President
------------------------
<PAGE> 31
EXHIBIT A
LEGAL DESCRIPTION OF LAND
<PAGE> 32
EXHIBIT B
TENANT IMPROVEMENTS
1. The Premises shall be delivered to and accepted by Tenant in its
existing condition.
2. Tenant shall select an architect and contractor approved by
Landlord to prepare plans and specifications for for and to construct the
leasehold improvements desired by Tenant. Landlord acknowledges that it has
approved Gensler as architect and either Nexus Construction Services, Inc. or
Turelk, Inc. as the contractor. The plans and specifications shall be submitted
to Landlord for approval, which approval shall not be unreasonably withheld or
delayed. To facilitate Landlord's approval of Tenant's architect and contractor,
Tenant shall obtain and furnish to Landlord an AIA qualification statement and
insurance certificate.
3. Landlord will provide Tenant with an allowance of up to $11.00
per square foot of rentable area in the Premises to be applied to the costs
actually incurred by Tenant in improving such space. Such allowance must be
applied to the actual cost of permanent leasehold requirements in the space, not
including cabling and wiring, all in accordance with the approved plans and
specifications, and no portion of such allowance may be utilized for Tenant's
owned property or other similar expenses.
4. (a) Wells Management Company, Inc. shall receive a
construction management fee of $10,405 as consideration for its construction
oversight, which amount shall be deducted from the allowance.
(b) The balance of the aforesaid allowance shall be disbursed
by Landlord to Tenant from time to time subject to and conditioned upon Tenant's
fulfillment of the following conditions for disbursement.
(c) From time to time after the date of execution of this
Lease, Tenant shall submit to Landlord a request for funds ("Request for
Funds"), containing a statement by or on behalf of Tenant setting forth the
amount of disbursement sought with an itemized breakdown of those expenses
comprising such requested disbursement and accompanied by (i) documentary
evidence satisfactory to Landlord confirming the expenditures identified in the
Request for Funds, and (ii) to the extent any such expenditures are for the
payment for labor performed on and/or materials stored on or incorporated into
any work on the Premises, lien release waivers in form and content satisfactory
to Landlord and executed by each engineer, contractor, subcontractor, supplier
and materialman to be paid pursuant to the Request for Funds and covering all
labor, services, equipment and materials to be paid thereunder.
(d) Upon verification of the accuracy of a Request for Funds,
including by Landlord's inspection of the Premises, or otherwise, which
verification shall occur no later than 10 business days after receipt by
Landlord of the Request for Funds and accompanying materials, and upon
satisfaction of all applicable conditions contained herein, Landlord shall make
disbursements to Tenant.
(e) Final disbursement shall, in addition to the other
requirements set forth herein, be subject to receipt by Landlord of a
certificate of occupancy allowing Tenant to occupy the Premises without
restriction.
5. Tenant shall indemnify and hold Landlord harmless from and
against any and all losses, damages, costs (including attorneys' fees),
liabilities, liens or claims of liens, or causes of action arising out of or
relating to the work of Tenant and its contractors in connection with the
construction of its Tenant Improvements.
<PAGE> 33
EXHIBIT C
DIRECT EXPENSES EXCLUSIONS
1. Exclusions From Direct Expenses. Despite any other provision of
Article 4 of the Lease, and except as otherwise expressly permitted by the
Lease, Direct Expenses shall not include:
(a) Depreciation, interest, or amortization on mortgages or
ground lease payments, except as otherwise expressly permitted by the terms of
the Lease.
(b) Real estate brokers' leasing commissions.
(c) Initial improvements or alterations to tenant spaces.
(d) Any costs expressly excluded from Direct Expenses
elsewhere in the Lease.
(e) Costs of any items for which Landlord receives
reimbursement from insurance proceeds or a third party. Insurance proceeds shall
be excluded from Direct Expenses in the year in which they are received, except
that any deductible amount under any insurance policy shall be included within
Direct Expenses.
(f) Costs of capital improvements, except as otherwise stated
in Section 7.1.1.
(g) Interest, principal, depreciation, attorney fees, costs of
environmental investigations or reports, points, fees, and other lender costs
and closing costs on any mortgage or mortgages, ground lease payments, or other
debt instrument encumbering the Building or Real Property.
(h) Insurance premiums to the extent of any refunds of those
premiums, and insurance deductibles in excess of commercially reasonable levels
for Comparable Buildings.
(i) Costs, fees, and compensation paid to Landlord, or to
Landlord's subsidiaries or affiliates, for services in or to the Building, or
for supplies or other materials, to the extent that they exceed the charges for
comparable services or supplies rendered by an unaffiliated third party of
comparable skill, competence, stature, and reputation.
(j) Management fees in excess of the sum of (i) administrative
salaries of $7,392 for the first Lease Year, increasing by 2.5% in each
subsequent Lease Year, (ii) liability insurance maintained by Landlord pursuant
to Section 10.2, and (iii) 10% of the costs described in subparagraphs (i) and
(ii).
