-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBG7X/nwv1Lp1Z9Wgw+yht2BZCyMHaU73OlwJffA5A5CmQlelLjNQQDKdxUnNKTk EWbbNL7KkDe1DcxjgWgArQ== 0001012870-00-002422.txt : 20000501 0001012870-00-002422.hdr.sgml : 20000501 ACCESSION NUMBER: 0001012870-00-002422 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTAL SOFTWARE INC CENTRAL INDEX KEY: 0001080306 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 77036737 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25829 FILM NUMBER: 613577 BUSINESS ADDRESS: STREET 1: 20883 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4083434400 MAIL ADDRESS: STREET 1: 20883 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 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 number: 000-25829 PORTAL SOFTWARE, INC. (Exact name of registrant as Specified in its Charter) Delaware 77-0369737 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.)
10200 South De Anza Boulevard, Cupertino, California 95014 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (408) 572-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value 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. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on April 27, 2000 as reported on the NASDAQ National Market System, was approximately $3,752,755,000. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of April 27, 2000, Registrant had outstanding 160,798,220 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on July 26, 2000 is incorporated by reference in Part III of this Form 10-K to the extent stated herein. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS General Information This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates, projections, beliefs and assumptions about our industry, our company, our business and prospects. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risks Associated With Portal's Business and Future Operating Results"-- "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. References in this document to "Portal", "we", "our" and "us" refer to Portal Software, Inc., a Delaware corporation, its predecessors, and each of its subsidiaries. Portal and Infranet are registered trademarks of Portal and the Portal logo, Infranet IPT and Real Time No Limits are trademarks of Portal. Each trademark, trade name or service mark of any other company appearing in this report belongs to its holder. BUSINESS OVERVIEW Portal develops, markets and supports real-time, scalable customer management and billing software, or CM&B software, for providers of Internet- based services. Portal's Infranet software is a comprehensive platform that meets the complex, mission-critical provisioning, accounting, reporting and marketing needs of providers of Internet-based services. Portal's Real Time No Limits Infranet product enables the real-time provisioning and reporting of services, including such functions as account creation, user authentication and authorization, activity tracking, pricing and rating, billing and customer service, including self-service, all on a scale of up to millions of users. In contrast to solutions that require extensive customization services, Portal's Infranet platform provides an "out-of-the-box" product that can generally be used by a wide variety of service providers ranging from emerging small companies offering an innovative service to a small number of subscribers to large telecommunications carriers with millions of subscribers. Portal believes that by providing a platform with an open architecture with fully documented APIs, Infranet facilitates the development of new services that can integrate with existing and new software applications and that can be interoperated with other new or existing services offered by other providers using Infranet. As of March 31, 2000, more than 200 customers have licensed Infranet, including US West, Qwest Communications Corp. ("Qwest"), Covad Communications Company ("Covad"), Inktomi Corp., Juno Online Services ("Juno Online"), L.P., Deutsche Telekom Online Service GmbH ("T-Online"), France Telecom SA and Demon Interactive Ltd. Industry Background Since 1994, the Internet and the Worldwide Web have grown at an explosive pace. International Data Corporation, or IDC, estimates that there were over 68 million Web users worldwide at the end of 1997. IDC projects this number to increase to over 319 million by the end of 2002, implying an annual growth rate of over 36%. The growth of the Internet is a global phenomenon that is fundamentally changing the nature of the telecommunications industry. Web user growth, coupled with the growth of new types of on-line and electronic commerce, or e-commerce, services, has driven the emergence of new service providers such as ISPs, on-line 2 communities, application service providers ("ASPs"), Internet telephony providers and many others. In addition, traditional telecommunications carriers have entered the on-line market, providing Internet connections and e-commerce services to businesses and consumers. Providers of Internet-based services are introducing new services and programs that address the dramatically changing nature of the Internet. These providers need flexible, powerful CM&B software that is readily adaptable to a wide range of services and smoothly scales from hundreds to millions of users. To be most effective, Portal believes that Internet-compatible CM&B software must be capable of operating in real time, handling high transaction volume, processing many different types of transactions and tracking multiple flows of information associated with the usage of various services. The Internet service environment is dominated by technologies and interfaces that are fundamentally different from a traditional telephone or cable network. For example, Internet service providers tend to operate distributed networks of UNIX or Windows NT-based Web servers, any or all of which may be servicing a given customer at a given moment. Traditional CM&B systems were typically designed to interface with and process data from the equipment and technologies used in telephone and cable television networks rather than in Internet service environments. Data traffic has many characteristics that are different from those of traditional voice transmissions. Existing CM&B systems used by many traditional telecommunications carriers are not oriented toward "always on", data-oriented services such as digital subscriber line, Internet telephony and virtual private networks. Many of these older systems will need to be upgraded or replaced in order to adapt to the changing environment. Portal also believes that providers of Internet-based services will increasingly offer services through or in combination with other providers, and that the efficiency and success of these "Internet value chains" will depend in part on the ability of the CM&B systems of these providers to interoperate and pass information and transactions among the participants. We believe that CM&B products that are more standard and open will best enable such interoperability and that Portal's Infranet provides a superior platform to meet the needs of such Internet value chains. Traditional CM&B solutions can generally be characterized as (1) inflexible, (2) capable only of periodic processing or "batch-oriented", (3) proprietary, (4) centralized and (5) difficult to scale to meet the complex requirements of providers of Internet-based services. In addition to a general lack of Internet-based capability, traditional systems were typically designed to service one particular type and size of service provider--a large, traditional RBOC-type carrier, for example, or a small competitive cellular telephone provider. As a result, there is often no smooth migration path; as the numbers of subscribers and services grow, a "forklift upgrade" to an entirely different CM&B product is often required. Finally, existing CM&B solutions are often not able to address one of the most fundamental requirements facing providers of Internet-based services: minimizing the time to market for new products and services. The Portal Software Strategy Portal's strategy is to establish itself as the CM&B platform of choice for providers of Internet-based services. Key elements of this strategy are: Extend Market Leadership Position. Portal's objective is to extend its position as a leader in the Internet-based CM&B market to establish itself as the broad platform of choice for providers of Internet-based services. Portal believes that its products enable each customer to design and deploy new services, which in turn increase the customer's use of Portal's products and services and generates additional opportunities for Portal to grow. 3 TARGET LEADING PROVIDERS OF ADVANCED COMMUNICATIONS SERVICES WORLDWIDE. The scalability and flexibility of its Infranet products enables Portal to target a broad range of providers of Internet-based services. Portal's targeted customer segments, and some representative existing customers, include: . on-line service divisions of traditional major telecommunications providers worldwide, such as France Telecom SA, NTT Soft, T-Online and US West; . wireless service divisions of traditional telecommunications providers worldwide, such as Telenor Mobile and Sonera Corporation; . on-line and Internet service providers, such as Qwest, UUNET Technologies, Inc., Viag Interkom, GmbH & Co., Covad, Northpoint Communications, Inc. and Rhythms NetConnections, Inc.; . application service providers ("ASPs") offering applications or information technology infrastructure as a service; and . companies that use the Internet to provide entirely new types of communications services, such as Juno Online, Palm.net, delta three.com, and Frontier Global Center, Inc. The unique capabilities of Infranet enable Portal to take this portfolio approach to targeting customers. Portal believes this approach offers the greatest opportunity for sustained growth, as many of these companies are or will be the market leaders in their respective industries. TARGET PROVIDERS OF ADVANCED INTERNET APPLICATIONS. To date, most Internet- based services have focused on "transportation" aspects of the Internet-- providing businesses and consumers with Internet access, whether by dialup, DSL, ISDN, cable, satellite, fixed wireless or mobile wireless methods, or have focused on extending communication services to the Internet, such as Internet telephony. Portal believes that Internet "applications" will become increasingly common. Examples of such application that will be offered over the Internet include online gaming and music. Portal believes that the capabilities of Infranet are well suited to providing the CM&B foundation for these emerging services. BUILD A LONG-TERM, HIGH MARGIN, SOFTWARE-DRIVEN BUSINESS MODEL. Portal's business model is predicated on the sale of standard software products, rather than the service-intensive, customer-specific solutions offered by many of its competitors. The scalability, comprehensive functionality and extensibility of Infranet, combined with Portal's strategic partnerships, are designed to allow Portal to achieve and maintain a high margin, software-driven business model without needing to provide an inordinate degree of consulting and integration services. LEVERAGE PARTNERSHIPS AND ALLIANCES WITH SYSTEMS INTEGRATORS, AND WITH PLATFORM, SOFTWARE AND SERVICES PROVIDERS. Portal has established a series of partnerships and alliances with systems integrators, such as Andersen Consulting, Cap Gemini, NTT Soft and PricewaterhouseCoopers and hardware platform, software and services providers, such as Cisco, Compaq, Hewlett- Packard, Microsoft, Oracle and Sun Microsystems. These partners and alliances provide a global extension of Portal's direct sales force and are a significant source of leads and referrals. This network of partners also enables Portal to focus on being the CM&B software platform provider while offering a complete customer solution using third-party components that perform ancillary functions such as tax or payment processing. In addition, Portal's systems integrator partners are trained to integrate Infranet with customers' existing legacy systems. Portal seeks "best of breed" partners in each particular area, to associate Infranet with market-leading technologies, products and systems integrators. Portal believes that this partnership strategy is unique in breadth and scope within its market, provides it with a competitive advantage and serves as a "force multiplier" which leverages Portal's own internal capabilities. GROW WITH CUSTOMERS AND THE INTERNET. While initial sales to customers are often substantial, Portal's strategy is to maximize its available opportunities for long-term revenue growth by targeting service providers with excellent growth prospects and capitalizing on additional sales opportunities with its customers. Portal's subsequent revenue growth can then occur through the addition of subscribers, add-on component sales, additional service revenues and maintenance and support agreements. In turn, Portal intends to continue to evolve 4 and refine its business to track the growth of Internet-based services, so that as these services proliferate, Portal's revenue growth opportunities will also increase. Accordingly, Portal typically prices its products on a per- subscriber basis so that they are more affordable for new, promising service providers that may in time grow to be leaders in their market segments and long-term, loyal customers. Infranet Software Platform Portal's core product, Infranet, is specifically designed to meet the complex, mission-critical provisioning, accounting, reporting and marketing needs of providers of Internet-based services. Portal's Infranet software is a real-time, scalable platform that enables service providers to address the critical business needs of customer management, services support and accurate and timely billing. Portal believes that its trademarked phrase, Real Time No Limits, accurately describes Infranet as the CM&B solution that provides these capabilities in real time, while also providing a broad and flexible platform for both the integration of existing products and services and the rapid development and deployment of new ones. In fiscal year 2000, Portal introduced Version 6.0 of Infranet which offers significantly enhanced features and performance. Managing the Customer Life Cycle The process of managing and billing customers involves a series of actions beginning with account creation through billing and post transaction reporting. Portal refers to these stages of customer interaction as the "customer life cycle." Infranet integrates the functionality for each stage of the customer life cycle with a single, unified customer database and a coordinated set of features and functions. The database acts as the repository for all data collected in real time during each stage of the customer life cycle as follows: ACCOUNT CREATION AND SERVICE PROVISIONING. Infranet supports a variety of registration standards and has all of the features necessary to register subscribers quickly. The Infranet registration process collects the data needed to provision and bill the subscriber for service, while also allowing service providers to collect additional subscriber profile information they may desire. As the data is collected and verified, Infranet creates customer accounts and activates the selected services in real time. AUTHENTICATION AND AUTHORIZATION. Infranet authenticates users based on user name and password, checks account status and authorizes access to individual services. Infranet can also check for duplicate user names and available credit or resources, enabling service providers to more effectively detect and prevent fraud and bad debt. ACTIVITY TRACKING. By recording all events in real time in its unified customer database, Infranet gives service providers the ability to build a detailed picture of individual customer behavior, either currently or historically. This also provides a complete audit trail of customer usage to resolve any issues that may subsequently arise. RATING/PRICING. Infranet offers a powerful and flexible "rating engine", which enables service providers to create a wide variety of pricing plans for a broad array of services. Infranet can price any tracked event as it occurs, so that customers and service representatives have real-time access to account balances and available credit. Infranet's rating engine supports multiple resource balances and limits, such as cash balances, free hours of usage, megabytes of server storage or any other resource defined by the service provider. The rating of a single event can update any or all existing balances. BILLING AND ACCOUNTS RECEIVABLE. Infranet's billing and payment system has been designed for flexibility from the ground up. Billing cycles can be any multiple of a month and can begin on any day of the month. Because of Infranet's real-time capability, accounts can be accurately closed at the end of the billing cycle, irrespective of when the billing process actually takes place. Infranet also supports multiple currencies and payment in real time, through interfaces with credit card processing systems such as Paymentech and ICVerify, or by invoice. A modular payment interface lets customers integrate additional payment methods and a general ledger interface lets service providers allocate journal entries using a general ledger code. Infranet supports both open item and balance forward accounting. 5 CUSTOMER MANAGEMENT. Customer service representatives can access customer data through an intuitive, Windows-based graphical user interface. Infranet organizes customer information into a variety of standard screens, which can also be readily customized. Service representatives can: . create, search and modify customer accounts; . view activity, balances and invoices; . perform billing operations; and . view and modify account hierarchy. Infranet enables providers to configure permissions and track customer service activity, ensuring a complete audit trail on each account. Infranet supplements these capabilities with a browser-based interface that enables customers to view selected account information directly. This self- service feature increases customer convenience and can help reduce customer service costs. REPORTING. Using the data in the Infranet unified customer database, service providers can create reports using a powerful, enterprise-wide reporting infrastructure called Infranet Insite. Insite report templates provide business intelligence to operations, finance, sales and marketing personnel. Insite includes a full set of customizable reports, and also supports new report development. Business Benefits Infranet is designed to enable service providers to capture the business benefits of increased revenues, reduced costs and improved customer service through its ability to manage the billing and customer management of services. INCREASED REVENUES. By helping to accelerate the time to market for new services, Infranet enables service providers to offer a variety of services quickly and to bundle and price these services in an optimal manner. Infranet enables services to be activated immediately when ordered by a subscriber, so that the service provider can immediately begin to collect revenue. Subscriber activity can then be monitored in real time, which allows the service provider to promote the consumption of more services through such means as targeted offers or increased credit limits. In addition, Infranet enables a service provider to analyze and "mine" subscribers' service usage data in real time, which can in turn be used to measure the success of marketing and targeting efforts and to identify new opportunities for subscriber revenue. Using Infranet's data analysis features, a service provider can quickly determine which offerings are not successful and easily make appropriate adjustments. For example, an unsuccessful pricing offer can quickly be terminated or tuned for better subscriber response. Finally, increased billing accuracy reduces the incidence of uncollected revenue and fraud. REDUCED COSTS. Infranet is designed to be an out-of-the-box solution that works with all relevant Internet standards and minimizes the service provider's software implementation, maintenance and subscriber servicing costs. Through the immediate validation of subscriber data and verification of credit, Infranet reduces the need for data correction and the incidence of credit problems. In addition, subscribers can access their billing and service information directly, which reduces the degree of costly person-to-person service required to satisfy the subscriber. Real-time monitoring and authentication substantially reduce the opportunities for fraud by ensuring that access to the service provider's network is granted only if the user has been properly verified. Infranet's monitoring and data analysis capabilities can help the service provider pinpoint unprofitable offerings or identify a degree of usage that justifies volume purchases of specific resources such as high-speed data circuits at a lower cost. IMPROVED CUSTOMER SERVICE. Infranet enables service providers to offer improved billing accuracy, enhanced customer service quality and responsiveness to their subscribers. Using Infranet, service providers can 6 easily tailor their offerings on a bundled or unbundled basis, substantially increasing customer choice without incurring additional costs. Up-to-the- minute account balances and status information can be made available to users on a 24x7 basis, either over the Internet or via customer service representatives. Potential customer account issues can be identified and resolved quickly, since there is no need to wait for regular billing cycles to expose these issues. Infranet's real-time capability enhances responsiveness to subscribers' needs, which can help reduce subscriber "churn", or turnover. Infranet Technology Portal's software architecture consists of the Infranet platform, upon which CM&B functionality is layered using fully documented open APIs. This approach, designed from the start to use object-oriented programming techniques, enables new processes and services to be readily incorporated, thus allowing an evolving multi-service model to be built without the need to change the underlying software foundations. Similarly, changes can be made in the object-based platform without affecting the behavior of the CM&B functions. Portal designed Infranet to meet the critical functional requirements sought by service providers. These requirements include scalability, enterprise integration and interoperability, comprehensive functionality and ease of use, flexibility and improved time to market--all operating on a real-time basis. SCALABILITY AND RELIABILITY. Infranet will run on a wide range of systems, from a laptop computer running Windows NT to a large cluster of UNIX-based servers. Infranet has been designed, using object-oriented programming methodologies, to scale from hundreds to millions of users through the incremental addition of servers. This capability allows a service provider to grow its CM&B infrastructure incrementally as its level of business grows without the need for architecture redesign or large-scale system replacements. For example, new servers can be added without taking the system offline, eliminating costly downtime. By running Infranet on multiple servers, a service provider can reduce exposure to various types of failures, including individual server failure, power failure and loss of physical facilities. This level of reliability and redundancy, long present in the traditional telephone network, is increasingly required in the Internet environment. Automatic load balancing features smooth out usage spikes and ensure high availability. Infranet's object-to-relational data model is optimized for high performance on-line transaction processing and high reliability. ENTERPRISE INTEGRATION AND INTEROPERABILITY. Infranet has been designed with fully documented, open APIs that allow Portal, its customers, partners and third party software developers to integrate Infranet with existing applications and services requiring minimal effort and programming overhead. This capability enables new services to be deployed quickly and efficiently while maintaining smooth interoperability with pre-established services. For example, a telecommunications carrier might use Infranet to add Internet- related services which then appear on a subscriber's monthly telephone bill. Infranet runs on server operating systems from Hewlett-Packard, Microsoft and Sun Microsystems and utilizes database software from Microsoft and Oracle. Infranet also can be readily integrated with a variety of packaged software applications, such as help desk, accounting, taxation and payment systems. COMPREHENSIVE FUNCTIONALITY AND EASE OF USE. Portal has drawn on its own experiences to develop a comprehensive suite of pre-defined, ready-to-use CM&B functions, such as customer registration, business policies, pricing plans and payment methods. Portal also seeks to provide upgrades and enhancements to Infranet on a regular basis, with a strong emphasis on response to customer feedback. Infranet employs a simple, intuitive Windows-based user interface for efficient addition and deletion of services and functions, as well as a set of templates for Web-based capabilities such as subscriber registration, password changes and account balance inquiries. Infranet addresses the entire customer management and billing life cycle, from account creation to monitoring and pricing to back-end management and reporting. FLEXIBILITY AND IMPROVED TIME TO MARKET. Infranet is designed to be a modular, extensible software product. This flexibility allows each Portal customer to tailor its individual Infranet installation to meet the exact needs of a particular environment, set of services and group of subscribers. The service provider is thereby empowered to respond quickly to the rapidly changing needs of the Internet marketplace. In addition, Infranet 7 can generally be customized to a service provider's needs relatively quickly, enabling its customers to improve their time to market with new products and services. Pricing Portal has structured the pricing of Infranet to accommodate its target customer segments, which range from startups to large on-line service providers with millions of subscribers. Portal typically prices Infranet on a per subscriber basis, with customary volume discounts for the upfront purchase of a large number of licenses. Supplemental purchases of additional components are also priced on a per subscriber basis, while annual maintenance and support contracts are priced as a percentage of the associated license revenues. Portal's initial sales of licenses and associated services, maintenance and support generally range from the low hundreds of thousands to several million dollars. Other Product Offerings Portal offers several capabilities and features as optional additions to Infranet. Infranet IPT introduced in September 1998 incorporates Infranet's core functionality to deliver the CM&B features needed by providers of Internet telephony services, such as real-time architecture, support for a broad range of services and pricing plans, out-of-the-box gateway integration, prepaid calling card support, and zone-based rating. Infranet IPT is designed to optimize resources for each step of the Internet telephony process, such as setting up calls, monitoring calls in progress, tracking usage and billing users. Infranet IPT enables account creation, authentication and fraud prevention, authorization and credit control, activity tracking, pricing and billing and customer management and reporting. In fiscal year 2000, Portal introduced its DNA (distributed non-stop architecture) option for customers requiring high availability and fault tolerance. Infranet DNA uses remote, limited scope satellite installations of Infranet to handle user authentication, service authorization, and event queuing. During normal operation, these satellites are updated in real time from the main database to allow for real-time operation in the geographically distributed environments typical to many service providers. In the event the main database is offline, the satellites allow the provider to maintain continuous operation so that customers are not denied access to services and revenue-generating events are not lost. Other optional additions to Infranet include: Netflow manager, which integrates Infranet with Cisco NetFlow to provide a solution for flexible tracking, rating and billing of bandwidth usage; Infranet MultiDB, introduced in fiscal year 2000, which enables the distribution of accounts across multiple databases in a single Infranet installation to support very large subscriber counts; and MCIS Manager which enables real-time billing for services deployed in Microsoft Commercial Internet System and site server environments. Customer Service and Support Portal believes that a high level of customer service and support is critical to the successful marketing and sale of Infranet. Portal provides support to its customers through maintenance and support agreements. Support includes assistance with technical problems related to the use of Portal's software and software maintenance and upgrade releases. Portal generally provides its base level of customer support via an Internet-based customer management system and higher levels of support via telephone and on-site technical assistance. Portal provides customer technical support for its products primarily from its Cupertino, California location and from its facilities in the United Kingdom and Hong Kong. Portal plans to establish additional customer support sites domestically and internationally commensurate with customer needs. Portal also offers project implementation services to assist customers in the project planning, installation and implementation of the Portal solution. Portal consulting services are also available for customers requiring additional software customization, upgrade assistance or other Infranet- related technical services. Portal professional services consultants are located in several cities in the United States and various countries outside 8 the United States. Portal has a leveraged business model based on using systems integrator partners to provide jointly or separately a range of services, including first-line technical support and project implementation services, in various locations around the world. Partnerships Portal has established a series of partnerships and alliances with systems integrators such as Andersen Consulting, Cap Gemini, NTT Soft and PricewaterhouseCoopers and hardware platform, software and services providers such as Cisco, Compaq, Hewlett-Packard, Microsoft, Oracle and Sun Microsystems. Portal employs this network of partnerships to both expand its sales, service and marketing capabilities and to extend the technical and functional application of its solution. Portal's network of partnerships allows Portal to maintain its focus as a product company while simultaneously obtaining sales, technical and service leverage through its partners. There are two types of partners in Portal's "Market Partnership Model": MARKET PARTNERS. Portal leverages its own sales and marketing efforts by taking advantage of the marketing and lead generation capabilities of its market partners. Market partners are specialized technology and services firms that adapt Portal's products to the needs of a specified market segment. For example, in the consumer ISP market, iPass, Inc., Microsoft and Software.com, Inc. provide complementary services and technologies, which are fully integrated with Infranet through Portal's open APIs. In turn, a set of systems integrators, such as Andersen Consulting, Cap Gemini, NTT Soft and PricewaterhouseCoopers, adapts this combination of Infranet and add-on technologies to the specific environment of each provider of on-line services. This combination of add-on technology and systems integration allows Portal to serve as the enabling technology for a complete solution in each of its markets. This approach also provides a mechanism for Portal to enter new markets as opportunities develop. In April 1999, Portal agreed to enter into a strategic alliance with Andersen Consulting under which Andersen Consulting agreed to provide services to Portal and the parties will expand their existing marketing alliance and work closely together to expand their customer service and marketing relationship. Under this arrangement, Andersen Consulting purchased 760,368 shares of common stock from Portal in a private placement concurrent with Portal's initial public offering. Upon signing of the definitive agreement in March 2000, Portal paid Andersen Consulting a services fee of $2.8 million. PLATFORM PARTNERS AND ALLIANCES. Portal's technology strategy is to focus exclusively on Infranet to enable real-time, mission-critical, Internet-based services. Given this focus, Portal forms partnerships and alliances with hardware platform providers, such as Cisco, Compaq, Hewlett-Packard and Sun Microsystems, database software developers such as Microsoft and Oracle, and software applications developers with best-of-breed products to provide superior solutions to its customers. By providing its platform partners and alliances with a fully documented set of open APIs, Portal ensures that Infranet can interoperate with their products. This allows Portal to partner with the leading-edge vendors in each area of functionality and provides the flexibility to adopt new products and technologies rapidly. Portal also seeks to generate referral sales from its platform partners' sales forces. In April 1999, Portal entered into a strategic alliance with Cisco under which Portal and Cisco will jointly develop, market and sell integrated hardware and software products targeted at providers of Internet-based services. Under this arrangement, Portal will be Cisco's strategic CM&B solution provider and Cisco will be Portal's strategic solution provider of equipment for next generation IP networks. Portal and Cisco have agreed to cooperate in the development, marketing and sale of these integrated products. 9 Sales and Marketing Sales Portal's sales strategy is to pursue targeted accounts both through its direct sales force and indirectly through its strategic partners. Portal has to date targeted its sales efforts at medium and large ISPs, on-line service divisions of traditional telecommunications providers and other providers of Internet-based services. Portal maintains direct sales personnel in thirteen states across the United States, and internationally in Australia, Canada, China, France, Germany, Hong Kong, Japan, Malaysia, Singapore, Spain and the United Kingdom. The direct sales force is organized into individual account teams, which include both sales representatives and systems engineers. Portal generates leads from contacts made through marketing partners, seminars and conferences, which are usually co-sponsored by marketing partners, market research, its Web site, trade shows, customers and its ongoing public relations program. The direct sales force is complemented by telemarketing representatives based at Portal's headquarters in Cupertino, California. Portal qualifies the leads and assigns an account team to prospective customers. The account team then initiates the sales process, which generally involves multiple presentations to information technology and business professionals within the prospective customer's organization. Portal intends to increase the size of its direct sales force and establish additional sales offices domestically and internationally. Portal complements its direct sales force with a series of partnerships and alliances with systems integrators such as Andersen Consulting, Cap Gemini, NTT Soft and PricewaterhouseCoopers, as well as with hardware platform and software applications developers and service providers such as Cisco, Compaq, Hewlett-Packard, Microsoft and Sun Microsystems. These partners provide a global extension of Portal's direct sales force and are a significant source of leads and referrals. Portal believes these relationships also serve to validate its technology and facilitate broad market acceptance of Infranet services. Portal's direct sales force works closely with its indirect distribution partners. After a partner has introduced Portal's products to a potential customer, an in-house account team is assigned to complete the sales process. Portal has derived, and anticipates continuing to derive, a significant portion of its revenues from customers that have significant relationships with Portal's market and platform partners. Many of these partners also work with competing software companies, and Portal's success will depend on their willingness and ability to devote sufficient resources and efforts to marketing Portal's products. Portal's agreements with these parties typically are in the form of non-exclusive referral fee or reseller agreements that may be terminated by either party without cause or penalty and with limited notice. Therefore, there is no guarantee any single party will continue to market Portal's products. If these relationships fail, Portal will have to devote substantially more resources to the distribution, sales and marketing, implementation and support of Infranet. Portal intends to establish additional indirect channels in the future. However, there can be no assurance that Portal will be able to establish relationships with additional partners on a timely basis or at all, or that such relationships will be successful. Marketing Portal's marketing programs are targeted at providers of Internet-based services and are currently focused on creating awareness of, and generating interest in, Infranet. Portal engages in a variety of marketing activities, including: . managing and maintaining its Web site; . conducting direct mailings and ongoing public relations campaigns; . conducting seminars; . creating and placing advertisements; and . establishing and maintaining close relationships with recognized industry analysts. 10 Portal is an active participant in technology-related conferences and demonstrates its products at trade shows targeted at providers of Internet- based services. Portal also focuses on a range of joint marketing strategies and programs with its partners in order to leverage their existing strategic relationships and resources. Customers Portal's typical customers are providers of Internet-based services that benefit from a scalable CM&B software solution. As of March 31, 2000, Portal had licensed Infranet to more than 200 customers worldwide, including: US West, Qwest, Covad, Inktomi, Juno Online, T-Online, France Telecom, Demon Interactive, UUNET and Viag Interkom. In fiscal year 2000, one customer accounted for 10% of Portal's total revenues. In fiscal year 1999, no individual customer accounted for 10% or more of Portal's total revenues. In fiscal year 1998, one customer accounted for 47% of Portal's total revenues. Although Portal's customers include both small and large providers of Internet-based services, a substantial portion of Portal's license and services revenues in any given quarter has, and is expected to continue to be, generated from a limited number of customers with large financial commitment contracts. As a result, if a contract is cancelled or deferred or an anticipated contract does not materialize, Portal's revenues would be materially adversely affected. Research and Development Portal believes that strong product development capabilities are essential to its strategy of enhancing its core technology, developing additional applications incorporating that technology and maintaining the competitiveness of its product and service offerings. Portal has invested significant time and resources in creating a structured process for undertaking all product development. This process involves several functional groups at all levels within Portal and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. In addition, Portal has recruited key engineers and software developers with experience in the CM&B, enterprise, database and operating system software markets and has complemented these individuals by hiring senior management with experience in software used by providers of Internet-based services. Portal's research and development expenses totaled approximately $26.1 million, $11.3 million and $5.6 million for fiscal year 2000, 1999 and 1998, respectively. As of April 5, 2000, approximately 221 employees were engaged in research and development activities. Competition Portal competes in markets that are new, intensely competitive, highly fragmented and rapidly changing. Portal competes on the basis of performance, scalability, extensibility, ease of integration and price. Portal faces competition from providers of traditional CM&B software such as Amdocs (which has recently acquired Solect Technology) and the Kenan Systems division of Lucent; emerging providers of Internet-specific billing software, such as Belle Systems and Daleen Technologies, Inc.; and providers of Internet-based services that develop proprietary systems. Portal also competes with systems integrators and with internal MIS departments of large telecommunications carriers. Portal is aware of numerous other major ISPs, software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete with Infranet. Portal believes it competes favorably in performance, scalability, extensibility, ease of integration and price, particularly due to Infranet's ability to run on a wide range of systems, Infranet's ability to integrate with existing applications, Infranet's comprehensive functionality and ease of use, and its flexibility. The failure of Portal to develop products that compete successfully with those of other suppliers in the market would harm our business. 11 Portal anticipates continued growth and competition in the telecommunications industry and the entrance of new competitors into the CM&B software market, and that the market for its products and services will remain intensely competitive. Many of Portal's current and future competitors have significantly more personnel and greater financial, technical, marketing and other resources than Portal. Intellectual Property Portal relies upon a combination of patent, copyright, trade secret and trademark law to protect its intellectual property. Portal currently has two issued U.S. patents relating to its technology that expire in 2017. While Portal relies on patent, copyright, trade secret and trademark law to protect its technology, Portal believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to Portal's technology. Portal generally enters into confidentiality or license agreements with its employees, consultants and corporate partners, and generally controls access to and distribution of its software, documentation and other proprietary information. Despite Portal's efforts to protect proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology or to develop products with the same functionality as Portal's products. Policing unauthorized use of its products is difficult, and Portal cannot be certain that the steps it has taken will prevent misappropriation of its technology, particularly in foreign countries where the laws may not protect proprietary rights as fully as do the laws of the United States. In addition, certain of Portal's license agreements require it to place the source code for Infranet into escrow. Such agreements generally provide that these parties will have a limited, non-exclusive right to use this code if: (i) there is a bankruptcy proceeding by or against Portal; (ii) Portal ceases to do business without a successor; or (iii) Portal discontinues providing maintenance and support. Substantial litigation regarding intellectual property rights exists in the software industry. Portal expects that software products may be increasingly subject to third-party infringement claims as the number of competitors in its industry segments grows and the functionality of products in different industry segments overlaps. Some of Portal's competitors in the market for CM&B software may have filed or may intend to file patent applications covering aspects of their technology that they may claim Portal's technology infringes. Portal cannot be certain that any of these competitors will not make a claim of infringement against it with respect to its products and technology. Portal's success and ability to compete are substantially dependent upon its internally developed technology. However, portions of Infranet incorporate software developed and maintained by third-party software vendors, such as operating systems, tools and database vendors. Portal may have to rely on third-party software vendors and developers to a larger degree in future products. Although Portal believes it could find other sources for these products, any significant interruption in the supply of these products could adversely impact Portal's sales unless and until it can secure another source. Employees As of April 5, 2000, Portal had 754 employees, 186 of whom were engaged in professional service, customer service and support, 240 in sales and marketing, 221 in engineering, and 107 in finance, administration and operations. Portal's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of Portal's key employees could harm its business. Portal's future success also depends on its continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, particularly in the San Francisco Bay Area where Portal is headquartered, due to the limited number of people available with the necessary technical skills and understanding of the Internet, and there can be no assurance that 12 Portal can retain or attract key personnel in the future. None of Portal's employees are represented by a labor union. Portal has not experienced any work stoppages and considers its relations with its employees to be good. ITEM 2. PROPERTIES Portal leases for its headquarters two buildings of approximately 142,700 and 93,200 square feet, respectively, in Cupertino, California. Portal occupies these premises under two leases expiring in December 2010. In connection with its relocation to these two buildings, Portal vacated a 24,455 square foot facility and subleased it for the remainder of the lease term, which expires in October 2003. In addition to its principal office space in Cupertino, California, Portal also leases facilities and offices domestically in California, Colorado, Connecticut, Georgia, Illinois, Massachusetts, New York, New Jersey, Texas and Virginia and internationally in Australia, Canada, China, Hong Kong, France, Germany, Japan, Malaysia, Singapore and the United Kingdom. These leases are for terms expiring from May 2000 to October 2004. Portal believes that the facilities it currently leases for its headquarters are sufficient to meet its needs through the next twelve months. Portal plans to lease additional space in other locations to support the growth of its foreign operations and domestic sales and marketing organizations. ITEM 3. LEGAL PROCEEDINGS Portal is not currently a party to any material legal proceeding. 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of Portal as of April 1, 2000:
Name Age Position ---- --- -------- John E. Little.......... 42 Chief Executive Officer, President and Chairman of the Board of Directors Jack L. Acosta.......... 52 Chief Financial Officer and Vice President, Finance Marc Aronson............ 43 Vice President, Engineering Mitchell L. Gaynor...... 40 Vice President, General Counsel and Secretary David S. Labuda......... 36 Chief Technology Officer Kevin P. Mosher......... 43 Vice President, Sales Michael E. Regan........ 44 Vice President, Professional Services Steven R. Sommer........ 45 Vice President, Marketing and Business Development Annette D. Surtees...... 44 Vice President, Human Resources
John E. Little. Mr. Little founded Portal in March 1985 and has been Chief Executive Officer and a Director since its inception. In addition, Mr. Little served as President from inception to March 1996 and has served as President since November 1996. Prior to founding Portal, Mr. Little was an independent consultant for a number of companies including Knight-Ridder Inc., AT&T Corp., Raytheon Company, Dow Jones News Retrieval, a subsidiary of Dow Jones & Company, Inc., Victor Company of Japan (JVC) and Sun Microsystems, Inc. Jack L. Acosta. Mr. Acosta has served as Chief Financial Officer and Vice President, Finance since February 1999. In addition, Mr. Acosta served as Secretary from February 1999 through April 1999. From July 1996 to January 1999, Mr. Acosta served as Executive Vice President and Chief Financial Officer for Sybase, Inc., a database company. From December 1994 until July 1996, Mr. Acosta served as Vice President, Engineering Services, Integration and Business Management of Sybase. From March 1993 until December 1994, Mr. Acosta served as President, Chief Operating Officer and a director of Tanon Manufacturing, Inc., a manufacturing and engineering services company. Prior to March 1993, Mr. Acosta held various management positions at Ungermann-Bass Inc., Atari, Inc., Diablo Systems, Inc. and Ford Motor Company. Marc Aronson. Mr. Aronson joined Portal in August 1998 as Senior Director of the SETI engineering group. In March 2000, he became Vice President, Engineering. From July 1997 to August 1998, Mr. Aronson was a Senior Engineering Director for Adobe Systems Inc., a software company. From September 1990 to July 1997, Mr. Aronson served as Engineering Director and in other engineering positions with Adobe. Mitchell L. Gaynor. Mr. Gaynor joined Portal in April 1999 as General Counsel and Secretary. From January 1997 to April 1999, Mr. Gaynor served as Vice President, General Counsel and Secretary of Sybase. From May 1996 to January 1997, he served as Vice President and Associate General Counsel of Sybase and from February 1993 to May 1996, Mr. Gaynor served as Senior Corporate Counsel of Sybase. David S. Labuda. Mr. Labuda has served as Chief Technology Officer since he joined Portal in March 1994. Between March 1994 and March 2000 he also served as Portal's Vice President, Engineering. From June 1990 to March 1994, Mr. Labuda was employed by Sun Microsystems, Inc., a network computing company, as a Director of UNIX Development. From August 1985 to June 1990, Mr. Labuda worked for Sun Microsystems as a Senior Engineer and Manager, including managing the software development for the SparcStation 1 and SparcStation 2 projects. Mr. Labuda received the first Sun Presidential Award and holds three patents from his tenure there. 14 Kevin P. Mosher. Mr. Mosher joined Portal in March 1997 as Vice President, Sales. From January 1996 to February 1997, Mr. Mosher served as Vice President of Sales for Software Emancipation, Inc., a software development and testing company. From May 1995 to November 1995, Mr. Mosher served as Vice President, National Sales at Watermark Software, Inc., an enterprise software company. From February 1991 to May 1995, Mr. Mosher served as Regional Vice President at Interleaf, Inc., a software tool company. From 1985 to 1991, Mr. Mosher held various senior sales management positions at Oracle Corporation. Michael E. Regan. Mr. Regan joined Portal in February 1999 as Vice President, Professional Services. From June 1998 to February 1999, Mr. Regan served as Vice President, Professional Services for Siebel Systems, Inc., a supplier of enterprise relationship management systems. From February 1988 to June 1998, Mr. Regan served as Vice President, Professional Services for Sybase, Inc. Steven R. Sommer. Mr. Sommer joined Portal in July 1997 as Vice President, Marketing and Business Development. From May 1993 to July 1997, Mr. Sommer served as Vice President, Worldwide Marketing and Enterprise Solutions for Informix Corporation, an enterprise database company. From February 1990 until April 1993, Mr. Sommer served as Vice President, Marketing for Cognos, Inc., an applications and tools development software company. Prior to February 1990, Mr. Sommer held various other marketing positions at Digital Equipment Corporation, Scitex America Corp., McKinsey & Company, Inc. and Procter and Gamble Company. Annette D. Surtees. Ms. Surtees joined Portal in August 1998 as Vice President, Human Resources. From February 1998 through July 1998, Ms. Surtees served as Director of Human Resources for VLSI Technology, Inc., an integrated circuit design and manufacturing company. From February 1997 to February 1998, Ms. Surtees was an independent consultant. From May 1988 until February 1997, Ms. Surtees held various human resources management positions at Seagate Technology, Inc., a data technology company, most recently as Vice President, Human Resources for Corporate, U.S. and European Operations. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Portal Software, Inc. Common Stock, par value $0.001, is traded on the NASDAQ National Market System under the symbol "PRSF." The price per share reflected in the table below represents the range of low and high closing sale prices for Portal's Common Stock as reported in the NASDAQ National Market System for the quarters indicated. Portal's common stock began publicly trading on May 6, 1999. All price amounts have been adjusted to reflect the two-for-one stock split effected on January 19, 2000.
High Low ------- ------- Fiscal 2000: Quarter ended July 31, 1999............................... $29.969 $13.875 Quarter ended October 30, 1999............................ $36.500 $17.125 Quarter ended January 31, 2000............................ $63.000 $29.313
Portal has never paid cash dividends on its capital stock. Portal currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The closing sale price of Portal's Common Stock as reported in the NASDAQ National Market System on April 27, 2000 was $40.4375. The number of stockholders of record of Portal's Common Stock as of April 27, 2000 was 920. During fiscal year 2000, Portal issued unregistered securities to a limited number of persons as follows (all common stock amounts have been adjusted to reflect the three-for-one stock split effected in April 1999 and the two-for- one stock split effected in January 2000): (a) Portal issued and sold an aggregate of 752,100 shares of its Common Stock to employees and consultants for an aggregate purchase price of $275,750.63 pursuant to direct stock issuances and the exercise of options under its 1995 Stock Option/Stock Issuance Plan. (b) In April 1999, the Registrant issued and sold 682,200 shares of Series A Preferred Stock to an investor upon exercise of a warrant for an aggregate purchase price of $56,850. (c) In May 1999, the Registrant issued and sold a total of 6,760,368 shares of Common Stock to Cisco Systems, Inc. and Anderson Consulting LLP for an aggregate purchase price of $44,089,996. (d) In May 1999, Imperial Bank purchased 24,972 shares of common stock upon exercise of a warrant; the exercise price was paid pursuant to a net exercise provision which reduced the number of shares that would otherwise have been issued. (e) In October 1999, Comdisco, Inc. purchased 194,238 shares of common stock upon exercise of a warrant; the exercise price was paid pursuant to a net exercise provision which reduced the number of shares that would otherwise have been issued. (f) In November 1999, Lighthouse Capital Partners II, L.P. purchased 255,704 shares of common stock upon exercise of a warrant; the exercise price was paid pursuant to a net exercise provision which reduced the number of shares that would otherwise have been issued. (g) During May and June 1999, Portal issued as a bonus of two shares of common stock to each of the 418 persons who were employees on May 6, 1999. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and Portal believes that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients in these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the 16 share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with Portal or otherwise, to information about Portal. Impact of Year 2000 In late 1999, Portal completed the remediation and testing of its systems for Year 2000 readiness. As a result of those planning and implementation efforts, Portal experienced no known significant disruptions in mission critical information technology and non-information technology systems. Portal believes those systems successfully responded to the Year 2000 date change. Portal expensed approximately $345,000 during fiscal year 2000 in connection with remediating its systems. Portal does not currently anticipate any additional Year 2000 remediation expenses. Portal also believes its products successfully responded to the Year 2000 date change. Portal will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. Despite these efforts, there can be no assurance that Portal will not experience in the future litigation, system disruptions or additional expenses related to Year 2000 matters. 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table shows selected consolidated financial data for Portal Software, Inc. ("Portal") for the past five fiscal years. To better understand the data in the table, investors should also read the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of Portal and the Notes to Consolidated Financial Statements. The basic and diluted net loss per share and the pro forma basic and diluted net loss per share computation excludes potential shares of common stock (options and common stock) subject to repurchase rights held by Portal, preferred stock and warrants, since their effect would be antidilutive. Pro forma net loss per share gives effect to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance. See Note 1 of Notes to Consolidated Financial Statements for a detailed explanation of the determination of the shares used to compute basic and diluted net loss per share and pro forma basic and diluted net loss per share. This table has been restated to reflect the impact of a two-for-one stock split, which became effective on January 20, 2000. See Note 6. The historical results are not necessarily indicative of results to be expected for any future period.
Years Ended January 31, -------------------------------------------- 1996 1997 1998 1999 2000 ------ ------- ------- -------- -------- (in thousands, except per share amounts) Consolidated Statement of Operations Data: Revenues: License fees................... $ -- $ 3,944 $ 6,892 $ 13,536 $ 67,049 Services....................... 1,862 1,101 2,524 13,133 36,000 ------ ------- ------- -------- -------- Total revenues................ 1,862 5,045 9,416 26,669 103,049 ------ ------- ------- -------- -------- Costs and expenses: Cost of license fees........... 13 62 970 458 2,596 Cost of services............... 267 518 2,152 9,425 22,808 Research and development....... 517 2,527 5,628 11,252 26,090 Sales and marketing............ 44 2,371 5,436 14,112 43,671 General and administrative..... 1,506 1,821 2,616 6,253 15,349 Amortization of deferred stock compensation.................. -- -- -- 2,297 8,235 ------ ------- ------- -------- -------- Total costs and expenses...... 2,347 7,299 16,802 43,797 118,749 ------ ------- ------- -------- -------- Loss from operations............. (485) (2,254) (7,386) (17,128) (15,700) Interest income (expense) and other income (expense), net..... (50) (20) (201) 435 9,696 ------ ------- ------- -------- -------- Loss before income taxes......... (535) (2,274) (7,587) (16,693) (6,004) Provision for income taxes....... -- -- -- (715) (1,616) ------ ------- ------- -------- -------- Net loss......................... $ (535) $(2,274) $(7,587) $(17,408) $ (7,620) ====== ======= ======= ======== ======== Basic and diluted net loss per share........................... $(0.08) $ (0.09) $ (0.18) $ (0.29) $ (0.06) ====== ======= ======= ======== ======== Shares used in computing basic and diluted net loss per share.. 6,788 24,864 41,571 59,062 124,816 ====== ======= ======= ======== ======== Pro forma basic and diluted net loss per share (unaudited)...... $ (0.15) $ (0.05) ======== ======== Shares used in computing pro forma basic and diluted net loss per share (unaudited)........... 116,167 140,836 ======== ========
January 31, ------------------------------------------ 1996 1997 1998 1999 2000 ------- ------ ------- ------- -------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.......... $ 328 $1,540 $14,646 $11,809 $ 43,887 Short-term investments and restricted short-term investments....................... -- -- -- -- 157,402 Working capital (deficit).......... (1,045) (651) 6,581 (9,150) 178,717 Restricted long-term investments... -- -- -- -- 5,856 Total assets....................... 881 3,527 23,125 32,344 265,529 Long-term obligations, net of current portion................... 98 447 1,500 2,022 1,525 Stockholders' equity (net capital deficiency)....................... (651) 112 7,763 (6,551) 208,370
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As more fully described below, this Form 10-K contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include, among others, those statements including the words "expects", "anticipates", "intends", "believes" and similar language. Portal's actual results could differ materially from those discussed in this Form 10-K. Factors that could cause or contribute to these differences include, but are not limited to, the risks discussed below and in the section below entitled "Risks Associated With Portal's Business and Future Operating Results". Overview Portal develops, markets and supports real-time customer management and billing software, known as CM&B software, for providers of Internet-based services. Portal was incorporated in California in March 1994 as Portal Information Network, Inc. In December 1995, Portal Communications Company, a predecessor company that was founded in 1985, was merged with and into Portal Information Network, Inc. Portal Communications Company operated a proprietary, network-based on-line system, provided Internet access and hosted private label on-line services from its inception until 1996 when these services were discontinued and the individual customers were sold to Sprint Corporation. In October 1997, Portal Information Network, Inc. changed its name to Portal Software, Inc. In April 1999, Portal reincorporated in Delaware. In late 1993, Portal began focusing on developing and marketing real-time CM&B software for the Internet. The first generally available version of the product, named Infranet, was shipped in May 1996. Beginning with fiscal 1997, substantially all of Portal's revenues have come from the license of one product, Infranet, and from related services. Revenues consist of Infranet license, consulting, training, support and maintenance fees. License revenues are comprised of perpetual or multiyear license fees, which are primarily derived from contracts with corporate customers and resellers. Portal believes that future license revenues will be generated from three sources: . license fees from new customers; . license fees for new products to existing customers; and . growth in the subscriber base of its existing customers, which will lead to increased revenue from subscriber-based licenses. Revenue from license fees is recognized when a formal agreement exists or purchase order is received, delivery of the product has occurred, no significant Portal obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. For electronic delivery, the software is considered to have been delivered when Portal has provided the customer with the access codes that allow for immediate possession of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue from arrangements with customers that are not the ultimate users, such as resellers, is not recognized until the product is delivered to the end-user. Services revenues are primarily comprised of revenues from systems implementation or other consulting activities, maintenance agreements and training of customers and partners. Arrangements that include software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When software services are considered essential, all revenue under the arrangement is recognized using contract accounting over time based on the percentage of the software services that have been completed. When software services are not considered essential, the revenue related to the software services is recognized as the services are performed. Maintenance agreements provide for technical support and include the right to unspecified upgrades. Maintenance revenues are deferred and recognized on a straight-line basis over the life of the related agreement, which is typically one year. Customer advances and billed amounts due from customers in excess of revenues recognized are recorded as deferred revenue. 19 Portal's cost of license fees includes a royalty payment for third-party technology included in Infranet. Resellers' commissions are also included in cost of license fees when Portal is paid directly by a customer for a contract originated by a systems integrator. Agreements with some of the integrators require Portal to make a payment equal to a percentage of the license and maintenance revenues recognized. Portal did not incur any shipping, packaging or documentation costs, as its product was delivered electronically over the Internet. Cost of services consists primarily of headcount-related expenses, costs related to outside consultants, travel and overhead associated with delivering consulting and training and providing support to Portal's customers. Portal has a limited operating history as a software company. Portal incurred a net loss of $7.6 million for fiscal 1998, $17.4 million for fiscal 1999, and $7.6 million for fiscal 2000. As of January 31, 2000, Portal had an accumulated deficit of $35.6 million. Portal expects to increase its sales and marketing, product development and administrative expenses for the foreseeable future. As a result, Portal will need to generate significant revenues from licenses of Infranet to achieve and maintain operating profitability. Portal has generated a substantial portion of its historical Infranet revenues from approximately 190 customers through January 31, 2000. Portal has established a series of partnerships with hardware platform, software and service providers and systems integrators. Portal has derived, and anticipates that it will continue to derive, a substantial portion of its revenues from customers that have significant relationships with its market and platform partners. Results of Operations The following table sets forth the results of operations for Portal expressed as a percentage of total revenues. These historical results are not necessarily indicative of results to be expected for any future period.
Years Ended January 31, ----------------------------- 1998 1999 2000 ------- ------- ------- Revenues: License fees............................. 73 % 51 % 65 % Services................................. 27 49 35 ------- ------- ------- Total revenues......................... 100 100 100 ------- ------- ------- Costs and expenses: Cost of license fees..................... 10 2 3 Cost of services......................... 23 35 22 Research and development................. 60 42 25 Sales and marketing...................... 58 53 42 General and administrative............... 28 23 15 Amortization of deferred stock compensation............................ -- 8 8 ------- ------- ------- Total costs and expenses............... 179 163 115 ------- ------- ------- Loss from operations....................... (79) (63) (15) Interest income (expense) and other income (expense), net............................ (2) 1 9 ------- ------- ------- Loss before income taxes................... (81) (62) (6) Provision for income taxes................. -- (3) (1) ------- ------- ------- Net loss................................... (81)% (65)% (7)% ======= ======= =======
20 Years Ended January 31, 1999 and 2000 Revenues Total revenues were $103.0 million in fiscal 2000, an increase of approximately $76.4 million or 286% over fiscal 1999. License fees revenues increased as a percentage of total revenues in fiscal 2000 compared to fiscal 1999 primarily due to increased license sales as a result of the maturation of the Infranet product and the expansion of Portal's sales and marketing operations. In October 1999, Portal shipped Infranet 6.0, the most recent version of Portal's customer management and billing software. One customer accounted for 10% of total revenue for the year ended January 31, 2000. No individual customer accounted for more than 10% of total revenue for the year ended January 31, 1999. Portal's business strategy is to provide CM&B software that will meet the needs of different Internet service business models. Consequently, because of the number of different Internet service business models, Portal has received, and will continue to receive, requests from customers to provide special features that do not currently exist in its product but that Portal may agree to provide to the customer in the future. It is Portal's expectation that certain customers will continue to negotiate and require features that are not immediately available. Customization of special features may in the future result in the deferral of revenues until the features are delivered. As in historical periods, as Infranet matures, Portal expects that fewer orders will require features not yet available. License fees totaled $67.0 million in fiscal 2000, an increase of approximately $53.5 million or 395% over fiscal 1999. The increase in license fees was primarily due to continued expansion of marketing activities and growth in Portal's sales force as well as greater demand for and acceptance of Infranet. Services revenues were $36.0 million in fiscal 2000, an increase of approximately $22.9 million or 174% over fiscal 1999. The increase in services revenues resulted from the increase in support and maintenance service fees related to Portal's growing customer base and the renewal of maintenance and support contracts. In addition, increased demand for Portal's consulting and training services to meet the increasingly complex demands of Portal's customers contributed to this increase. The following table shows Portal's revenue by region:
Years Ended January 31, ------------------------- Percent 1999 2000 Change ----------- ------------ ------- (in thousands) Geographical Revenues: North America............................. $ 19,531 $ 66,920 243% Percentage of total revenues.............. 73% 65% International Europe.................................... 4,406 28,659 550% Percentage of total revenues............ 17% 28% Intercontinental.......................... 2,732 7,470 173% Percentage of total revenues............ 10% 7% ----------- ------------ --- Total international................... 7,138 36,129 406% Percentage of total revenues.......... 27% 35% ----------- ------------ --- Total revenues........................ $ 26,669 $ 103,049 286% =========== ============ ===
North American revenues, which are defined by Portal as revenues from the United States and Canada, were $66.9 million in fiscal 2000, an increase of approximately $47.4 million or 243%, over fiscal 1999. The increase in North American revenues was primarily due to continued expansion in North American marketing activities and growth of Portal's sales force as well as greater acceptance of Infranet. 21 International revenues for Europe and Intercontinental, which is defined by Portal as Asia-Pacific, Japan and Latin America, totaled $36.1 million in fiscal 2000, an increase of approximately $29.0 million or 406% over fiscal 1999. European revenues were $28.7 million in fiscal 2000, an increase of approximately $24.3 million or 550% over fiscal 1999. Intercontinental revenues were $7.5 million in fiscal 2000, an increase of approximately $4.7 million or 173% over fiscal 1999. The increase in international revenues was primarily due to the growth of Portal's direct sales force and increased marketing efforts worldwide including the establishment of a sales presence in France, Germany, Spain, Japan and Singapore during fiscal 2000, as well as the establishment of Portal's European headquarters in the United Kingdom in April 1999. International revenues represented 35% of total revenues in fiscal 2000, compared with approximately 27% in fiscal 1999. In fiscal 2000, revenues from Europe were 28% of total revenues and revenues from Intercontinental were 7% of total revenues. Expenses Cost of License Fees Cost of license fees consists of resellers' commission payments to systems integrators and third-party royalty obligations. Cost of license fees was $2.6 million in fiscal 2000, an increase of approximately $2.1 million or 467% over fiscal 1999. The increase in cost of license fees is primarily due to increased license revenue and increased resellers' commissions resulting from Portal expanding its base of systems integrator partners. Gross margin for license fees was approximately 96% in fiscal 2000 compared to approximately 97% in fiscal 1999. For the years ended January 31, 2000 and 1999, Portal did not incur any shipping, packaging or documentation costs, as its product was delivered electronically over the Internet. Cost of Services Cost of services primarily consists of maintenance, consulting and training expenses. Cost of services was $22.8 million in fiscal 2000, an increase of approximately $13.4 million or 142% over fiscal 1999. The increase in cost of services is primarily due to an increase in the number of consulting and technical support personnel necessary to support both the expansion of Portal's installed base of customers and new implementations. Gross margin for services was approximately 37% in fiscal 2000 compared to approximately 28% in fiscal 1999. The increase in gross margin was primarily due to a decrease in the use of higher cost third-party personnel as a result of the hiring of additional consulting employees. Portal expects cost of services to increase substantially in the future as a result of increased demand for services. Research and Development Expenses Research and development expenses consist primarily of personnel and related costs for Portal's development and certain technical support efforts. Research and development expenses were $26.1 million in fiscal 2000, an increase of approximately $14.8 million or 132% over fiscal 1999. The increase was primarily due to an increase in the number of research and development personnel necessary to support both expanded functionality of Infranet and increases in Portal's quality assurance and product publications operations. Portal currently believes its investment in research and development will increase substantially in the future as Portal hires additional research and development employees. Portal has not capitalized any software development costs to date. Sales and Marketing Expenses Sales and marketing expenses consist of personnel and related costs for Portal's direct sales force, marketing staff and marketing programs, including trade shows, advertising and costs associated with Portal's recruitment of new, and maintenance of existing, strategic partnerships. Sales and marketing expenses were $43.7 million in fiscal 2000, an increase of approximately $29.6 million or 209% over fiscal 1999. The increase was due to a number of factors, including an increase in the number of sales and marketing personnel, the opening of new 22 sales offices in the United States, Europe and Asia-Pacific, the establishment of a European headquarters in the United Kingdom, the costs of increasing sales capabilities in China and expenses incurred in connection with trade shows and additional marketing programs. Portal expects that sales and marketing expenses will increase substantially in the future as Portal hires additional sales and marketing personnel, increases spending on advertising and marketing programs and establishes sales offices in additional domestic and international locations. General and Administrative Expenses General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources and facilities as well as information system expenses not allocated to other departments. General and administrative expenses were $15.3 million in fiscal 2000, an increase of approximately $9.1 million or 145% over fiscal 1999. The increase was primarily due to a higher number of general and administrative personnel and to additional legal and accounting costs incurred in connection with business activities. Portal expects that general and administrative expenses will increase substantially in the future as Portal hires additional general and administrative personnel and continues to incur greater legal and accounting costs in connection with expanding business activities. Amortization of Deferred Stock Compensation Portal recorded deferred stock compensation of approximately $16.8 million in fiscal 1999, representing the difference between the exercise prices of options granted to acquire certain shares of common stock during fiscal 1999 and the deemed fair value for financial reporting purposes of Portal's common stock on their respective grant dates. Portal amortized deferred compensation expense of approximately $2.3 million and $8.2 million during the years ended January 31, 1999 and 2000. This compensation expense relates to options awarded to individuals in all operating expense categories. Total deferred compensation at January 31, 2000 of approximately $6.3 million is being amortized over the vesting periods of the options, which is generally 4 years, using a graded vesting method. The amortization of deferred compensation currently recorded is estimated to be $3.7 million in fiscal 2001, $1.9 million in fiscal 2002 and $0.7 million in fiscal 2003. Interest Income (Expense) and Other Income (Expense) Interest income (expense) includes interest and dividend income from cash, cash equivalents and short-term investments offset by interest on capital leases. Other income includes a $3.8 million one-time gain upon remeasurement of the liability related to the put option granted to Andersen Consulting LLC, which was settled upon the completion of Portal's initial public offering in May 1999. See Note 4. Interest income (expense) and other income was $9.7 million in fiscal 2000, an increase of approximately $9.3 million or 2,129% over fiscal 1999. The increase was primarily due to the one-time gain upon remeasurement of the put option and interest income from the investment of funds received upon completion of the initial public offering. Provision for Income Taxes The $1.6 million income tax provision for fiscal 2000 relates to foreign withholding taxes on revenue and tax on earnings generated from operations in certain foreign jurisdictions. Under Statement of Financial Accounting Standards No. 109 (FAS 109), deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets are more likely than not. Based on the weight of available evidence, Portal has provided a valuation allowance against certain deferred tax assets. Management will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. The $0.7 million income tax provision shown for fiscal 1999 is the result of alternative minimum taxes, foreign withholding taxes on revenue, and tax on earnings generated from operations in certain foreign jurisdictions. 23 Years Ended January 31, 1998 and 1999 Revenues Total revenues were $26.7 million in fiscal 1999, an increase of $17.3 million or 183% over fiscal 1998. In fiscal 1999, no individual customer accounted for 10% or more of total revenues, while one customer, CompuServe, in fiscal 1998 accounted for 47% of total revenues. In fiscal 1999, Portal's top ten customers accounted for approximately 37% of total revenues, while in fiscal 1998, the top ten customers accounted for 83% of total revenues. License fees declined as a percentage of total revenues in fiscal 1999 compared to fiscal 1998 primarily due to Portal signing several contracts in fiscal 1999 that could not be recognized under Portal's revenue recognition policy. The license fees on these contracts were deferred because features promised to the customer were not yet available as the functionality required by these customers was in the process of being developed, or the license fees were bundled with services considered essential to the functionality of the software being delivered. The percentage decline was also due to increased demand for Portal's services. License fees totaled $13.5 million in fiscal 1999, an increase of $6.6 million or 96% over fiscal 1998. The increase in license fees was primarily due to expanded marketing activities, growth in Portal's sales force and greater demand for and the acceptance of Infranet. Services revenues were $13.1 million in fiscal 1999, an increase of $10.6 million or 420% over fiscal 1998. The increase in services revenues resulted, in part, from the increase in support and maintenance service fees related to Portal's growing installed base, both in terms of directly supported sites as well as additional users, and the renewal of maintenance contracts. The increase also resulted from the timing of services revenue recognition, which typically begins prior to the recognition of license fees, particularly in the case of large customers that require integration with legacy systems. In addition, the increase in services revenues resulted from increased demand for Portal's consulting, maintenance and training services to meet the increasingly complex demands of Portal's customers. The following table shows Portal's revenue by region:
Years Ended January 31, --------------- Percent 1998 1999 Change ------ ------- ------- (in thousands) Geographical Revenues: North America....................................... $7,955 $19,531 146% Percentage of total revenues........................ 85% 73% International Europe.............................................. 1,072 4,406 311% Percentage of total revenues...................... 11% 17% Intercontinental.................................... 389 2,732 602% Percentage of total revenues...................... 4% 10% ------ ------- --- Total international............................. 1,461 7,138 389% Percentage of total revenues.................... 15% 27% ------ ------- --- Total revenues.................................. $9,416 $26,669 183% ====== ======= ===
North American revenues, which are defined by Portal as revenues from the United States and Canada, were $19.5 million in fiscal 1999, an increase of $11.6 million or 146%, over fiscal 1998. The increase in North American revenues was primarily due to expanded marketing activities, greater acceptance of Infranet and growth in Portal's sales force in the North American market. 24 International revenues for Europe and Intercontinental, which are defined by Portal as Asia-Pacific, Japan and Latin America, totaled $7.1 million in fiscal 1999, an increase of $5.7 million or 389% over fiscal 1998. European revenues were $4.4 million in fiscal 1999, an increase of $3.3 million or 311% over fiscal 1998. Intercontinental revenues were $2.7 million in fiscal 1999, an increase of $2.3 million or 602% over fiscal 1998. The increase in international revenues was primarily due to growth in Portal's direct sales force and increased marketing efforts worldwide and the opening of an international sales office in Hong Kong. International revenues represented 27% of total revenues in fiscal 1999, compared with 15% in fiscal 1998. In fiscal 1999, revenues from Europe were 17% of total revenues and revenues from Intercontinental were 10% of total revenues. Expenses Cost of License Fees Cost of license fees consists of resellers' commission payments to systems integrators and third-party royalty obligations. Cost of license fees was $0.5 million in fiscal 1999, a decrease of $0.5 million or 53% from fiscal 1998. Gross margin for license fees was approximately 97% in fiscal 1999 compared to approximately 86% in fiscal 1998. The increase in gross margin and the decrease in cost of license fees were primarily due to a substantial reseller commission paid to a systems integrator in fiscal 1998. Portal did not incur any shipping, packaging or documentation costs, as its product was delivered electronically over the Internet. Cost of Services Cost of services primarily consists of maintenance, consulting, and training expenses. Cost of services was $9.4 million in fiscal 1999, an increase of $7.3 million or 338% over fiscal 1998. The increase was primarily due to an increase in the number of consulting and technical support personnel necessary to support both the expansion of Portal's installed base of customers and new implementations. Gross margin for services was approximately 28% in fiscal 1999 compared to approximately 15% in fiscal 1998. The increase in gross margin for services was due primarily to increased availability and utilization of service personnel. Research and Development Expenses Research and development expenses consist primarily of personnel and related costs for Portal's development and certain technical support efforts. Research and development expenses were $11.3 million in fiscal 1999, an increase of $5.6 million or 100% over fiscal 1998. The increase was primarily due to an increase in the number of research and development personnel necessary to support both expanded functionality of Infranet and increases in Portal's quality assurance, technical support and technical publications operations. Sales and Marketing Expenses Sales and marketing expenses consist of personnel and related costs for Portal's direct sales force, marketing staff and marketing programs, including trade shows, advertising and costs associated with Portal's recruitment of new and maintenance of existing strategic partnerships. Sales and marketing expenses were $14.1 million in fiscal 1999, an increase of $8.7 million or 160% over fiscal 1998. The increase was primarily due to an increase in the number of sales and marketing personnel, the opening of new sales offices in the United States and Hong Kong, the costs of establishing sales capabilities in China and expenses incurred in connection with trade shows and additional marketing programs. General and Administrative Expenses General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources and facilities and information system expenses not allocated to other departments. General and administrative expenses were $6.3 million in fiscal 1999, an 25 increase of $3.6 million or 139% over fiscal 1998. The increase was primarily due to an increase in the number of general and administrative personnel and to increased legal and accounting costs incurred in connection with business activities. Liquidity and Capital Resources Cash, cash equivalents and short-term investments (including restricted investments) totaled $201.3 million at January 31, 2000, compared to a balance of $11.8 million at January 31, 1999. Portal generated $3.4 million in cash from operations in the year ended January 31, 2000, an increase of $6.7 million over the $3.3 million used in the year ended January 31, 1999. Net cash from operations in fiscal 2000 was primarily comprised of a $7.6 million loss, a $14.1 million increase in accounts receivable and a $1.6 million increase in prepaids and other current assets. This was offset by a $9.5 million increase in deferred revenue and a combined increase in accounts payable and accrued compensation of $11.0 million. Also, amortization of deferred stock compensation, which is included in the results of operations, but does not require the use of cash, amounted to $8.2 million for the year ended January 31, 2000 compared to $2.3 million for the year ended January 31, 1999. Portal has continued to make significant investments in equipment. During the year ended January 31, 2000, Portal purchased computer servers, workstations, networking equipment and other capital equipment amounting to approximately $15.2 million, primarily to further expand its product capability, and increase its internal network communication, product demonstration and service capability. Of this amount, $0.3 million was funded from Portal's equipment lease line facility. Portal has raised equity capital from outside investors to fund its operations. In fiscal 1998, Portal raised approximately $15.0 million from the sale of preferred stock and raised an additional $0.1 million from sales of common stock, primarily upon exercise of stock options by employees. In fiscal 1999, Portal raised $0.4 million from the exercise of warrants for preferred stock issued in connection with its capital lease line facility and its term loan, and raised an additional $0.4 million from sales of common stock, primarily upon exercise of stock options by employees. In the year ended January 31, 2000, Portal completed an initial public offering and concurrent private sales of stock to Cisco Systems, Inc. and Andersen Consulting LLC that collectively raised $102.4 million. Portal also completed a follow-on offering in October 1999, which raised approximately $106.0 million, net of underwriting commissions and estimated expenses. During the same period, Portal raised an additional $6.6 million from sales of common stock issued from Portal's employee stock purchase plan and upon the exercise of stock options by employees and warrants by third parties, net of repurchases. Historically, Portal has also used debt and leases to partially finance its operations and capital purchases. Portal has a $3.0 million capital lease line facility with an equipment lessor, which it established in fiscal 1998. The lease line has a term of 48 months and bears interest at a rate of 8.5% per annum. Separately, during the year ended January 31, 2000, Portal repaid an outstanding $3.0 million term loan with a finance company. The term loan was collateralized by substantially all of Portal's assets, with the exception of new equipment purchased using funds provided by the capital lease line facility. On April 15, 1999, Portal entered into a line of credit with a bank under which Portal may borrow up to $5.0 million. Amounts borrowed under this line of credit bear interest at a rate of the bank's prime rate plus 0.5% and mature on April 13, 2000. Portal had borrowed $1.0 million under the line of credit, which it used to repay the remaining $1.0 million installment of the term loan, which matured in April 1999. The outstanding balance on the line of credit was repaid in May 1999 from the proceeds of Portal's initial public offering. Portal also converted a customer deposit for prepaid services into a $1.1 million short-term liability in fiscal 1999. This liability bore interest at a rate of 10% per annum and was repaid in July 1999. The capital lease line facility comprised the entire amount of the debt obligations on Portal's balance sheet as of January 31, 2000. The capital lease line facility includes certain covenants requiring minimum liquidity, tangible net worth and profitability over time and becomes due immediately if Portal fails to meet these covenants. Portal is currently, and has always been, in compliance with these covenants. 26 On April 12, 1999, Portal agreed to enter into a strategic alliance with Andersen Consulting LLC under which Andersen Consulting LLC agreed to provide services to Portal and the parties will expand their existing marketing alliance and work closely together to expand their customer service and marketing relationship. Under this agreement, Portal agreed to pay Andersen Consulting LLC for its services a minimum services fee in cash of $2.8 million and a cash settled put for 400,000 of the shares which were purchased by Andersen Consulting LLC in a private placement concurrent with Portal's initial public offering. This put guaranteed a closing value of $6.0 million at the end of the first day of trading. Because the closing value exceeded $6.0 million, Portal was not required to make any payment related to this put. The definitive agreement was entered into, and the $2.8 million payment was made, in March 2000. The resulting intangible will be amortized over a period of approximately four and one half years, the term of the alliance, beginning in April 2000. In the normal course of business, Portal enters into leases for new or expanded facilities in both domestic and international locations. During fiscal 2000, Portal entered into two leases for its worldwide headquarters that expire in December 2010. In connection with these leases, Portal issued two letters of credit totaling $5,250,000 in lieu of a security deposit for the facilities. See Note 5. In connection with all leases, Portal will make payments of approximately $9.6 million, $9.0 million, $9.2 million, $8.3 million, and $8.5 million in the years ending January 31, 2001, 2002, 2003, 2004 and 2005, respectively, and a total of $54.5 million thereafter until expiration of the leases. Portal's capital requirements depend on numerous factors, including market acceptance of Portal's products, the resources Portal devotes to developing, marketing, selling and supporting its products, the timing and extent of establishing international operations, and other factors. Portal expects to devote substantial capital resources to hire and expand its sales, support, marketing and product development organizations, to expand marketing programs, to establish additional facilities worldwide and for other general corporate activities. Although Portal believes that its current cash balances and cash generated from operations will be sufficient to fund its operations for at least the next 12 months, Portal may require additional financing within this time frame. Additional funding, if needed, may not be available on terms acceptable to Portal, or at all. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. In June 1999, the FASB delayed implementation of FAS 133, so that implementation is now required for fiscal years beginning after June 15, 2000. As Portal does not currently engage in hedging activities, Portal expects that the adoption of FAS 133 will not have a material impact on its financial position or results of operations. Due to the delayed effective date, Portal will be required to implement FAS 133 for fiscal 2002. In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98- 9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 to extend the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Portal does not expect the final adoption of SOP 98-9 to have a material impact on its future revenues or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition. Portal believes that its revenue recognition policies are compliant with SAB 101. 27 Risks Associated With Portal's Business and Future Operating Results Portal's future operating results may vary substantially from period to period. The price of our common stock will fluctuate in the future, and an investment in our common stock is subject to a variety of risks, including but not limited to the specific risks identified below. Inevitably, some investors in our securities will experience gains while others will experience losses depending on the prices at which they purchase and sell securities. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this report. This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in this "Risks Associated With Portal's Business and Future Operating Results" and elsewhere in this report. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. It is difficult to predict our business because we have a limited history operating as a provider of CM&B software The results of operations for the fiscal year ended January 31, 2000 contained in this report are not necessarily indicative of results for fiscal year ending January 31, 2001 or any other future period. Moreover, Portal has a relatively brief operating history as a provider of CM&B software and had no meaningful license revenue until 1996. Therefore, Portal will experience the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, including those discussed in this report. Our business strategy may not prove successful, and we may not successfully address these risks. We have not achieved sustained profitability In order to be profitable, we must increase our revenues. We may not be able to increase or even maintain our revenues, and we may not achieve sufficient revenues or profitability in any future period. We incurred net losses of approximately $7.6 million for fiscal year 2000, $17.4 million for fiscal year 1999, $7.6 million for fiscal year 1998 and $2.3 million for fiscal year 1997. We had a slight net profit in the fourth quarter of fiscal year 2000. We did not achieve operating profitability in fiscal year 2000. In addition, we expect to significantly increase our sales and marketing, product development and administrative expenses. As a result, we will need to generate significant revenues from sales of Infranet to achieve and maintain profitability. We expect that we will face increased competition that may make it more difficult to increase our revenues. Even if we are able to increase revenues, we may experience price competition which would lower our gross margins and our profitability. Another factor that will lower our gross margins is any increase in the percentage of our revenues that is derived from indirect channels and from services, both of which have lower margins. If we do achieve operating profitability, we cannot be certain that we can sustain or increase operating and net profitability on a quarterly or annual basis. 28 Our quarterly operating results may fluctuate in future periods and we may fail to meet expectations Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, our operating results may be below one or more of the expectations of public market analysts and investors, and the price of our common stock may fall. Failure by technology companies to meet or exceed analyst expectations or any resulting changes in analyst recommendations or ratings frequently results in substantial decreases in the market value of the stock of such companies. Factors that could cause quarterly fluctuations include: . variations in demand for our products and services; . the timing and execution of individual contracts, particularly large contracts that would materially affect our operating results in a given quarter; . the timing of sales of our products and services; . our ability to develop and attain market acceptance of enhancements to Infranet and new products and services; . delays in introducing new products and services; . new product introductions by competitors; . changes in our pricing policies or the pricing policies of our competitors; . announcements of new versions of products that cause customers to postpone purchases of Portal's current products; . the mix of products and services sold; . the mix of sales channels through which our products and services are sold; . the mix of domestic and international sales; . costs related to acquisitions of technologies or businesses; . the timing of releases of new versions of third-party software and hardware products that work with our products; . our ability to attract, integrate, train, retain and motivate a substantial number of sales and marketing, research and development, technical support and other management personnel; . our ability to expand our operations; . the amount and timing of expenditures related to expansion of our operations; and . global economic conditions generally, as well as those specific to ISPs and other providers of Internet-based services. We have difficulty predicting the volume and timing of orders. For example, substantially all of our future revenues will come from licenses of Infranet and related services, and the market for this product is in its early stages of development and is therefore unpredictable. In any given quarter, our sales have involved, and we expect will continue to involve, large financial commitments from a relatively small number of customers. As a result, the cancellation or deferral of even a small number of licenses of Infranet would reduce our revenues, which would adversely affect our quarterly financial performance. Also, we have often booked a large amount of our sales in the last month of the quarter and often in the last week of that month. Accordingly, delays in the closing of sales near the end of a quarter could cause quarterly revenue to fall substantially short of anticipated levels. Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters. We may also experience seasonality in our business. In many software companies, rate of growth of license fees revenues tends to decline between the fourth quarter of one year and the first quarter of the next year, due in 29 part to the structure of sales compensation plans. If we experience such seasonality in the future, our rate of growth or absolute revenues could decline in the first quarter of a fiscal year compared to the preceding fourth quarter. In addition, the European operations of many companies experience some flatness in the summer months. Such seasonality may cause our results of operations to fluctuate or become more difficult to predict. We record as deferred revenue fees from contracts that do not meet our revenue recognition policy requirements. While a portion of our revenues each quarter is recognized from deferred revenue, our quarterly performance will depend primarily upon entering into new contracts to generate revenues for that quarter. New contracts that we enter into may not result in revenue in the quarter in which the contract was signed, and we may not be able to predict accurately when revenues from these contracts will be recognized. We plan to significantly increase our operating expenses to expand our sales and marketing operations, broaden our customer support capabilities, develop new distribution channels and fund greater levels of research and development. We determine our operating expenses largely on the basis of anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue could cause significant variations in our operating results from quarter-to- quarter and could result in substantial operating losses. It is difficult to predict the timing of individual orders because Infranet has a long and variable sales cycle To date, the sales cycle for Infranet generally has been three to nine months or more. The long sales and implementation cycles for Infranet may cause license revenues and operating results to vary significantly from period to period. Along with systems integrators and our other distribution partners, we spend significant time educating and providing information to our prospective customers regarding the use and benefits of Infranet. Even after purchase, our customers tend to deploy Infranet slowly and deliberately, depending on the specific technical capabilities of the customer, the size of the deployment, the complexity of the customer's network environment, and the quantity of hardware and the degree of hardware configuration necessary to deploy Infranet. Our business depends on the commercial acceptance of Infranet, and it is uncertain to what extent the market will accept this product Our future growth depends on the commercial success of Infranet. Substantially all of our licensing revenues are derived from Infranet. Our business will be harmed if our target customers do not adopt and purchase Infranet. The market for Internet-based CM&B software is in its early stages of development. Our future financial performance will also depend on the successful development, introduction and customer acceptance of new and enhanced versions of Infranet. We are not certain that our target customers will widely adopt and deploy Infranet as their CM&B solution. In the future we may not be successful in marketing Infranet or any new or enhanced products or services. Our future revenues will also depend on our customers licensing software for additional applicants or for additional subscribers. Their failure to do so could harm our business. Significant technical challenges arise in our business because many of our customers purchase and implement Infranet in phases, deploy Infranet across a variety of computer hardware platforms and integrate it with a number of legacy systems, third-party software applications and programming tools. Implementation frequently involves participation by our professional services group, which has limited resources. Some customers may also require us to develop costly customized features or capabilities, which increase our costs and consume our limited customer service and support resources. Also, revenues we derive from our services business have a significantly lower margin than revenues derived from licensing Infranet. If new or existing customers have difficulty deploying our products or require significant amounts of our professional services support, our operating margins could be harmed. We must hire and retain qualified sales personnel to sell Infranet Our financial success and our ability to increase revenues in the future depend considerably upon the growth and productivity of our direct sales force that has historically generated a majority of Portal's license revenues. 30 This productivity and growth will depend to a large degree on our success in recruiting, training and retaining additional direct salespeople. There is a shortage of direct sales personnel with the skills and expertise necessary to sell our products. Our business will be harmed if we fail to hire or retain qualified sales personnel, or if newly hired salespeople fail to develop the necessary sales skills or develop these skills more slowly than we anticipate. In addition, because we currently rely on indirect sales for a significant portion of our market opportunities, we may miss sales opportunities that are available through other sales distribution methods and other sources of leads, such as domestic and foreign resellers. In the future, we intend to augment our indirect sales distribution methods through additional third-party distribution arrangement. However, there is no guarantee that we will successfully augment these arrangements or that the expansion of indirect sales distribution methods will increase revenues. We may be at a serious competitive disadvantage if we fail to enhance these indirect sales channels. We also use systems integrators and other strategic relationships to implement and sell Infranet We have entered into relationships with third-party systems integrators, as well as with hardware platform and software applications developers and service providers. We have derived, and anticipate that we will continue to derive, a significant portion of our revenues from customers that have significant relationships with our market and platform partners. We could lose sales opportunities if we fail to work effectively with these parties or fail to grow our base of market and platform partners. Many of these partners also work with competing software companies, and our success will depend on their willingness and ability to devote sufficient resources and efforts to marketing our products versus the products of others. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms, or at all. Our agreements with these parties typically are in the form of nonexclusive referral fee or reseller agreements that may be terminated by either party without cause or penalty and with limited notice. Therefore, there is no guarantee that any single party will continue to market our products. If these relationships fail, we will have to devote substantially more resources to the distribution, sales and marketing, implementation and support of Infranet than we would otherwise, and our efforts may not be as effective as those of our partners, either of which would harm our business. Our quarterly revenue is generated from a limited number of customers and our customer base is concentrated and the loss of one or more of our customers could cause our business to suffer A substantial portion of our license and services revenues in any given quarter has been, and is expected to continue to be, generated from a limited number of customers with large financial commitments. For example, two customers accounted for a total of 27% of total revenues for the quarter ended October 31, 1999 and one customer accounted for 10% of total revenue during the year ended January 31, 2000. As a result, if a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed. We have initially targeted large ISPs, including on-line divisions of telecommunications carriers and other providers of Internet-based services, including the wireless divisions of telecommunications carriers. Some of the industries we have targeted are consolidating, which could reduce the number of potential customers available to us. Our business will suffer dramatically if we fail to successfully manage our growth Our ability to successfully offer Infranet and new products and services in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations domestically and internationally and have grown our headcount substantially. Our business will suffer dramatically if we fail to effectively manage this growth. On April 5, 2000, we had 754 employees, compared to a total of 242 employees on January 31, 1999. We expect to continue to hire new employees at a rapid pace. This growth has placed, and our anticipated future operations will continue to place, a significant strain on our management systems and resources and on our internal training capabilities. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train and manage our work force worldwide. Although we have recently occupied one 31 new building for our headquarters in Cupertino, California and have entered into a lease for another adjacent building, we expect that we will also have to continue to expand our facilities in California and other locations, and we may face difficulties and significant expenses identifying and moving into suitable office space. Our significant international operations and our planned expansion of our international operations make us much more susceptible to risks from international operations For the year ended January 31, 2000 and the year ended January 31, 1999, we derived approximately 35% and 27% of our revenue, respectively, from sales outside North America. As a result, we face risks from doing business on an international basis, including, among others: . reduced protection for intellectual property rights in some countries; . licenses, tariffs and other trade barriers; . difficulties in staffing and managing foreign operations; . longer sales and payment cycles; . greater difficulties in collecting accounts receivable; . political and economic instability; . seasonal reductions in business activity; . potentially adverse tax consequences; . compliance with a wide variety of complex foreign laws and treaties; and . variance and unexpected changes in local laws and regulations. We currently have offices in a number of foreign locations including Australia, Canada, China, France, Germany, Hong Kong, Japan, Malaysia, Singapore, Spain and the United Kingdom and plan to establish additional facilities in other parts of the world. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. We cannot be certain that our investments in establishing facilities in other countries will produce desired levels of revenue. In addition, we have sold Infranet internationally for only a few years and we have limited experience in developing localized versions of Infranet and marketing and distributing them internationally. Further, our international revenues are currently denominated in U.S. dollars. Therefore, a strengthening of the dollar versus other currencies could make our products less competitive in foreign markets or collection of receivables more difficult. We do not currently engage in currency hedging activities. To the extent that we are unable to successfully manage expansion of our business into international markets due to any of the foregoing factors, our business could be adversely affected. Our proprietary rights may be inadequately protected, and there is a risk of infringement Our success and ability to compete depend substantially upon our internally developed technology, which we protect through a combination of patent, copyright, trade secret and trademark law. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology or to develop products with the same functionality as our products. 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. Others may develop technologies that are similar or superior to our technology. Moreover, as the number of competitors in our industry segments grow and the functionality of products in different industry segments overlaps, we expect that our software products may in the future become subject to third-party infringement claims. Some of our competitors in the market for CM&B software may have filed or may intend 32 to file patent applications covering aspects of their technology upon which they may claim our technology infringes. Any litigation, brought by us or by others, could be time-consuming and costly and could divert the attention of our technical and management personnel. In addition, litigation could cause product shipment delays or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, or at all, and could have a material and adverse impact on our gross margins and profitability. If a successful claim of product infringement were made against us, our business could be significantly harmed. Our business will suffer if our software contains significant errors or our product development is delayed We face possible claims and higher costs as a result of the complexity of our products and the potential for undetected errors. Due to the "mission critical" nature of Infranet, undetected errors are of particular concern. Complex software, such as ours, always contains undetected errors. The implementation of Infranet, which we accomplish through our services division and with our partners, typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with an implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project and to provide these services at reduced or no cost. If our software contains significant undetected errors or we fail to meet our customers' expectations or project milestones in a timely manner we could experience: . loss of or delay in revenues and loss of market share; . loss of customers; . failure to achieve market acceptance; . diversion of development resources; . injury to our reputation; . increased service and warranty costs; . legal actions by customers against us; and . increased insurance costs. Our licenses with customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements generally cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or service-giving rise to the damages. However, these contractual limitations on liability may not be enforceable, particularly if the damages relate to a Year 2000 problem, and we may be subject to claims based on errors in our software or mistakes in performing our services including claims relating to damages to our customers' internal systems. A product liability claim, whether or not successful, could harm our business by increasing our costs, damaging our reputation and distracting our management. Despite investigation and testing by us and our partners, Infranet and the underlying systems and protocols running it may contain previously undetected errors or defects associated with Year 2000 or other date functions. Several customers, despite warnings regarding the use of non-Year 2000 certified versions of Infranet, have continued to use non-certified versions, and decline to upgrade to certified versions or implement maintenance fixes or bug releases made available to them. Portal integrates certain third party software into Infranet. These third party vendors may detect errors in their products after previously indicating that their products are Year 2000 compliant. Such revelations by our partners, have occurred in the past and may occur in the future; and these revelations have and could cause us to make changes in our products in response. 33 In the past we have failed to release certain new products and upgrades on time. Future delays may result in: . customer dissatisfaction; . cancellation of orders and license agreements; . negative publicity; . loss of revenues; . slower market acceptance; or . legal action by customers against us. Our business may be harmed if we are unable to develop, license or acquire new products or enhancements to Infranet on a timely and cost-effective basis, or if the market does not accept these products or enhancements. We incorporate software licensed from third parties into Infranet and any significant interruption in the availability of these third-party software products or defects in these products could harm our business in the short- term Portions of Infranet incorporate software developed and maintained by third-party software vendors, such as operating systems, tools and database vendors. We expect that we may have to incorporate software from third party vendors and developers to a larger degree in our future products. Any significant interruption in the availability of these third-party software products or defects in these products or future products could harm our sales unless and until we can secure another source. 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. The absence of, or any significant delay in, the replacement of that functionality could result in delayed or lost sales and increased costs and could harm our business in the short-term. Our future success will depend on our ability to manage technological change The market for CM&B software and services and Internet applications is characterized by: . rapid technological change; . frequent new product introductions; . changes in customer requirements; and . evolving industry standards. Future versions of hardware and software platforms embodying new technologies and the emergence of new industry standards could render our products obsolete. Our future success will depend upon our ability to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers. Infranet is designed to work on a variety of hardware and software platforms used by our customers. However, Infranet may not operate correctly on evolving versions of hardware and software platforms, programming languages, database environments, accounting and other systems that our customers use. We must constantly modify and improve our products to keep pace with changes made to these platforms and to back-office applications and other Internet-related applications. This may result in uncertainty relating to the timing and nature of new product announcements, introductions or modifications, which may harm our business. If we fail to modify or improve our products in response to evolving industry standards, our products could rapidly become obsolete, which would harm our business. 34 The markets in which we sell our product are highly competitive and we may not be able to compete effectively We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing. We face competition from providers of traditional CM&B software such as Amdocs (which has recently acquired Solect Technology) and the Kenan Systems division of Lucent; emerging providers of Internet-specific billing software, such as Belle Systems and Daleen Technologies, Inc.; and providers of Internet-based services that develop proprietary systems. We also compete with systems integrators and with internal MIS departments of larger telecommunications carriers. We are aware of numerous other major ISPs, software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete with Infranet. We anticipate continued growth and competition in the on-line services and telecommunications industries and the entrance of new competitors into the CM&B software market, and that the market for our products and services will remain intensely competitive. We expect that competition will increase in the near term and that our primary long-term competitors may have not yet entered the market. Many of our current and future competitors have significantly more personnel and 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 than we can. Also, current and potential competitors have greater name recognition and more extensive customer bases that they can use to compete more effectively. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which could harm our business. Our business substantially depends upon the continued growth of the Internet and Internet-based services We sell Infranet to organizations providing Internet-based services. Consequently, our future revenues and profits, if any, substantially depend upon the continued acceptance and use of the Internet as an effective medium of commerce and communication. Rapid growth in the use of the Internet and on- line services is a recent phenomenon and it may not continue. As a result, a broad base of regular Internet users may not develop, and the market may not accept recently introduced services and products that rely upon the Internet, such as Infranet. Future regulation of the Internet may slow its growth, resulting in decreased demand for our products and services and increased costs of doing business Due to the increasing popularity and use of the Internet, it is possible that state and federal regulators could adopt laws and regulations that may impose additional burdens on those companies conducting business on-line. The growth and development of the market for Internet-based services may prompt calls for more stringent consumer protection laws or for imposition of additional taxes. The adoption of any additional laws or regulations may decrease the expansion of the Internet or impose additional burdens on those companies conducting business on-line. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business, or otherwise harm our business. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales tax, libel and personal privacy is uncertain and may take years to resolve. Our costs could increase and our growth could be harmed by any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other on-line services. Our future success depends on our ability to attract and retain additional personnel, particularly qualified sales persons We intend to hire a significant number of additional sales, support, marketing, administrative and research and development personnel in fiscal year 2001 and beyond. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our business cannot 35 continue to grow if we cannot attract qualified personnel. We currently have a small customer service and support organization and will need to increase our staff to support new customers and the expanding needs of our existing customers. Hiring qualified customer service and support personnel, as well as sales, marketing, administrative and research and development personnel, is very competitive in our industry, particularly in the San Francisco Bay Area, where Portal is headquartered, due to the limited number of people available with the necessary technical skills and understanding of the Internet. We may experience greater difficulty attracting these personnel with equity incentives as a public company than we did as a privately held company. Our future success also depends upon the continued service of our executive officers and other key sales, marketing and support personnel in general, and on the services of John E. Little, our President and Chief Executive Officer, and David S. Labuda, our Chief Technology Officer, in particular. None of our officers or key employees is bound by an employment agreement for any specific term. Our relationships with these officers and key employees are at will. Acquisitions of companies or technologies may result in disruptions to our business and management due to difficulties in assimilating personnel and operations Although we have not done so in the past, we may make acquisitions or investments in other companies, products or technologies in the future. If we make any 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 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. The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets. The price of our common stock has been, and will be volatile The trading price of our common stock has fluctuated in the past and will fluctuate in the future. This future fluctuation could be a result of a number of factors, many of which are outside our control. Some of these factors include: . quarter-to-quarter variations in our operating results; . failure to meet the expectations of industry analysts; . changes in earnings estimates by analysts; . announcements and technological innovations or new products by us or our competitors; . increased price competition; . developments or disputes concerning intellectual property rights; and . general conditions in the Internet industry. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many Internet and computer software companies, including ours, and which have often been unrelated to the operating performance of these companies or our company. Decreases in the trading prices of stocks of technology companies are often precipitous. For example, the price of Portal's stock dropped rapidly during the first quarter of fiscal year 2001. 36 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about Portal's risk management activities includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements for the reasons described under the caption "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-- Risks Associated With Portal's Business And Future Operating Results." Short-Term Investment Portfolio We do not hold derivative financial instruments in our short-term investment portfolio. Our short-term investments consist of instruments that meet high quality standards consistent with our investment policy. This policy dictates that we diversify our holdings and limit our short-term investments to a maximum of $5 million to any one issuer. Our policy also dictates that all short-term investments mature in 24 months or less. The following summarizes Portal's short-term investments and the related weighted average yields, as of January 31, 2000 (in thousands, except interest rates):