(k) counting and audit fees, except as otherwise provided in
Sections 4.5 and 14.4.
2. Adjustment of Taxes. For purposes of this Lease, Tax Expenses
attributable to any Expense Year shall be the amount of Tax Expenses assessed
for that year. If Landlord later receives any supplemental or additional
assessment for any such Expense Year, Tenant shall pay Landlord, within thirty
(30) days after the date of the invoice for this assessment, Tenant's Share of
the supplemental or additional assessment. If, by the beginning of the last year
of the Lease Term, the Real Property has not been fully assessed for any year
during the Lease Term, Tax Expenses shall be adjusted to the Tax Expenses that
would have been payable in such year or years if the Real Property had been
fully assessed. These provisions shall survive the Lease Expiration Date or
other termination of this Lease.
<PAGE> 34
EXHIBIT D
RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the following Rules and
Regulations.
1. Except as otherwise provided in Article 23 of this Lease, no sign,
placard, picture, advertisement, name or notice shall be inscribed, displayed or
printed or affixed on or to any part of the outside of the Building without the
prior written consent of Landlord. Landlord shall have the right to remove any
such sign, placard, picture, advertisement, name or notice, unless Landlord has
given written consent, without notice to and at the expense of Tenant. Landlord
shall not be liable in damages for such removal unless the written consent of
Landlord had been obtained.
2. Tenant, upon the termination of its tenancy, shall deliver to Landlord
all keys, magnetic locks, security systems (if not removed by Tenant), etc. of
offices, rooms and toilet rooms which shall have been furnished to Tenant or
which Tenant shall have made.
3. 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, and
no foreign substance of any kind whatsoever shall be thrown therein, and the
expense of any breakage, stoppage, or damage resulting from the violation of
this rule shall be borne by Tenant.
4. Tenant shall not use the Premises in any manner which exceeds the floor
load design capacity of the floor on which the Premises are located.
5. Tenant agrees that its use of electrical current shall never exceed the
capacity of the existing base Building feeders, risers or wiring installation.
6. No part of the Building or Premises shall be used for gambling, immoral
or other unlawful purposes. No birds or animals of any kind shall be brought
into the Building (other than trained assist dogs required to be used by the
visually impaired).
7. The sidewalks, entrances, passages, corridors, halls, elevators, and
stairways in the Building and on the Real Property shall not be used for any
purposes other than those for which same were intended as ingress and egress.
Tenant shall use reasonable efforts to see that the doors of the Premises are
closed and securely locked before leaving the Building and to cause all water
apparatus (i.e. kitchen sinks and appliances, restroom fixtures, water
fountains, etc.) to be entirely shut off before Tenant or Tenant's employees
leave the Building, so as to prevent waste or damage.
8. Landlord shall have the right to prohibit any advertising by Tenant
which utilizes Landlord's name, or a picture or visual rendition of the Building
but only to the extent which the same tends, in Landlord's reasonable
discretion, to impair the reputation of the Building or its desirability as a
location for offices and other permitted uses, and upon written notice from
Landlord, Tenant shall refrain from or discontinue such advertising.
9. In the event of any conflict between the provisions of these Rules and
Regulations and the other provisions of this Lease, the other provisions of this
Lease shall control.
<PAGE> 35
EXHIBIT E
1. Covenants, Conditions and Restrictions in an instrument recorded
September 29, 1978 in Book 12864, page 63 of Official Records, as amended by
documents declaring modifications thereof recorded in Book June 5, 1979 13173,
page 1210 of Official Records and recorded May 21, 1980 in Book 13613, page 322
of Official Records.
2. Easements, Covenants and Conditions contained in the Deed by and
between The Irvine Company, as Grantor, and SAN/BAR Corporation, as Grantee,
recorded March 30, 1979 in Book 13086, page 1976 of Official Records.
3. The Terms, Provisions and Conditions contained in a document
entitled "Declaration of Special Land Use Restrictions ("Regulations"),
Abatement Lien, Mortgage Lien and Option to Repurchase", executed by and between
The Irvine Company and SAN/BAR Corporation, recorded March 30, 1979 in Book
13086, page 1979 of Official Records.
4. The Terms, Provisions and Conditions contained in a document
entitled "Reciprocal Easement Agreement", executed by and between The Irvine
Company, Crow IIC East, SAN/BAR Corporation and CB Institutional Fund IV,
recorded January 6, 1982 as Instrument No. 82-004179 of Official Records.
5. Covenants, Conditions and Restrictions in an instrument recorded
January 11, 1984 as Instrument No. 84-014634 of Official Records.