Years Ending January 31, ----------------------------- 2001 2002 Thereafter Total -------- ------- ---------- -------- Cash Equivalents.................... $ 32,317 $ -- -- $ 32,317 Weighted Average Yield............ 4.73% -- -- 4.73% Investments......................... 90,748 66,654 -- 157,402 Weighted Average Yield............ 5.91% 6.45% -- 6.13% -------- ------- --- -------- Total Portfolio..................... $123,065 $66,654 -- $189,719 Weighted Average Yield............ 5.60% 6.45% -- 5.90%
Impact of Foreign Currency Rate Changes During fiscal year 2000, most local currencies of our international subsidiaries weakened against the U.S. dollar. Because we translate foreign currencies into U.S. dollars for reporting purposes, currency fluctuations can have an impact, though generally immaterial, on our results. Portal believes that its exposure to currency exchange fluctuation risk has been insignificant primarily due to the denomination of our sales transactions in U.S. dollars. For the fiscal year ended January 31, 2000, there was an immaterial currency exchange impact from our intercompany transactions. As of January 31, 2000, we did not engage in foreign currency hedging activities. As a global concern, Portal anticipates that its sales outside the United States will increasingly be denominated in other currencies. In such event, Portal will face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on Portal's financial position and results of operations. In order to reduce the effect of foreign currency fluctuations, Portal may hedge its exposure on certain transactional balances that are denominated in foreign currencies through the use of foreign currency forward exchange contracts. The success of such activity will depend upon the estimation of future transactions denominated in various currencies. To the extent that these estimates are overstated or understated during periods of currency volatility, Portal could experience unanticipated currency gains or losses. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements The following financial statements are filed as part of this report
Page ---- Report of Ernst & Young LLP, Independent Auditors..................... 39 Consolidated Balance Sheets as of January 31, 1999 and 2000........... 40 Consolidated Statements of Operations for the three years ended January 31, 2000..................................................... 41 Consolidated Statement of Stockholders' Equity (Net Capital Deficiency) for the three years ended January 31, 2000............... 42 Consolidated Statements of Cash Flows for the three years ended January 31, 2000..................................................... 43 Notes to Consolidated Financial Statements............................ 44
38 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Portal Software, Inc. We have audited the accompanying consolidated balance sheets of Portal Software, Inc. as of January 31, 1999 and 2000, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended January 31, 2000. These financial statements are the responsibility of the management of Portal Software, Inc. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Portal Software, Inc. at January 31, 1999 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Palo Alto, California February 16, 2000, except for paragraph 4 of Note 4, as to which the date is March 13, 2000 39 PORTAL SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except par value)
January 31, ------------------ 1999 2000 -------- -------- ASSETS ------ Current assets: Cash and cash equivalents................................ $ 11,809 $ 43,887 Accounts receivable, net of allowance for doubtful accounts of $940 and $1,187 at January 31, 1999 and 2000, respectively...................................... 14,474 28,546 Short-term investments................................... -- 152,090 Restricted short-term investments........................ -- 5,312 Prepaids and other current assets........................ 1,440 4,516 -------- -------- Total current assets................................... 27,723 234,351 Property and equipment, net................................ 4,417 18,785 Restricted long-term investments........................... -- 5,856 Other assets............................................... 204 6,537 -------- -------- $ 32,344 $265,529 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) ------------------------------------ Current liabilities: Accounts payable......................................... $ 2,567 $ 7,655 Accrued compensation..................................... 1,147 9,060 Other accrued liabilities................................ 5,214 5,282 Current portion of long-term debt........................ 4,122 -- Current portion of capital lease obligations............. 479 780 Deferred revenue......................................... 23,344 32,857 -------- -------- Total current liabilities.............................. 36,873 55,634 Long-term portion of capital lease obligations............. 2,022 1,525 Commitments Stockholders' equity (net capital deficiency): Convertible preferred stock, no par value, issuable in series: 29,700 shares authorized and 57,304 shares issued and outstanding at January 31, 1999; 5,000 shares authorized, $0.001 par value, none issued and outstanding at January 31, 2000......................... 18,482 -- Common stock, $0.001 par value; 250,000 shares authorized at January 31, 2000; 78,367 and 158,927 shares issued and outstanding at January 31, 1999 and January 31, 2000, respectively...................................... 927 159 Additional paid-in capital............................... 16,753 251,047 Accumulated other comprehensive loss..................... -- (639) Notes receivable from stockholders....................... (318) (259) Deferred stock compensation.............................. (14,456) (6,379) Accumulated deficit...................................... (27,939) (35,559) -------- -------- Stockholders' equity (net capital deficiency).......... (6,551) 208,370 -------- -------- $ 32,344 $265,529 ======== ========
See accompanying notes. 40 PORTAL SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Years Ended January 31, --------------------------- 1998 1999 2000 ------- -------- -------- Revenues: License fees................................... $ 6,892 $ 13,536 $ 67,049 Services....................................... 2,524 13,133 36,000 ------- -------- -------- Total revenues............................... 9,416 26,669 103,049 ------- -------- -------- Costs and expenses: Cost of license fees........................... 970 458 2,596 Cost of services............................... 2,152 9,425 22,808 Research and development....................... 5,628 11,252 26,090 Sales and marketing............................ 5,436 14,112 43,671 General and administrative..................... 2,616 6,253 15,349 Amortization of deferred stock compensation.... -- 2,297 8,235 ------- -------- -------- Total costs and expenses..................... 16,802 43,797 118,749 ------- -------- -------- Loss from operations............................. (7,386) (17,128) (15,700) Interest income and other income (expense), net.. 39 540 6,268 Gain on sale of investment....................... -- 311 -- One-time gain upon expiration of unexercised put option on common stock.......................... -- -- 3,810 Interest expense................................. (240) (416) (382) ------- -------- -------- Loss before income taxes......................... (7,587) (16,693) (6,004) Provision for income taxes....................... -- (715) (1,616) ------- -------- -------- Net loss......................................... $(7,587) $(17,408) $ (7,620) ======= ======== ======== Basic and diluted net loss per share............. $ (0.18) $ (0.29) $ (0.06) ======= ======== ======== Shares used in computing basic and diluted net loss per share.................................. 41,571 59,062 124,816 ======= ======== ========
See accompanying notes. 41 PORTAL SOFTWARE, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (in thousands, except share amounts)
Convertible Accumulated Notes Preferred Stock Common Stock Additional Other Receivable Deferred --------------------- ------------------- Paid-In Comprehensive from Stock Accumulated Shares Amount Shares Amount Capital Income (Loss) Stockholders Compensation Deficit ----------- -------- ----------- ------ ---------- ------------- ------------ ------------ ----------- Balances at January 31, 1997............ 36,423,180 $ 3,035 59,330,232 $ 41 $ -- $ -- $ (20) $ -- $ (2,944) Total comprehensive loss............ (7,587) Payment received on notes receivable...... -- -- -- -- -- -- 20 -- -- Issuance of Series A preferred stock upon exercise of warrants........ 200,100 17 -- -- -- -- -- -- -- Issuance of Series B preferred stock net of issuance costs of $39.... 19,999,998 14,961 -- -- -- -- -- -- -- Issuance of common stock upon exercise of options, net of repurchases..... -- -- 16,595,340 136 -- -- -- -- -- Issuance of Series B preferred stock warrants in connection with long-term debt.. -- 104 -- -- -- -- -- -- -- ----------- -------- ----------- ----- -------- ----- ----- -------- -------- Balances at January 31, 1998............ 56,623,278 18,117 75,925,572 177 -- -- -- -- (10,531) Total comprehensive loss............ (17,408) Issuance of Series A preferred stock upon exercise of warrants........ 209,100 17 -- -- -- -- -- -- -- Issuance of Series B preferred stock........... 471,996 348 -- -- -- -- -- -- -- Issuance of common stock upon exercise of stock options, net of repurchases..... -- -- 2,403,792 749 -- -- (318) -- -- Issuance of common stock upon exercise of warrants -- -- 37,722 1 -- -- -- -- -- Deferred stock compensation.... -- -- -- -- 16,753 -- -- (16,753) -- Amortization of deferred stock compensation.... -- -- -- -- -- -- -- 2,297 -- ----------- -------- ----------- ----- -------- ----- ----- -------- -------- Balances at January 31, 1999............ 57,304,374 18,482 78,367,086 927 16,753 -- (318) (14,456) (27,939) Comprehensive income (loss): Net unrealized loss on investments..... (704) Translation adjustment and other........... 65 Net loss........ (7,620) Total comprehensive loss............ Issuance of Series A preferred stock upon exercise of warrants........ 682,200 58 -- -- -- -- -- -- -- Conversion of preferred stock to common stock upon completion of initial public offering........ (57,986,574) (18,540) 57,986,574 29 18,511 -- -- -- -- Issuance of common stock in initial public offering and private placement, net of issuance costs........... -- -- 15,961,198 8 102,360 -- -- -- -- Reincorporation to Delaware..... -- -- -- (888) 888 -- -- -- -- Issuance of common stock in secondary public offering, net of issuance costs.. -- -- 5,900,000 3 105,959 -- -- -- -- Issuance of common stock upon exercise of stock options, net of repurchases..... -- -- (408,618) -- 3,258 -- 59 -- -- Issuance of common stock for cash............ -- -- 145,914 -- 118 -- -- -- -- Issuance of common stock upon exercise of warrants........ -- -- 474,944 -- 146 -- -- -- -- Issuance of common stock pursuant to Employee Stock Purchase Plan... -- -- 499,402 -- 2,976 -- -- -- -- Impact of Stock split........... -- -- -- 80 (80) -- -- -- -- Deferred stock compensation.... -- -- -- -- 158 -- -- (158) -- Amortization of deferred stock compensation.... -- -- -- -- -- -- -- 8,235 -- Balances at January 31, 2000............ -- $ -- 158,926,500 $ 159 $251,047 $(639) $(259) $( 6,379) $(35,559) =========== ======== =========== ===== ======== ===== ===== ======== ======== Total Stockholders' Equity (Net Capital Deficiency) ------------- Balances at January 31, 1997............ $ 112 Total comprehensive loss............ (7,587) Payment received on notes receivable...... 20 Issuance of Series A preferred stock upon exercise of warrants........ 17 Issuance of Series B preferred stock net of issuance costs of $39.... 14,961 Issuance of common stock upon exercise of options, net of repurchases..... 136 Issuance of Series B preferred stock warrants in connection with long-term debt.. 104 ------------- Balances at January 31, 1998............ 7,763 Total comprehensive loss............ (17,408) Issuance of Series A preferred stock upon exercise of warrants........ 17 Issuance of Series B preferred stock........... 348 Issuance of common stock upon exercise of stock options, net of repurchases..... 431 Issuance of common stock upon exercise of warrants 1 Deferred stock compensation.... -- Amortization of deferred stock compensation.... 2,297 ------------- Balances at January 31, 1999............ (6,551) Comprehensive income (loss): Net unrealized loss on investments..... (704) Translation adjustment and other........... 65 Net loss........ (7,620) ------------- Total comprehensive loss............ (8,259) ------------- Issuance of Series A preferred stock upon exercise of warrants........ 58 Conversion of preferred stock to common stock upon completion of initial public offering........ -- Issuance of common stock in initial public offering and private placement, net of issuance costs........... 102,368 Reincorporation to Delaware..... -- Issuance of common stock in secondary public offering, net of issuance costs.. 105,962 Issuance of common stock upon exercise of stock options, net of repurchases..... 3,317 Issuance of common stock for cash............ 118 Issuance of common stock upon exercise of warrants........ 146 Issuance of common stock pursuant to Employee Stock Purchase Plan... 2,976 Impact of Stock split........... -- Deferred stock compensation.... -- Amortization of deferred stock compensation.... 8,235 Balances at January 31, 2000............ $208,370 =============
See accompanying notes. 42 PORTAL SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended January 31, ---------------------------- 1998 1999 2000 ------- -------- --------- OPERATING ACTIVITIES: Net loss......................................... $(7,587) $(17,408) $ (7,620) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.................. 525 940 1,939 Amortization of deferred stock compensation.... -- 2,297 8,235 Remeasurement gain related to put option....... -- -- (3,810) Changes in operating assets and liabilities: Accounts receivable, net...................... (4,966) (8,777) (14,072) Prepaids and other current assets............. (52) (1,340) (1,585) Other assets.................................. (39) (59) (285) Accounts payable.............................. 1,222 1,025 3,088 Accrued compensation.......................... 569 244 7,913 Other accrued liabilities..................... 232 4,138 80 Deferred revenue.............................. 7,421 15,625 9,513 ------- -------- --------- Net cash provided by (used in) operating activities................................. (2,675) (3,315) 3,396 ------- -------- --------- INVESTING ACTIVITIES: Purchases of short-term investments.............. -- -- (201,433) Maturity of short-term investments............... -- -- 42,851 Purchases of long-term investments............... -- -- (5,948) Maturity of long-term investments................ -- -- 68 Purchases of property and equipment.............. (1,855) -- (15,186) Equity investments in private companies.......... -- -- (2,000) ------- -------- --------- Net cash used in investing activities....... (1,855) -- (181,648) ------- -------- --------- FINANCING ACTIVITIES: Payment received on stockholder notes receivable...................................... 20 -- -- Proceeds from issuance of long-term debt......... 3,000 -- -- Repayment of long-term debt...................... (498) -- (4,122) Proceeds from line of credit..................... -- -- 1,000 Repayment of line of credit...................... -- -- (1,000) Principal payments under capital lease obligations..................................... -- (319) (544) Proceeds from issuance of common stock, net of repurchases and issuance cost................... 136 432 214,952 Proceeds from issuance of preferred stock........ 14,978 365 -- ------- -------- --------- Net cash from financing activities.......... 17,636 478 210,286 ------- -------- --------- Effect of exchange rate on cash and cash equivalents..................................... -- -- 44 ------- -------- --------- Net increase (decrease) in cash and cash equivalents..................................... 13,106 (2,837) 32,078 Cash and cash equivalents at beginning of year... 1,540 14,646 11,809 ------- -------- --------- Cash and cash equivalents at end of year......... $14,646 $ 11,809 $ 43,887 ======= ======== ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest......... $ 43 $ 361 $ 366 ======= ======== ========= Income taxes paid.............................. $ -- $ 215 $ 553 ======= ======== ========= Supplemental disclosures of non-cash financing activity: Issuance of Series B preferred stock warrants in connection with long-term debt............. $ 104 $ -- $ -- ======= ======== ========= Issuance of debt upon conversion of customer deposit included in deferred revenue.......... $ -- $ 1,122 $ -- ======= ======== ========= Equipment acquired under capital lease obligations................................... $ -- $ 2,820 $ 337 ======= ======== ========= Deferred stock compensation related to options granted....................................... $ -- $ 16,753 $ 158 ======= ======== ========= Issuance of common stock for stockholder notes receivable.................................... $ -- $ 318 $ -- ======= ======== =========
See accompanying notes. 43 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Significant Accounting Policies: Nature of Business and Basis of Presentation Portal Software, Inc. or Portal, formerly Portal Information Network, Inc., was incorporated in California in 1994 and reincorporated in Delaware in April 1999. Portal markets and supports real-time customer management and billing software, or CM&B software, for providers of Internet-based services. Portal's software is a comprehensive solution that is designed to meet the complex, mission-critical provisioning, accounting, reporting and marketing needs of providers of Internet-based services. Portal markets its products worldwide through a combination of a direct sales force and distribution partners. Substantially all of Portal's license revenues are derived from sales of its Infranet product. Portal has incurred operating losses to date and, at January 31, 2000, had an accumulated deficit of $35.6 million. Portal's activities have been primarily financed through private placements and public offerings of equity securities. Portal may need to raise additional capital through the issuance of debt or equity securities. Such financing may not be available on terms satisfactory to Portal, if at all. Principles of Consolidation The consolidated financial statements include the accounts of Portal and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Foreign Currency Portal considers the functional currency of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the year. Translation gains and losses are reported within accumulated other comprehensive income (loss). Net gains and losses resulting from foreign exchange transactions were immaterial in all periods presented. Revenue Recognition License revenues are comprised of fees for multi-year or perpetual licenses, which are primarily derived from contracts with corporate customers and resellers. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Portal obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. For electronic delivery, the software is considered to have been delivered when Portal has provided the customer with the access codes that allow for immediate possession of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue on arrangements with customers who are not the ultimate users (primarily resellers) is not recognized until the product is delivered to the end user. Services revenues are primarily comprised of revenue from systems integration or other consulting fees, maintenance agreements and training. Arrangements that include software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When software services are considered essential, revenue under the arrangement is recognized using contract accounting. When software services are not considered essential, the revenue related to the software services is recognized as the services are performed. Maintenance agreements provide technical support and include the right to unspecified upgrades on an if-and-when-available basis. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which is typically one year. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue. 44 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In February 1998, Portal adopted Statement of Position 97-2 ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9, "Software Revenue Recognition." These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 98-9 amends SOP 97-2 and 98-4, extending the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Portal does not expect the final adoption of SOP 98-9 to have a material impact on its future revenues or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition. Portal believes that its revenue recognition policies are compliant with SAB 101. Research and Development Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on Portal's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by Portal between the completion of the working model and the point at which the product is ready for general release have been insignificant. Therefore, through January 31, 2000, Portal has charged all such costs to research and development expense in the period incurred. Concentration of Credit Risk Portal sells its software and services to customers consisting mainly of North American, European and Asia-Pacific Internet service providers and enhanced service developers. Portal performs ongoing credit evaluations of its customers and does not require collateral. Portal maintains an allowance for potential credit losses and such losses have been within management's expectations. During the years ended January 31, 1998, 1999 and 2000, Portal added approximately $50,000, $1.4 million and $1.0 million to its allowance for doubtful accounts. Write-offs of uncollectible accounts totaled $0.5 million and $0.8 million for the years ended January 31, 1999 and 2000, respectively (none for the year ended January 31, 1998). One customer accounted for 10% of total revenue during the year ended January 31, 2000. No individual customer accounted for greater than 10% of total revenue during fiscal 1999 and one customer accounted for 47% of Portal's total revenues in fiscal 1998. Segment Information Portal operates solely in one segment, the development and marketing of CM&B software. Portal's foreign offices consist of sales, marketing and support activities through its foreign subsidiaries and an overseas reseller network. Operating losses generated by the foreign operations of Portal and their corresponding identifiable assets were not material in any period presented. Portal's chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. The Company does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, gross margin or net income. In addition, as Portal's assets are primarily located in its corporate office in the United States and not allocated to any specific region, the Company does not produce reports for, or measure the performance of, its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues and gross margin. 45 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Portal's export revenue represented 15%, 27% and 35% of total revenues in the years ending January 31, 1998, 1999 and 2000. All of the export sales to date have been denominated in U.S. dollars and were derived from sales to Europe and Asia-Pacific. Total export revenues for these years were $1.1 million, $4.4 million and $28.7 million to customers in Europe and $0.4 million, $2.7 million and $7.5 million to customers in the Asia-Pacific and Latin American regions. Fair Value of Financial Instruments The fair value of notes receivable is estimated by discounting the future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. At January 31, 1999 and 2000, the carrying value of the notes receivable approximated their fair value. The fair value of short-term and long-term capital lease obligations is estimated based on current interest rates available to Portal for debt instruments with similar terms, degrees of risk, and remaining maturities. At January 31, 1999 and 2000, the carrying values of these obligations approximate their respective fair values. Advertising We expense advertising costs as incurred. Advertising expense for the years ended January 31, 1998, 1999 and 2000 was approximately $24,000, $0.2 million and $0.5 million, respectively. Cash, Cash Equivalents, Short-Term and Long-Term Investments Portal considers all highly liquid, low-risk debt instruments with an original maturity at the date of purchase of three months or less to be cash equivalents. Through January 31, 1999, Portal maintained cash and cash equivalents in money market accounts with major financial institutions for which the carrying amount approximated its fair value. Upon completion of the initial public offering in May 1999 and secondary stock offering in October 1999 (see Note 6), Portal received additional cash which was available for investment. At January 31, 2000, cash equivalents and short-term investments consist primarily of commercial paper, money market funds and government securities. All short-term investments mature within 24 months. Portal classifies, at the date of acquisition, its cash equivalents and short-term investments as available-for-sale in accordance with the provisions of the FASB's Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). Securities are reported at fair market value, with the related unrealized gains and losses included within stockholders' equity. Unrealized gains and losses were not material at January 31, 1998 and 1999. At January 31, 2000, unrealized losses were $703,000 due primarily to the effects of increasing interest rates on long-term securities. It is not expected that a significant amount of the unrealized loss will be realized. Debt and discount securities are adjusted for straight-line amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded using the specific identification method. The following schedule summarizes the estimated fair value of Portal's cash, cash equivalents and short-term investments (in thousands):
January 31, --------------- 1999 2000 ------- ------- Cash and cash equivalents: Cash.................................................... $ 4,359 $11,570 Money market funds...................................... 7,450 12,142 Commercial paper........................................ -- 14,977 U.S. Government securities.............................. -- 5,198 ------- ------- $11,809 $43,887 ======= =======
46 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Short-term investments at January 31, 2000 (in thousands):
Gross Unrealized ------------------------------ Fair Cost Gain Loss Value -------- ---- ----- -------- Commercial paper.......................... $ 12,303 $ -- $ (4) $12,299 Corporate notes........................... 90,364 -- (571) 89,793 Municipal bonds........................... 55,434 -- (124) 55,310 Restricted investments.................... (5,312) -- -- (5,312) -------- ---- ----- -------- $152,789 $ -- $(699) $152,090 ======== ==== ===== ========
The estimated fair value of cash, cash equivalents and short-term investments classified by date of maturity is as follows (in thousands):
January 31, ---------------- 1999 2000 ------- -------- Due within one year...................................... $11,809 $125,467 Due within two years..................................... -- 75,822 Restricted short-term investments........................ -- (5,312) ------- -------- $11,809 $195,977 ======= ========
In accordance with FAS 115, Portal classifies all non-restricted short-term investments as available-for-sale since these securities are available to support current operations. Restricted short-term investments represent collateral for a $950,000 letter of credit backing surety bonds required by a customer contract and for a $3 million letter of credit issued to Portal's landlord to guarantee payment of tenant improvements. On February 29 and October 31, 2000, the surety bonds of $750,000 and $200,000, respectively, will expire. On February 29, 2000, the guarantee for tenant improvements did expire. The restricted short-term investments are not available to support current operations and, consequently, are classified as held-to-maturity. As a result, unrealized gains and losses are not recorded. At January 31, 2000, amortized cost approximated fair value. Restricted long-term investments of $5,856,000 represent collateral for two letters of credit issued in lieu of security deposits for two new facility leases and consist of corporate bonds maturing over a period of one to three years. The two letters of credit for $2,250,000 and $3,000,000 are renewable annually until they expire on December 31, 2010. The restricted long-term investments are classified as held-to-maturity and, consequently, unrealized gains and losses are not recorded. At January 31, 2000, amortized cost approximated fair value. Realized gains and losses from sales of each type of security were immaterial for all periods presented. Depreciation and Amortization Depreciation on office and computer equipment and furniture is computed using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the related lease term or their estimated useful lives, typically five years. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 47 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net Loss Per Share Basic net loss per share and diluted net loss per share are presented in conformity with the FASB's Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented. In accordance with FAS 128, basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. All share and per share amounts shown in this table have been restated to reflect a two- for-one stock split effective January 20, 2000. The following table presents the calculation of basic and diluted net loss per share for the three years ended January 31, 2000 (in thousands, except per share data):
Years ended January 31, ---------------------------- 1998 1999 2000 -------- -------- -------- Net loss................................... $ (7,587) $(17,408) $ (7,620) ======== ======== ======== Basic and diluted: Weighted-average shares of common stock outstanding............................. 68,174 77,804 133,000 Less: Weighted-average shares subject to repurchase.............................. (26,603) (18,742) (8,184) -------- -------- -------- Weighted-average shares used in computing basic and diluted net loss per share...... 41,571 59,062 124,816 ======== ======== ======== Basic and diluted net loss per share... $ (0.18) $ (0.29) $ (0.06) ======== ======== ========
Portal has excluded all convertible preferred stock, warrants for convertible preferred stock, outstanding stock options, and shares subject to repurchase from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. The total number of shares excluded from the calculations of diluted net loss per share was 76,519,800, 80,371,692 and 20,679,540 for the years ended January 31, 1998, 1999 and 2000. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share using the treasury stock method. See Note 6 for further information on these securities. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation", ("FAS 123"), encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. Portal has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for its stock option plans. See the pro forma disclosures of applying FAS 123 included in Note 6. Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net loss and other comprehensive income (loss), which includes certain changes in equity of the company that are excluded from net loss. Specifically, FAS 130 requires foreign currency translation adjustments and changes in the fair value of available-for-sale securities to be included in other accumulated comprehensive income (loss). Comprehensive loss for the three years ended January 31, 2000 has been disclosed in the Statement of Stockholders' Equity (Net Capital Deficiency). 48 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Recently Issued Accounting Standards In June 1998, the FASB issued "Accounting for Derivative Instruments and Hedging Activities," ("FAS 133"). FAS 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. In June 1999, the FASB delayed implementation of FAS 133, so that implementation is now required for fiscal years beginning after June 15, 2000. As Portal does not currently engage in hedging activities, Portal expects that the adoption of FAS 133 will not have a material impact on its financial position or results of operations. Due to the delayed effective date, Portal will be required to implement FAS 133 for fiscal 2002. (2) Property and Equipment Property and equipment is recorded at cost and consists of the following (in thousands):
January 31, -------------- 1999 2000 ------ ------- Office and computer equipment................................ $4,970 $17,290 Furniture and fixtures....................................... 1,237 2,217 Leasehold improvements....................................... 348 3,584 ------ ------- 6,555 23,091 Less accumulated depreciation and amortization............... 2,138 4,306 ------ ------- Property and equipment, net.................................. $4,417 $18,785 ====== =======
Included in property and equipment at January 31, 1999 and 2000 were assets acquired under capital lease obligations with a cost of approximately $2.8 million and $3.0 million. Accumulated depreciation related to the assets acquired under capital lease totaled approximately $0.3 million and $1.1 million at January 31, 1999 and 2000. (3) Long-Term Debt, Convertible Promissory Notes and Line of Credit In July 1997, Portal entered into a $3.0 million note payable agreement with a financial institution to finance working capital. The agreement was subsequently amended in February 1999 to change the installment payment dates. The note, bearing an interest rate at 10.75% per annum, was payable in three installments of $1.5 million, $0.5 million, and $1.0 million on February 19, 1999, March 31, 1999, and April 30, 1999 and was paid on schedule. In connection with the note, Portal issued warrants to the lender to purchase 130,098 shares of Series B preferred stock at an exercise price of $1.50 per share. As of April 30, 1999, the entire loan had been repaid. In December 1998, Portal entered into an agreement with a customer to convert $1.1 million from a deposit into a note payable. The note, bearing an interest rate of 10% per annum, was due on November 30, 1999. The entire balance on the note was repaid in July 1999. On April 15, 1999, Portal entered into a line of credit with a bank under which Portal may borrow up to $5 million. Amounts borrowed under this line of credit bear interest at a rate of the bank's prime rate plus 0.5% and mature on April 13, 2000. On April 22, 1999, Portal borrowed $1.0 million under the line of credit to repay the final installment of the term loan that matured in April 1999. The entire balance on the line of credit was repaid in May 1999. 49 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Agreement with Andersen Consulting LLC On April 12, 1999, Portal agreed to enter into a strategic alliance with Andersen Consulting LLC under which Andersen Consulting LLC agreed to provide services to Portal and the parties agreed to expand their existing marketing alliance and work closely together to expand their customer service and marketing relationship. Under this arrangement, Andersen Consulting LLC agreed to purchase up to 800,000 shares of common stock from Portal in a private placement concurrent with Portal's initial public offering at the initial public offering price, less the underwriting discount. Under this agreement, Portal agreed to pay Andersen Consulting LLC for its services a minimum services fee in cash of $2.8 million and a cash settled put for 400,000 of the shares to be purchased by Andersen Consulting LLC. This put guaranteed a closing value of $6.0 million at the end of the first day of trading for 400,000 common shares sold to Andersen and required Portal to pay Andersen Consulting LLC in cash for any differences between the closing value of these shares and $6.0 million. Upon the date of the arrangement, Portal recorded the fair value of the put of approximately $3.8 million. The value of the put was determined using the Black-Scholes pricing model using a risk-free interest rate of 6.3%, an expected life of one month and a volatility factor of 100%. Upon completion of the initial public offering (see Note 6), the put option was settled. Based on the closing price of Portal's common stock at the end of the first day of trading, the net cash settlement of the put was computed at a value of zero. As a result, a gain upon remeasurement of the liability of $3.8 million was recorded as other income in the year ended January 31, 2000. At January 31, 2000, the initial fair value of the put, approximately $3.8 million, has been classified as a prepaid service asset, and allocated between current and long-term assets as appropriate. Upon signing of the definitive agreement in March 2000, the services fee of $2.8 million was paid and capitalized. The entire prepaid service asset of $6.6 million will be amortized on a straight-line basis over the term of the agreement of approximately four and one half years. (5) Commitments Operating Leases Portal leases its office facilities and some property under various operating lease agreements. During fiscal 2000, Portal entered into two leases for its worldwide headquarters, which expire in December 2010. Rental expense for all operating leases was approximately $0.7 million, $1.6 million and $4.7 million for fiscal 1998, 1999 and 2000. Future minimum lease payments as of January 31, 2000 for all operating leases are as follows (in thousands): Year ending January 31, 2001.............................................................. $ 9,634 2002.............................................................. 9,018 2003.............................................................. 9,226 2004.............................................................. 8,337 2005.............................................................. 8,484 Thereafter........................................................ 54,529 ------- Total minimum lease payments.................................... $99,228 =======
50 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the leases for its worldwide headquarters, Portal has issued two letters of credit as deposits for the facilities. The letters, in the amounts of $2,250,000 and $3,000,000, have terms that allow the reduction down to $1,100,000 and $1,450,000, respectively, if certain covenants regarding sales and cash flow are met. Both letters of credit renew yearly until expiration on 12/31/2010. Capital Lease Obligations Portal leases certain furniture, computers, and equipment under non- cancelable capital leases. Obligations under capital leases represent the present value of future non-cancelable rental payments under various lease agreements. Future minimum lease payments under capital leases are as follows (in thousands): Year ending January 31, 2001............................................................... $ 939 2002............................................................... 1,006 2003............................................................... 609 2004............................................................... 23 ------ Total minimum payments........................................... 2,577 Less amount representing interest.................................... (272) ------ Present value of future payments..................................... 2,305 Less current portion................................................. (780) ------ Long-term portion.................................................... $1,525 ======
(6) Stockholders' Equity Reincorporation and Stock Splits During February 1999, Portal's board of directors authorized the reincorporation of Portal in the state of Delaware. This reincorporation was effective on April 29, 1999. Portal is authorized to issue 250,000,000 shares of common stock, $0.001 par value and 5,000,000 shares of undesignated preferred stock, $0.001 par value. The board of directors will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. In April 1999, Portal's board of directors approved a three-for-one split of Portal's common and preferred stock. The stock split took place on April 29, 1999. In December 1999, the board of directors approved a two-for-one split of Portal's common stock, which was effected by means of a stock dividend. This stock split dividend was paid on January 19, 2000. Concurrently with the stock dividend, Portal's outstanding stock options and stock option purchase plans were adjusted to reflect the two-for-one stock split. All share and per share amounts in the accompanying consolidated financial statements have been adjusted retroactively to reflect these stock splits. Initial Public Offering On May 11, 1999, Portal completed an initial public offering of its common stock. All 9.2 million shares covered by Portal's Registration Statement on Form S-1, including shares covered by an over-allotment option that was exercised, were sold by Portal at a price of $7.00 per share, less an underwriting discount of $0.49 per share. In addition, on May 11, 1999, the Company issued 760,368 shares of common stock to Andersen Consulting LLC and 6.0 million shares of common stock to Cisco Systems, Inc. for $6.51 per share or an aggregate purchase price of approximately $44.0 million. Net proceeds to the Company from all shares sold were 51 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) approximately $102.4 million. Upon the consummation of Portal's initial public offering on May 11, 1999, all of the then outstanding Series A preferred stock and Series B preferred stock automatically converted into common stock. Secondary Stock Offering In October 1999, Portal completed a secondary offering of 11.5 million shares of Portal common stock, including shares covered by an over-allotment option that was exercised. Of these shares, Portal offered 5.9 million primary shares and selling stockholders offered 5.6 million shares. Net proceeds to the Company were approximately $106.0 million after underwriting commissions and expenses. Convertible Preferred Stock A summary of convertible preferred stock as of January 31, 1999 is as follows:
January 31, 1999 ---------------------- Authorized Outstanding ---------- ----------- Series A............................................ 18,900,000 36,832,380 Series B............................................ 10,800,000 20,471,994 ---------- ---------- 29,700,000 57,304,374 ========== ==========
At January 31, 1999, 29,700,000 shares of convertible preferred stock were authorized. In connection with the initial public offering in May 1999, all convertible preferred stock was converted to common stock. As of January 31, 2000, 5,000,000 shares of preferred stock were authorized and no shares were outstanding. Common Stock Portal has issued shares of common stock, which are subject to Portal's right to repurchase at the original issuance price upon the occurrence of certain events, as defined in the agreement relating to the sale of such stock. The repurchase rights lapse ratably over a period of one to four years from the date of issuance. At January 31, 1998 and 1999 and January 31, 2000, approximately 29,427,294, 13,021,692 and 5,627,966 shares were subject to repurchase. Of the shares subject to repurchase, 16,857,828, 11,894,022 and 5,501,240 shares were issued upon the exercise of options under the 1995 Stock Option/Issuance Plan. At January 31, 2000, common stock was reserved for issuance as follows: Exercise of outstanding stock options......................... 20,540,899 Shares of common stock available for grant under the 1999 Stock Incentive Plan......................................... 4,633,587 ---------- Total common stock reserved for issuance.................... 25,174,486 ==========
Warrants Warrants to purchase 62,724 shares of common stock for a price of $0.008 per share were issued in connection with bridge loan financing in December 1995. During the years ended January 31, 1999 and 2000, 37,722 and 25,002 shares were issued in connection with exercises of these warrants. The value ascribed to the warrants is immaterial for financial statement purposes. As of January 31, 2000, none of these warrants were outstanding. 52 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Warrants to purchase 7,241,400 shares of Series A preferred stock at a price of $0.09 per share were issued in connection with the issuance of Series A preferred stock in March 1996. During the years ended January 31, 1997, 1998, 1999 and 2000, 6,150,000, 200,100, 209,100 and 682,200 shares were exercised. The value ascribed to these warrants is immaterial for financial statement purposes. As of January 31, 2000, none of these warrants were outstanding. Warrants to purchase 460,194 shares of Series B preferred stock for a price of $0.75 per share were issued in connection with the issuance of notes payable and the signing of capital lease agreements in July 1997. During the year ended January 31, 2000, these warrants were exercised on a net basis, resulting in the issuance of 449,942 shares of common stock. The warrants were appraised at the date of issuance and additional interest expense of $104,000 was recorded. This amount was deferred and is being amortized to interest expense over the term of the notes. During the years ended January 31, 1999 and 2000, $38,310 and $17,175 of the additional interest expense was amortized. Stock Options Upon the reincorporation of Portal on April 29, 1999, all options issued under the 1995 Stock Option/Stock Issuance Plan were assumed by the 1999 Stock Incentive Plan (the "Plan"). Under the Plan, the board of directors is authorized to grant incentive stock options or nonqualified stock options to employees, officers, and directors of Portal. The Plan allows for the grant of incentive stock options to employees and grant of nonstatutory stock options to eligible participants. The number of shares of common stock available for issuance under the Plan automatically increases on the first trading day of each fiscal year during the term of the Plan, beginning with fiscal 2001, by an amount equal to four percent (4%) of the shares of common stock outstanding on the last trading day of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 10,500,000 shares. The option price of options granted under the Plan is not less than 100% or 85% of the fair value on the date of the grant as determined by the board of directors for incentive stock options and nonqualified stock options, respectively, except for incentive stock options granted to a person owning greater than 10% of the total voting power of Portal, for which the exercise price of the options must not be less than 110% of the fair value at the time of grant. Options granted prior to January 27, 1999 generally become exercisable upon grant subject to repurchase rights in favor of Portal until vested. Options granted after January 27, 1999 generally become exercisable only when vested. Options generally vest over a period of no more than five years. Options may be granted with different vesting terms at the discretion of the board of directors. Options are exercisable for a term of ten years after the date of grant except those incentive stock options granted to a person owning greater than 10% of the total voting power of stock of Portal, which are exercisable for a term of five years after the date of grant. If the optionee's employment by or service with Portal is terminated, the options cease to be exercisable after a specified period, generally three months (one year in the case of death or disability). In the event of a change in control in which options granted under the Plan are not assumed, the options will accelerate and vest in full and existing repurchase rights will lapse. 53 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of Portal's stock option activity under all Plans and related information follows:
January 31, 1998 January 31, 1999 January 31, 2000 ---------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year................ 3,334,536 $0.01 1,783,368 $0.01 11,192,400 $ 0.77 Options granted......... 18,541,830 $0.01 13,782,000 $0.70 13,110,467 $13.25 Options exercised....... (18,423,948) $0.01 (4,072,968) $0.22 (2,157,738) $ 0.87 Options canceled........ (1,669,050) $0.01 (300,000) $0.64 (1,604,230) $ 2.32 =========== ========== ========== ====== Outstanding at end of year................... 1,783,368 $0.01 11,192,400 $0.77 20,540,899 $ 8.60 =========== ========== ========== ====== Exercisable at end of year................... 1,783,368 $0.01 11,192,400 $0.77 7,929,314 $ 1.28 =========== ========== ========== ====== Additional authorized shares................. -- -- -- -- 12,943,820 -- =========== ========== ========== ====== Weighted-average fair value of options granted................ $0.01 $0.18 $ 9.03
At January 31, 1998, 1999 and 2000, 16,857,828, 11,894,022 and 5,627,966 shares, which had been issued upon exercise of options, were subject to repurchase. At January 31, 1998, 1999 and 2000, options to acquire 100,386, 278,946 and 2,326,790 shares were vested but not exercised. Exercise prices for options outstanding as of January 31, 2000 and the weighted-average remaining contractual life are as follows:
Options Outstanding Options Exercisable ------------------------------------ ------------------------ Weighted- Average Number Remaining Weighted- Number Weighted- Outstanding at Contractual Average Outstanding at Average Range of January 31, Life Exercise January 31, Exercise Exercise Prices 2000 (In years) Price 2000 Price --------------- -------------- ----------- --------- -------------- --------- $0.00-0.66.............. 2,821,902 8.3 0.28 2,821,902 0.28 0.67-0.83.............. 1,595,850 8.6 0.74 1,595,850 0.74 1.33................... 3,009,564 8.8 1.33 3,009,564 1.33 2.00................... 967,350 9.0 2.00 122,512 2.00 5.00................... 4,903,520 9.1 5.00 253,188 5.00 7.00................... 3,463,762 9.2 7.00 30,303 7.00 19.50.................. 374,802 9.5 19.50 19,646 19.50 20.91-27.00............ 1,834,602 9.6 24.77 66,725 25.15 31.25-39.86............ 673,280 9.8 38.64 9,624 38.92 40.25-47.50............ 896,267 9.8 46.08 0 0.00 ---------- --- ----- --------- ----- 20,540,899 9.0 8.61 7,929,314 1.28 ========== === ===== ========= =====
During the year ended January 31, 1999, in connection with the grant of certain share options to employees, Portal recorded deferred stock compensation of $16.8 million representing the difference between the exercise price and the deemed fair value of Portal's common stock on the date such stock options were granted. Such amount is included as a reduction of stockholders' equity (net capital deficiency) and is being amortized by charges to operations on a graded vesting method. In fiscal 1999 and 2000, Portal recorded amortization of deferred stock compensation expense of approximately $2.3 million and $8.2 million. At January 31, 2000, Portal had a total of approximately $6.3 million remaining to be amortized over the corresponding vesting period of each respective option, generally four years. The amortization expense relates to options awarded to employees in all operating expense categories. This amount has not been separately allocated to these categories. 54 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1999 Employee Stock Purchase Plan In February 1999, the board of directors approved the adoption of Portal's 1999 Employee Stock Purchase Plan ("1999 Purchase Plan"). The stockholders approved this plan in April 1999. A total of 3,600,000 shares of common stock have been reserved for issuance under the 1999 Purchase Plan. The number of shares of common stock available for issuance under the 1999 Purchase Plan automatically increases on the first trading day of each fiscal year during the term of the 1999 Purchase Plan, beginning with fiscal 2001, by an amount equal to two percent (2%) of the shares of common stock outstanding on the last trading day of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 4,000,000 shares. The 1999 Purchase Plan permits eligible employees to acquire shares of Portal's common stock through periodic payroll deductions of up to 15% of total compensation. No more than 2,500 shares may be purchased on any purchase date per employee. Each offering period will have a maximum duration of 24 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of Portal's common stock on the first day of the applicable offering period or on the last day of the respective purchase period. The initial offering period commenced on the effectiveness of the initial public offering and will end on the last business day of May 2001. A total of 499,402 shares were sold under the 1999 Purchase Plan during the year ended January 31, 2000 at a price of $5.95 per share. Accounting for Stock-Based Compensation As discussed in Note 1, Portal has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee and director stock- based awards because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock-based awards. Under APB Opinion No. 25, Portal does not recognize compensation expense with respect to such awards if the exercise price equals or exceeds the fair value of the underlying security on the date of grant and other terms are fixed. Prior to January 31, 1999, the fair value for these awards was estimated at the date of grant using the minimum value options pricing model. Subsequent to this date, Portal estimated fair value based on the Black-Scholes pricing model. These models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because Portal's stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The fair value of options granted was estimated using the following weighted-average assumptions:
Year Ended January 31, ---------------- 1998 1999 2000 ---- ---- ---- Risk-free interest rate..................................... 6% 6% 6% Expected life (years)....................................... 6 6 5 Volatility.................................................. -- -- 85% Dividend Yield.............................................. 0% 0% 0%
55 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. Portal's pro forma information follows (in thousands, except per share amounts):
Year Ended January 31, --------------------------- 1998 1999 2000 ------- -------- -------- Net loss: As reported................................ $(7,587) $(17,408) $ (7,620) Pro forma.................................. (7,607) (17,861) (39,406) Basic and diluted net loss per share: As reported................................ $ (0.18) $ (0.29) $ (0.06) Pro forma.................................. (0.18) (0.30) (0.32)
(7) Income Taxes Portal's provision for income taxes was approximately $0.7 million and $1.6 million for the years ended January 31, 1999 and 2000. No provision for income tax for 1998 has been recorded as Portal incurred a net operating loss for that period. The reconciliation of income tax expense (benefit) attributable to continuing operations computed at the U.S. federal statutory rates to income tax expense (benefit) for the fiscal years ended January 31, 1998, 1999 and 2000 is as follows (in thousands):
Years Ended January 31, ------------------------- 1998 1999 2000 ------- ------- ------- Tax provision (benefit) at U.S. statutory rate......................................... $(2,579) $(5,676) $(2,041) Loss for which no tax benefit is currently recognizable................................. 2,579 5,676 2,881 Alternative minimum tax....................... -- 500 -- Foreign income and withholding taxes.......... -- 215 776 ------- ------- ------- Total....................................... $ -- $ 715 $ 1,616 ======= ======= =======
Deferred income taxes reflect the net tax effects 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 Portal's deferred tax assets are as follows (in thousands):
January 31, ------------------ 1999 2000 -------- -------- Deferred tax assets: Net operating loss carry-forwards.................... $ -- $ 2,084 Tax credit carry-forwards............................ 1,053 4,041 Deferred revenue..................................... 8,980 13,424 Accruals and reserves not currently deductible....... 1,679 3,053 Other, net........................................... 848 3,366 -------- -------- Total deferred tax assets.......................... 12,560 25,968 Valuation allowance.................................... (12,560) (25,968) -------- -------- Net deferred tax assets................................ $ -- $ -- ======== ========
Realization of deferred tax assets is dependent on future earnings, if any, the timing and the amount of which are uncertain. Accordingly, a valuation allowance, in an amount equal to the deferred tax assets as of January 31, 1999 and 2000, has been established to reflect these uncertainties. The change in the valuation allowance was a 56 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) net increase of approximately $8.2 million and $13.4 million for the years ended January 31, 1999 and 2000. Approximately $10.5 million of the valuation allowance for deferred tax assets is attributable to unbenefitted stock option deductions, the benefit of which will be credited to equity when realized. As of January 31, 2000, Portal's federal and state net operating loss carry-forwards for income tax purposes were approximately $5.6 million and $2.5 million, respectively. If not utilized, the federal net operating loss carry-forwards will begin to expire in 2013, and the state net operating loss carry-forwards will begin to expire in 2002. Portal had federal research and development tax credit carry-forwards of approximately $1.6 million, which will expire at various dates from 2012 through 2020, if not utilized. The Company also had state research and development credit carry-forwards of approximately $1.3 million with no expiration dates and manufacturer's investment credit carry-forwards of approximately $.2 million which will expire in 2007 and 2008, if not utilized. In addition, Portal had a foreign tax credit carry-forwards of approximately $1.0 million, which will expire in 2004 and 2005, if not utilized. Utilization of tax credit carry-forwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in expiration of tax credit carry-forwards before full utilization. 57 PORTAL SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (8) Quarterly Results of Operations (Unaudited) The following table presents Portal's operating results for each of the eight quarters in the period ended January 31, 2000. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of Portal and the financial statement footnotes appearing elsewhere in this Form 10K (in thousands).
Quarter Ended ------------------------------------------------------------------------------------- April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, 1998 1998 1998 1999 1999 1999 1999 2000 --------- -------- -------- -------- --------- -------- -------- -------- Consolidated Statement of Operations Data: Revenues: License fees.......... $ 2,185 $ 1,876 $ 3,817 $ 5,658 $ 9,064 $12,651 $18,076 $27,258 Services.............. 1,881 2,411 3,414 5,427 6,101 8,159 9,976 11,764 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues....... 4,066 4,287 7,231 11,085 15,165 20,810 28,052 39,022 ------- ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of license fees.. 60 86 143 169 185 321 607 1,483 Cost of services...... 1,201 1,673 2,232 4,319 4,195 4,795 6,482 7,336 Research and development.......... 2,207 2,460 3,148 3,437 4,285 6,171 6,757 8,877 Sales and marketing... 2,000 3,141 4,016 4,955 7,329 8,828 11,795 15,719 General and administrative....... 714 1,273 1,439 2,827 2,235 2,919 3,845 6,350 Amortization of deferred stock compensation......... 96 234 537 1,430 2,026 2,985 1,801 1,423 ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses............ 6,278 8,867 11,515 17,137 20,255 26,019 31,287 41,188 ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations.... $(2,212) $(4,580) $(4,284) $(6,052) $(5,090) $(5,209) $(3,235) $(2,166) ======= ======= ======= ======= ======= ======= ======= ======= As a Percentage of Total Revenues: Revenues: License fees.......... 54 % 44 % 53 % 51 % 60 % 61 % 64 % 70 % Services.............. 46 56 47 49 40 39 36 30 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues....... 100 100 100 100 100 100 100 100 ------- ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of license fees.. 1 2 2 2 1 2 2 4 Cost of services...... 30 39 31 39 28 23 23 19 Research and development.......... 54 57 43 31 28 30 24 23 Sales and marketing... 49 73 56 45 49 42 42 40 General and administrative....... 18 30 20 25 15 14 14 16 Amortization of deferred stock compensation......... 2 6 7 13 13 14 7 4 ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses............ 154 207 159 155 134 125 112 106 ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations.... (54)% (107)% (59)% (55)% (34)% (25)% (12)% (6)% ======= ======= ======= ======= ======= ======= ======= =======
58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by this item with respect to identification of directors is incorporated by reference to the information contained in the section captioned "Election of Directors" in the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held July 26, 2000 (the "Proxy Statement"), to be filed with the Commission within 120 days after the end of the Registrant's fiscal year ended January 31, 2000. For information with respect to the executive officers of the Registrant, see "Executive Officers of the Registrant" at the end of Part I of this Report on Form 10-K. The information required by this item with respect to the information required under Item 405 of Regulation S-K is incorporated by reference to the information contained in the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information contained in the section captioned "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information contained in the section captioned "Share Ownership by Principal Stockholders and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information contained in the section captioned "Employment Agreements and Certain Transactions" in the Proxy Statement. 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report on Form 10-K: 1. Financial Statements. The Consolidated Financial Statements of Portal Software, Inc. and Report of Independent Auditors contained in this Report on Form 10-K are listed in the Index to Consolidated Financial Statements contained in Item 8 above:
Pages Located in Form 10-K --------- Report of Independent Auditors.................................... 39 Consolidated Balance Sheets as of January 31, 1999 and 2000....... 40 Consolidated Statements of Operations for the Three Years Ended January 31, 2000................................................. 41 Consolidated Statement of Stockholders' Equity (Net Capital Deficiency) for the Three Years Ended January 31, 2000........... 42 Consolidated Statements of Cash Flows for the Three Years Ended January 31, 2000................................................. 43 Notes to Consolidated Financial Statements........................ 44-58
2. Financial Statement Schedules. None 3. Exhibits Required by Item 601 of Regulation S-K. The management contracts and compensatory plans required to be filed as part of, or incorporated by reference into, this Report are: (i) 1999 Stock Incentive Plan, Exhibit 10.5; (ii) 1999 Employee Stock Purchase Plan, Exhibit 10.6; (iii) 1995 Stock Option/Stock Issuance Plan and exhibits, Exhibit 10.4. (b) Reports on Form 8-K. The Company filed no Reports on Form 8-K during the quarter ended January 31, 2000. (c) Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report on Form 10-K: 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(1) Bylaws. 4.1(1) Form of Registrant's Specimen Common Stock Certificate. 4.2(1) Amended and Restated Investors' Rights Agreement, among the Registrant and the investors and founders named therein, dated January 29, 1998. 4.3(1) Amendment No. 1 to the Amended and Restated Investors' Rights Agreement, dated March 3, 1998. 10.1(1) Lease Agreement between Registrant and Stevens Creek Office Center Associates for office facilities at Stevens Creek Office Center, Cupertino, California, dated November 4, 1991, as amended. 10.2(1) Lease Agreement between Registrant and Stevens Creek Office Center Associates for office facilities at 20833 Stevens Creek Boulevard, Cupertino, California, dated as of September 8, 1998. 10.3(1) Loan and Security Agreement by and between Registrant and Lighthouse Capital Partners, L.P., dated as of July 24, 1997, as amended. 10.4(1) Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits. 10.5(1) Registrant's 1999 Stock Incentive Plan. 10.6(1) Registrant's 1999 Employee Stock Purchase Plan. 10.7(1) Form of Directors' and Officers' Indemnification Agreement. 10.8(1) Form of Registrant's Software License and Support Agreement.
60 10.9(1) Form of Registrant's Business Alliance Agreement. 10.10(1) Stock Purchase Agreement with Cisco Systems, Inc., dated April 13, 1999. 10.11(1) Stock Purchase Agreement with Andersen Consulting LLP, dated April 12, 1999. 10.12(2) Loan Agreement and General Security Agreement between Portal Software, Inc. and Imperial Bank, dated April 15, 1999. 10.13(1) Lease agreement dated June 25, 1999 by and between Registrant and TST Cupertino, L.L.C. for office facilities at Cupertino City Center V, 10200 South De Anza Boulevard, Cupertino, California. 10.14 Lease dated September 1999 between TST Torre, L.L.C. and Portal Software, Inc. for office facilities located at 10201 Torre Avenue, Cupertino, California. 13.1(3) Proxy for 2000 Annual Meeting of Stockholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule (In EDGAR format only).
- -------- (1) Incorporated herein by reference from Registration Statement on Form S-1 (No. 333-72999). (2) Incorporated herein by reference from Registration Statement on Form S-1 (No. 333-86183). (3) To be filed with Securities and Exchange Commission not later than 120 days after the end of the period covered by this Report on Form 10-K. 61 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 on Form 10-K to be signed on its behalf of the undersigned, thereunto duly authorized. PORTAL SOFTWARE, INC. /s/ John E. Little April 27, 2000 By: _________________________________ John E. Little Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on 10-K has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ John E. Little Chairman of the Board and April 27, 2000 ____________________________________ Chief Executive Officer John E. Little (Principal Executive Officer) /s/ Jack L. Acosta Chief Financial Officer April 27, 2000 ____________________________________ (Principal Financial and Jack L. Acosta Accounting Officer) ____________________________________ Director William T. Coleman, III /s/ Arthur C. Patterson Director April 27, 2000 ____________________________________ Arthur C. Patterson /s/ David C. Peterschmidt Director April 27, 2000 ____________________________________ David C. Peterschmidt /s/ Edward J. Zander Director April 27, 2000 ____________________________________ Edward J. Zander
62 EXHIBIT INDEX
Exhibit No. Description ------- ----------- 3.1(1) Amended and Restated Certificate of Incorporation. 3.2(1) Bylaws. 4.1(1) Form of Registrant's Specimen Common Stock Certificate. 4.2(1) Amended and Restated Investors' Rights Agreement, among the Registrant and the investors and founders named therein, dated January 29, 1998. 4.3(1) Amendment No. 1 to the Amended and Restated Investors' Rights Agreement, dated March 3, 1998. 10.1(1) Lease Agreement between Registrant and Stevens Creek Office Center Associates for office facilities at Stevens Creek Office Center, Cupertino, California, dated November 4, 1991, as amended. 10.2(1) Lease Agreement between Registrant and Stevens Creek Office Center Associates for office facilities at 20833 Stevens Creek Boulevard, Cupertino, California, dated as of September 8, 1998. 10.3(1) Loan and Security Agreement by and between Registrant and Lighthouse Capital Partners, L.P., dated as of July 24, 1997, as amended. 10.4(1) Registrant's 1995 Stock Option/Stock Issuance Plan and exhibits. 10.5(1) Registrant's 1999 Stock Incentive Plan. 10.6(1) Registrant's 1999 Employee Stock Purchase Plan. 10.7(1) Form of Directors' and Officers' Indemnification Agreement. 10.8(1) Form of Registrant's Software License and Support Agreement. 10.9(1) Form of Registrant's Business Alliance Agreement. 10.10(1) Stock Purchase Agreement with Cisco Systems, Inc., dated April 13, 1999. 10.11(1) Stock Purchase Agreement with Andersen Consulting LLP, dated April 12, 1999. 10.12(2) Loan Agreement and General Security Agreement between Portal Software, Inc. and Imperial Bank, dated April 15, 1999. 10.13(1) Lease agreement dated June 25, 1999 by and between Registrant and TST Cupertino, L.L.C. for office facilities at Cupertino City Center V, 10200 South De Anza Boulevard, Cupertino, California. 10.14 Lease dated September 1999 between TST Torre, L.L.C. and Portal Software, Inc. for office facilities located at 10201 Torre Avenue, Cupertino, California. 13.1(3) Proxy for 2000 Annual Meeting of Stockholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule (In EDGAR format only).
- -------- (1) Incorporated herein by reference from Registration Statement on Form S-1 (No. 333-72999). (2) Incorporated herein by reference from Registration Statement on Form S-1 (No. 333-86183). (3) To be filed with Securities and Exchange Commission not later than 120 days after the end of the period covered by this Report on Form 10-K. (b) Financial Statement Schedules Schedules not listed above have been omitted because the information required to be set therein is not applicable or is shown in the financial statements or notes thereto. 63 EX-10.14 2 LEASE AGREEMENT Exhibit 10.14 LEASE TST TORRE, L.L.C., a Delaware limited liability company, Landlord and PORTAL SOFTWARE, INC., a Delaware corporation, Tenant for 10201 Torre Avenue Cupertino, California September _____, 1999 LEASE THIS LEASE is made as of the ____ day of September, 1999 ("Effective Date"), between TST TORRE, L.L.C. ("Landlord"), a Delaware limited liability company, having an office c/o Tishman Speyer Properties, L.P. 520 Madison Avenue, New York, New York 10022 and Portal Software, Inc., ("Tenant"), a Delaware corporation, having an office at 20883 Stevens Creek Boulevard, Cupertino, CA 95014 Landlord and Tenant hereby covenant and agree as follows: ARTICLE 1 BASIC LEASE PROVISIONS PREMISES The first (1st), second (2nd), and third (3rd) floors of the Building, as more particularly shown on Exhibits A-1 through A-3, inclusive. BUILDING The building, fixtures, equipment and other improvements and appurtenances now located or hereafter erected, located or placed upon the land known as 10201 Torre Avenue in Cupertino, California. REAL PROPERTY The Building, together with the plot of land upon which it stands. SCHEDULED November 1, 1999 DELIVERY DATE DELIVERY GRACE December 1, 1999 PERIOD EXPIRATION DATE SCHEDULED RENT May 1, 2000 COMMENCEMENT DATE SCHEDULED May 1, 2000 COMMENCEMENT DATE: EXPIRATION DATE December 31, 2010; provided, however, that promptly following the determination of the date which is the "Expiration Date" as defined in that certain Lease dated as of June 25, 1999, by and between TST CUPERTINO, L.L.C., a Delaware limited liability company, as landlord, and Tenant, as tenant, concerning Cupertino City Center V ("CCCV Lease"), if such determination ever occurs, Landlord and Tenant shall amend this Lease to conform the Expiration Date hereunder with the Expiration Date of the CCCV Lease; or the last day of any renewal or extended term, if the Term of this Lease shall have been extended in accordance with any express provision hereof. TERM The period commencing on the Commencement Date and ending on the Expiration Date. PERMITTED USES Executive and general office use for the transaction of Tenant's business, related training, software research and development activities and storage or distribution of materials incidental thereto, but excluding any Prohibited Use (as hereinafter defined). TENANT'S One hundred percent (100%). PROPORTIONATE SHARE AGREED AREA OF 93,218 rentable square feet. BUILDING AGREED AREA OF 93,218 rentable square feet allocated as follows: PREMISES Floor 1 - 29,191 rentable square feet Floor 2 - 31,834 rentable square feet Floor 3 - 32,193 rentable square feet FIXED RENT (i) $2,824,505.40 per annum ($235,375.45 per month) ($2.525 per rentable square foot of the Premises ("RSF") per month) for the period commencing on the Commencement Date and ending on the day preceding the first anniversary of the Commencement Date, both dates inclusive; (ii) $2,909,240.52 per annum ($242,436.71 per month) ($2.601 per RSF per month) for the period commencing on the first (1st) anniversary of the Commencement Date and ending on the day preceding the second (2nd) anniversary of the Commencement Date, both dates inclusive; (iii) $2,996,517.72 per annum ($249,709.81 per month) ($2.679 per RSF per month) for the period commencing on the second (2nd) anniversary of the Commencement Date and ending on the day preceding the third (3rd) anniversary of the Commencement Date, both dates inclusive; (iv) $3,086,413.20 per annum ($257,201.10 per month) ($2.759 per RSF per month) for the period commencing on the third (3rd) anniversary of the Commencement Date and ending on the day preceding the fourth (4th) anniversary of the Commencement Date, both dates 2 inclusive; (v) $3,179,005.56 per annum ($264,917.13 per month) ($2.842 per RSF per month) for the period commencing on the fourth (4th) anniversary of the Commencement Date and ending on the day preceding the fifth (5th) anniversary of the Commencement Date, both dates inclusive; (vi) $3,274,375.68 per annum ($272,864.64 per month) ($2.927 per RSF per month) for the period commencing on the fifth (5th) anniversary of the Commencement Date and ending on the day preceding the sixth (6th) anniversary of the Commencement Date, both dates inclusive; (vii) $3,372,606.96 per annum ($281,050.58 per month) ($3.015 per RSF per month) for the period commencing on the sixth (6th) anniversary of the Commencement Date and ending on the day preceding the seventh (7th) anniversary of the Commencement Date, both dates inclusive; (viii) $3,473,785.20 per annum ($289,482.10 per month) ($3.105 per RSF per month) for the period commencing on the seventh (7th) anniversary of the Commencement Date and ending on the day preceding the eighth (8th) anniversary of the Commencement Date, both dates inclusive; (ix) $3,577,998.72 per annum ($298,166.56 per month) ($3.199 per RSF per month) for the period commencing on the eighth (8th) anniversary of the Commencement Date and ending on the day preceding the ninth (9th) anniversary of the Commencement Date; (x) $3,685,338.72 per annum ($307,111.56 per month) ($3.295 per RSF per month) for the period commencing on the ninth (9th) anniversary of the Commencement Date and ending on the day preceding the tenth (10th) anniversary of the Commencement Date, both dates inclusive, and (xi) $3,795,898.92 per annum ($316,324.91 per month) ($3.393 per RSF per month) for the period commencing on the tenth (10th) anniversary of the Commencement Date and ending on the Expiration Date, both dates inclusive. ADDITIONAL RENT All sums other than Fixed Rent payable by Tenant to Landlord under this Lease, including Tenant's Tax Payment, Tenant's Operating Payment, late charges, overtime or excess service charges, and interest and other costs related to Tenant's failure to perform any of its obligations under this Lease. RENT Fixed Rent and Additional Rent, collectively. INTEREST RATE The lesser of (i) two percent (2%) per annum above the then current Base Rate charged by Citibank, N.A. or its successor, or (ii) the maximum rate permitted by applicable law. SECURITY DEPOSIT $3,000,000.00, as adjusted pursuant to Article 33 below. 3 LANDLORD'S BROKER Cornish & Carey Commercial TENANT'S BROKER C.B. Richard Ellis, Inc. LANDLORD'S AGENT Tishman Speyer Properties, L.P. or any other person designated at any time and from time to time by Landlord as Landlord's Agent and their successors and assigns. All capitalized terms used in the Lease text without definition are defined in Exhibit B. ARTICLE 2 PREMISES, TERM, RENT Section 2.1 Lease of Premises. Subject to the terms of this Lease, ----------------- Landlord leases to Tenant and Tenant leases from Landlord the Premises for the Term. In addition, Landlord grants to Tenant the right to use, on a non- exclusive basis, together with Landlord and Landlord's agents, contractors and employees, other Building common elements and common facilities including, without limitation, the Building elevators, roof and the Building Surface Lot (as hereinafter defined) (collectively, the "Common Areas"). No member of the general public shall be afforded any rights of use or access to the Common Areas. Section 2.2 Commencement Date. Upon the Effective Date, the terms and ----------------- provisions hereof shall be fully binding on Landlord and Tenant prior to the occurrence of the Commencement Date (as hereinafter defined). The Term of this Lease shall commence on that date (the "Commencement Date") which is the earlier of (i) the "Scheduled Commencement Date" as specified in Article 1, and (ii) the date Tenant commences the conduct of business from the Premises (other than pursuant to Section 2.8 below). Tenant's obligation to commence the payment of Fixed Rent shall commence on that date (the "Rent Commencement Date") which is the later of (i) the "Scheduled Rent Commencement Date" specified in Article 1, as such date may be extended for Landlord Delays (as defined in the Workletter Agreement attached hereto as Exhibit D (the "Workletter Agreement")), and (ii) if Landlord does not tender possession of the Premises to Tenant on or before the "Delivery Grace Period Expiration Date" specified in Article 1, then, the date which is the same number of days following the Scheduled Rent Commencement Date as the date of Landlord's tender of possession of the Premises to Tenant ("Delivery Date") is following the Delivery Grace Period Expiration Date. Unless sooner terminated as hereinafter provided, the Term shall end on the "Expiration Date" specified in Article 1. If Landlord does not tender possession of the Premises to Tenant on or before the "Scheduled Delivery Date" specified in Article 1 for any reason whatsoever, Landlord shall not be liable for any damage thereby, and, except as otherwise provided herein, this Lease shall not be void or voidable thereby. Section 2.3 Payment of Rent. Tenant shall pay to Landlord, without --------------- notice or demand, and without any set-off, counterclaim, abatement or deduction whatsoever, except as may be expressly set forth in this Lease, in lawful money of the United States by wire transfer of 4 funds to Landlord's account, as designated by Landlord, or by check drawn upon a bank approved by Landlord, (i) Fixed Rent in equal monthly installments, in advance, on the first (1st) day of each calendar month during the Term, commencing on the Rent Commencement Date, and (ii) Additional Rent, at the times and in the manner set forth in this Lease. Landlord hereby approves the Bank of Boston as Tenant's commercial bank. Section 2.4 First Month's Rent. [Intentionally Deleted] ------------------ Section 2.5 Interest. If Tenant shall fail to pay any installment or -------- other payment of Rent within five (5) days following the date when due, interest shall accrue on such installment or payment as a late charge, from the date such installment or payment became due until the date paid at the Interest Rate. In addition to such interest, if any amount is not paid within ten (10) days after same is due, a late charge equal to two percent (2%) of such amount shall be assessed (provided, however, that no interest shall accrue on any such late charge), which late charge Tenant hereby agrees is a reasonable estimate of the damages Landlord shall suffer as a result of Tenant's late payment, which damages include Landlord's additional administrative and other costs associated with such late payment. The parties agree that it would be impracticable and extremely difficult to fix Landlord's actual damages in such event. Such interest and late charges are separate and cumulative and are in addition to and shall not diminish or represent a substitute for any or all of Landlord's rights or remedies under any other provision of this Lease. Notwithstanding the foregoing, on the first two (2) occasions during each twelve (12) consecutive months during the Term, Landlord shall give Tenant written notice of any amount not received when due and Tenant shall have five (5) Business Days after receipt of such notice within which to pay the delinquent amount and thereby avoid imposition of any late charge or interest with respect to such delinquency. Section 2.6 Parking. Tenant shall be allocated for the use of Tenant ------- and Tenant's employees, customers, service suppliers or other invitees (collectively, "Tenant's Invitees") within the parking area located adjacent to the Building ("Parking Area"), three and 26/100ths (3.26) parking spaces per one thousand (1,000) rentable square feet that Tenant occupies in the Premises, on a non-exclusive basis without fee or charge to Tenant except for Tenant's Proportionate Share of any Operating Expenses and Taxes with respect to such Parking Area, which share with respect to the CCCV Spaces (as hereinafter defined) shall be the portion of operating expenses and taxes allocated by the fee owner of the CCCV Spaces to Tenant's use rights respecting such CCCV Spaces provided under this Section 2.6. As more particularly described on the Site Plan attached hereto as Exhibit "A-4", the Parking Area consists of (a) two hundred twenty-one (221) surface spaces in a surface lot located on the Real Property adjacent to the Building (the "Building Surface Lot"), (b) twenty-six (26) surface spaces located on a surface lot in the location as shown by cross- hatching on the Site Plan as to which Landlord is the owner and holder of a non- exclusive easement (the "Parcel 2 Spaces"), and (c) fifty-seven (57) spaces located in the lower level of Cupertino City Center V 10200 DeAnza Boulevard, as to which Landlord is the owner and holder of a non-exclusive easement ("CCCV Spaces"). Nothing contained herein shall be deemed to impose any liability upon Landlord for personal injury or theft, for damage to any motor vehicle, or for loss of property from within any motor vehicle, which is suffered by Tenant or any of Tenant's Invitees in connection with their use of such Parking Area except when caused by Landlord's gross negligence or willful misconduct. In order to assure the proper and efficient operation and maintenance of the Parking Area, Tenant 5 agrees to comply with the Parking Rules and Regulations attached hereto as Exhibit C as such may be amended from time to time (and such other parking rules as may be promulgated by the fee owners of those portions of the Parking Area described in clauses (b) and (c) above), and shall use diligent efforts to cause each of Tenant's Invitees to comply with such Parking Rules and Regulations. The rights of Tenant and Tenant's Invitees shall at all times be subject to the rights of Landlord and other parties permitted to use the Parking Area to use the same in common with Tenant and Tenant's Invitees. Landlord shall enforce all Parking Rules and Regulations in a reasonable and nondiscriminatory manner, and consistent with the manner in which owners of other comparable office buildings in Cupertino, California enforce similar parking rules and regulations. Section 2.7 Ownership of Real Property. Tenant understands and -------------------------- acknowledges that as of the Effective Date Landlord is not the fee owner of the Real Property. Landlord hereby represents and warrants to Tenant that pursuant to the terms and provisions of that certain Agreement for Exchange and Purchase and Escrow Instructions, dated September 22, 1998 (as amended), by and between Symantec Corporation and TST Development, L.L.C. (Landlord's predecessor-in- interest), Landlord possesses the contractual right to acquire the Real Property at a closing which is scheduled to occur on the Scheduled Delivery Date. Landlord shall use its commercially reasonable efforts to complete the purchase of the Real Property on the Scheduled Delivery Date, or as soon thereafter as is reasonably possible, and shall advise Tenant in writing upon the occurrence of the same. If Landlord fails, or is otherwise unable, to complete the acquisition of the Real Property on or before February 28, 2000, then Tenant, upon not less than ten (10) Business Days' prior notice to Landlord shall have the right, as its sole and exclusive remedy, to terminate this Lease, unless within such ten- (10-) Business-Day period Landlord advises Tenant it has completed such purchase. Upon any such termination, Landlord shall return to Tenant any Security Deposit and thereupon Landlord and Tenant shall be released from any further duties, obligations or liabilities hereunder. Section 2.8 Interim Occupancy. From and after the Delivery Date, ----------------- Tenant shall have the right, upon prior written notice to Landlord, to use all or any portion of the Premises on an interim basis prior to Tenant's commencement of construction, provided that Tenant shall cease such interim occupancy if Landlord determines, in its reasonable judgment, that any such interim occupancy is interfering with the performance of Landlord's Work. Any such interim occupancy of the Premises shall be upon all of the terms and conditions of this Lease, except that Tenant shall not be obligated to make any payments of Fixed Rent. During any such period of interim occupancy and regardless of the amount of the Premises so used by Tenant, Tenant shall reimburse Landlord for the amount of electricity, water and other utility charges, security and cleaning costs incurred by Landlord during such period, pro rated on a daily basis for each day Tenant is in occupancy, for purposes other than construction of the Improvements. In addition, during any such period of interim occupancy, Tenant shall reimburse Landlord for the amount of Taxes and insurance costs incurred by Landlord during such period, based upon the amount of the Premises so used by Tenant (as determined on a floor-by-floor basis) pro rated on a daily basis for each day Tenant is in occupancy, for purposes other than construction of the Improvements. 6 ARTICLE 3 USE AND OCCUPANCY Section 3.1 (a) Permitted Uses. Tenant shall use and occupy the -------------- Premises for the Permitted Uses and for no other purpose. Tenant shall not use or occupy or permit the use or occupancy of any part of the Premises in a manner constituting a Prohibited Use. If Tenant uses the Premises for a purpose which constitutes a Prohibited Use or violates any Requirement, or which causes the Building to be in violation of any Requirement, then Tenant shall promptly discontinue such use upon notice of such violation. Tenant's failure to discontinue such use as soon as commercially reasonably possible shall be a material default hereunder and Landlord shall have the right, without Tenant having any further period in which to cure, (i) to terminate this Lease immediately, and (ii) to exercise any and all rights and remedies available to Landlord at law or in equity. (b) Licenses and Permits. Tenant, at its expense, -------------------- shall procure and at all times maintain and comply with the terms and conditions of all licenses and permits required for the lawful conduct of the Permitted Uses in the Premises. Landlord shall procure and maintain any licenses and permits required for the lawful operation of the Building Systems or the Parking Facility, the cost of which shall be included in Operating Expenses. ARTICLE 4 CONDITION OF THE PREMISES Section 4.1 Condition. Tenant has inspected the Premises and agrees --------- (a) to accept possession of the Premises in a "broom clean" condition free of debris, but otherwise in its "as is" condition existing on the Delivery Date, (b) that neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises or the Building except as expressly set forth in this Lease (including the exhibits hereto), and (c) except for the construction of Landlord's Work (as defined in the Workletter Agreement), Landlord has no obligation to perform any work, supply any materials, incur any expense or make any alterations or improvements to the Premises to prepare the Premises for Tenant's occupancy. The terms and conditions of the construction of the Improvements (as defined in the Workletter Agreement) are set forth in the Workletter Agreement. Tenant's occupancy of the Premises on the Delivery Date shall be deemed to be acceptance of Landlord's tender of possession thereof and shall be conclusive evidence, as against Tenant, that Tenant has accepted possession of the Premises in its then current condition. Without affecting such acceptance of possession of the Premises by Tenant on the Delivery Date, Landlord shall perform, or cause to be performed, Landlord's Work in accordance with the Workletter Agreement concurrently with Tenant's construction of the Improvements. In addition, in accordance with the terms and provisions of Section 7.1 below, Landlord shall be responsible for the correction of any latent or patent defects in the Landlord Repair Areas (as hereinafter defined) at any time during this Term of the Lease or any extension thereof. No provision of this Section 4.1 shall diminish Landlord's obligations under Section 7.1 below. 7 ARTICLE 5 ALTERATIONS Section 5.1 Tenant's Alterations. Tenant shall not make any -------------------- alterations, additions or other physical changes in or about the Premises (collectively, "Alterations") (other than decorative Alterations such as painting, wall coverings and floor coverings and the installation of voice and/or data cabling (collectively, "Decorative Alterations")) without Landlord's prior consent, which consent shall not be unreasonably withheld or delayed. Provided that the cost of performing such Alterations (exclusive of Decorative Alterations) is less than Fifty Thousand Dollars ($50,000.00) per incident and not more than One Hundred Thousand Dollars ($100,000.00) per year in the aggregate, Tenant may make such Alterations without Landlord's prior consent; provided such Alterations (i) are non-structural and do not affect any Building System, (ii) are performed only by Landlord's designated contractors or by contractors or mechanics approved by Landlord to perform such Alterations, (iii) affect only the Premises and are not visible from outside of the Premises, (iv) do not affect the certificate of occupancy issued for the Building or the Premises, (v) do not adversely affect any service furnished by Landlord to Tenant or to any other tenant of the Building and (vi) do not violate any Requirement or cause the Premises or the Building to be non-compliant with any Requirement. (b) Plans and Specifications. Prior to making any Alterations ------------------------ which require Landlord's consent, Tenant, at its expense, shall (i) submit to Landlord for its written approval, detailed plans and specifications (including layout, architectural, mechanical, electrical, plumbing, sprinkler and structural drawings) of each proposed Alteration, and with respect to any Alteration affecting any Building System, Tenant shall submit proof that the Alteration has been designed by, or reviewed and approved by, Landlord's designated engineer for the affected Building System; (ii) furnish to Landlord duplicate original policies or certificates of worker's compensation (covering all persons to be employed by Tenant, and Tenant's contractors and subcontractors in connection with such Alteration) and comprehensive public liability (including property damage coverage) insurance and Builder's Risk coverage (issued on a completed value basis) all in such form, with such companies, for such periods and in such amounts as Landlord may reasonably require, naming Landlord, Landlord's managing agent, and their respective employees and agents, any Lessor and any Mortgagee as additional insureds and (iii) with respect to any Alterations individually costing at least Five Hundred Thousand Dollars ($500,000.00), furnish to Landlord such other evidence of Tenant's ability to complete and to fully pay for such Alterations (which may include a requirement that Tenant obtain payment and performance bonds) as is reasonably satisfactory to Landlord. Prior to making any and all Alterations, Tenant, at its expense, shall obtain all permits, approvals and certificates required by any Governmental Authorities and deliver copies thereof to Landlord. In no event shall Tenant be required to post any payment or performance bonds in connection with the performance of any Decorative Alterations. If Landlord does not respond in writing within ten (10) Business Days of receipt of Tenant's plans and specifications, stating with specificity its reasons therefor, Tenant shall deliver a second notice to Landlord, stating in bold type on the first page thereof "URGENT - DELAY NOTICE," which notice may be delivered by facsimile to Landlord at 650-969-3873 and at 212-935-8235 and as otherwise set forth in Article 27, and if Landlord fails to respond within five (5) days thereafter, Landlord's consent shall be deemed given. Upon Tenant's request, Landlord shall reasonably cooperate with Tenant in obtaining any 8 permits, approvals or certificates required to be obtained by Tenant in connection with any permitted Alteration (if the provisions of the applicable Requirement require that Landlord join in such application), provided Landlord shall incur no cost, expense or liability in connection therewith. (c) Governmental Approvals. Upon completion of any ---------------------- Alterations, Tenant, at its expense, shall promptly obtain certificates of final approval of such Alterations required by any Governmental Authority and shall furnish Landlord with copies thereof, together with "as-built" plans and specifications for such Alterations. Section 5.2 Manner and Quality of Alterations. All Alterations shall --------------------------------- be performed (a) in a good and workmanlike manner and free from defects, (b) in accordance with the plans and specifications, and by contractors approved by Landlord, (c) under the supervision of a licensed architect reasonably satisfactory to Landlord, and (d) in compliance with all Requirements, the terms of this Lease, all procedures and regulations then prescribed by Landlord for coordinating all work performed in the Building and the Rules and Regulations. All materials and equipment to be used in the Premises shall be of first quality and at least equal to the standards applicable to comparable office buildings located in Cupertino, California, and no such materials or equipment (other than Tenant's Property) shall be subject to any lien or other encumbrance. Section 5.3 Removal of Tenant's Property. Tenant's Property shall be ---------------------------- and remain the property of Tenant and Tenant may remove the same at any time on or before the Expiration Date. On or prior to the Expiration Date, Tenant shall, unless otherwise directed by Landlord, at Tenant's expense, remove any Specialty Alteration designated in writing by Landlord to be removed at the time consent thereto was granted and close up any slab penetrations in the Premises. At least ten (10) Business Days prior to commencing the closing of any such slab penetrations, Tenant shall notify Landlord of its intention to effect such closings. Tenant shall repair and restore, in a good and workmanlike manner, any damage to the Premises or the Building caused by Tenant's removal of any Specialty Alterations or Tenant's Property or by the closing of any slab penetrations, and upon default thereof after the expiration of applicable notice and cure periods, Tenant shall reimburse Landlord, on demand, for Landlord's cost of repairing and restoring such damage. Any Specialty Alterations or Tenant's Property which Tenant is required by the terms of this Lease to remove and is not so removed by the Expiration Date or the earlier termination of this Lease shall be deemed abandoned and Landlord may remove and dispose of same, and repair and restore any damage caused thereby, at Tenant's cost and without accountability to Tenant. Tenant shall not be required to remove any of the Improvements or any subsequent Alterations unless, in either case, the same constitute Specialty Alterations which Landlord advises Tenant must be removed at the time consent thereto was granted. In no event shall Tenant be required to remove any telephone or data cabling. If requested by Tenant prior to the installation of any component of the Improvements or of any Alterations, Landlord will notify Tenant whether (i) any such component of the Improvements or any such Alterations, or any material component thereof (including, without limitation, any oversized or exposed conduit) not expressly included within the definition of Specialty Alterations is considered by Landlord to be such and (ii) Landlord will waive any requirement that Tenant remove the same upon the expiration or earlier termination of this Lease. This Section 5.3 shall survive the expiration or earlier termination of this Lease. 9 Section 5.4 Mechanic's Liens. Tenant, at its expense, shall ---------------- discharge any lien or charge filed against the Premises or the Real Property in connection with any work claimed or determined in good faith by Landlord to have been done by or on behalf of, or materials claimed or determined in good faith by Landlord to have been furnished to, Tenant, within ten (10) days after Tenant's receipt of notice thereof by payment, filing the bond required by law or otherwise in accordance with law. Section 5.5 Labor Relations. Tenant shall not employ, or permit the --------------- employment of, any contractor, mechanic or laborer, or permit any materials to be delivered to or used in the Premises if Landlord reasonably determines that any such employment, delivery or use causes or is reasonably anticipated to cause material and adverse interference or labor conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or, if Tenant is not then the sole occupant of the Building, others. In the event of such interference or conflict, upon Landlord's request, Tenant shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. Section 5.6 Tenant's Costs. Tenant shall pay promptly to Landlord or -------------- its designee, upon demand, with respect to any Alterations individually costing less than Fifty Thousand Dollars ($50,000.00) and/or which are not performed at Tenant's request by Landlord, all out-of-pocket costs actually and reasonably incurred by Landlord in connection with Tenant's Alterations, including costs incurred in connection with (i) Landlord's review of the Alterations (including review of requests for approval thereof) and (ii) the provision of Building personnel during the performance of any Alteration required by trade union policy or otherwise, to operate elevators or otherwise to facilitate Tenant's Alterations and as requested by Tenant. In addition, if Tenant's Alterations shall cost more than Fifty Thousand Dollars ($50,000.00) and which will be performed by Landlord at Tenant's request, Tenant shall pay to Landlord or its designee, upon demand, an administrative fee in respect of the performance of such Alterations and the scheduling of Building equipment, facilities and personnel in connection therewith in an amount equal to three percent (3%) of the total "hard costs" of any such Alterations, where "hard costs" means all costs of constructing such Alterations excluding architectural and engineering fees, inspection and testing costs, legal and accounting costs, permit fees and premiums for any builder's risk insurance. The terms and provisions of this Section 5.6 shall not apply to the Improvements. Tenant's reimbursement and payment obligations concerning the Improvements are set forth in the Workletter Agreement. Section 5.7 Tenant's Equipment. Tenant shall not move any heavy ------------------ machinery, heavy equipment, freight, bulky matter or fixtures (collectively, "Equipment") into or out of the Building without Landlord's prior consent and payment to Landlord of any costs incurred by Landlord in connection therewith. If such Equipment requires special handling, Tenant agrees (a) to employ only persons holding a Master Rigger's License to perform such work, (b) all work performed in connection therewith shall comply with all applicable Requirements and (c) such work shall be done only during hours designated by Landlord. Tenant shall indemnify and hold Landlord harmless from and against all damages sustained by persons or property and all monies paid out by Landlord in settlement of any claims or judgments (including all expenses and attorneys' fees incurred in connection therewith) and all costs 10 incurred in repairing any damage to the Building or appurtenances. The agreements set forth in this Section 5.7 shall survive the expiration or earlier termination of this Lease. Section 5.8 Legal Compliance. The approval of plans or ---------------- specifications, or consent by Landlord to the making of any Alterations, does not constitute Landlord's agreement or representation that such plans, specifications or Alterations comply with any Requirements or the certificate of occupancy issued for the Building. Landlord shall have no liability to Tenant or any other party in connection with Landlord's approval of any plans and specifications for any Alterations, or Landlord's consent to Tenant's performing any Alterations. If as the result of any Alterations made by or on behalf of Tenant, Landlord is required to make any alterations or improvements to any part of the Building in order to comply with any Requirements, whether or not in or near the Premises, Tenant shall pay all costs and expenses incurred by Landlord in connection with such alterations or improvements. ARTICLE 6 FLOOR LOAD Section 6.1 Floor Load. Tenant shall not place a load upon any floor ---------- of the Premises that exceeds fifty (50) pounds per square foot "live load" without Landlord's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed with respect to any proposed request for consent which is accompanied by the determination of a licensed structural engineer, reasonably satisfactory to Landlord, that the load Tenant intends to place upon the floor of the Premises will not impair the structural integrity of the Building. Landlord reserves the right to reasonably designate the position of all Equipment which Tenant wishes to place within the Premises, and to place limitations on the weight thereof. ARTICLE 7 REPAIRS Section 7.1 Landlord's Repair and Maintenance. Landlord shall --------------------------------- operate, maintain and, except as provided in Section 7.2 hereof, make all necessary repairs (both structural and nonstructural) to (i) the Building Systems, (ii) the Common Areas, (iii) structural elements of Building floors, exterior walls and interior load-bearing walls, and (iv) exterior window glass, all in conformance with standards generally applicable to office buildings of comparable age and quality in Cupertino, California, and (v) to the Premises if caused by the active negligence or willful misconduct of Landlord or its employees, agents or contractors. Those elements of the Building as described in clauses (i) through (iv) above are collectively referred to as the "Landlord Repair Areas". Section 7.2 Tenant's Repair and Maintenance. Subject to the ------------------------------- provisions of Article 13 hereof, Tenant shall promptly, at its expense and in compliance with Article 5 of this Lease, (a) make all nonstructural repairs to the Premises and the fixtures, equipment and appurtenances therein as and when needed to preserve the Premises in good working order and condition, except for reasonable wear and tear and damage for which Tenant is not responsible, 11 and (b) replace scratched or damaged doors, signs and glass (other than exterior window glass) in and about the Premises. Without limiting the foregoing, all damage to the Premises or to any other part of the Building (including exterior window glass), or to any fixtures, equipment, sprinkler system and/or appurtenances thereof, whether requiring structural or nonstructural repairs, caused by or resulting from any act, omission, neglect or improper conduct of, or Alterations made by, or the moving of Tenant's fixtures, furniture or equipment into, within or out of the Premises by, Tenant or Tenant's agents, contractors, subcontractors, employees, invitees or licensees (collectively, a "Tenant Party"), and all damage to any portion of the Building's Systems existing in the Premises, shall be repaired at Tenant's expense; provided, however, that Tenant shall not be charged for any damage to the Building to the extent that (A) the cost of repairing such damage is covered by the "all-risk" insurance maintained by Landlord pursuant to Section 12.3 below or is recovered by Landlord through Tenant's Operating Payment (as hereinafter defined) or (B) such damage is caused by the active negligence or willful misconduct of Landlord or Landlord's agents, contractors or employees. Such repairs shall be made by (i) Tenant, at Tenant's expense, if the required repairs are nonstructural in nature and do not affect any Building System and/or if any damaged portion of the sprinkler system is contained within the Premises, or (ii) Landlord, at Tenant's expense, if the required repairs are structural in nature, involve replacement of exterior window glass (if such damage is so caused by any Tenant Party) or affect any Building System or any portion of the sprinkler system not contained within the Premises. All Tenant repairs shall be of a quality at least equal to the original work or construction utilizing new construction materials and shall be made in accordance with this Lease. Tenant shall give Landlord prompt notice of any defective condition of which Tenant is aware in any Building System located in, servicing or passing through the Premises. If Tenant fails after ten (10) days' notice (or such shorter period as may be required in an emergency) to proceed with due diligence to make any repairs required to be made by Tenant, Landlord may make such repairs and all costs and expenses incurred by Landlord on account thereof, plus interest thereon at the Interest Rate, shall be paid by Tenant within ten (10) days after Landlord delivers to Tenant an invoice therefor. Tenant hereby waives any and all rights under and benefits of Subsection 1 of Section 1931, and Sections 1941 and 1942, of the California Civil Code and any similar law, statute or ordinance now or hereafter in effect. Section 7.3 Vermin. Tenant shall, at its expense, cause the Premises ------ to be exterminated, from time to time as Landlord may reasonably direct or whenever there is evidence of infestation to Landlord's reasonable satisfaction, by licensed exterminators approved by Landlord. Section 7.4 Interruptions Due to Repairs. Landlord reserves the ---------------------------- right to make all changes, alterations, additions, improvements, repairs or replacements to the Building, including the Building Systems which provide services to Tenant, as Landlord deems necessary or desirable, provided that in no event shall the level of any building service decrease in any material respect from the level required of Landlord in this Lease as a result thereof (other than temporary changes in the level of such services during the performance of any such work by Landlord). Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises during the making of such repairs, alterations, additions, improvements, repairs or replacements, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever. Except as otherwise provided in this Lease, 12 there shall be no Rent abatement or allowance to Tenant for a diminution of rental value, no actual or constructive eviction of Tenant, in whole or in part, no relief from any of Tenant's other obligations under this Lease, and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Building or the Premises, or in or to fixtures, appurtenances or equipment therein. Notwithstanding any contrary provision of this Lease, if Tenant is prevented from using for the conduct of its business, and does not use for the conduct of its business, the Premises or any material portion thereof, for ten (10) consecutive Business Days (the "Eligibility Period") as a result of (i) any construction, repair, maintenance or alteration performed by Landlord after the Commencement Date and not necessitated by the negligence or willful misconduct of any Tenant Party, or (ii) the failure in any material respect of Landlord or its agents or contractors to provide to the Premises any of the utilities and services required to be provided under this Lease (including Articles 11 and 16 below) and not caused by the negligence or willful misconduct of any Tenant Party or otherwise due to the occurrence of a casualty or condemnation, (iii) any failure to provide access to the Premises and not caused by the negligence or willful misconduct of any Tenant Party or otherwise due to the occurrence of a casualty or condemnation, or (iv) because of the presence of Hazardous Materials in, on or around the Building, the Premises or the Real Property which were not caused or introduced by any Tenant Party and which Hazardous Materials pose a material and significant health risk to occupants of the Premises, then, in any and all such events, Tenant's obligation to pay Fixed Rent, Tenant's Operating Payment and Tenant's Tax Payment shall be abated or reduced, as the case may be, from and after the first (1st) day following the last day of the Eligibility Period and continuing for such time that Tenant continues to be so prevented from using for the conduct of its business, and does not so use for the conduct of its business, the Premises or a material portion thereof, in the proportion that the rentable square feet of the portion of the Premises that Tenant is prevented from using, and does not so use, bears to the total rentable square feet of the Premises. For purposes of this Section 7.4, Tenant shall not be deemed to have used the Premises for the conduct of its business as a result of the presence of limited numbers of employees of Tenant who are present within the Premises performing activities such as securing the Premises, removing files and computers and engaging in other limited commercial activities. ARTICLE 8 TAXES AND OPERATING EXPENSES Section 8.1 Definitions. For the purposes of this Article 8, the ----------- following terms shall have the meanings set forth below: (a) "Assessed Valuation" shall mean the amount for which the Real Property is assessed by the County Assessor of Santa Clara for the purpose of imposition of Taxes. (b) "Operating Expenses" shall mean the aggregate of all costs and expenses (and taxes, if any, thereon) paid or incurred by or on behalf of Landlord (whether directly or through independent contractors) in connection with the operation, repair, maintenance and administration of the Building and the Real Property, such as: (i) insurance 13 premiums, (ii) the cost of electricity, gas, water, air conditioning and other fuel and utilities, (iii) attorneys' fees and disbursements and auditing, management and other professional fees and expenses, (iv) the cost to implement any Transportation Demand Management measures required by the City of Cupertino, and (v) any capital improvement as described in items (1) or (2) below which shall be installed by Landlord in the Building. Such improvements shall be amortized on a straight-line basis over the useful life thereof as reasonably determined by Landlord in accordance with GAAP (as hereinafter defined) (with interest accruing on the unamortized portion thereof at the Base Rate in effect at the time such improvements are substantially completed per annum), and the amount included in Operating Expenses in any calendar year of the Term (until such improvement has been fully amortized) shall be equal to the annual amortized amount. A capital improvement shall be included in Operating Expenses only if it either (1) results in a reduction in Operating Expenses (as for example, a labor-saving improvement), provided, the amount included in Operating Expenses in any calendar year of the Term shall not exceed an amount equal to the savings resulting from the installation and operation of such improvement, and/or (2) is made during any calendar year of the Term in compliance with Requirements (but excluding compliance with the terms and provisions of any Requirement in effect on the Commencement Date with respect to the Landlord Compliance Items (as defined in the Workletter Agreement), it being understood that Landlord's cost of complying with any such existing Requirement with respect to the Landlord Compliance Items (but not the cost of complying with any material modifications of any such existing Requirement with respect to the Landlord Compliance Items occurring after the Commencement Date) is not to be included in Operating Expenses). Operating Expenses shall not include any Excluded Expenses. (c) "Statement" shall mean a statement setting forth (1) the Taxes payable for the applicable calendar year, or (2) the Operating Expenses payable for the preceding calendar year. (d) "Taxes" shall mean (i) all real estate taxes, assessments, sewer and water rents, rates and charges and other governmental levies, impositions or charges, whether general, special, ordinary, extraordinary, foreseen or unforeseen, which may be assessed, levied or imposed upon all or any part of the Real Property, and (ii) all expenses (including reasonable attorneys' fees and disbursements and experts' and other witnesses' fees) incurred in contesting any of the foregoing or the Assessed Valuation of all or any part of the Real Property to the extent the prosecution of such contest was commercially reasonable. Taxes shall not include (x) interest or penalties incurred by Landlord as a result of Landlord's late payment of Taxes, except for interest payable in connection with the installment payment of assessments pursuant to the next sentence, (y) any franchise, net income, excess profits, gift, capital stock, inheritance, succession or estate taxes imposed upon Landlord or (2) any surcharges imposed by any Governmental Authority upon the Real Property respecting cleanup or remediation of Hazardous Materials and characterized as a tax. If Landlord elects to prepay any assessment or to pay any assessment in fewer annual installments than the maximum number permitted by law, then for the purposes of this Article 8, (i) such assessment shall be deemed to have been divided and to be payable in the maximum number of installments permitted by law, and (ii) there shall be deemed included in Taxes for each calendar year of the Term the installments of such assessment that would have become payable during such calendar year, together with interest that would have become payable during such calendar year on such installments and on all such installments 14 thereafter, as provided by law, all as if such assessment had been so divided. If at any time the methods of taxation prevailing on the date hereof shall be altered so that in lieu of or as an addition to the whole or any part of Taxes, there shall be assessed, levied or imposed (1) a tax, assessment, levy, imposition or charge based on the income or rents received from the Real Property whether or not wholly or partially as a capital levy or otherwise, (2) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon all or any part of the Real Property and imposed upon Landlord, (3) a license fee measured by the rents, or (4) any other tax, assessment, levy, imposition, charge or license fee however described or imposed, then all such taxes, assessments, levies, impositions, charges or license fees or the part thereof so measured or based shall be deemed to be Taxes, provided that any tax, assessment, levy, imposition or charge imposed on income from the Real Property shall be calculated as if the Real Property were the only asset of Landlord. Section 8.2 (a) Tenant's Tax Payment. During each calendar year of -------------------- the Term, or portion thereof, Tenant shall pay to Landlord Tenant's Proportionate Share of the amount of Taxes payable or incurred by Landlord during such calendar year ("Tenant's Tax Payment"). On or about the start of each calendar year of the Term, Landlord shall furnish to Tenant a Statement of the Taxes. Tenant shall pay Tenant's Tax Payment to Landlord, in monthly installments, on the first day of each month during each calendar year, an amount equal to one twelfth of Tenant's Tax Payment due for each calendar year. If there is any increase or decrease in Taxes payable for any calendar year, whether levied during or after such calendar year, Landlord may furnish a revised Statement for such calendar year, Tenant's Tax Payment for such calendar year shall be adjusted and, within ten (10) Business Days after Tenant's receipt of such revised Statement (a) with respect to any increase in Taxes payable for such calendar year, Tenant shall pay such increase in Tenant's Tax Payment to Landlord, or (b) with respect to any decrease in Taxes payable for such calendar year, Landlord shall credit such decrease in Tenant's Tax Payment against the next installment of Rent payable by Tenant or, to the extent any such credit is determined and/or received by Landlord following the expiration or earlier termination of the Term for reasons other than following an Event of Default, the amount thereof shall be paid to Tenant. If, during the Term, Landlord elects to collect Tenant's Tax Payments, in full or in installments on any date or dates other than as presently required, then following Landlord's notice to Tenant, Tenant's Tax Payments shall be correspondingly revised. Any rebates, discounts or like items actually received by Landlord shall be credited to reduce the amount of the Taxes. (b) If the applicable real estate tax fiscal year is changed, Taxes for such fiscal year shall be apportioned on the basis of the number of days in such fiscal year included in the particular calendar year for the purpose of making the computations under this Section. (c) Only Landlord shall be eligible to institute proceedings to reduce the Assessed Valuation of the Real Property and the filing of any such proceeding by Tenant without Landlord's prior written consent shall constitute an Event of Default. Upon Tenant's request and provided it is commercially reasonable to do so, Landlord shall institute all appropriate proceedings to seek a reduction of the Assessed Valuation of the Real Property and to otherwise contest the amount, validity or applicability of any Taxes. In any such case, or if any such proceedings are prosecuted at other than Tenant's request, Tenant's Tax Payment shall include Tenant's Proportionate Share of the cost reasonably incurred by Landlord in initiating and 15 prosecuting such proceedings in good faith, to the extent such costs have not been recovered by Landlord through Tenant's Operating Payment. If Landlord receives a refund of Taxes for any calendar year of the Term, Landlord shall, at its election, either pay to Tenant, or credit against subsequent payments of Rent due hereunder, an amount equal to Tenant's Proportionate Share of the refund, net of any expenses incurred by Landlord in achieving such refund, which amount shall not exceed Tenant's Tax Payment paid for such calendar year; provided, however, that Landlord shall pay to Tenant the portion of Tenant's Proportionate Share of any such refund that exceeds the amount of the then monthly installment of Fixed Rent hereunder. Except as otherwise expressly provided in this Lease, Landlord shall not be obligated to file any application or institute any proceeding seeking a reduction in Taxes or the Assessed Valuation. (d) Tenant shall be obligated to make Tenant's Tax Payment regardless of whether Tenant may be exempt from the payment of any taxes by reason of Tenant's diplomatic or other tax exempt status. (e) If the Commencement Date is a date other than January 1, then the amount of Taxes payable by Tenant during the month and year in which the Term of this Lease commences shall be apportioned on the basis of the number of days in the period from the Commencement Date to December 31 shall bear to the total number of days in such calendar year. If the Expiration Date shall occur on a date other than December 31, any Additional Rent payable by Tenant to Landlord under this Section 8.2 for the calendar year in which such Expiration Date occurs shall be apportioned on the basis of the number of days in the period from January 1 to the Expiration Date shall bear to the total number of days in such calendar year. In the event of the expiration or earlier termination of this Lease, any Additional Rent under this Section 8.2 shall be paid or adjusted within thirty (30) days after submission of the Statement. The rights and obligations of Landlord and Tenant under the provisions of this Section 8.2 with respect to any Additional Rent shall survive the expiration or earlier termination of this Lease. (f) Tenant shall be responsible for any applicable occupancy or rent tax now in effect or hereafter enacted and, if payable by Landlord, Tenant shall promptly pay such amounts to Landlord, upon Landlord's demand, as Additional Rent. Section 8.3 Tenant's Operating Payment. (a) Tenant shall pay to -------------------------- Landlord Tenant's Proportionate Share of Operating Expenses paid or incurred by Landlord during each calendar year of the Term ("Tenant's Operating Payment"). For each calendar year of the Term, Landlord shall furnish to Tenant a written statement setting forth Landlord's good faith reasonable estimate of Tenant's Operating Payment for such calendar year, based upon such year's budget. Tenant shall pay to Landlord on the first day of each month during such calendar year an amount equal to one-twelfth of Landlord's estimate of Tenant's Operating Payment for such calendar year. If, however, Landlord shall furnish any such estimate for a calendar year subsequent to the commencement thereof, then (a) until the first day of the month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 8.3 during the last month of the preceding calendar year, (b) promptly after such estimate is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant's Operating Payment previously made for such calendar year 16 were greater or less than the installments of Tenant's Operating Payment to be made for such calendar year in accordance with such estimate, and (i) if there shall be a deficiency, Tenant shall pay the amount thereof within ten (10) Business Days after demand therefor, or (ii) if there shall have been an overpayment, Landlord shall credit the amount thereof against subsequent payments of Rent due hereunder or, to the extent any such credit is determined following the expiration or earlier termination of the Term for reasons other than following an Event of Default, the amount thereof shall be paid to Tenant, and (c) on the first day of the month following the month in which such estimate is furnished to Tenant, and on the first day of each month thereafter throughout the remainder of such calendar year, Tenant shall pay to Landlord an amount equal to one-twelfth of Tenant's Operating Payment shown on such estimate. (b) On or before May 1st of each calendar year of the Term, Landlord shall furnish to Tenant a Statement for the immediately preceding calendar year. Each such Statement shall be accompanied by a computation of Operating Expenses for the Building prepared by Landlord's managing agent. If the Statement shall show that the sums paid by Tenant under Section 8.3(a) exceeded the actual amount of Tenant's Operating Payment for such calendar year, Landlord shall credit the amount of such excess against subsequent payments of Rent due hereunder. If the Statement for such calendar year shall show that the sums so paid by Tenant were less than Tenant's Operating Payment for such calendar year, Tenant shall pay the amount of such deficiency within ten (10) Business Days after Tenant's receipt of the Statement. (c) If the Commencement Date is a date other than January 1, then the amount of Operating Expenses payable by Tenant during the month and year in which the Term of this Lease commences shall be apportioned on the basis of the number of days in the period from the Commencement Date to December 31 shall bear to the total number of days in such calendar year. If the Expiration Date shall occur on a date other than December 31, any Additional Rent under this Section 8.3 for the calendar year in which such Expiration Date shall occur shall be apportioned on the basis of the number of days in the period from January 1 to the Expiration Date. Upon the expiration or earlier termination of this Lease, any Additional Rent under this Article 8 shall be paid or adjusted within thirty (30) days after submission of the Statement. The rights and obligations of Landlord and Tenant under the provisions of this Section 8.3 with respect to any Additional Rent shall survive the expiration or earlier termination of this Lease. Section 8.4 Accounting Methods. ------------------ The determination by Landlord of the amount of Operating Expenses and Taxes incurred by Landlord shall be made on an accrual basis, consistently applied. Section 8.5 Non-Waiver; Disputes. (a) Landlord's failure to render -------------------- any Statement on a timely basis with respect to any calendar year shall not prejudice Landlord's right to thereafter render a Statement with respect to such calendar year or any subsequent calendar year, nor shall the rendering of a Statement prejudice Landlord's right to thereafter render a corrected Statement for that calendar year. (b) Each Statement sent to Tenant shall be conclusively binding upon Tenant unless Tenant shall (i) within thirty (30) days after such Statement is sent, pay to Landlord the amount set forth in such Statement, without prejudice to Tenant's right to dispute 17 such Statement, and (ii) within ninety (90) days after such Statement is sent, send a written notice to Landlord objecting to such Statement and specifying the reasons that such Statement is claimed to be incorrect. Tenant agrees that Tenant will not employ, in connection with any dispute under this Lease, any person who is to be compensated in whole or in part, on a contingency fee basis. If the parties are unable to resolve any dispute as to the correctness of such Statement within 30 days following such notice of objection, either party may refer the issues raised to an independent firm of certified public accountants which is a so-called "Big-Five" public accounting firm selected by Landlord and reasonably acceptable to Tenant, and the decision of such accountants shall be conclusively binding upon Landlord and Tenant. Landlord shall not unreasonably withhold its consent to a proposal received from Tenant that such audit be performed by a regional accounting firm with demonstrable experience in the appropriate accounting procedures and practices respecting the operation, maintenance, repair and administration of commercial office buildings. In connection therewith, Tenant and such accountants shall execute and deliver to Landlord a confidentiality agreement, in form and substance reasonably satisfactory to Landlord, whereby such parties agree not to disclose to any third party any of the information obtained in connection with such review. Tenant shall pay the fees and expenses relating to such procedure, unless such accountants shall determine that Landlord overstated Operating Expenses by more than three percent (3%) for such Comparison Year, as finally determined, in which case Landlord shall pay such fees and expenses. If such audit reveals that Landlord has over-charged or under-charged Tenant, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord or Tenant, as applicable, shall reimburse to the other party the amount of such over-charge or under-charge, as the case may be, together with interest thereon at the Base Rate calculated from the end of the year to which such Statement relates until the date of such reimbursement. Section 8.6 Net Lease. This Lease is designed as a "net lease," and --------- the provisions in this Lease for payment by Tenant of its share of Operating Expenses and Taxes are intended to pass on to Tenant and reimburse Landlord for Tenant's Proportionate Share of all costs and expenses incurred in connection with the management, operation, maintenance or repair of the Building except as otherwise expressly herein provided. ARTICLE 9 REQUIREMENTS OF LAW Section 9.1 (a) Tenant's Compliance. Except as otherwise provided ------------------- in this Lease, Tenant, at its expense, shall comply (or cause to be complied) with all Requirements applicable to the Premises, regardless of whether imposed by their terms upon Landlord or Tenant. All repairs and alterations to the Premises, whether structural or nonstructural, ordinary or extraordinary, required to be made to cause the Premises to comply with any Requirements and which arise as a result of (i) the specific manner and nature of Tenant's use or occupancy of the Premises, as distinct from general office use, (ii) Alterations made by Tenant in the Premises or (iii) a breach by Tenant of any provisions of this Lease, shall be made by Tenant, at Tenant's expense and in compliance with Article 5, if such repairs or alterations are nonstructural and do not affect any Building System, or by Landlord, at Tenant's expense, if such repairs or alterations are structural or affect any Building System. If Tenant obtains knowledge of any 18 failure to comply with any Requirements applicable to the Premises, Tenant shall give Landlord prompt written notice thereof. (b) Hazardous Materials. Tenant shall not cause, nor permit any ------------------- other Tenant Party to cause, (i) any Hazardous Materials to be brought into the Building, (ii) the storage or use of Hazardous Materials in any manner not permitted by any Requirements, or (iii) the escape, disposal or release of any Hazardous Materials within or in the vicinity of the Building. Nothing herein shall be deemed to prevent Tenant's use of any Hazardous Materials customarily used in the ordinary course of office work, provided such use is in accordance with all Requirements. Tenant shall be responsible, at its expense, for all matters directly or indirectly based on, arising or resulting from the actual or alleged presence of Hazardous Materials in the Premises or in the Building which is caused by any Tenant Party. Tenant shall provide to Landlord copies of all communications received by Tenant with respect to any Requirements relating to Hazardous Materials, and/or any claims made in connection therewith. Landlord or its agents may perform environmental inspections of the Premises at any time subject to the provisions of Article 17 hereof. The covenants contained in this Subsection shall survive the expiration or earlier termination of this Lease. (c) Landlord's Compliance. Landlord shall comply with (or cause --------------------- to be complied with) all Requirements applicable to the Building (including the Premises) which are not the obligation of Tenant hereunder or pursuant to the Workletter Agreement, to the extent that non-compliance would materially impair Tenant's use and occupancy of the Premises and Tenant's ability to conduct its business in the Premises for office use; and, except with respect to Requirements which are in effect as of the Commencement Date applicable to the Landlord Compliance Items (but not excepting any subsequent material modifications thereto), the cost thereof shall be included in Operating Expenses pursuant to Section 8.1(e) of this Lease. (d) Landlord's Insurance. Tenant shall not cause, nor shall -------------------- Tenant permit any other Tenant Party to cause, any action or condition that would (i) violate applicable rules, regulations and guidelines of the Fire Department, Fire Insurance Rating Organization or any other authority having jurisdiction over the Building, (ii) cause an increase in the premiums of fire insurance then covering the Building over that payable with respect to comparable first-class office buildings or (iii) result in insurance companies of good standing refusing to insure the Building or any property therein in amounts and against risks as reasonably determined by Landlord. If the fire insurance premiums increase as a result of Tenant's failure to comply with the provisions of this Article 9, Tenant shall promptly cure such failure and shall reimburse Landlord, as Additional Rent, for the increased fire insurance premiums paid by Landlord as a result of such failure by Tenant. In any action or proceeding to which Landlord and Tenant are parties, a schedule or "make up" of rates for the Building or the Premises issued by the appropriate Fire Insurance Rating Organization, or other body fixing such fire insurance rates, shall be conclusive evidence of the fire insurance rates then applicable to the Building. Section 9.2 Fire Alarm System; Sprinklers. Tenant shall extend, add ----------------------------- to and modify the fire-alarm and life-safety and sprinkler systems in the Premises, utilizing Landlord-approved contractors, in accordance with this Lease, the Rules and Regulations and all Requirements, if and to the extent such system has not been installed in the Premises prior to the Commencement Date. If the Fire Insurance Rating Organization or any Governmental Authority 19 or any of Landlord's insurers requires or recommends any modifications and/or Alterations be made or any additional equipment be supplied in connection with the sprinkler system or fire alarm and life-safety system serving the Building or the Premises by reason of Tenant's business, or the location of the partitions, trade fixtures, or other contents of the Premises, Landlord (to the extent outside of the Premises) or Tenant (to the extent within the Premises) shall make such modifications and/or Alterations, and supply such additional equipment, in either case at Tenant's expense. ARTICLE 10 SUBORDINATION Section 10.1 Subordination and Attornment. (a) Landlord represents ---------------------------- that, as of the Effective Date, there are no existing Superior Leases and no existing Mortgages. Provided any such Mortgagee or Lessor has executed and delivered a Nondisturbance Agreement (as hereinafter defined), this Lease shall be subject and subordinate to any Mortgages and Superior Leases hereafter entered into by Landlord, and, at the request of any Mortgagee or Lessor, Tenant shall attorn to such Mortgagee or Lessor, its successors in interest or any purchaser in a foreclosure sale. (b) If a Lessor or Mortgagee or any other person or entity shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or the delivery of a new lease or deed, then at the request of the successor landlord and upon such successor landlord's written agreement to accept Tenant's attornment and to recognize Tenant's interest under this Lease, Tenant shall be deemed to have attorned to and recognized such successor landlord as Landlord under this Lease. The provisions of this Article are self-operative and require no further instruments to give effect hereto; provided, however, that Tenant shall promptly execute and deliver any instrument that such successor landlord may reasonably request (i) evidencing such attornment, (ii) setting forth the terms and conditions of Tenant's tenancy, and (iii) containing such other terms and conditions as may be required by such Mortgagee or Lessor, provided such terms and conditions do not materially increase Tenant's obligations or materially and adversely affect the rights of Tenant under this Lease. Upon such attornment this Lease shall continue in full force and effect as a direct lease between such successor landlord and Tenant upon all of the terms, conditions and covenants set forth in this Lease except that such successor landlord shall not be: (i) liable for any act or omission of Landlord (except to the extent such act or omission continues beyond the date when such successor landlord succeeds to Landlord's interest and Tenant gives notice of such act or omission); (ii) subject to any defense, claim, counterclaim, set-off or offsets which Tenant may have against Landlord; (iii) bound by any prepayment of more than one month's Rent to any prior landlord; 20 (iv) bound by any obligation to make any payment to Tenant which was required to be made prior to the time such successor landlord succeeded to Landlord's interest; (v) bound by any obligation to perform any work or to make improvements to the Premises except for (x) repairs and maintenance required to be made by Landlord under this Lease, and (y) repairs to the Premises as a result of damage by fire or other casualty or a partial condemnation pursuant to the provisions of this Lease, but only to the extent that such repairs can reasonably be made from the net proceeds of any insurance or condemnation awards, respectively, actually made available to such successor landlord; (vi) bound by any modification, amendment or renewal of this Lease made without successor landlord's consent; (vii) liable for the repayment of any security deposit or surrender of any letter of credit, unless and until such security deposit actually is paid or such letter of credit is actually delivered to such successor landlord; or (viii) liable for the payment of any unfunded tenant improvement allowance, refurbishment allowance or similar obligation. Section 10.2 Mortgage or Superior Lease Defaults. Tenant shall not ----------------------------------- cause a default under any Superior Lease or Mortgage, or omit to do anything that Tenant is obligated to do under the terms of this Lease so as to cause Landlord to be in default thereunder. Any Mortgagee may elect that this Lease shall have priority over the Mortgage that it holds and, upon notification to Tenant by such Mortgagee, this Lease shall be deemed to have priority over such Mortgage, regardless of the date of this Lease. In connection with any financing of the Real Property, the Building or of the interest of the lessee under any Superior Lease, Tenant shall consent to any reasonable modifications of this Lease requested by any lending institution, provided such modifications do not materially increase the obligations, or materially and adversely affect the rights, of Tenant under this Lease. Section 10.3 Tenant's Termination Right. As long as any Superior -------------------------- Lease or Mortgage shall exist, Tenant shall not seek to terminate this Lease by reason of any act or omission of Landlord (a) until Tenant shall have given notice of such act or omission to all Lessors and/or Mortgagees, and (b) until a reasonable period of time (not to exceed an additional thirty (30) days beyond the grace period otherwise afforded Landlord) shall have elapsed following the giving of notice of such default and the expiration of any applicable notice or grace periods (unless such act or omission is not capable of being remedied within a reasonable period of time), during which period such Lessors and/or Mortgagees shall have the right, but not the obligation, to remedy such act or omission and thereafter diligently proceed to so remedy such act or obligation. If any Lessor or Mortgagee elects to remedy such act or omission of Landlord, Tenant shall not seek to terminate this Lease so long as such Lessor or Mortgagee is proceeding with reasonable diligence to effect such remedy. Section 10.4 Provisions. The provisions of this Article shall (a) ---------- inure to the benefit of Landlord, any future owner of the Building or the Real Property, Lessor or Mortgagee 21 and any sublessor thereof and (b) apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of any such Superior Lease or Mortgage. Section 10.5 Non-Disturbance Agreements. Notwithstanding any -------------------------- contrary provision of this Article 10, a condition precedent to the subordination of this Lease to any future Mortgage or Superior Lease is that such future Mortgagee or Lessor shall execute and deliver to Tenant a then commercially-reasonable non-disturbance and attornment agreement in the form prescribed by such Mortgagee or Lessor ("Nondisturbance Agreement"). Any such Nondisturbance Agreement shall provide that, so long as no Event of Default is continuing under this Lease, no foreclosure of any such Mortgage and no termination of any such Superior Lease shall disturb Tenant's right of possession hereunder, and that such future Mortgagee or Lessor, or their respective successors in interest (including, without limitation, foreclosure sale purchasers) shall recognize and be bound by this Lease, subject only to the limitations in Section 10.1(b)(i) through (viii). ARTICLE 11 SERVICES Section 11.1 Elevators. Landlord, at its expense, shall provide --------- passenger elevator service to the Premises at all times. Section 11.2 Heating, Ventilation and Air Conditioning. (a) Landlord ----------------------------------------- shall furnish to the Premises heating, ventilation and air-conditioning ("HVAC") in accordance with the standards set forth in Exhibit E on all Business Days from 8:00 a.m. to 6:00 p.m. and from 8:00 a.m. to 1:00 p.m. on Saturdays. Landlord, at its expense, shall repair and maintain the HVAC System (as hereinafter defined) in good working order, provided repairs required as a result of the negligence or willful misconduct of Tenant, its agents or employees, shall be performed at Tenant's expense. Landlord shall have access to all air-cooling, fan, ventilating and machine rooms and electrical closets and all other mechanical installations of Landlord (collectively, "Mechanical Installations"), and Tenant shall not construct partitions or other obstructions which may interfere with Landlord's access thereto or the moving of Landlord's equipment to and from the Mechanical Installations. Neither Tenant, nor its agents, employees or contractors shall at any time enter the Mechanical Installations or tamper with, adjust, or otherwise affect such Mechanical Installations. (b) Landlord shall not be responsible if the normal operation of the Building System providing HVAC to the Premises (the "HVAC System") shall fail to provide cooled or heated air, as the case may be, in accordance with the specifications set forth in Exhibit E (the "Design Standards") by reason of (i) any machinery or equipment installed by or on behalf of Tenant or any person claiming through or under Tenant, which shall have an electrical load in excess of the average electrical load and human occupancy factors for the HVAC System as designed, as the case may be, (ii) any rearrangement of partitioning or other Alterations (including the Improvements) made or performed by or on behalf of Tenant or any person claiming through or under Tenant or (iii) any failure by Tenant to install, if missing, blinds or shades on all windows, which blinds and shades are subject to Landlord's approval, or to keep all of the operable windows in the Premises closed. In addition, Tenant acknowledges 22 that the HVAC System may be unable to conform to the Design Standards in circumstances where Tenant and its employees fail to lower window blinds when necessary because of the sun's position. Tenant at all times shall cooperate fully with Landlord and shall abide by the rules and regulations which Landlord may reasonably prescribe for the proper functioning and protection of the HVAC System. Section 11.3 Overtime HVAC. Landlord shall not be required to ------------- furnish any HVAC service during periods other than for the hours and days set forth in Section 11.2 hereof ("Overtime Periods") unless Tenant delivers notice to Landlord's property management office requesting such services at least twenty-four (24) hours prior to the time at which such services are to be provided, but Landlord shall use reasonable efforts (without obligation to incur any additional cost) to arrange such service on such shorter notice as Tenant shall provide. If HVAC is furnished to the Premises during Overtime Periods, then the direct utility costs incurred by Landlord thereby shall be includable within Operating Expenses, but Tenant shall not be obligated to reimburse Landlord for any increased depreciation to the HVAC System resulting thereby. Section 11.4 Cleaning. Landlord shall cause the Premises (excluding -------- any portions thereof used for the storage, preparation, service or consumption of food or beverages) to be cleaned, substantially in accordance with the standards set forth in Exhibit F. Any areas of the Premises requiring additional cleaning such as areas used for preparation or consumption of food, shall be cleaned, at Tenant's expense, by Landlord's employees or Landlord's contractor, at rates which shall be competitive with rates of other cleaning contractors providing services to first-class office buildings in Cupertino, California. Landlord and its cleaning contractor and their respective employees shall have access to the Premises at all times except between 8:00 A.M. and 5:30 P.M. on Business Days. Section 11.5 Water. Landlord, at Landlord's expense, shall, subject ----- to Unavoidable Delays, provide at all times to the Premises hot and cold water for drinking, cleaning, break-room kitchen and lavatory purposes. If Tenant requires or uses water or steam for any additional purposes, Landlord shall use its commercially reasonable efforts (subject to any Requirements which may limit water use) to supply the same. Tenant shall pay for the reasonable charges of Landlord for the water furnished based upon actual cost. Tenant shall pay also to Landlord Landlord's reasonable charge for any required pumping or heating thereof, and any sewer rent, tax and/or charge now or hereafter assessed or imposed upon the Premises or the Real Property pursuant to any Requirement. Section 11.6 Refuse and Rubbish Removal. Landlord shall provide -------------------------- refuse and rubbish removal services at the Premises for ordinary office refuse and rubbish pursuant to regulations reasonably established by Landlord. Tenant shall pay to Landlord, within 10 Business Days of receipt of an invoice therefor, Landlord's reasonable charge for such removal to the extent that the refuse generated by Tenant exceeds the refuse and rubbish customarily generated by executive and general office tenants. Tenant shall not dispose of any refuse and rubbish in the public areas of the Building, and if Tenant does so, Tenant shall be liable for Landlord's reasonable charge for such removal. Tenant shall cause its employees, agents, contractors and business visitors to observe such additional rules and regulations regarding rubbish removal and/or recycling as Landlord may, from time to time, reasonably impose. 23 Section 11.7 Service Interruptions. Landlord reserves the right --------------------- to suspend any service when necessary, by reason of Unavoidable Delays, accidents or emergencies, or for repairs, alterations or improvements which, in Landlord's reasonable judgment, are necessary or appropriate until such Unavoidable Delay, accident or emergency shall cease or such repairs, alterations or improvements are completed and Landlord shall not be liable for any interruption, curtailment or failure to supply services. Landlord shall use reasonable efforts to restore such service, remedy such situation and minimize any interference with Tenant's business, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates, or to incur any other overtime costs or additional expenses whatsoever. The exercise of any such right or the exercise of any such right or the occurrence of any such failure by Landlord shall not constitute an actual or constructive eviction, in whole or in part, entitle Tenant to any compensation, abatement or diminution of Rent, relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience to Tenant, or interruption of Tenant's business, or otherwise. In case of any interruption in the services called for under this Article 11 which continues beyond the Eligibility Period, Tenant shall have the rights set forth in Section 7.4 above. Section 11.8 Non-essential Service Contractors. If Tenant reasonably --------------------------------- believes that the contractor selected by Landlord for the provision of landscaping, janitorial, refuse removal or security services for the Premises (any such service, a "Non-essential Service") is not performing any such Non- essential Service consistent with the standards of other first-class office buildings comparable to the Building, or is providing such services at a cost which exceeds that then being charged in Santa Clara County by other comparable service providers performing comparable services, or poses a threat to any Tenant Party through suspected intentional misconduct or is reasonably suspected by Tenant to have committed acts of theft or vandalism within the Premises, then Tenant shall so notify Landlord in writing. If, after Landlord has been afforded a reasonable opportunity to correct any such reported service deficiency, Tenant reasonably believes that such deficiency has not been corrected, then Tenant shall have the right, following thirty (30) days' written notice to Landlord, to engage directly, at Tenant's sole cost and expense, an alternate service provider for such purportedly deficient Non-essential Service. In any such event, Landlord shall terminate the services of the contractor previously providing such Non-essential Service and Operating Expenses shall, henceforth, exclude any charge respecting such Non-essential Service; provided, however, that (a) Tenant shall promptly provide to Landlord copies of all invoices from such alternate Non-essential Service provider and (b) all such invoiced costs shall be included by Landlord in "Operating Expenses" solely for the purpose of determining the amount of the Management Fee (as defined in Exhibit B). In addition, provided that Portal Software, Inc., or a Related Entity (as hereinafter defined) is the sole tenant of the Building, Landlord shall reasonably consider any request by Tenant that Landlord utilize the services of a different Non-essential Service provider. Nothing set forth in this Section 11.8 shall be deemed to limit or abridge Tenant's right to arrange for the provision of other auxiliary services to the Premises such as the presence of day porters, maids, flower services or snack suppliers. Section 11.9 Emergency Generator. From and after the date ------------------- Landlord tenders possession of the Premises to Tenant through the Term of this Lease, and any renewals or extensions thereof, but only for so long as Portal Software, Inc., or a Related Entity is the sole tenant of the Building, Landlord shall grant to Tenant the exclusive right (but not the obligation) 24 to (i) use the existing emergency generator and any and all related existing switching gear located in the Building's emergency generator plant (the "Emergency Generator") and (ii) allocate the use of the electrical capacity of such Emergency Generator between the Premises and those certain premises occupied by Tenant pursuant to the CCCV Lease (the "CCCV Premises") at Tenant's discretion. Landlord agrees to cooperate with Tenant, at Tenant's sole cost and expense, with Tenant's efforts, conducted at Tenant's sole cost and expense, to (y) obtain access rights ("Transmission Easement") across any real property owned or controlled by third parties located between the Premises and the CCCV Premises and (z) construct any and all conduits, cabling and junction boxes or other electrical apparatus necessary to link the Premises with the CCCV Premises for purposes of transmitting backup power from the Emergency Generator ("Transmission Facilities"), all of which Transmission Facilities shall be installed pursuant to the terms of Article 5 and are hereby deemed to be Alterations that affect a Building System; provided that, as Landlord's sole contribution toward the cost of installing the Transmission Facilities, if Tenant so installs the Transmission Facilities, Landlord shall grant to Tenant a credit against the Review Fee payable by Tenant pursuant to Section 1(g) of the Workletter Agreement, which credit shall be in the amount of Seventeen Thousand Dollars ($17,000.00). Landlord hereby disclaims any responsibility whatsoever for the condition of the Emergency Generator or its fitness or suitability for Tenant's use or intended purpose and Tenant shall accept the Emergency Generator in its "as is" condition with all faults, including any deferred maintenance and, except to the extent caused by the active negligence or willful misconduct of Landlord or Landlord's Agent, but subject in all cases to the provisions of Section 31.18 of this Lease, Tenant hereby assumes all risks arising from Tenant's use of the Emergency Generator. Tenant acknowledges that Landlord makes no representation nor warranty concerning Tenant's ability to obtain the Transmission Easement or any approvals from Governmental Authorities necessary to construct the Transmission Facilities. If Tenant so elects to use the Emergency Generator, Tenant shall be solely responsible for performing any maintenance or repair to the Emergency Generator which may be necessary or required to address any deferred maintenance or otherwise necessary to bring the Emergency Generator up to proper running order in compliance with all Requirements. In addition to the foregoing, during any such periods as Tenant elects to so utilize the Emergency Generator, Tenant shall also be responsible for performing, or causing to be performed, at Tenant's sole cost and expense, (1) weekly testing of the Emergency Generator; (2) periodic replenishing of any fuel consumed by the Emergency Generator during any periods in which it is run; and (3) any and all inspections, maintenance or repairs to the Emergency Generator necessary to keep it in proper running order consistent with standards applicable to office buildings located in Cupertino, California comparable to the Building. ARTICLE 12 INSURANCE; PROPERTY LOSS OR DAMAGE; REIMBURSEMENT Section 12.1 Tenant's Insurance. (a) Tenant, at its expense, ------------------ shall obtain and keep in full force and effect during the Term: (i) a policy of commercial general liability insurance on an occurrence basis against claims for personal injury, death and/or property damage occurring in or 25 about the Premises or the Building, under which Tenant is named as the insured and Landlord, Landlord's managing agent and any Lessors and any Mortgagees whose names shall have been furnished by Landlord to Tenant from time to time are named as additional insureds, which insurance shall provide primary coverage without contribution from any other insurance carried by or for the benefit of Landlord, Landlord's managing agent or any Lessors or Mortgagees named as additional insureds, and Tenant agrees to obtain blanket broad-form contractual liability coverage to insure its indemnity obligations set forth in Article 30 hereof. The minimum limits of liability shall be a combined single limit with respect to each occurrence in an amount of not less than Five Million Dollars ($5,000,000.00), provided, however, that Landlord shall retain the right to require Tenant to increase such coverage on no more than two (2) occasions during the initial Term of this Lease to that amount of insurance which in Landlord's reasonable judgment is then being customarily required by landlords for similar office space in first-class buildings in Cupertino, California or is otherwise required by any Lessor or Mortgagee. The deductible or self insured retention for such policy shall in no event exceed Ten Thousand Dollars ($10,000.00) at any time. If the aggregate limit applying to the Premises is reduced by the payment of a claim or establishment of a reserve equal to or greater than 50% of the annual aggregate, Tenant shall immediately arrange to have the aggregate limit restored by endorsement to the existing policy or the purchase of an additional insurance policy unless, in Landlord's reasonable judgment, Tenant maintains sufficient excess liability insurance to satisfy the liability requirements of this Lease without the reinstatement of the aggregate limit; (ii) insurance against loss or damage by fire, and such other risks and hazards as are insurable under then available standard forms of "all risk" property insurance policies with extended coverage, insuring Tenant's Property, and all Specialty Alterations for the full insurable value thereof or replacement cost value thereof, having a deductible amount, if any, as reasonably determined by Landlord; (iii) during the performance of any Alteration, until completion thereof, Builder's risk insurance on an "all risk" basis and on a completed value form including a Permission to Complete and Occupy endorsement, for full replacement value covering the interest of Landlord and Tenant (and their respective contractors and subcontractors), any Mortgagee and any Lessor in all work incorporated in the Building and all materials and equipment in or about the Premises; (iv) Workers' Compensation Insurance, as required by law; (v) such other insurance as is customarily required to be carried by tenants in first-class office buildings in Cupertino, California and in such amounts as Landlord, any Mortgagee and/or any Lessor may reasonably require from time to time. Tenant hereby acknowledges and agrees that, if Tenant elects not to carry business interruption insurance, then, to the fullest extent permitted by law, Tenant forever waives and releases Landlord from any claims or liability arising from or in connection with damage or injury to Tenant's business, which damage or injury would have been covered by business interruption insurance if such policy had been obtained. 