<PAGE> 36
EXHIBIT F
FORM OF TENANT'S ESTOPPEL CERTIFICATE
The undersigned as Tenant under that certain Office Lease (the "Lease")
made and entered into as of __________, 2000, and between FUND VIII AND FUND IX
ASSOCIATES, a Georgia joint venture partnership, as Landlord, and the
undersigned as Tenant, for Premises being the entire Office Building located at
15253 Bake Parkway, Irvine, California certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the
Lease and all amendments and modifications thereto. The documents contained in
Exhibit A represent the entire agreement between the parties as to the Premises.
2. The undersigned has commenced occupancy of the Premises described
in the Lease, currently occupies the Premises, and the Lease Term commenced on
_________.
3. The Lease is in full force and effect and has not been modified,
supplemented or amended in any way except as provided in Exhibit A.
4. Tenant has not transferred, assigned, or sublet any portion of
the Premises nor entered into any license or concession agreements with respect
thereto except as follows:
5. Base Rent became payable on _______________.
6. The Lease Term expires on _________________.
7. To the actual knowledge of Tenant, without investigation or
inquiry and except as specified herein, all conditions of the Lease to be
performed by Landlord necessary to the enforceability of the Lease have been
satisfied and Landlord is not in default thereunder.
8. No rental has been paid more than thirty (30) days in advance and
no security has been deposited with Landlord except as provided in the Lease.
9. To the actual knowledge of Tenant, without investigation or
inquiry and except as specified herein, as of the date hereof, there are no
existing defenses or offsets that the undersigned has, which preclude
enforcement of the Lease by Landlord.
10. All monthly installments of Base Rent, all Additional Rent and
all monthly installments of estimated Additional Rent have been paid when due
through _________________. The current monthly installment of Base Rent is
$__________. The current monthly installment of Additional Rent is
$____________.
11. The undersigned acknowledges that this Estoppel certificate may
be delivered to Landlord's prospective mortgagee, or a prospective purchaser,
and acknowledges that it recognizes that if same is done, said mortgagee,
prospective mortgagee, or prospective purchaser will be relying upon the
statements contained herein in making the loan or acquiring the property of
which the Premises are a part, and in accepting an assignment of the Lease as
collateral security, and that receipt by it of this certificate is a condition
of making of the loan or acquisition of such property.
Executed at ______________ on the _____ day of ______________, ______.
"Tenant":
QUEST SOFTWARE, INC., a California corporation
By: ____________________________
Its: ____________________________
<PAGE> 37
EXHIBIT G
BUILDING SIGNAGE
The building signage shall comply with the Covenants, Conditions and
Restrictions and all applicable regulations of the City of Irvine, and shall
meet with Landlord's approval, which approval shall not be unreasonably withheld
or delayed.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>3
<FILENAME>a70764ex21-1.txt
<DESCRIPTION>EXHIBIT 21.1
<TEXT>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Quest Software, Inc.
------------------------------------
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
- ---- ----------------------------
<S> <C>
MBR Technologies, Inc. California
Foglight Software, Inc. Delaware
Client/Server Solutions, Inc. Missouri
1397639 Ontario Ltd. Ontario, Canada
MessageWise, Inc. Ontario, Canada
881229 Alberta Ltd. Alberta, Canada
Fastlane Technologies, Inc. Canada
Fastlane Technologies (UK) Limited United Kingdom
Fastlane Technologies Deutschland GmbH Germany
Fastlane Technologies Corporation Delaware
OnWire Technologies, Inc. Massachusetts
Active Concepts Pty, Ltd. Australia
Active Concepts, Inc. California
Fresh Dew Investments Limited British Virgin Islands
Murecia Investments Limited British Virgin Islands
Quest Software France SARL France
Quest Software (UK) Ltd. United Kingdom
Quest Software Pty., Ltd. Australia
Quest Software GmbH Germany
Quest Software Foreign Sales Corporation Barbados
Q.S.I. Quest Software Israel Limited Israel
Quest Software Company Limited Ireland
Quest Holding Company, LLC California
Quest Softair, Inc. California
Quest Software, Ltda Brazil
Quest Software Espana, S.A. Spain
Quest Software Mexico S. de R.L. de C.V. Mexico
Quest Software Benelux B.V. Netherlands
Quest Norge AS Norway
Quest Scandinavia AS Denmark
AB Grundstenen 90479 Sweden
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>4
<FILENAME>a70764ex23-1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Shareholders of
Quest Software, Inc.
Irvine, California
We consent to the incorporation by reference in Registration Statement Nos.
333-38002, 333-49668, 333-91429 and 333-96183 on Form S-8 and Registration
Statement No. 333-46648 on Form S-3 of Quest Software, Inc. of our report dated
January 30, 2001 appearing in this Annual Report on Form 10-K of Quest Software,
Inc. for the year ended December 31, 2000.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Quest Software, Inc.
and subsidiaries, listed in Item 14. This financial statement schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 2001
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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