26 (b) All insurance required to be carried by Tenant pursuant to the terms of this Lease (i) shall contain a provision that (x) other than those customary exclusions found in customary forms of commercial general liability policies, no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained, (y) the policy shall be noncancellable and/or no material change in coverage shall be made thereto unless Landlord, Lessors and Mortgagees shall have received 30 days' prior notice of the same, by certified mail, return receipt requested, and (z) Tenant shall be solely responsible for the payment of all premiums under such policies and Landlord, Lessors and Mortgagees shall have no obligation for the payment thereof, and (ii) shall be effected under valid and enforceable policies issued by reputable and independent insurers permitted to do business in the State of California and rated in Best's Insurance Guide, or any successor thereto (or if there be none, an organization having a national reputation) as having a "Best's Rating" of "A-" and a "Financial Size Category" of at least "X" or, if such ratings are not then in effect, the equivalent thereof or such other financial rating as Landlord may at any time consider appropriate. (c) On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate policies of insurance, including evidence of waivers of subrogation required to be carried by each party pursuant to this Article 12. Evidence of each renewal or replacement of a policy shall be delivered by Tenant to Landlord at least 10 days prior to the expiration of such policy. In lieu of the policy of insurance required to be delivered to Landlord pursuant to this Article (the "Policy"), Tenant may deliver to Landlord a certification from Tenant's insurance company (on the form currently designated "Acord 27", or the equivalent, rather than on the form currently designated "Acord 25-S", or the equivalent) which shall be binding on Tenant's insurance company, and which shall expressly provide that such certification (i) conveys to Landlord and any other named insured and/or additional insureds thereunder (the "Insured Parties") all the rights and privileges afforded under the Policy as primary insurance, and (ii) contains an unconditional obligation of the insurance company to advise all Insured Parties in writing by certified mail, return receipt requested, at least 30 days in advance of any termination or change to the Policy that would affect the interest of any of the Insured Parties. Section 12.2 Waiver of Subrogation. Landlord and Tenant shall each --------------------- procure an appropriate clause in or endorsement to any property insurance covering the Premises, the Building and personal property, fixtures and equipment located therein, wherein the insurance companies shall waive subrogation or consent to a waiver of right of recovery, and Landlord and Tenant agree not to make any claim against, or seek to recover from, the other for any loss or damage to its property or the property of others resulting from fire or other hazards to the extent covered by such property insurance; provided, however, that the release, discharge, exoneration and covenant not to sue contained herein shall be limited by and coextensive with the terms and provisions of the waiver of subrogation or waiver of right of recovery. Tenant acknowledges that Landlord shall not carry insurance on, and shall not be responsible for, (i) damage to any Specialty Alterations, (ii) Tenant's Property, and (iii) any loss suffered by Tenant due to interruption of Tenant's business. Section 12.3 Landlord's Insurance. Landlord shall, from and after -------------------- the Effective Date and until the Expiration Date, maintain in effect the following insurance: (i) fire and "all risk" insurance providing coverage in the event of fire, vandalism, malicious mischief 27 and all other risks normally covered by "all risk" policies in the area of the Building, covering the Building (excluding the property required to be insured by Tenant pursuant to Section 12.1) in an amount not less than ninety- deductibles which as of the Effective Date is Twenty-Five Thousand Dollars ($25,000.00) but is subject to periodic change over the Term) of the Building excluding foundations, footings and other below-grade structural elements; and (ii) commercial general liability insurance or the equivalent in the amount of at least Five Million Dollars ($5,000,000.00), against claims of bodily injury, personal injury or property damage arising out of Landlord's operations, assumed liabilities, contractual liabilities, or use of the Building and Common Areas. Such insurance may be carried under blanket or umbrella insurance policies. Upon written request from Tenant, but no more than one (1) time during any calendar year, Landlord shall provide Tenant with evidence that Landlord is carrying the insurance Landlord is required to maintain pursuant to this Section 12.3. ARTICLE 13 DESTRUCTION - FIRE OR OTHER CAUSE Section 13.1 Restoration. If the Premises are damaged by ----------- fire or other casualty, or if the Building is damaged such that Tenant is deprived of reasonable access to the Premises or Tenant's use of any portion of the Premises is materially impaired, Tenant shall give prompt notice thereof to Landlord, and the damage shall be repaired by Landlord, at its expense, to substantially the condition of the Premises prior to the damage, subject to the provisions of any Mortgage or Superior Lease, but Landlord shall have no obligation to repair or restore (i) Tenant's Property or (ii) any Specialty Alterations. Until such time as the restoration of the Premises is substantially completed, Fixed Rent, Tenant's Operating Payment and Tenant's Tax Payment shall be reduced in the proportion by which the area of the part of the Premises which is inaccessible, or the use of which has been so impaired, and is not used by Tenant bears to the total area of the Premises. Section 13.2 Landlord's Termination Right. Notwithstanding anything ---------------------------- to the contrary contained in Section 13.1, if (i) the Premises are totally damaged or are rendered wholly untenantable, or if the Building shall be so damaged that, in Landlord's opinion, substantial alteration, demolition, or reconstruction of the Building shall be required (whether or not the Premises are so damaged or rendered untenantable) and the estimated period for the repair or restoration of the Premises or the Building set forth in the Restoration Notice (as hereinafter defined) is more than twelve (12) months from the date of such damage or (ii) under the provisions of any Mortgage or Superior Lease, Landlord shall be unable so to restore the Premises or Tenant's reasonable access to the Premises, then in either such event, Landlord may, not later than sixty (60) days following the date of the damage, give Tenant a notice terminating this Lease. If this Lease is so terminated, (a) the Term shall expire upon the thirtieth (30th) day after such notice is given, (b) Tenant shall vacate the Premises and surrender the same to Landlord, (c) Tenant's liability for Rent shall cease as of the date of the damage, and (d) any prepaid Rent for any period after the date of the damage shall be refunded by Landlord to Tenant. 28 Section 13.3 Tenant's Termination Right. If the Premises are totally -------------------------- damaged and are thereby rendered wholly untenantable, or if the Building shall be so damaged that Tenant is deprived of reasonable access to the Premises, or Tenant's use of any portion of the Premises is materially impaired, Landlord shall, within sixty (60) days following the date of the damage, cause a contractor or architect selected by Landlord to give notice (the "Restoration Notice") to Tenant of the date by which such contractor or architect estimates the restoration of the Premises or the Building, as applicable, shall be Substantially Completed. If (i) such date, as set forth the Restoration Notice, is more than twelve (12) months from the date of such damage and if Landlord has not elected to terminate this Lease pursuant to Section 13.2, then Tenant shall have the right to terminate this Lease by giving notice to Landlord not later than thirty (30) days following Tenant's receipt of the Restoration Notice or (ii) Landlord elects not to terminate this Lease pursuant to Section 13.2, but fails to Substantially Complete the repair or restoration of the Premises or the Building, as applicable, within twelve (12) months from the date of damage or destruction, Tenant, upon not less than thirty (30) days' prior written notice, may elect to terminate this Lease (either such notice in (i) or (ii), a "Termination Notice"). If Tenant delivers to Landlord a Termination Notice, unless, with respect to a Termination Notice delivered pursuant to clause (ii) of the preceding sentence, Landlord within such thirty-(30-) day period Substantially Completes such repair or restoration or delivers a letter from its general contractor indicating that such work will be Substantially Completed within (90) days of the date of such Termination Notice, this Lease shall be deemed to have terminated as of the date of the giving of the Termination Notice, in the manner set forth in the second sentence of Section 13.2. Upon any such termination of this Lease, Tenant shall vacate the Premises and remove all of its furniture, fixtures, equipment and personal property as quickly as commercially reasonably possible. Section 13.4 Final 12 Months. Notwithstanding anything set forth --------------- to the contrary in this Article 13, in the event that any damage rendering the Premises wholly untenantable occurs during the final twelve (12) months of the Term, either Landlord or Tenant may terminate this Lease by notice to the other party within thirty (30) days after the occurrence of such damage and this Lease shall expire on the thirtieth (30th) day after the date of such notice unless Tenant has the then-exercisable right under Article 34 of this Lease to extend the Term and exercises such right within thirty (30) days following the date of such damage or destruction. For purposes of this Section 13.4, the Premises shall be deemed wholly untenantable if due to such damage, Tenant shall be precluded from using more than fifty percent (50%) of the Premises for the conduct of its business and Tenant's inability to so use the Premises is reasonably expected to continue until the Expiration Date. Section 13.5 Waivers. Tenant hereby waives the provisions of ------- Section 1932, subdivision 2, and Landlord and Tenant hereby waive the provisions of Section 1933, subdivision 4, of the California Civil Code, and any similar law, statute or ordinance now or hereafter in effect. Section 13.6 Inability to Collect. Notwithstanding any of the -------------------- foregoing provisions of this Article 13, if and for so long as by reason of any action or inaction by any Tenant Party, Landlord or any Mortgagee or Lessor is unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the Premises or the Building, then, without prejudice to any other remedies that may be available against 29 Tenant, there shall be no abatement of Rent and Landlord shall have no obligation to restore the Premises. Section 13.7 Landlord's Liability. Any Building employee to whom -------------------- any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to such property, or for the loss of or damage to any property of Tenant by theft or otherwise. None of Landlord, its agents, any Mortgagee or Lessor shall liable for any injury or damage to persons or property or interruption of Tenant's business resulting from fire or other casualty, any damage caused by other tenants or persons in the Building or by construction of any private, public or quasi-public work, or any latent defect in the Premises or in the Building (except that Landlord shall be required to repair the same to the extent provided in Article 5). No penalty shall accrue for delays which may arise by reason of adjustment of fire insurance on the part of Landlord or Tenant, or for delay on account of "labor troubles" or any other cause beyond Landlord's control arising from any repair or restoration of any portion of the Premises or of the Building, provided that Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises during the performance of any such repair or restoration, provided further that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever. Nothing in this Section 13.7 shall affect any right of Landlord to the indemnity from Tenant to which Landlord may be entitled under Article 30 in order to recoup for payments made to compensate for losses of third parties. Section 13.8 Windows. If at any time any windows of the Premises ------- are temporarily closed, darkened or covered over by reason of repairs, maintenance, alterations or improvements to the Building, or any of such windows are permanently closed, darkened or covered over due to any Requirement, Landlord shall not be liable for any damage Tenant may sustain and Tenant shall not be entitled to any compensation or abatement of any Rent, nor shall the same release Tenant from its obligations hereunder or constitute an actual or constructive eviction. Section 13.9 Insurance Shortfall. Notwithstanding any other ------------------- provision of this Article 13, if Landlord is otherwise obligated to repair or restore the Premises and/or the Building hereunder, but, for any reason whatsoever, the estimated cost of such repair or restoration, as reasonably determined by Landlord (the "Estimated Restoration Cost"), exceeds the insurance proceeds available to Landlord for such repair or restoration (the "Shortfall") then, unless Tenant undertakes to fund such entire Shortfall in accordance with this Section 13.9, Landlord may terminate this Lease by notice to Tenant, which termination shall be in the manner provided in the last sentence of Section 13.2. If Tenant elects to fund such Shortfall, then such Shortfall shall be funded in the same manner as the Total Construction Cost (as defined in the Workletter Agreement) is to be funded pursuant to the Workletter Agreement, and shall be disbursed on a pro rata basis with such insurance proceeds to pay for the actual costs of such repair or restoration ("Actual Restoration Cost"). Promptly following the determination of any variance between the Actual Restoration Cost and the Estimated Restoration Cost or any revision to the anticipated insurance proceeds, Tenant shall fund any additional Shortfall caused thereby or be refunded any excess payments previously made by Tenant. 30 ARTICLE 14 EMINENT DOMAIN Section 14.1 (a) Total Taking. If all or substantially all of the ------------ Real Property, the Building or the Premises shall be acquired or condemned for any public or quasi-public purpose, this Lease shall terminate and the Term shall end as of the date of the vesting of title, with the same effect as if such date were the Expiration Date, and Rent shall be prorated and adjusted as of such date. (b) Partial Taking. If only a part of the Real Property, the -------------- Building or the Premises shall be acquired or condemned then, except as hereinafter provided in this Article 14, this Lease and the Term shall continue in full force and effect, provided that from and after the date of the vesting of title, the Rent and Tenant's Proportionate Share shall be modified to reflect the reduction of the Premises and/or the Building as a result of such acquisition or condemnation. (c) Landlord's Termination Right. Landlord may give to Tenant, ---------------------------- within sixty (60) days following the date upon which Landlord receives notice that all or a portion of the Real Property, the Building or the Premises has been acquired or condemned, a notice of termination of this Lease with respect to such portion of the Premises acquired or condemned. (d) Tenant's Termination Right. If the part of the Real Property -------------------------- so acquired or condemned consists of more than one (1) floor of the Building, or if, by reason of such acquisition or condemnation, Tenant no longer has reasonable means of access to the Premises, Tenant may terminate this Lease by notice to Landlord given within thirty (30) days following the date upon which Tenant received notice of such acquisition or condemnation. If Tenant so notifies Landlord, this Lease shall end and expire upon the thirtieth (30th) day following the giving of such notice. If a part of the Premises shall be so acquired or condemned and this Lease and the Term shall not be terminated in accordance with this Section 14.1 Landlord, at Landlord's expense, but without requiring Landlord to spend more than it collects as an award, shall, subject to the provisions of any Mortgage or Superior Lease, restore that part of the Premises not so acquired or condemned to a self-contained rental unit substantially equivalent (with respect to character, quality, appearance and services) to that which existed immediately prior to such acquisition or condemnation, excluding Tenant's Property and/or Specialty Alterations. (e) Apportionment of Rent. Upon any termination of this --------------------- Lease pursuant to the provisions of this Article 14, Rent shall be apportioned as of, and shall be paid or refunded up to and including, the date of such termination. Section 14.2 Awards. Upon any acquisition or condemnation ------ of all or any part of the Real Property, Landlord shall receive the entire award for any such acquisition or condemnation, and Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term, Tenant's Alterations or improvements; and Tenant hereby assigns to Landlord all of its right in and to such award. Nothing contained in this 31 Article 14 shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the then value of any Tenant's Property or Specialty Alteration included in such taking and for any moving expenses, provided any such award is in addition to, and does not result in a reduction of, the award made to Landlord. Section 14.3 Temporary Taking. If all or any part of the Premises ---------------- is acquired or condemned temporarily during the Term for any public or quasi- public use or purpose, Tenant shall give prompt notice to Landlord and the Term shall not be reduced or affected in any way and Tenant shall continue to pay all Rent payable by Tenant without reduction or abatement and to perform all of its other obligations under this Lease, except to the extent prevented from doing so by the condemning authority, and Tenant shall be entitled to receive any award or payment from the condemning authority for such use, which shall be received, held and applied by Tenant as a trust fund for payment of the Rent falling due. Section 14.4 Waiver. To the extent it is inconsistent with ------ the above, each party hereto hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure allowing either party to petition a court to terminate this Lease in the event of a partial taking of the Premises. ARTICLE 15 ASSIGNMENT AND SUBLETTING Section 15.1 (a) No Assignment or Subletting. Except as expressly --------------------------- set forth herein, Tenant shall not assign, mortgage, pledge, encumber, or otherwise transfer this Lease, whether by operation of law or otherwise, and shall not sublet (or underlet), or permit, or suffer the Premises or any part thereof to be used or occupied by others (whether for desk space, mailing privileges or otherwise), without Landlord's prior consent in each instance. Any assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention of the provisions of this Article 15 shall be void. (b) Collection of Rent. If, without Landlord's consent when ------------------ required under this Article 15, this Lease is assigned, or any part of the Premises is sublet or occupied by anyone other than Tenant or this Lease or the Premises or any of Tenant's Property is encumbered (by operation of law or otherwise), Landlord may collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent herein reserved. No such collection shall be deemed a waiver of the provisions of this Article 15, an acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance of Tenant's covenants hereunder. Tenant shall remain fully liable for the obligations under this Lease. (c) Further Assignment/Subletting. Landlord's consent to any ----------------------------- assignment or subletting shall not relieve Tenant from the obligation to obtain Landlord's express consent to any further assignment or subletting. Except for a person or entity who acquired an interest in the Premises directly from the initial Tenant named herein in accordance with this Article 15, no subtenant shall be permitted to assign or encumber its sublease or further 32 sublet any portion of its sublet space, or otherwise suffer or permit any portion of the sublet space to be used or occupied by others. Section 15.2 Tenant's Notice. If Tenant desires to assign this --------------- Lease or sublet all or any portion of the Premises in a transaction for which Landlord's consent is required hereunder, Tenant shall give notice thereof to Landlord, which shall be accompanied by (a) with respect to an assignment of this Lease, the date Tenant desires the assignment to be effective, and (b) with respect to a sublet of all or a part of the Premises, (i) the material business terms on which Tenant would sublet such premises, and (ii) a description of the portion of the Premises to be sublet. Such notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) shall be granted the right, at Landlord's option, (1) with respect to a sublease for a term expiring no earlier than six (6) months prior to the Expiration Date, to terminate this Lease with respect to such space as Tenant proposes to sublease (the "Partial Space"), upon the terms and conditions hereinafter set forth, or (2) if the proposed transaction is an assignment of this Lease, to terminate this Lease. Such option may be exercised by notice from Landlord to Tenant within ten (10) Business Days after Landlord's receipt of Tenant's notice; provided, however, that Landlord shall have no such option to terminate this Lease with respect to any such proposed subletting unless on the date of such proposed transaction Tenant is occupying less than fifty percent (50%) of the rentable area of the Premises. Section 15.3 Landlord's Termination. If Landlord exercises its ---------------------- option, if any, to terminate all or a portion of this Lease pursuant to Section 15.2, (a) this Lease shall end and expire with respect to all or a portion of the Premises, as the case may be, on the date that such assignment or sublease was to commence, (b) Rent shall be apportioned, paid or refunded as of such date, (c) the then amount of the Security Deposit shall be reduced to an amount equal to the product of (x) the then amount of the Security Deposit and (y) a ratio, the numerator of which is the number of RSF in the remaining portion of the Premises and the denominator of which is the number of RSF in the Premises immediately prior to Landlord's exercise of such option, (d) Tenant, upon Landlord's request, shall enter into an amendment of this Lease ratifying and confirming such total or partial termination, and setting forth any appropriate modifications to the terms and provisions hereof, and (e) Landlord shall be free to lease the Premises (or any part thereof) to Tenant's prospective assignee or subtenant; provided, however, that (i) in the event of any such total termination respecting a proposed assignment, Landlord shall pay to Tenant a cancellation fee in an amount equal to the amount Tenant would otherwise have been entitled to receive pursuant to Section 15.7(a) hereof if such assignment transaction as described in such Tenant notice had been completed and (ii) in the event of any such partial termination respecting a proposed subletting, Landlord shall pay to Tenant an amount equivalent the portion of net subleasing profits, determined in the manner provided for in Section 15.7(b) hereof, that otherwise would have been retained by Tenant if Landlord had not so exercised such option to terminate, which payment shall be made by Landlord in the same manner that Tenant would have been obligated to pay to Landlord Landlord's portion of such subleasing profits pursuant to such Section 15.7(b). Section 15.4 Conditions to Assignment/Subletting. (a) If Landlord ----------------------------------- consent to the proposed assignment or subletting shall not be unreasonably withheld or delayed. Such consent shall be granted or declined, as the case may 33 be, within ten (10) Business Days after Landlord's receipt of (i) a true and complete statement reasonably detailing the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Premises, (ii) current financial information with respect to the proposed assignee or subtenant, including its most recent financial statements, and (iii) any other information Landlord may reasonably request, provided that: (A) in Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in a business or activity, and the Premises will be used in a manner, which (1) is in keeping with the then standards of the Building, (2) limits the use of the Premises to general and executive offices, and (3) does not violate any restrictions set forth in this Lease, any Mortgage or Superior Lease; (B) the proposed assignee or subtenant is a reputable person or entity of good character with sufficient financial means to perform all of its obligations under this Lease or the sublease, as the case may be, and Landlord has been furnished with reasonable proof thereof; (C) the form of the proposed sublease or instrument of assignment shall be reasonably satisfactory to Landlord and shall comply with the provisions of this Article 15; (D) there shall be not more than five (5) subtenants in each floor of the Premises; (E) the aggregate consideration to be paid by the proposed subtenant under the terms of the proposed sublease shall not be less than seventy-five percent (75%) of the then current market rent for the Premises (the "Market Sub-rent") determined as though the Premises were vacant and taking into account (x) the length of the term of the proposed sublease, (y) any rent concessions granted to subtenant, and (z) the cost of any alterations being performed for the sublessee; provided, however, the provisions of this Subsection 15.4(a)(E) shall cease to apply if after a period of sixty (60) days Tenant is unable to consummate a sublease transaction for an amount at least equal to the Market Subrent; (F) Tenant shall, upon demand, reimburse Landlord for all expenses reasonably incurred by Landlord in connection with such assignment or sublease, including any investigations as to the acceptability of the proposed assignee or subtenant and all legal costs reasonably incurred in connection with the granting of any requested consent, which investigation and legal costs shall not exceed the aggregate amount of Two Thousand Five Hundred Dollars ($2,500.00) ("Expense Limit"); provided, however, that such Expense Limit shall not apply to any assignment or sublease in connection with the bankruptcy or reorganization of Tenant or that involves an amendment to this Lease, and all costs reasonably incurred in reviewing any plans and specifications for Alterations proposed to be made in connection therewith; (G) the proposed subtenant or assignee shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity, regardless of whether the 34 proposed assignee or subtenant agrees to waive such diplomatic or sovereign immunity, and shall be subject to the service of process in, and the jurisdiction of the courts of, the County of Santa Clara and State of California; and (H) in Landlord's reasonable judgment, the proposed assignee or subtenant shall not be of a type or character, or engaged in a business or activity, or owned or controlled by or identified with any entity, which may result in protests or civil disorders or commotions at, or other disruptions of the normal business activities in, the Building. (b) With respect to each and every subletting and/or assignment authorized by Landlord under the provisions of this Lease, it is further agreed that: (i) the form of the proposed assignment or sublease shall be reasonably satisfactory to Landlord and shall comply with the provisions of this Article ; (ii) no sublease shall be for a term ending later than one day prior to the Expiration Date of this Lease; (iii) no sublease shall be delivered to any subtenant, and no subtenant shall take possession of any part of the Premises, until an executed counterpart of such sublease has been delivered to Landlord and approved in writing by Landlord as provided in Section 15.4(a); (iv) if an Event of Default shall occur at any time prior to the effective date of such assignment or subletting and be continuing and yet uncured on the date that would otherwise be such effective date, then Landlord's consent thereto, if previously granted, shall be immediately deemed revoked without further notice to Tenant, and any such deemed unconsented to assignment or subletting shall constitute a further Event of Default hereunder; and (v) each sublease shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, it being the intention of Landlord and Tenant that Tenant shall assume and be liable to Landlord for any and all acts and omissions of all subtenants and anyone claiming under or through any subtenants which, if performed or omitted by Tenant, would be a default under this Lease; and Tenant and each subtenant shall be deemed to have agreed that upon the occurrence and during the continuation of an Event of Default hereunder, Tenant has hereby assigned to Landlord, and Landlord may, at its option, accept such assignment of, all right, title and interest of Tenant as sublandlord under such sublease, together with all modifications, extensions and renewals thereof then in effect and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (A) liable for any previous act or omission of Tenant under such sublease, (B) subject to any counterclaim, offset or defense not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, (C) bound by any previous modification of such sublease not consented to by Landlord or by any prepayment of more than one month's rent, (D) bound to return such subtenant's security deposit, if any, except to the extent Landlord shall receive actual possession of such deposit and 35 such subtenant shall be entitled to the return of all or any portion of such deposit under the terms of its sublease, or (E) obligated to make any payment to or on behalf of such subtenant, or to perform any work in the subleased space or the Building, or in any way to prepare the subleased space for occupancy, beyond Landlord's obligations under this Lease. The provisions of this Section 15.4(b)(v) shall be self-operative, and no further instrument shall be required to give effect to this provision, provided that the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such subordination and attornment. Section 15.5 Binding on Tenant; Indemnification of Landlord. ---------------------------------------------- Each sublease pursuant to this Article 15 shall be subject to all of the covenants, terms and conditions of this Lease. Notwithstanding any assignment or subletting or any acceptance of Rent by Landlord from any assignee or subtenant, Tenant shall remain fully liable for the payment of all Rent due and for the performance of all the covenants, terms and conditions contained in this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant or assignee or anyone claiming under or through any subtenant or assignee shall be deemed to be a default under this Lease by Tenant. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any and all losses, liabilities, damages and expenses (including reasonable attorneys' fees and disbursements) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or anyone claiming under or through any subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease, irrespective of whether Landlord shall give or decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise any of its options under this Article 15. Section 15.6 Tenant's Failure to Complete. If Landlord consents to ---------------------------- a proposed assignment or sublease and Tenant fails to execute and deliver to Landlord such assignment or sublease within ninety (90) days after the giving of such consent, then Tenant shall again comply with all of the provisions and conditions of Section 15.2 hereof before assigning this Lease or subletting all or part of the Premises. Section 15.7 Profits. If Tenant shall enter into any ------- assignment or sublease permitted hereunder or consented to by Landlord, Tenant shall, within sixty (60) days of Landlord's consent to such assignment or sublease, deliver to Landlord a complete list of Tenant's reasonable third-party brokerage fees, legal fees and architectural fees paid or to be paid in connection with such transaction, together with a list of all of Tenant's Property to be transferred to such assignee or sublessee. Tenant shall deliver to Landlord evidence of the payment of such fees promptly after the same are paid. In consideration of such assignment or subletting, Tenant shall pay to Landlord: (a) In the case of an assignment, on the effective date of the assignment, an amount equal to fifty percent (50%) of all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including sums paid for the sale or rental of Tenant's Property, less, in the case of a sale thereof, the then fair market value thereof, as reasonably determined by Landlord) after first deducting Tenant's reasonable third-party brokerage fees, legal fees and architectural fees and the reasonable costs of any additional tenant 36 improvements made by Tenant, all as incurred in connection with such transaction and an amount equal to the unamortized balance of the Agreed TI Costs (as hereinafter defined). For purposes of this Section 15.7, the term "Agreed TI Costs" shall mean an amount equal to the lesser of (i) the cost of the Improvements paid for by Tenant pursuant to the Workletter Agreement or (ii) the product of (x) the number of RSF in the Premises and (y) Seventeen and 50/100ths Dollars ($17.50), which amount shall be amortized over the remaining portion of the Term (exclusive of any Renewal Term (as hereinafter defined)) with interest thereon at a per annum rate equal to eight percent (8%); or (b) in the case of a sublease, fifty percent (50%) of any consideration payable under the sublease to Tenant by the subtenant which exceeds on a per square foot basis the Fixed Rent and Additional Rent accruing during the term of the sublease in respect of the subleased space (together with any sums paid for the sale or rental of Tenant's Property, less, in the case of the sale thereof, the then fair market value thereof, as reasonably determined by Landlord) after first deducting Tenant's reasonable third-party brokerage fees, legal fees and architectural fees and the reasonable costs of any additional tenant improvements made by Tenant, all as incurred in connection with such transaction, and an amount equal to the Agreed TI Costs, which amount shall be allocated, if such sublease is for less than the entire Premises, on a pro rata basis, to the rentable area of such subleased space and, if such sublease is less than the entire Premises, the actual cost incurred by Tenant in separately demising the subleased space (collectively, "Tenant's Costs"). The sums payable under this clause shall be paid by Tenant to Landlord as and when paid by the subtenant to Tenant commencing at such time as Tenant has first recovered all of Tenant's Costs. Section 15.8 (a) Transfers. If Tenant is a corporation, the --------- transfer (by one or more transfers) of a majority of the stock of Tenant shall be deemed a voluntary assignment of this Lease; provided, however, that the provisions of this Article 15 shall not apply to the transfer of shares of stock of Tenant if and so long as Tenant is publicly traded on a nationally recognized stock exchange including, without limitation, the NASDAQ Stock Market. For purposes of this Section 15.8 the term "transfers" shall be deemed to include the issuance of new stock which results in a majority of the stock of Tenant being held by a person or entity which does not hold a majority of the stock of Tenant on the date hereof. If Tenant is a partnership, the transfer (by one or more transfers) of a majority interest in the partnership shall be deemed a voluntary assignment of this Lease. If Tenant is a limited liability company, trust, or any other legal entity, the transfer (by one or more transfers) of a majority of the beneficial ownership interests in such entity, however characterized, shall be deemed a voluntary assignment of this Lease. The provisions of Section 15.1 shall not apply to transactions with a corporation into or with which Tenant is merged or consolidated or to which substantially all of Tenant's assets are transferred so long as (i) such transfer was made for a legitimate independent business purpose and not for the purpose of transferring this Lease, (ii) if at the time of any such transfer either (A) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (1) the net worth of Tenant immediately prior to such merger, consolidation or transfer, and (2) the net worth of the original Tenant on the date of this Lease, or (B) the successor to Tenant has a total market capitalization of at least Three Billion Three Hundred Million Dollars ($3,300,000,000.00), and (iii) proof satisfactory to Landlord of such net worth is delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. Tenant may also, upon prior notice to but without the necessity of the consent 37 of Landlord, permit any corporation or other business entity which controls, is controlled by, or is under common control with the original Tenant (a "Related Entity") to sublet all or part of the Premises for any Permitted Use, provided the Related Entity is in Landlord's reasonable judgment of a character and engaged in a business which is in keeping with the standards for the Building and the occupancy thereof. Such sublease shall not be deemed to vest in any such Related Entity any right or interest in this Lease or the Premises nor shall it relieve, release, impair or discharge any of Tenant's obligations hereunder. For the purposes hereof, "control" shall be deemed to mean ownership of not less than fifty percent (50%) of all of the voting stock of such corporation or not less than fifty percent (50%) of all of the legal and equitable interest in any other business entity if Tenant is not a corporation. (b) Applicability. The limitations set forth in this ------------- Section 15.8 shall apply to subtenant(s), assignee(s) and guarantor(s) of this Lease, if any, and any transfer by any such entity in violation of this Section 15.8 shall be a transfer in violation of Section 15.1. (c) Modifications, Takeover Agreements. Any modification, ---------------------------------- amendment or extension of a sublease and/or any other agreement by which a landlord of a building other than the Building agrees to assume the obligations of Tenant under this Lease shall be deemed a sublease for the purposes of Section 15.1 hereof. Section 15.9 Assumption of Obligations. Any assignment or transfer, ------------------------- whether made with Landlord's consent or without Landlord's consent, if and to the extent permitted hereunder, shall not be effective unless and until the assignee executes, acknowledges and delivers to Landlord an agreement in form and substance satisfactory to Landlord whereby the assignee (a) assumes Tenant's obligations under this Lease and (b) agrees that, notwithstanding such assignment or transfer, the provisions of Section 15.1 hereof shall be binding upon it in respect of all future assignments and transfers. Section 15.10 Tenant's Liability. The joint and several liability ------------------ of Tenant and any successors-in-interest of Tenant and the due performance of Tenant's obligations under this Lease shall not be discharged, released or impaired by any agreement or stipulation made by Landlord, or any grantee or assignee of Landlord, extending the time, or modifying any of the terms and provisions of this Lease, or by any waiver or failure of Landlord, or any grantee or assignee of Landlord, to enforce any of the terms and provisions of this Lease. Section 15.11 Listings in Building Directory. The listing of any ------------------------------ name other than that of Tenant on the doors of the Premises, the Building directory or elsewhere shall not vest any right or interest in this Lease or in the Premises, nor be deemed to constitute Landlord's consent to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. Any such listing shall constitute a privilege revocable in Landlord's discretion by notice to Tenant. Section 15.12 Lease Disaffirmance or Rejection. If at any time after -------------------------------- an assignment by Tenant named herein, this Lease is not affirmed or rejected in any proceeding of the types described in Section 18.1(f) hereof or any similar proceeding, or upon a termination of this Lease due to any such proceeding, Tenant named herein, upon request of Landlord given after such disaffirmance, rejection or termination (and actual notice thereof to Landlord in the 38 event of a disaffirmance or rejection or in the event of termination other than by act of Landlord), shall (a) pay to Landlord all Rent and other charges due and owing by the assignee to Landlord under this Lease to and including the date of such disaffirmance, rejection or termination, and (b) as "tenant," enter into a new lease of the Premises with Landlord for a term commencing on the effective date of such disaffirmance, rejection or termination and ending on the Expiration Date, unless sooner terminated in accordance therewith, at the same Rent and upon the then executory terms, covenants and conditions contained in this Lease, except that (i) the rights of Tenant named herein under the new lease shall be subject to the possessory rights of the assignee under this Lease and the possessory rights of any persons claiming through or under such assignee or by virtue of any statute or of any order of any court, (ii) such new lease shall require all defaults existing under this Lease to be cured by Tenant named herein with due diligence, and (iii) such new lease shall require Tenant named herein to pay all Rent which, had this Lease not been so disaffirmed, rejected or terminated, would have become due under the provisions of this Lease after the date of such disaffirmance, rejection or termination with respect to any period prior thereto. If Tenant named herein defaults in its obligations to enter into such new lease for a period of ten (10) days after Landlord's request, then, in addition to all other rights and remedies by reason of default, either at law or in equity, Landlord shall have the same rights and remedies against Tenant named herein as if it had entered into such new lease and such new lease had thereafter been terminated as of the commencement date thereof by reason of Tenant's default thereunder. Section 15.13 Space Sharing Arrangements. Notwithstanding any -------------------------- contrary provision of this Lease, Tenant may allow employees of companies to whom Tenant is providing products or services, or with which Tenant is collaborating in the development or provision of products or services, to work in the Premises without Landlord's consent (but with contemporaneous written notice thereof to Landlord of the identities of such persons working at the Premises) and without being deemed to have sublet any portion of the Premises, so long as (A) such employees do not occupy more than twenty-five percent (25%) of the rentable area of the Premises, in the aggregate, at any one time, and such space is not separately demised from the space occupied by Tenant and (B) the number of such employees does not exceed twenty-five percent (25%) of the total number of persons regularly occupying the Premises. Section 15.14 Arbitration. If Tenant believes that Landlord ----------- has unreasonably withheld its consent to any proposed assignment or subletting hereunder, then Tenant may (but is not obligated to) submit such dispute to expedited arbitration pursuant to Section 31.20 below. ARTICLE 16 ELECTRICITY Section 16.1 Electricity. Subject to any Requirements or any ----------- public utility rules or regulations governing energy consumption, Landlord shall make or cause to be made, customary arrangements with public utilities and/or public agencies to furnish electric current to the Premises for Tenant's use in amounts sufficient for normal lighting by overhead fluorescent fixtures and for normal use of computers, workstations, photocopying machines in reasonable numbers, facsimile machines, typewriters, electronic telecommunications and computer network equipment customary for general office use and other office machines of comparable electrical 39 consumption, but not including electricity required for special lighting or any other item of equipment which (singly) consumes more than one and 50/100 (1.50) kilowatt per hour at rated capacity or requires a voltage other than one hundred twenty (120) volts single phase ("High Consumption Equipment"). If any tax is imposed upon Landlord's receipts from the sale or resale of electricity to Tenant, the amount of such tax shall be paid by Tenant if and to the extent permitted by law. The electricity to be provided to the Premises under this Article 16 shall be furnished by a reputable supplier selected by Landlord; provided, however, at Tenant's request, Landlord shall consult with Tenant regarding switching to other electricity service providers who provide electricity at lower rates, and also shall consult with Tenant regarding the methods of contracting for such electricity to maximize savings resulting from time-of-use metering or other variable pricing models to the extent that it is technically feasible to do so. If Landlord, at Tenant's request, changes energy suppliers, all fees, credits, discounts and rebates received in connection therewith shall be applied against Operating Expenses. Notwithstanding anything set forth in this Section 16.1 to the contrary, Tenant shall have the right to install High Consumption Equipment which is within the design criteria of the Building, as reasonably determined by Landlord. Section 16.2 Excess Electricity. Tenant shall at all times comply ------------------ with the rules and regulations of the utility company supplying electricity to the Building. Tenant shall not use any electrical equipment which, in Landlord's reasonable judgment, would exceed the capacity of the electrical equipment serving the Premises. If Landlord reasonably determines that Tenant's electrical requirements necessitate installation of any additional risers, feeders or other electrical distribution equipment (collectively, "Electrical Equipment") and, promptly following Landlord's written notice to Tenant of any such determination, Tenant fails to curtail its electrical requirements sufficiently to prevent the necessity of Landlord's installing any such Electrical Equipment, or if Tenant provides Landlord with evidence reasonably satisfactory to Landlord of Tenant's need for excess electricity and requests that additional Electrical Equipment be installed, Landlord shall, at Tenant's expense, install such additional Electrical Equipment, provided that Landlord, in its sole judgment, considering the potential needs of present and future Building tenants and of the Building itself, determines that (a) such installation is practicable and necessary, (b) such additional Electrical Equipment is permissible under applicable Requirements, and (c) the installation of such Electrical Equipment will not cause permanent damage or injury to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable alterations, or exceed the limits of the switchgear or other facilities serving the Building, or require power in excess of that available from the public utility serving the Building. Any costs incurred by Landlord in connection therewith shall be paid by Tenant within ten (10) days after the rendition of a bill therefor. Tenant shall not make or perform, or permit the making or performance of, any Alterations to wiring installations or other electrical facilities in or serving the Premises or make any additions to the office equipment or other appliances in the Premises which utilize electrical energy (other than ordinary small office equipment) without the prior consent of Landlord, in each instance, and in compliance with this Lease. Section 16.3 Service Disruption. Except as otherwise provided in ------------------ Section 7.4, Landlord shall not be liable in any way to Tenant for any failure, defect or interruption of, or change in the supply, character and/or quantity of electric service furnished to the Premises for any reason except if attributable to the gross negligence or willful misconduct of Landlord or the 40 failure by Landlord to pay any amounts owing to the utility company or other electrical energy supplier, nor shall there be any allowance to Tenant for diminution of rental value, nor shall the same constitute an actual or constructive eviction of Tenant, in whole or part, or relieve Tenant from any of its Lease obligations, and no liability shall arise on the part of Landlord by reason of inconvenience, annoyance or injury to business whether electricity is provided by public or private utility or by any electricity generation system owned and operated by Landlord. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises as a result of any such failure, defect or interruption of, or change in the supply, character and/or quantity of, electric service, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever. Section 16.4 Discontinuance of Service. Provided that in all cases a ------------------------- reasonable substitute energy supplier is available for Tenant to contract with directly, Landlord reserves the right to discontinue furnishing electricity to Tenant in the Premises on not less than fifteen (15) days notice to Tenant. If Landlord exercises such right, or is compelled to discontinue furnishing electricity to Tenant, this Lease shall continue in full force and effect and shall be unaffected thereby, except that from and after the effective date of such discontinuance, Landlord shall not be obligated to furnish electricity to Tenant hereunder. If Landlord so discontinues furnishing electricity, Tenant shall arrange to obtain electricity directly from any utility company and other energy supplier serving the Premises to the extent that the same is available, suitable and safe for such purposes. All equipment which may be required to obtain electricity of substantially the same quantity, quality and character shall be installed by Landlord at the sole cost and expense of (a) Landlord, if Landlord voluntarily discontinues such service, or (b) Tenant, if Landlord is compelled to discontinue such service by the public utility or pursuant to applicable Requirements or if such discontinuance arises out of the acts or omissions or otherwise at the request of Tenant. Landlord shall not voluntarily discontinue furnishing electricity to Tenant until Tenant is able to receive electricity directly from the public utility or other company servicing the Building, unless the public utility or other company is not prepared to furnish electricity to the Premises on the date required as a result of Tenant's delay or negligence in arranging for service or Tenant's refusal to provide the utility company with a deposit or other security requested by the utility company or Tenant's refusal to take any other action requested by the utility company. ARTICLE 17 ACCESS TO PREMISES Section 17.1 Landlord's Access. (a) Tenant shall permit Landlord, ----------------- Landlord's agents and public utility service providers servicing the Building to erect, use and maintain concealed ducts, pipes and conduits in and through the Premises provided such use does not cause the usable area of the Premises to be reduced beyond a de minimis amount. Landlord shall promptly repair any damage to the Premises or Tenant's Property caused by any work performed pursuant to this Article 17. (b) Landlord, any Lessor or Mortgagee and any other party designated by Landlord and their respective agents shall have the right to enter the Premises at all reasonable 41 times, upon reasonable written notice except in the case of emergency, to examine the Premises, to show the Premises to prospective purchasers, Mortgagees or Lessors of the Building and their respective agents and representatives or others, to make such repairs, alterations or additions to the Premises or the Building conducted in a manner so as to minimize disruption to Tenant's business (i) as Landlord may deem necessary or appropriate, (ii) which Landlord may elect to perform following Tenant's failure to perform, or (iii) to comply with any Requirements, and Landlord shall be allowed to take all material into the Premises that may be required for the performance of such work without the same constituting an actual or constructive eviction of Tenant in whole or in part and without any abatement of Rent. (c) All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises (including exterior Building walls, exterior core corridor walls, and doors and entrances other than doors and entrances solely connecting areas within the Premises), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, mail chutes, conduits and other mechanical facilities, Building Systems and Building facilities are not part of the Premises, and Landlord shall have the use thereof and access thereto through the Premises for the purposes of Building operation, maintenance, alteration and repair. Section 17.2 Final 12 Months. [Intentionally Deleted] --------------- Section 17.3 Alterations to Building; Building Name Changes. ---------------------------------------------- Landlord has the right at any time to (a) change the name, number or designation by which the Building is commonly known, and (b) alter the Building to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building without any such acts constituting an actual or constructive eviction and without incurring any liability to Tenant, so long as such changes do not deprive Tenant of access to the Premises. So long as Tenant is in occupancy of at least fifty percent (50%) of the rentable area of the Building, Landlord shall not change the name of the Building to that of any competitor of Tenant. If Landlord should change the name of the Building on one (1) or more occasions during the Term, then Landlord shall reimburse Tenant for all out-of-pocket stationery and printing costs reasonably incurred by Tenant in connection with the second (2nd) and any subsequent such name changes. ARTICLE 18 DEFAULT Section 18.1 Tenant's Defaults. Each of the following events ----------------- shall be an "Event of Default" hereunder: (a) Tenant fails to pay when due any installment of Fixed Rent and such default shall continue for five (5) Business Days after notice of such default is given to Tenant, or failure to pay when due of any other item of Rent and such default shall continue for seven (7) Business Days after notice of such default is given to Tenant, except that if Landlord shall have given two (2) such notices of default in the payment of any Rent in any twelve- (12-) month period, Tenant shall not be entitled to any further notice of its delinquency in the payment of any 42 Rent or an extended period in which to make payment until such time as twelve (12) consecutive months shall have elapsed without Tenant having failed to make any such payment when due, and the occurrence of any default in the payment of any Rent within such twelve- (12-) month period after the giving of two (2) such notices shall constitute an Event of Default; or (b) Tenant fails to observe or perform any other term, covenant or condition of this Lease to be observed or performed by Tenant and if such failure continues for more than twenty (20) days after notice by Landlord to Tenant of such default, or if such default is of such a nature that it cannot be completely remedied within twenty (20) days, failure by Tenant to commence to remedy such failure within said twenty (20) days, and thereafter diligently prosecute to completion all steps necessary to remedy such default, provided the same is completed within ninety (90) days or as soon thereafter as is commercially practicable unless Tenant's failure to cure such default within such ninety-(90-) day period would constitute a default under any Mortgage or Superior Lease; or (c) [Intentionally deleted] (d) Tenant's interest in this Lease shall devolve upon or pass to any person, whether by operation of law or otherwise, except as expressly permitted under Article 15 hereof; or (e) Tenant generally does not, or is unable to, or admits in writing its inability to, pay its debts as they become due; or (f) Tenant files a voluntary petition in bankruptcy or insolvency, or is adjudicated a bankrupt or insolvent, or files any petition or answer seeking any reorganization, liquidation, dissolution or similar relief under any present or future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, or makes an assignment for the benefit of creditors or seeks or consents to or acquiesces in the appointment of any trustee, receiver, liquidator or other similar official for Tenant or for all or any part of Tenant's property; or (g) if, within sixty (60) days after the commencement of any proceeding against Tenant, whether by the filing of a petition or otherwise, seeking bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, such proceeding shall not have been dismissed, or if, within sixty (60) days after the appointment of any trustee, receiver, liquidator or other similar official for Tenant or for all or any part of Tenant's property, without the consent or acquiescence of Tenant, as the case may be, such appointment shall not have been vacated or otherwise discharged, or if any lien, execution or attachment or other similar filing shall be made or issued against Tenant or any of Tenant's property pursuant to which the Premises shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant. Section 18.2 Tenant's Liability. If, at any time, (a) Tenant ------------------ shall be comprised of two or more persons, (b) Tenant's obligations under this Lease shall have been guaranteed by any person other than Tenant, or (c) Tenant's interest in this Lease shall have been assigned, the 43 word "Tenant," as used in Section 18.1 (e), (f) and (g), shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in this Article shall be deemed paid as compensation for the use and occupancy of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Rent or a waiver on the part of Landlord of any rights under this Lease. ARTICLE 19 REMEDIES AND DAMAGES Section 19.1 Landlord's Remedies. If any Event of Default occurs ------------------- under this Lease as provided in Section 18.1, Landlord, at Landlord's option, and without limiting Landlord in the exercise of any other right or remedy Landlord may have on account of such Event of Default, and without any further demand or notice, may terminate this Lease and/or, to the extent permitted by law, remove all persons and property from the Premises, which property shall be stored by Landlord at a warehouse or elsewhere at the risk, expense and for the account of Tenant. (a) If Landlord elects to terminate this Lease as provided in Section 19.1, pursuant to Section 1951.2 of the California Civil Code, Landlord shall be entitled to recover from Tenant the aggregate of: (i) The worth at the time of award of the unpaid Rent and charges equivalent to Rent earned as of the date of the termination hereof; (ii) The worth at the time of award of the amount by which the unpaid Rent and charges equivalent to Rent which would have been earned after the date of termination hereof until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) The worth at the time of award of the amount by which the unpaid Rent and charges equivalent to Rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iv) Any other amount necessary to compensate Landlord for 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; and (v) Any other amount which Landlord may hereafter be permitted to recover from Tenant to compensate Landlord for the detriment caused by Tenant's default. For the purposes of this Section 19.1(a), the "time of award" shall mean the date upon which the judgment in any action brought by Landlord against Tenant by reason of such Event of Default is entered or such earlier date as the court may determine; the "worth at the time of 44 award" of the amounts referred to in Sections 19.1(a)(i) and 19.1(a)(ii) shall be computed by allowing interest at the Interest Rate, but not less than the legal rate; and the "worth at the time of award" of the amount referred to in Section 19.1(a)(iii) 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%) per annum. Tenant agrees that such charges shall be recoverable by Landlord under California Code of Civil Procedure Section 1174(b) or any similar, successor or related provision of law. Further, Tenant hereby waives the provisions of California Code of Civil Procedure Section 1174(c) and California Civil Code Section 1951.7 or any other similar, successor or related provision of law providing for Tenant's right to satisfy any judgment in order to prevent a forfeiture of this Lease or requiring Landlord to deliver written notice to Tenant of any reletting of the Premises. Section 19.2 (a) Notwithstanding anything to the contrary set forth herein, Landlord's reentry to perform acts of maintenance or preservation of, or in connection with efforts to relet, the Premises, or any portion thereof, or the appointment of a receiver upon Landlord's initiative to protect Landlord's interest under this Lease shall not terminate Tenant's right to possession of the Premises or any portion thereof and, until Landlord does elect to terminate this Lease, this Lease shall continue in full force and Landlord may pursue all its remedies hereunder including, without limitation, the right to recover from Tenant as they become due hereunder all Rent and other charges required to be paid by Tenant under the terms of this Lease. (b) Nothing in this Article 19 shall be deemed to affect Landlord's right to indemnification, under the indemnification clause or clauses contained in this Lease, for claims or liability arising from events occurring prior to the termination of this Lease. (c) In the event of any Event of Default by Tenant as set forth above, then in addition to any other remedies available to Landlord at law or in equity or under this Lease, Landlord shall have the right to bring an action or actions from time to time against Tenant, in any court of competent jurisdiction, for all Rent and other sums due or becoming due under this Lease, including all damages and costs proximately caused thereby, notwithstanding Tenant's abandonment or vacation of the Premises or other acts of Tenant, as permitted by Section 1951.4 of the California Civil Code or any successor, related or similar provision of law. Such remedy may be exercised by Landlord without prejudice to its right thereafter to terminate this Lease in accordance with the other provisions contained in this Article 19. Section 19.3 In the event of an Event of Default by Tenant and Tenant's abandonment of the Premises or if Landlord shall elect to reenter or shall take possession of the Premises pursuant to any legal proceeding or pursuant to any notice provided by law, and, so long as an Event of Default is continuing, until Landlord elects to terminate this Lease, Landlord may, from time to time, without terminating this Lease, recover all Rent as it becomes due pursuant to Section 19.2(a) and/or relet the Premises or any part thereof for the account of and on behalf of Tenant, on any terms, for any term (whether or not longer than the Term), and at any rental as Landlord in its reasonable discretion may deem advisable, and Landlord may make any alterations and repairs to the Premises in connection therewith. Tenant hereby irrevocably constitutes and appoints Landlord as its attorney-in-fact, which appointment shall be deemed coupled with an interest and shall be irrevocable, for purposes of reletting the Premises pursuant 45 to the immediately preceding sentence. In the event that Landlord shall elect to so relet the Premises on behalf of Tenant, then rentals received by Landlord from such reletting shall be applied: (a) First, to reimburse Landlord for the costs and expenses of such reletting (including, without limitation, costs and expenses of retaking or repossessing the Premises, removing persons and property therefrom, securing new tenants, and, if Landlord shall maintain and operate the Premises, the costs thereof) and necessary or reasonable alterations. (b) Second, to the payment of any indebtedness of Tenant to Landlord other than Fixed Rent, Additional Rent and other sums due and unpaid hereunder. (c) Third, to the payment of Fixed Rent, Additional Rent and other sums due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of other or future obligations of Tenant to Landlord as the same may become due and payable. Should the rentals received from such reletting, when applied in the manner and order indicated above, at any time be less than the total amount owing from Tenant pursuant to this Lease, then Tenant shall pay such deficiency to Landlord, and if Tenant does not pay such deficiency within five (5) days of Tenant's receipt of written notice thereof, Landlord may bring an action against Tenant for recovery of such deficiency or pursue its other remedies hereunder or under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law. Section 19.4 (a) All rights, powers and remedies of Landlord hereunder and under any other agreement now or hereafter in force between Landlord and Tenant shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Landlord at law or in equity. The exercise of any one or more of such rights or remedies shall not impair Landlord's right to exercise any other right or remedy including, without limitation, any and all rights and remedies of Landlord under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law. (b) If, after Tenant's abandonment of the Premises, Tenant leaves behind any items of personal property, then Landlord shall store such property at a warehouse or any other location at the risk, expense and for the account of Tenant, and such property shall be released only upon Tenant's payment of such charges, together with moving and other costs relating thereto and all other sums due and owing under this Lease. If Tenant does not reclaim such property within the period permitted by law, Landlord may sell such property in accordance with law and apply the proceeds of such sale to any sums due and owing hereunder, or retain said property, granting Tenant credit against sums due and owing hereunder for the reasonable value of such property. (c) To the extent permitted by law, Tenant hereby waives all provisions of, and protections under, any decisions, statutes, rules, regulations and other laws of the State of 46 California to the extent same are inconsistent and in conflict with specific terms and provisions hereof. Section 19.5 Default Interest; Other Rights of Landlord. Any Rent ------------------------------------------ or damages payable under this Lease and not paid when due shall bear interest at the Interest Rate from the due date until paid, and the interest shall be deemed Additional Rent. If Tenant fails to pay any Additional Rent when due, Landlord, in addition to any other right or remedy, shall have the same rights and remedies as in the case of a default by Tenant in the payment of Fixed Rent. If Tenant is in arrears in the payment of Rent, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to any items Landlord sees fit, regardless of any request by Tenant. Landlord reserves the right, without liability to Tenant and without constituting any claim of constructive eviction, to suspend furnishing or rendering to Tenant any property, material, labor, utility or other service, whenever Landlord is obligated to furnish or render the same at the expense of Tenant, in the event that (but only for so long as) an Event of Default by Tenant is continuing hereunder. ARTICLE 20 LANDLORD'S RIGHT TO CURE; FEES AND EXPENSES If Tenant defaults in the performance of its obligations under this Lease, Landlord, without thereby waiving such default, may perform such obligation for the account and at the expense of Tenant: (a) immediately or at any time thereafter, and without notice, in the case of emergency creating a risk of imminent harm to persons or property or in the case the default (i) will result in a material violation of any Requirement, or (ii) will result in a cancellation of any insurance policy maintained by Landlord, and (b) in any other case if an Event of Default exists and Landlord gives notice of Landlord's intention so to perform the defaulted obligation. As soon as reasonably possible following Landlord's commencement of any action pursuant to clause (a) above, Landlord shall advise Tenant in writing of the initiation by Landlord of any such actions. All costs and expenses incurred by Landlord in connection with any such performance by it for the account of Tenant and all costs and expenses, including reasonable counsel fees and disbursements, incurred by Landlord in any action or proceeding (including any unlawful detainer proceeding) brought by Landlord to enforce any obligation of Tenant under this Lease and/or right of Landlord in or to the Premises, shall be paid by Tenant to Landlord on demand, with interest thereon at the Interest Rate from the date incurred by Landlord. Except as expressly provided to the contrary in this Lease, all costs and expenses which, pursuant to this Lease (including the Rules and Regulations) are incurred by Landlord and payable to Landlord by Tenant, and all charges, amounts and sums payable to Landlord by Tenant for any property, material, labor, utility or other services which, pursuant to this Lease or at the request and for the account of Tenant, are provided, furnished or rendered by Landlord, shall become due and payable by Tenant to Landlord in accordance with the terms of the bills rendered by Landlord to Tenant. 47 ARTICLE 21 NO REPRESENTATIONS BY LANDLORD; LANDLORD'S APPROVAL Section 21.1 No Representations. Except as expressly set forth ------------------ herein, Landlord and Landlord's agents have made no warranties, representations, statements or promises with respect to the Building, the Real Property or the Premises and no rights, easements or licenses are acquired by Tenant by implication or otherwise. This Lease contains the entire agreement between the parties and all understandings and agreements previously made between Landlord and Tenant are merged in this Lease, which alone fully and completely expresses their agreement. Tenant is entering into this Lease after full investigation and is not relying upon any statement or representation made by Landlord not embodied in this Lease. Section 21.2 Written Approval. All references in this Lease to ---------------- the consent or approval or Landlord mean the written consent or approval of Landlord, duly executed by Landlord. Section 21.3 No Money Damages. Wherever in this Lease Landlord's ---------------- consent or approval is required, Landlord hereby acknowledges its duty to act in each such case consistent with a covenant of good faith and fair dealing (but Landlord shall not otherwise be subject to a "reasonableness" standard where Landlord has reserved its right to act in its sole discretion). If Landlord refuses to grant such consent or approval, whether or not Landlord expressly agreed that such consent or approval would not be unreasonably withheld, Tenant shall not make, and Tenant hereby waives, any claim for money damages (including any claim by way of set-off, counterclaim or defense) based upon Tenant's claim or assertion that Landlord unreasonably withheld or delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce such provision, by specific performance, injunction or declaratory judgment. Notwithstanding the foregoing, Tenant's waiver set forth in the second sentence of this Section 21.3 shall not apply to any final non-appealable judgment that Tenant obtains from a court of competent jurisdiction that Landlord acted in bad faith in making its determination to withhold its consent or approval. Section 21.4 Vibrations. Tenant recognizes and acknowledges ---------- that the operation of the Building equipment may cause minimal amounts of vibration or noise which may be transmitted throughout the Premises. Beyond using its commercially reasonable efforts to reasonably minimize any such vibration or noise, Landlord shall have no obligation to reduce such vibration or noise beyond that which is customary in comparable first-class office buildings of similar age and construction. Section 21.5 Light and Air. ------------- Tenant covenants and agrees that no diminution of light, air or view by any structure which may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of Rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease or Tenant's obligations. 48 ARTICLE 22 END OF TERM Section 22.1 Expiration. Upon the expiration or other termination of ---------- this Lease, Tenant shall quit and surrender the Premises to Landlord vacant, broom clean and in good order and condition, ordinary wear and tear, repairs and damage for which Tenant is not responsible under the terms of this Lease excepted, and Tenant shall remove all of Tenant's Property and Tenant's Alterations as may be required pursuant to Article 5 of this Lease. The foregoing obligation shall survive the expiration or sooner termination of the Term. Section 22.2 Holdover Rent. Landlord and Tenant recognize that the ------------- damage to Landlord resulting from any failure by Tenant to timely surrender possession of the Premises may be substantial, may exceed the amount of the Rent theretofore payable hereunder, and will be impossible to accurately measure. Tenant therefore agrees that if possession of the Premises is not surrendered to Landlord within twenty-four (24) hours after the Expiration Date or sooner termination of the Term, in addition to any other rights or remedies Landlord may have hereunder or at law, Tenant shall (a) pay to Landlord for each month during which Tenant holds over in the Premises after the Expiration Date or sooner termination of the Term, in addition to all Additional Rent, (i) for the first month, a sum equal to one hundred twenty-five percent (125%) of the Fixed Rent payable under this Lease for the last full calendar month of the Term ("Final Fixed Rent"), for the next two (2) months of any such holdover, one hundred fifty percent (150%) of such Final Fixed Rent and, thereafter, two hundred percent (200%) of such Final Fixed Rent, (b) be liable to Landlord for (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises (a "New Tenant") in order to induce such New Tenant not to terminate its lease by reason of the holding-over by Tenant, and (ii) the loss of the benefit of the bargain if any New Tenant shall terminate its lease by reason of the holding-over by Tenant, and (c) indemnify Landlord against all claims for damages by any New Tenant. All such holdover rent shall be determined based upon the number of calendar days during any month such holdover occurs and the actual number of calendar days in any such month in which Tenant's holding-over continues. No holding-over by Tenant, nor the payment to Landlord of the amounts specified above, shall operate to extend the Term hereof. Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the Expiration Date or sooner termination of this Lease, and no acceptance by Landlord of payments from Tenant after the Expiration Date or sooner termination of the Term shall be deemed to be other than on account of the amount to be paid by Tenant in accordance with the provisions of this Article 22. All of Tenant's obligations under this Article shall survive the expiration or earlier termination of the Term of this Lease. ARTICLE 23 QUIET ENJOYMENT Provided this Lease is in full force and effect and no Event of Default then exists, Tenant may peaceably and quietly enjoy the Premises without hindrance by Landlord or any person lawfully claiming through or under Landlord, subject to the terms and conditions of this Lease and to all Superior Leases and Mortgages. 49 ARTICLE 24 NO SURRENDER; NO WAIVER Section 24.1 No Surrender or Release. No act or thing done by ----------------------- Landlord or Landlord's agents or employees during the Term shall be deemed an acceptance of a surrender of the Premises, and no provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver is in writing and is signed by Landlord, and any such waiver shall be effective only for the specific purpose and in the specific instance in which given. If Tenant at any time desires to have Landlord sublet the Premises for Tenant's account, Landlord or Landlord's agents are authorized to receive Tenant's keys to the Premises for such purpose without releasing Tenant from any of the obligations under this Lease, and Tenant hereby relieves Landlord of any liability for loss of or damage to any of Tenant's effects in connection with such subletting. Section 24.2 No Waiver. The failure of either party to seek redress --------- for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations, shall not be construed as a waiver or relinquishment for the future performance of such obligations of this Lease or the Rules and Regulations, or of the right to exercise such election but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt by Landlord of any Rent payable pursuant to this Lease or any other sums with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Fixed Rent or Additional Rent herein stipulated shall be deemed to be other than a payment on account of the earliest stipulated Fixed Rent or Additional Rent, or as Landlord may elect to apply such payment, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Fixed Rent or Additional Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Fixed Rent or Additional Rent or pursue any other remedy provided in this Lease. The existence of a right of renewal or extension of this Lease, or the exercise of such right, shall not limit Landlord's right to terminate this Lease in accordance with the terms hereof, or create any option for further extension or renewal of this Lease. ARTICLE 25 WAIVER OF TRIAL BY JURY THE PARTIES HEREBY AGREE THAT THIS LEASE CONSTITUTES A WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY PURSUANT TO THE PROVISIONS OF CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 631 AND EACH PARTY DOES HEREBY CONSTITUTE AND APPOINT THE OTHER PARTY ITS TRUE AND LAWFUL ATTORNEY-IN-FACT, WHICH APPOINTMENT IS COUPLED WITH AN INTEREST, AND EACH PARTY DOES HEREBY AUTHORIZE AND EMPOWER THE OTHER PARTY, IN THE NAME, PLACE AND STEAD OF SUCH PARTY, TO FILE THIS LEASE WITH THE CLERK OR JUDGE OF ANY COURT OF COMPETENT 50 JURISDICTION AS A STATUTORY WRITTEN CONSENT TO WAIVER OF TRIAL BY JURY. LANDLORD'S INITIALS: _____ TENANT'S INITIALS: _____ If Landlord commences any summary proceeding against Tenant, Tenant will not interpose any counterclaim of any nature or description in any such proceeding (unless failure to impose such counterclaim would preclude Tenant from asserting in a separate action the claim which is the subject of such counterclaim), and will not seek to consolidate such proceeding with any other action which may have been or will be brought in any other court by Tenant. This Article 25 shall survive the expiration or earlier termination of this Lease. ARTICLE 26 INABILITY TO PERFORM This Lease and the obligations of the parties hereunder (including the obligation of Tenant to pay Rent and to perform all of the other covenants and agreements of Tenant hereunder) shall not be affected, impaired or excused by any Unavoidable Delays except as otherwise expressly set forth herein. Each party shall use reasonable efforts to promptly notify the other of any Unavoidable Delay which prevents such party from fulfilling any of its obligations under this Lease. Notwithstanding the foregoing, no Unavoidable Delay shall excuse the timely performance of any obligation under this Lease which is to be performed or discharged by the payment of money. ARTICLE 27 NOTICES Except as otherwise expressly provided in this Lease, consents, notices, demands, requests, approvals or other communications given under this Lease shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand (provided a signed receipt is obtained) or if sent by registered or certified mail (return receipt requested) or by a nationally recognized overnight delivery service making receipted deliveries, addressed as follows: if to Tenant, (a) at Tenant's address set forth on the first page of this Lease, Attn: Sr. Director, Operations and Attention: General Counsel, if mailed prior to Tenant's taking possession of the Premises, or (b) at the Building, Attn: Sr. Director, Operations and Attention: General Counsel, if mailed subsequent to Tenant's taking possession of the Premises, or if to Landlord, at Landlord's address set forth on the first page of this Lease, Attn: Chief Financial Officer, and with copies to (v) Tishman Speyer Properties L.P., 444 51 Castro Street, Suite 520, Mountain View, CA 94041, Attn: Property Manager -CO (w) Tishman Speyer Properties L.P., 520 Madison Avenue, New York, New York 10022, Attn: General Counsel, (x) Tishman Speyer Properties L.P., 520 Madison Avenue, New York, New York 10022, Attn: Head of Management Department and (y) any Mortgagee or Lessor which shall have requested copies of notices, by notice given to Tenant in accordance with the provisions of this Article 27 at the address designated by such Mortgagee or Lessor; or to such other address(es) as either Landlord or Tenant or any Mortgagee or Lessor may designate as its new address(es) for such purpose by notice given to the other in accordance with the provisions of this Article 27. Any such approval, consent, notice, demand, request or other communication shall be deemed to have been given on the date of receipted delivery or refusal to accept delivery or three (3) Business Days after it shall have been mailed as provided in this Article 27, whichever is earlier. ARTICLE 28 RULES AND REGULATIONS Tenant and Tenant's contractors, employees, agents, visitors and licensees shall observe and comply with the Rules and Regulations, as reasonably supplemented or reasonably amended from time to time, provided, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations as originally promulgated or as so supplemented or so amended from time to time, the provisions of this Lease shall control. Landlord reserves the right, from time to time, so to adopt additional Rules and Regulations and so to amend the Rules and Regulations then in effect. ARTICLE 29 BROKER Section 29.1 Broker Representations. Landlord has retained ---------------------- Landlord's Broker as leasing agent in connection with this Lease and Landlord will be solely responsible for any fee that may be payable to Landlord's Broker. Landlord agrees to pay a commission to Tenant's Broker pursuant to a separate agreement. Each of Landlord and Tenant represents and warrants to the other that it has not dealt with any broker in connection with this Lease other than Landlord's Agent, Landlord's Broker and Tenant's Broker and that to the best of its knowledge and belief, no other broker, finder or like entity procured or negotiated this Lease or is entitled to any fee or commission in connection herewith. The execution and delivery of this Lease by each party shall be conclusive evidence that each party has relied upon the foregoing representations and warranties. Section 29.2 Indemnity. Each of Landlord and Tenant shall indemnify, --------- defend, protect and hold the other party harmless from and against any and all costs expenses, claims and liabilities (including reasonable attorneys' fees and disbursements) which the indemnified party may incur by reason of any claim of or liability to any broker, finder or like agent (other than Landlord's Agent, Landlord's Broker and Tenant's Broker) arising out of any dealings claimed 52 to have occurred between the indemnifying party and the claimant in connection with this Lease, and/or the above representation being false. Landlord shall indemnify, defend, protect and hold Tenant harmless from any claim of or liability to Landlord's Agent or Landlord's Broker respecting any fee or commission relating to this Lease. The provisions of this Article 29 shall survive the expiration or earlier termination of the Term of this Lease. ARTICLE 30 INDEMNITY Section 30.1 (a) Tenant's Indemnity. Tenant shall not do or permit ------------------ to be done any act or thing upon the Premises or the Building which may subject Landlord to any liability or responsibility for injury, damages to persons or property or to any liability by reason of any violation of law or of any Requirement, and shall exercise such control over the Premises as to fully protect Landlord against any such liability. Tenant shall indemnify, defend, protect and hold harmless each of the Indemnitees from and against any and all Losses (as defined in subsection (c) hereof), resulting from any claims (i) against Indemnitees to the extent arising from any act, omission or negligence of Tenant, its contractors, licensees, agents, servants, employees, invitees or visitors and (ii) against the Indemnitees arising from any accident, injury or damage whatsoever caused to any person or to the property of any person and occurring during or (if Tenant shall continue to use and occupy the Premises), after the expiration of the Term, in the Premises, except to the extent that any such accident, injury or damage results from the active negligence or willful misconduct of Landlord or its contractors, agents or employees. (b) Landlord's Indemnity. Landlord shall indemnify, defend and -------------------- hold harmless Tenant from and against all claims against Tenant arising from any accident, injury or damage whatsoever caused to any person or the property of any person in or about the common or public areas of the Building (specifically excluding the Premises) to the extent attributable to the gross negligence or willful misconduct of Landlord or its employees or agents. (c) Indemnity Inclusions. For purposes of this Article 30, the -------------------- term "Losses" means any and all losses, liabilities, damages, claims, judgments, fines, suits, demands, costs, interest and expenses of any kind or nature (including reasonable attorneys' fees and disbursements) incurred in connection with any claim, proceeding or judgment and the defense thereof, and including all costs of repairing any damage to the Premises or the Building or the appurtenances of any of the foregoing to which a particular indemnity and hold harmless agreement applies. Section 30.2 Defense and Settlement. If any claim, action or ---------------------- proceeding is made or brought against any Indemnitee, then upon demand by an Indemnitee, Tenant, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Indemnitee's name (if necessary), by attorneys approved by the Indemnitee, which approval shall not be unreasonably withheld. Attorneys for Tenant's insurer shall hereby be deemed approved for purposes of this Section 30.2. Notwithstanding anything herein contained to the contrary, Tenant may direct the Indemnitee to settle any claim, suit or other proceeding provided that (a) such settlement shall involve no obligation on the part of the Indemnitee other than the payment of money, (b) any payments to be made pursuant to such settlement shall be paid in full exclusively 53 by Tenant at the time such settlement is reached, (c) such settlement shall not require the Indemnitee to admit any liability, and (d) the Indemnitee shall have received an unconditional release from the other parties to such claim, suit or other proceeding. The provisions of this Article 30 shall survive the expiration or earlier termination of this Lease. ARTICLE 31 MISCELLANEOUS Section 31.1 Delivery. This Lease shall not be binding upon Landlord -------- or Tenant unless and until Landlord shall have executed and delivered a fully executed copy of this Lease to Tenant. Section 31.2 Transfer of Real Property. Landlord's obligations under ------------------------- this Lease shall not be binding upon the Landlord named herein after the sale, conveyance, assignment or transfer (collectively a "Transfer") by such Landlord (or upon any subsequent landlord after the Transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such Transfer, Landlord (and any such subsequent Landlord) shall be entirely freed and relieved of all covenants and obligations of Landlord hereunder, and the transferee of Landlord's interest (or that of such subsequent Landlord) in the Building or the Real Property, as the case may be, shall be deemed to have assumed all obligations under this Lease. Section 31.3 Limitation on Liability. The liability of Landlord for ----------------------- Landlord's obligations under this Lease shall be limited to Landlord's interest in the Real Property or any interest of Landlord in any net insurance claims, condemnation awards, sales proceeds or rents, all as attributable to Landlord's interest in the Real Property, and Tenant shall not look to any other property or assets of Landlord or the property or assets of any partner, shareholder, director, officer, principal, employee or agent, directly and indirectly, of Landlord (collectively, the "Parties") in seeking either to enforce Landlord's obligations under this Lease or to satisfy a judgment for Landlord's failure to perform such obligations; and none of the Parties shall be personally liable for the performance of Landlord's obligations under this Lease. Section 31.4 Rent. Notwithstanding anything to the contrary ---- contained in this Lease, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated Fixed Rent, Tenant's Tax Payment, Tenant's Operating Payment, Additional Rent or Rent, shall constitute rent for the purposes of Section 502(b)(6) of the United States Bankruptcy Code. Section 31.5 Entire Document. This Lease (including any Schedules --------------- and Exhibits referred to herein and all supplementary agreements provided for herein) contains the entire agreement between the parties and all prior negotiations and agreements are merged into this Lease. All of the Schedules and Exhibits attached hereto are incorporated in and made a part of this Lease, provided that in the event of any inconsistency between the terms and provisions of this Lease and the terms and provisions of the Schedules and Exhibits hereto, the terms and provisions of this Lease shall control. All Article and Section references set forth herein shall, 54 unless the context otherwise requires, be deemed references to the Article s and Sections of this Lease. Section 31.6 Governing Law. This Lease shall be governed in all ------------- respects by the laws of the State of California. Section 31.7 Unenforceability. If any provision of this Lease, or ---------------- its application to any person or circumstance, shall ever be held to be invalid or unenforceable, then in each such event the remainder of this Lease or the application of such provision to any other person or any other circumstance (other than those as to which it shall be invalid or unenforceable) shall not be thereby affected, and each provision hereof shall remain valid and enforceable to the fullest extent permitted by law. Section 31.8 Lease Disputes. (a) Except as expressly provided to -------------- the contrary in this Lease, Landlord and Tenant agree that all disputes arising, directly or indirectly, out of or relating to this Lease, and all actions to enforce this Lease, shall be dealt with and adjudicated in the state courts of the State of California or the United States District Court for the Northern District of California and for that purpose each of Landlord and Tenant hereby expressly and irrevocably submits itself to the jurisdiction of such courts. So far as is permitted under applicable law, this consent to personal jurisdiction shall be self-operative and no further instrument or action, other than service of process in one of the manners specified in this Lease, or as otherwise permitted by law, shall be necessary in order to confer jurisdiction upon it in any such court. (b) To the extent that Tenant has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Tenant irrevocably waives such immunity in respect of its obligations under this Lease. Section 31.9 Landlord's Agent. Unless Landlord shall render written ---------------- notice to Tenant to the contrary, Tishman Speyer Properties, L.P. is authorized to act as Landlord's agent in connection with the performance of this Lease, and Tenant shall direct all correspondence and requests to, and shall be entitled to rely upon correspondence received from, Tishman Speyer Properties, L.P., as agent for the Landlord in accordance with Article 27. Tenant acknowledges that Tishman Speyer Properties, L.P. is acting solely as agent for Landlord in connection with the foregoing; and neither Tishman Speyer Properties, L.P. nor any of its direct or indirect partners, officers, shareholders, directors, employees, principals, agents or representatives shall have any liability to Tenant in connection with the performance of this Lease, and Tenant waives any and all claims against any and all of such parties arising out of, or in any way connected with, this Lease, the Building or the Real Property. Section 31.10 Estoppel. Within fifteen (15) days following request -------- from Landlord, any Mortgagee or any Lessor, Tenant shall deliver to Landlord a written statement executed and acknowledged by Tenant, in form satisfactory to Landlord, (a) stating the Commencement Date and the Expiration Date, and that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications), (b) setting forth the 55 date to which the Fixed Rent and any Additional Rent have been paid, together with the amount of monthly Fixed Rent then payable, (c) stating whether or not, to the best of Tenant's knowledge, Landlord is in default under this Lease, and, if Landlord is in default, setting forth the specific nature of all such defaults, (d) stating the amount of the Security Deposit, if any, under this Lease, (e) stating whether there are any subleases or assignments affecting the Premises, (f) stating the address of Tenant to which all notices and communication under the Lease shall be sent, and (g) responding to any other matters reasonably requested by Landlord, such Mortgagee or such Lessor. Tenant acknowledges that any statement delivered pursuant to this Section 31.10 may be relied upon by any purchaser or owner of the Real Property or the Building, or all or any portion of Landlord's interest in the Real Property or the Building or any Superior Lease, or by any Mortgagee, or assignee thereof or by any Lessor, or assignee thereof. Section 31.11 Certain Interpretational Rules. For purposes of this ------------------------------ Lease, whenever the words "include", "includes", or "including" are used, they shall be deemed to be followed by the words "without limitation" and, whenever the circumstances or the context requires, the singular shall be construed as the plural, the masculine shall be construed as the feminine and/or the neuter and vice versa. This Lease shall be interpreted and enforced without the aid of any canon, custom or rule of law requiring or suggesting construction against the party drafting or causing the drafting of the provision in question. Section 31.12 Captions. The captions in this Lease are inserted only -------- as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease or the intent of any provision hereof. Section 31.13 Parties Bound. The terms, covenants, conditions and ------------- agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided in this Lease, to their respective legal representatives, successors, and assigns. Section 31.14 Memorandum of Lease. This Lease shall not be recorded; ------------------- however, at Landlord's request, Landlord and Tenant shall promptly execute, acknowledge and deliver a memorandum with respect to this Lease sufficient for recording and Landlord may record the Memorandum. Section 31.15 Counterparts. This Lease may be executed in two or ------------ more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. Section 31.16 Rooftop Communications Equipment. During the Term of -------------------------------- this Lease (and any renewals or extensions thereof), Tenant shall have the right, without payment of any fee or charge therefor, to install and operate microwave transmitter-receivers or satellite dishes (each, a "Satellite Dish") of a weight, height and width reasonably acceptable to Landlord and as reasonably necessary for Tenant's use of the Premises and conduct of its business therein. Landlord shall not withhold its consent to the installation of a Satellite Dish reasonably comparable to those installed on buildings in Cupertino, California that are comparable to the Building. Tenant's rights pursuant to this Section 31.16 may not be assigned 56 independent of this Lease or sublet other than to a subtenant in occupancy of, and conducting business operations within, the Premises and are subject to the following: (a) The precise location of any Satellite Dish shall be as approved by Landlord in its reasonable discretion within ten (10) days following receipt of Tenant's request to install such Satellite Dish on the roof of the Building. (b) Tenant shall pay any federal, state and local taxes applicable to the installation and use of any Satellite Dish and Tenant shall procure, maintain and pay for and obtain all fees, permits and governmental agency licenses necessary in connection with the installation, maintenance and operation of such Satellite Dish; provided, however, that Landlord shall reasonably cooperate with the efforts of Tenant in connection with any governmental application or filing required thereby. (c) Tenant shall be permitted, at its expense, but without separate charge other than any charges permitted to be imposed by Landlord under Article 5 hereof, to install, modify, alter, repair, maintain, operate and replace in one (1) existing chaseway of the Building in an area in the core of the Building one (1) non-dedicated conduit for its cabling use (and the use of the cables contained therein connecting to the Building's roof for operation of Tenant's Satellite Dish(es)). All installations required in connection with any Satellite Dish shall be made by means of conduits, wires or cables that will pass through existing openings in the walls or roof decks of the Building, and all cables and wires located on the roof of the Building used in connection with any Satellite Dish shall be covered by rust-proof conduits and attachments. In no event shall any of Tenant's installations be made through the roof surface or membrane of the Building without the prior written consent of Landlord, which consent may be withheld in Landlord's sole and absolute discretion. The installation of any Satellite Dish shall be subject to Landlord's review and approval and shall conform to the engineering standards commonly used for installing similar microwave and satellite dishes on comparable buildings. (d) Tenant, at its sole cost and expense, shall comply with all present and future laws and with any reasonable requirements of any applicable fire rating bureau relating to the maintenance, use, installation and operation of any Satellite Dish. Tenant shall install, maintain and operate all of its equipment used in connection with any Satellite Dish in conformity with all laws and all regulations of all government agencies having jurisdiction over the installation, use and operation of such Satellite Dish, including, without limitation, the Federal Aviation Administration and the Federal Communications Commission; provided, however, that if compliance with such laws or regulations would require a change in the size, configuration or location of any Satellite Dish, such changes shall be subject to Landlord's prior written consent in accordance with subsection (a) above. (e) Prior to the expiration or earlier termination of the Term of this Lease, Tenant shall remove any and all Satellite Dishes and all wires and cables used in connection with such Satellite Dish(es), and shall restore and repair all damage to the Building occasioned by the installation, maintenance or removal of such Satellite Dish(es). If Tenant fails to timely complete such removal, restoration and repair, all sums incurred by Landlord to complete such work shall be paid by Tenant to Landlord upon demand. 57 (f) Landlord makes no representations or warranties whatsoever with respect to the fitness or suitability of the Building for the installation, maintenance and operation of any Satellite Dish, including, without limitation, with respect to the quality and clarity of any receptions and transmissions to or from any Satellite Dish and the presence of any interference with such signals, whether emanating from the Building or otherwise. (g) Tenant must contact the manager of the Building prior to the date Tenant proposes to install any Satellite Dish on the roof of the Building in order to make arrangements for the movement of any materials needed in connection with the installation of such Satellite Dish. (h) Tenant shall provide adequate maintenance personnel in order to ensure the safe operation of any Satellite Dish. In addition, Tenant shall install, maintain and operate all of its equipment used in connection with any Satellite Dish in a fashion and manner so as not to interfere with the use and operation of any: (i) other television or radio equipment in the Building; (ii) present or future electronic control system for any of the Building Systems or the operation of the elevators in the Building; (iii) other transmitting, receiving or master television, telecommunications or microwave antenna equipment currently located on the roof of the Building; or (iv) any radio communication system now used by Landlord. In addition, Tenant shall use its commercially reasonable efforts to ensure that Tenant will not interfere with any equipment installed by Landlord in the future. Landlord shall use its commercially reasonable efforts to ensure that Tenant's equipment will not be unreasonably interfered with. Section 31.17 Roof Deck. Landlord agrees that, following Landlord's --------- completion of Landlord's Work, Tenant may, at Tenant's election and at Tenant's sole cost and expense, reinstall the Roof Deck (as defined in Schedule 1 to the Workletter Agreement) subject to the requirements of Article 5. Upon any such reinstallation, the Roof Deck shall be deemed to be a portion of the Common Areas. Tenant shall not use the Roof Deck in any manner that could adversely affect the integrity of the roof membrane, and Tenant shall take reasonable precautions to prevent membrane punctures by sharp objects. Landlord understands and acknowledges that, if Tenant so elects to reinstall the Roof Deck, Tenant intends to place on the Roof Deck chairs, tables, planters and other personal property (collectively, the "Roof Deck Furniture"). In connection therewith, Tenant shall not install any Roof Deck Furniture which is visible from the street below without Landlord's consent, which consent shall not be unreasonably withheld. Tenant agrees that any use of the Roof Deck shall be at Tenant's sole risk. Tenant shall, at Tenant's sole cost and expense, take all precautions necessary to prevent any objects from falling off of, or being thrown from, the Roof Deck, including, without limitation, implementing all safety measures reasonably requested by Landlord. Except to the extent caused by its gross negligence or willful misconduct, Landlord shall have no liability to Tenant for any loss, cost, claim, liability or expense arising out of Tenant's use of the Roof Deck, and Tenant shall reimburse Landlord for and protect, indemnify, defend, and hold Landlord harmless from and against any and all claims, liability, damage or loss arising out of any injury to or death of any person or damage to or destruction of property attributable to or resulting from the use of the Roof Deck by Tenant or any Tenant Party. Section 31.18 Limitation on Damages. Except as otherwise provided in --------------------- Section 1951.2 of the California Civil Code and in Section 22.2 of this Lease and notwithstanding any 58 provision of this Lease other than such Section 22.2 to the contrary, in no event shall Landlord or Tenant be liable or responsible for any indirect, consequential, punitive or exemplary damages. Section 31.19 Expedited Arbitration. In connection with any dispute --------------------- between Landlord and Tenant pursuant to Section 15.14 hereof, Landlord and Tenant agree that: (a) upon the request of Tenant, the dispute shall be submitted to the AAA for disposition pursuant to the "Expedited Procedures of the Association" of the AAA; (b) the decision of the AAA shall be final and all actions necessary to implement the decision of the AAA shall be undertaken as soon as possible, but in no event later than ten (10) Business Days after the rendering of such decision; (c) all fees payable to the AAA for services rendered in connection with the resolution of the dispute shall be paid by the party suffering the adverse decision of the AAA. For purposes of this Section 31.19, the phrase "Expedited Procedures of the Association" shall mean those procedures set forth in paragraphs 53 through 57 of that certain booklet published by the Association and titled "Commercial Arbitration Rules," as amended and effective on November 1, 1993. ARTICLE 32 TAX STATUS OF BENEFICIAL OWNERS Tenant recognizes and acknowledges that Landlord and/or certain beneficial owners of Landlord may from time to time qualify as real estate investment trusts pursuant to Sections 856 et seq. of the Code or as entities described in Section 511(a)(2) of the Code, and that avoiding (a) the loss of such status, (b) the receipt of any income derived under any provision of this Lease that does not constitute "rents from real property" (in the case of real estate investment trusts) or that constitutes "unrelated business taxable income" (in the case of entities described in Section 511(a)(2) of the Code), and (c) the imposition of penalty or similar taxes (each an "Adverse Event") is of material concern to Landlord and such beneficial owners. In the event that this Lease or any document contemplated hereby could, in the opinion of counsel to Landlord, result in or cause an Adverse Event, Tenant agrees to cooperate with Landlord in negotiating an amendment or modification thereof and shall at the request of Landlord execute and deliver such documents reasonably required to effect such amendment or modification. Any amendment or modification pursuant to this Article 32 shall be structured so that the economic results to Landlord and Tenant shall be substantially similar to those set forth in this Lease without regard to such amendment or modification. Without limiting any of Landlord's other rights under this Article 32, Landlord may waive the receipt of any amount payable to Landlord hereunder and such waiver shall constitute an amendment or modification of this Lease with respect to such payment. ARTICLE 33 SECURITY DEPOSIT Section 33.1 Security Deposit. Tenant shall deposit the Security ---------------- Deposit with Landlord upon the execution of this Lease in cash as security for the faithful performance and 59 observance by Tenant of the terms, covenants and conditions of this Lease, including the surrender of possession of the Premises to Landlord as herein provided. Section 33.2 Letter of Credit. In lieu of a cash deposit, Tenant may ---------------- deliver the Security Deposit to Landlord in the form of a clean, irrevocable, non-documentary and unconditional letter of credit (the "Letter of Credit") issued by and drawable upon (i) Bank of Boston or (ii) any commercial bank, trust company, national banking association or savings and loan association with offices for banking purposes in San Francisco, California, satisfactory to Landlord (the "Issuing Bank"), which has outstanding unsecured, uninsured and unguaranteed indebtedness, or shall have issued a letter of credit or other credit facility that constitutes the primary security for any outstanding indebtedness (which is otherwise uninsured and unguaranteed), that is then rated, without regard to qualification of such rating by symbols such as "+" or "-" or numerical notation, "Aa" or better by Moody's Investors Service and "AA" or better by Standard & Poor's Rating Service, and has combined capital, surplus and undivided profits of not less than Five Hundred Million Dollars ($500,000,000.00). Such Letter of Credit shall (a) name Landlord as beneficiary, (b) be in the amount of the Security Deposit, (c) have a term of not less than one year, (d) permit multiple drawings, (e) be fully transferable by Landlord without the payment of any fees or charges by Landlord, and (f) otherwise be in form and content satisfactory to Landlord. If upon any transfer of the Letter of Credit, any fees or charges shall be so imposed, then such fees or charges shall be payable solely by Tenant and the Letter of Credit shall so specify. The Letter of Credit shall provide that it shall be deemed automatically renewed, without amendment, for consecutive periods of one year each thereafter during the Term unless the Issuing Bank sends a notice (the "Non-Renewal Notice") to Landlord by certified mail, return receipt requested, not less than forty-five (45) days next preceding the then expiration date of the Letter of Credit stating that the Issuing Bank has elected not to renew the Letter of Credit. Landlord shall have the right, upon receipt of the Non-Renewal Notice, to draw the full amount of the Letter of Credit, by sight draft on the Issuing Bank, and shall thereafter hold or apply the cash proceeds of the Letter of Credit pursuant to the terms of this Article 33 until Tenant delivers to Landlord a substitute Letter of Credit which meets the requirements of this Section 33.2. The Issuing Bank shall agree with all drawers, endorsers and bona fide holders that drafts drawn under and in compliance with the terms of the Letter of Credit will be duly honored upon presentation to the Issuing Bank at an office location in San Francisco, California, or with respect to the Bank of Boston, any of its offices in the States of California or New York. The Letter of Credit shall be subject in all respects to the Uniform Customs and Practice for Documentary Credits (1993 revision), International Chamber of Commerce Publication No. 500. Section 33.3 Application of Security. If (a) an Event of Default by ----------------------- Tenant occurs in the payment or performance of any of the terms, covenants or conditions of this Lease, including the payment of Rent, or any payment default following Tenant's bankruptcy as to which no notice or cure is required, or (b) Landlord receives a Non-Renewal Notice and Tenant does not provide a substitute Letter of Credit satisfying the requirements of Section 33.2 within ten (10) Business Days following the date of such Non-Renewal Notice, Landlord may apply or retain the whole or any part of the cash Security Deposit or may notify the Issuing Bank and thereupon receive all or such portion of the Security Deposit represented by the Letter of Credit as is then, and so long as such Event of Default is continuing, thereafter needed for the uses hereinbelow authorized, and use, apply, or retain the whole or any part of such proceeds, as the case may be, to the extent required for the payment of any Fixed Rent or any other sum as to 60 which Tenant is in default including (a) any sum which Landlord may expend or may be required to expend by reason of Tenant's default, and/or (b) any damages or Deficiency to which Landlord is entitled pursuant to this Lease or applicable Requirements, whether such damages or Deficiency accrues before or after summary proceedings or other reentry by Landlord. If Landlord applies or retains any part of the Security Deposit, Tenant, upon demand, shall deposit with Landlord the amount so applied or retained so that Landlord shall have the full Security Deposit on hand at all times during the Term. If Tenant shall fully and faithfully comply with all of the terms, covenants and conditions of this Lease, the Security Deposit (or so much thereof as remains after Landlord has been adequately compensated for damages due to Tenant's failure to comply fully with the terms, covenants and conditions of this Lease) shall be returned to Tenant after the Expiration Date and after delivery of possession of the Premises to Landlord in the manner required by this Lease. Tenant expressly agrees that Tenant shall have no right to apply any portion of the Security Deposit against any of Tenant's obligations to pay Rent hereunder. Section 33.4 Transfer. (a) Upon a sale of the Real Property or the -------- Building or a leasing of the Building, or any financing of Landlord's interest therein, Landlord shall have the right to transfer the cash Security Deposit or the Letter of Credit, as applicable, to the vendee, lessee or lender. With respect to the Letter of Credit, within five (5) days after notice of such sale, leasing or financing, Tenant, at its sole cost, shall arrange for the transfer of the Letter of Credit to the new landlord or the lender, as designated by Landlord in the foregoing notice or have the Letter of Credit reissued in the name of the new landlord or the lender. Tenant shall look solely to the new landlord or lender for the return of such cash Security Deposit or Letter of Credit and the provisions hereof shall apply to every transfer or assignment made of the Security Deposit to a new landlord. Tenant shall not assign or encumber or attempt to assign or encumber the cash Security Deposit or Letter of Credit and neither Landlord nor its successors or assigns shall be bound by any such action or attempted assignment, or encumbrance. Section 33.5 Reduction in Security Deposit Amount. ------------------------------------ (a) Definitions. For purposes of this Section 33.5, the ----------- following terms shall have the meanings set forth below: (i) "Audited Financial Statements" means unqualified (except for a qualification for a change in accounting principles with which the opining CPA concurs) audited financial statements of Tenant as of the end of, and for the, applicable Measurement Year, certified by any of the "Big Five" firms of independent certified public accountants or any other firm of independent certified public accountants of recognized standing selected by Tenant but acceptable to Landlord ("CPA"). (ii) "Cash Flow From Operations" means, with respect to any Measurement Year, cash flow from operating activities as set forth in the Tenant Financial Report and determined in accordance with GAAP, including, without limitation, the requirements of Financial Accounting Standards Board Statement No. 95, as amended, but adjusted to exclude any such cash flows arising from extraordinary or non-recurring items. (iii) "Financial Milestones" means that (A) as of the applicable Measurement Date, Tenant has Working Capital of at least Thirty Million Dollars 61 ($30,000,000.00) and (B) during the applicable Measurement Year, Tenant has achieved (1) Net Sales of at least One Hundred Million Dollars ($100,000,000.00) and (2) Cash Flow From Operations that is greater than Zero (0). (iv) "GAAP" means generally accepted accounting principles, consistently applied. (v) "Measurement Date" means the last day of the applicable Measurement Year. (vi) "Measurement Year" means Tenant's most recent four-(4-) quarter fiscal period ending prior to the applicable Reduction Date. (vii) "Milestones" means the Financial Milestones and the Secondary Milestones, collectively. (viii) "Net Sales" means, with respect to any Measurement Year, aggregate gross revenues from the sale of Tenant's products or merchandise or the provision of services by Tenant in connection with Tenant's business, but deducting or excluding therefrom, as applicable: (A) appropriate allowances for (1) merchandise returns by customers, (2) uncollectible accounts receivable and (3) anticipated direct or indirect refunds, rebates, discounts or other credits or sales price reductions to customers; (B) interest, service, finance or sales carrying charges paid by customers for extension of credit on sales where not included in the merchandise sales price; and (C) revenues from sales, not in the ordinary course of Tenant's business, of fixtures, machinery or equipment; all as determined in accordance with GAAP. (ix) "Reduction Date" means the first (1st) anniversary of the Commencement Date and each anniversary of the Commencement Date thereafter. (x) "Reduction Increment" means an amount equal to the lesser of (a) fifteen percent (15.00%) of the initial amount of the Security Deposit or (b) the excess of the then amount of the Security Deposit over the Reduction Limit. (xi) "Reduction Limit" means One Million Four Hundred Fifty Thousand Dollars ($1,450,000.00). (xii) "Secondary Milestones" means that (A) as of the applicable Measurement Date, Tenant has Working Capital of at least Fifty Million Dollars ($50,000,000.00) and (B) during the applicable Measurement Year, Tenant has achieved (1) Net Sales of at least Two Hundred Fifty Million Dollars ($250,000,000.00) and (2) Cash Flow From Operations of at least Thirty Million Dollars ($30,000,000.00). (xiii) "Secondary Reduction Increment" means an amount equal to the lesser of (a) twenty-five percent (25.00%) of the initial amount of the Security Deposit or (b) the excess of the then amount of the Security Deposit over the Reduction Limit. (xiv) "Tenant Financial Report" means a report package consisting of: (A) a certificate of Tenant setting forth each component of the applicable 62 Milestones and, with respect to any such component that is not set forth on the face of the Audited Financial Statements, a supporting schedule showing, in reasonable detail, the calculation thereof, certified by the principal financial officer of Tenant as fairly presenting the amounts of all components of the applicable Milestones in accordance with this Article 33, together with copies of (B) the applicable Audited Financial Statements. (xv) "Working Capital" means the excess of current assets over current liabilities of Tenant, as such terms are defined by, and determined in accordance with, GAAP. (b) Reduction Procedure. Following each Reduction Date, Tenant shall deliver to Landlord a Tenant Financial Report and, provided that Tenant has satisfied each of the applicable Financial Milestones or, as the case may be, each of the Secondary Milestones, as of the Measurement Date and with respect to the Measurement Year and, provided further that both (A) no Event of Default has occurred and is continuing as of the date that is ten (10) Business Days following the date upon which Landlord receives such Tenant Financial Report ("Release Date") and (B) no Event of Default described in Section 18.1(a) hereof has occurred on three (3) or more occasions during the portion of the Term preceding such Release Date, then, for each such Reduction Date until the amount of the Security Deposit has been reduced to the Reduction Limit, if Tenant has so satisfied the applicable Financial Milestones, the Security Deposit shall be reduced effective as of the Release Date by the Reduction Increment, unless Tenant has so satisfied the applicable Secondary Milestones, in which event the Security Deposit shall be reduced by the Secondary Reduction Increment. Promptly following any such Release Date, Landlord shall provide written notice to Tenant of any such permitted reduction in the amount of the Security Deposit and (i) if Tenant has posted the Security Deposit in cash, Landlord shall deliver a check payable to the order of Tenant in the amount of the Reduction Increment or the Secondary Reduction Increment, as the case may be, together with such notice or (ii) if Tenant has delivered to Landlord the Security Deposit in the form of a Letter of Credit, then, from and after Tenant's receipt of such Landlord notice, Tenant shall be authorized to deliver a substitute or amended Letter of Credit to Landlord satisfying the requirements set forth in Section 33.2 above and in an amount equal to the Security Deposit as reduced by such Reduction Increment or Secondary Reduction Increment, as the case may be, and Landlord shall exchange the prior Letter of Credit for the substitute Letter of Credit in cooperation with the Issuing Bank. ARTICLE 34 RENEWAL TERM Section 34.1 Renewal Term. Tenant shall have the right to renew the ------------ Term for all of the Premises for one (1) renewal term of five (5) years ("Renewal Term") which shall commence on the day following the expiration of the initial Term and end on the fifth (5th) anniversary of the originally-scheduled Expiration Date, unless the Renewal Term shall sooner terminate pursuant to any of the terms of this Lease or otherwise. The Renewal Term shall commence only if (a) Tenant shall have notified Landlord in writing of Tenant's exercise of such renewal right (the "Exercise Notice") not later than fourteen (14) months prior to the Expiration Date, (b) at the time of the exercise of such right and immediately prior to the Expiration Date, no Event of Default shall have occurred and be continuing hereunder, and (c) Tenant and/or a 63 Related Entity shall be in occupancy of at least sixty-six percent (66%) of the rentable area of the Premises at the time such Exercise Notice is given. Time is of the essence with respect to the giving of the Exercise Notice of Tenant's exercise of such renewal option. The Renewal Term shall be upon all of the agreements, terms, covenants and conditions hereof binding upon Tenant, except that the Fixed Rent (as defined in Section 1.1) shall be determined as provided in Section 34.2 and Tenant shall have no further right to renew the Term. Upon the commencement of the Renewal Term, (A) the Renewal Term shall be added to and become part of the Term (but shall not be considered part of the initial Term), (B) any reference to "this Lease", to the "Term", the "term of this Lease" or any similar expression shall be deemed to include the Renewal Term, and (C) the expiration of the Renewal Term shall become the Expiration Date. Section 34.2 Renewal Term Rent. If the Term shall be renewed as ----------------- provided in Section 34.1, the annual Fixed Rent payable during the Renewal Term shall be equal to one hundred percent (100%) of the annual fair market rental value of the Premises (the "Fair Market Value") as of the day immediately following the originally-scheduled Expiration Date. For purposes hereof, the "Fair Market Value" shall mean the rent at which tenants, as of the commencement of the Renewal Term, will be leasing non-sublease space on a "triple-net" basis comparable in size, location and quality to the Premises, for a comparable term, and considering all other factors relevant to the determination of Fair Market Value, which comparable space is located in first-class office buildings comparable to the Building in Cupertino, California. Within thirty (30) days following Landlord's receipt of the Exercise Notice, Landlord shall advise Tenant in writing of Landlord's determination of Fair Market Value (the "Rent Notice"). Within thirty (30) days of Tenant's receipt of Landlord's Rent Notice, Tenant shall advise Landlord in writing whether Tenant accepts Landlord's determination of Fair Market Value, elects to rescind Tenant's exercise of the renewal option or elects to have the determination of Fair Market Value be resolved by arbitration as provided in Section 34.3 hereof. Tenant's failure to so advise Landlord of its election within such thirty-(30-) day period shall constitute Tenant's acceptance of Landlord's determination of Fair Market Value. If Tenant timely elects to rescind its exercise of the renewal option, the Term of this Lease shall end on the Expiration Date. If the Fixed Rent payable during the Renewal Term has not been determined prior to the commencement thereof, Tenant shall pay Fixed Rent in an amount equal to the Fair Market Value for the Premises as determined by Landlord (the "Interim Rent"). Upon final determination of the Fixed Rent for the Renewal Term, Tenant shall commence paying such Fixed Rent as so determined, and within ten (10) days after such determination Tenant shall pay any deficiency in prior payments of Fixed Rent or, if the Fixed Rent as so determined shall be less than the Interim Rent, Tenant shall be entitled to a credit against the next succeeding installments of Fixed Rent in an amount equal to the difference between each installment of Interim Rent and the Fixed Rent as so determined which should have been paid for such installment until the total amount of the over payment has been recouped. Section 34.3 Arbitration. If Tenant shall dispute Landlord's ----------- determination of Fair Market Value pursuant to Section 34.2, Tenant shall give notice to Landlord of such dispute within ten (10) days of Tenant's receipt of Landlord's determination, and such dispute shall be determined by a single arbitrator appointed in accordance with the American Arbitration Association Real Estate Valuation Arbitration Proceeding Rules. The arbitrator shall be impartial and shall have not less than ten (10) years' experience in the County of Santa Clara in a calling related to the leasing of commercial office space in office buildings comparable to the 64 Building, and the fees of the arbitrator shall be shared equally by Landlord and Tenant. Within fifteen (15) days following the appointment of the arbitrator, Landlord and Tenant shall attend a hearing before the arbitrator at which each party shall submit a report setting forth its determination of the Fair Market Value of the Premises for the Renewal Term, together with such information on comparable rentals and such other evidence as such party shall deem relevant. The arbitrator shall, within thirty (30) days following such hearing and submission of evidence, render his or her decision by selecting the determination of Fair Market Value submitted by either Landlord or Tenant which, in the judgment of the arbitrator, most nearly reflects the Fair Market Value of the Premises for the Renewal Term. The arbitrator shall have no power or authority to select any Fair Market Value other than a Fair Market Value submitted by Landlord or Tenant, and the decision of the arbitrator shall be final and binding upon Landlord and Tenant. ARTICLE 35 SIGNAGE Section 35.1 Exterior Signage. Subject to the provisions of this ---------------- Article 35, Tenant shall have the right, in accordance with this Article 35, and subject to (i) Landlord's prior review and approval, which shall not be unreasonably withheld, conditioned or delayed, (ii) the receipt by Tenant of all necessary governmental approvals therefor and (ii) the compliance of any such signage with all Requirements to construct, install, maintain, repair and replace signs and other identifying materials containing the Tenant Name (as hereinafter defined) in, on or about the Premises. (a) Monument Signage. ---------------- (i) Subject to the provisions of this Section 35.1(a), Tenant shall have the right to replace any or all of the three (3) existing monument signs located on the Real Property each with a corresponding replacement monument sign in the same location exclusively bearing the Tenant Name (collectively, the "Monument Signs"). (ii) The Monument Signs (A) shall be consistent with the quality and appearance of the Building, (B) shall be subject to receipt by Tenant of all governmental permits and approvals required therefor and (C) if desired to be illuminated by Tenant, shall be illuminated with such lighting and at such times as shall be reasonably approved in advance by Landlord and Tenant. Notwithstanding the foregoing, in the event Tenant is unable to obtain any such approval or permit after exercise of its commercially reasonable efforts, Tenant may, at Tenant's sole cost and expense, require that (X) the parties make such reasonable changes and/or modifications to the location and/or any other characteristic of each Monument Sign which may have adversely affected Tenant's ability to obtain such approval or permit, and (Y) notwithstanding any such disapproval, Tenant may exercise any rights of appeal or rehearing available, resubmit Tenant's application therefor with the changes or modifications described in clause (X) above and/or at reasonable intervals after any prior disapproval, resubmit its application for such permit or approval (with or without changes). 65 (iii) For purposes of this Article 35, "Tenant Name" means Portal Software and any other legal name or trade name by which Tenant or its products may be known. As part of the Tenant Name, Tenant may include any logo commonly associated with Tenant or its products. (iv) Each Monument Sign may be designed to include up to three (3) identification bands. Tenant may assign its rights to the Monument Signs to any permitted assignee of this Lease or transfer a right to use one or more of such identification bands to any subtenant in occupancy of at least one (1) entire floor of the Building, in either case subject to Landlord's approval, not to be unreasonably withheld, of any Tenant Name to be placed on any such Monument Sign other than as defined in Section 35.1(a)(iii). Tenant may not design and install a Monument Sign containing more than such three (3) identification bands without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion. Section 35.2 Miscellaneous. ------------- (a) The size and quantity of all of Tenant's identifying language shall be consistent with the tenant identity signage programs of first class office buildings in Cupertino, California comparable to the Building, shall be in keeping with the overall character of the Building's architecture and construction materials, and shall be otherwise subject to Landlord's prior review and approval in accordance with Section 35.1. (b) Tenant shall be solely responsible for all costs and expenses relating to the design, permitting (including receipt of all necessary electrical, building and other permits and/or approvals), fabrication, installation, operation and all on-going maintenance and repair of any and all signage installed by Tenant in accordance with the terms and provisions of this Article 35, together with all electrical equipment related thereto. [BALANCE OF THIS PAGE INTENTIONALLY BLANK] 66 Section 35.3 Restoration of the Building. At the expiration or --------------------------- earlier termination of the Term of this Lease, Tenant shall, at its sole cost and expense, remove any displays of the Tenant Name or other insignia, and restore the areas of the Building where such identifying materials were located. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: TENANT: - --------- ------- TST TORRE, L.L.C., a Delaware PORTAL SOFTWARE, INC., limited liability company a Delaware corporation By: ___________________________ By:______________________________________ Name: ___________________________ Name: Jack L. Acosta Its: ___________________________ Its: Vice President and Chief Financial Officer By:______________________________________ Name: Mitchell Gaynor Its: General Counsel and Secretary 67 EXHIBIT A FLOOR PLANS [See attached copies of the Floor Plans for each of the First (1st) through Third (3rd) Floors, inclusive, of the Building which comprise, respectively, EXHIBIT A-1 through EXHIBIT A-3] 68 EXHIBIT A-4 SITE PLAN OF PARKING AREAS -------------------------- 69 EXHIBIT B DEFINITIONS Base Rate: The annual rate of interest publicly announced from time --------- to time by Citibank, N.A., or its successor, in New York, New York as its "base rate" (or such other term as may be used by Citibank, N.A., from time to time, for the rate presently referred to as its "base rate"). Building System: The mechanical, electrical, plumbing, sanitary, --------------- sprinkler, heating, ventilation and air conditioning, security, life-safety, elevator and other service systems or facilities of the Building up to the point of localized distribution to the Premises (excluding, however, supplemental HVAC systems of tenants (including Tenant), sprinklers and the horizontal distribution systems within and servicing the Premises and by which mechanical, electrical, plumbing, sanitary, heating, ventilating and air conditioning, security, life-safety and other service systems are distributed from the base Building risers, feeders, panelboards, etc. for provision of such services to the Premises). Business Days: All days, excluding Saturdays, Sundays and all days ------------- observed by either the State in which the Building is located, the Federal Government or the labor unions servicing the Building as legal holidays. Code: The Internal Revenue Code of 1986, as amended, and the ---- regulations promulgated thereunder. Cost Per Kilowatt Hour: (a) The total cost for electricity incurred ---------------------- by Landlord to service the Building during a particular billing period (including energy charges, demand charges, surcharges, time-of-day charges, fuel adjustment charges, rate adjustment charges, taxes, rebates and any other factors used by the public utility company in computing its charges to Landlord), divided by (b) the total kilowatt hours purchased by Landlord to provide electricity to the Building during such period. Deficiency: The difference between (a) the Fixed Rent and Additional ---------- Rent for the period which otherwise would have constituted the unexpired portion of the Term (assuming the Additional Rent for each year thereof to be the same as was payable for the year immediately preceding such termination or re-entry), and (b) the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of the Lease for any part of such period (after first deducting from such rents all expenses incurred by Landlord in connection with the termination of this Lease, Landlord's re-entry upon the Premises and such reletting, including repossession costs, brokerage commissions, attorneys' fees and disbursements, and alteration costs). Excluded Expenses: (a) Taxes; (b) franchise or income taxes imposed ----------------- upon Landlord; (c) mortgage amortization and interest; (d) leasing commissions; (e) the cost of tenant installations and decorations incurred in connection with preparing space for any Building tenant, including workletters and concessions; (f) ground rent, if any; (g) management 70 fees exceeding an amount (the "Management Fee") equal to three percent (3%) of the sum of (A) Fixed Rent due under this Lease, (B) the aggregate of all Operating Expenses excluding the Management Fee and (C) Taxes; (h) wages, salaries and benefits paid to any persons above the grade of Building Manager; (i) legal and accounting fees, judgments and other costs relating to (A) disputes with tenants, prospective tenants or other occupants of the Building, (B) disputes with purchasers, prospective purchasers, Mortgagees or prospective Mortgagees, Lessors or prospective Lessors of the Building or the Real Property or any part of either, or (C) negotiations of leases, contracts of sale or mortgages; (j) costs of services provided to other tenants of the Building on a "rent-inclusion" basis which are not provided to Tenant on such basis; (k) costs that are reimbursed out of insurance, warranty or condemnation proceeds, or which are reimbursable by Tenant or other tenants other than pursuant to an expense escalation clause; (l) costs in the nature of penalties or fines; (m) costs for services, supplies or repairs paid to any related entity in excess of costs that would be payable in an "arm's length" or unrelated situation; (n) allowances, concessions or other costs and expenses of improving or decorating any demised or demisable space in the Building; (o) consulting, brokerage, appraisal, advertising and promotional fees and expenses in connection with the leasing, financing or sale of the Building; (p) the costs of installing, operating and maintaining a specialty improvement or an improvement other than for general office use, including a cafeteria, lodging or private dining facility, or an athletic, luncheon or recreational club; (q) any costs or expenses (including fines, interest, penalties and legal fees) arising out of Landlord's failure to timely pay Operating Expenses or Taxes; (r) costs incurred in connection with the removal, encapsulation or other treatment of any Hazardous Materials other than with respect to any Hazardous Materials introduced into the Premises and/or the Building by Tenant or its employees, agents or contractors, and (s) the cost of capital improvements other than those expressly included in Operating Expenses pursuant to Section 8.1 of this Lease; (t) capitalized costs incurred in correcting defects in, or significant design errors relating to, the initial design or construction of the Building; (u) the wages and benefits of any employee who does not devote substantially all of his or her employed time to the operation and management of the Building or Real Property unless such wages and benefits are prorated to reflect time spent on operating and managing the Real Property vis-a-vis time spent on matters unrelated to operating and managing the Real Property; (v) charitable and political contributions or membership fees; (w) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (x) costs or expenses arising from the active negligence or willful misconduct of Landlord or Landlord's agents, servants or employees or from the breach by Landlord of any of its obligations under this Lease; (y) except for any amortization or depreciation charges expressly provided for in this Lease as includable in Operating Expenses, depreciation charges or contributions to capital replacement reserves; (z) except for costs and expenses incurred for maintenance and repair of objects of art on or about the Real Property for which Landlord is responsible, costs for any sculptures, paintings, furniture or other objects of art; (aa) charges to reserves for uncollectible accounts; (ab) costs and expenses associated with the operation of the entity that is Landlord including associated accounting and legal fees, costs concerning disputes with Landlord's Agent or Landlord's other agents and employees, and general corporate and administrative expenses (other than travel and related expenses reasonably incurred by persons responsible for the operation, management and repair of the Building who are based outside of the San Francisco Bay Area); (ac) costs incurred to correct any "Year 2000" software problems in any Building Systems; (ad) the amount of any deductible carried by Landlord under insurance policies respecting the Building which exceed One Hundred Fifty 71 Thousand Dollars ($150,000.00) or, with respect to earthquake insurance, five percent (5%) of the replacement value of the Building; and (ac) any parking rent charged by the owner of the Parcel 2 Spaces. Governmental Authority (Authorities): The United States of America, ------------------------------------ the City of Cupertino, County of Santa Clara, or State of California, or any political subdivision, agency, department, commission, board, bureau or instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over the Real Property or any portion thereof or the curbs, sidewalks, and areas adjacent thereto. Hazardous Materials: Any substances, materials or wastes currently or ------------------- in the future deemed or defined in any Requirement as "hazardous substances," "toxic substances," "contaminants," "pollutants" or words of similar import. HVAC Systems: The Building System designed to provide heating, ------------ ventilation and air conditioning. Indemnitees: Landlord, Landlord's Agent, each Mortgagee and Lessor, ----------- and each of their respective direct or indirect partners, officers, shareholders, directors, members, trustees, beneficiaries, employees, principals, contractors, licensees, invitees, servants, agents, or representatives. Lessor: A lessor under a Superior Lease. ------ Mortgage(s): Any mortgage, trust indenture or other financing ----------- document which may now or hereafter affect the Premises, the Real Property, the Building or any Superior Lease and the leasehold interest created thereby, and all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder. Mortgagee(s): Any mortgagee, trustee or other holder of a Mortgage. ------------ Prohibited Use: Any use or occupancy of the Premises that in -------------- Landlord's reasonable judgment would: (a) cause damage to the Building, the Premises or any equipment, facilities or other systems therein; (b) impair the appearance of the Building; (c) interfere with the efficient and economical maintenance, operation and repair of the Premises or the Building or the equipment, facilities or systems thereof; (d) adversely affect any service provided to, and/or the use and occupancy by, any Building tenant or occupants; (e) violate the certificate of occupancy issued for the Premises or the Building or (f) adversely affect the image of the Building as a first-class office location in Cupertino, California. Prohibited Use also includes the use of any part of the Premises for: (i) a restaurant or bar (other than one (1) full-scale cafeteria for use by Tenant's employees and invitees, provided such cafeteria is not open to the general public and is constructed in accordance with the Workletter Agreement or Article 5 hereof and which Tenant hereby acknowledges shall, in either event, constitute a Specialty Alteration); (ii) the preparation, consumption, storage, manufacture or sale of food or beverages (except in connection with vending machines and/or warming kitchens or break rooms installed for the use of Tenant's employees only), liquor, tobacco or drugs; (iii) the business of photocopying, multilith or offset printing (except photocopying in connection with Tenant's own business); 72 (iv) a typing or stenography business; (v) a school or classroom (other than a training facility for Tenant's customers and invitees); (vi) lodging or sleeping; (vii) the operation of retail facilities (meaning a business whose primary patronage arises from the generalized solicitation of the general public to visit Tenant's offices in person without a prior appointment) of a savings and loan association or retail facilities of any financial, lending, securities brokerage or investment activity; (viii) a payroll office; (ix) a barber, beauty or manicure shop; (x) an employment agency, executive search firm or similar enterprise; (xi) offices of any Governmental Authority, any foreign government, the United Nations, or any agency or department of the foregoing; (xii) the manufacture, retail sale, storage of merchandise or auction of merchandise, goods or property of any kind to the general public which could reasonably be expected to create a volume of pedestrian traffic substantially in excess of that normally encountered in the Premises; (xiii) the rendering of medical, dental or other therapeutic or diagnostic services; or (xiv) any illegal purposes or any activity constituting a nuisance. Requirements: All present and future laws, rules, orders, ordinances, ------------ regulations, statutes, requirements, codes and executive orders, extraordinary and ordinary of (i) all Governmental Authorities, including the Americans With Disabilities Act, 42 U.S.C. (S)12,101 (et seq.), and any law of like import, and all rules, regulations and government orders with respect thereto, and any of the foregoing relating to Hazardous Materials, environmental matters, public health and safety matters, (ii) any applicable fire rating bureau or other body exercising similar functions, affecting the Real Property or the maintenance, use or occupation thereof, or any street, avenue or sidewalk comprising a part of or in front thereof or any vault in or under the same and (iii) all requirements of all insurance bodies affecting the Premises. Rules and Regulations: The rules and regulations annexed to and made --------------------- a part of this Lease as Exhibit G, as they may be modified from time to time by Landlord. Specialty Alterations: Alterations consisting of kitchens, pantries, --------------------- executive bathrooms, raised computer floors, computer installations, safe deposit boxes, vaults, libraries or file rooms requiring reinforcement of floors, internal staircases, conveyors, dumbwaiters, and other Alterations of a similar character. Substantial Completion: As to any construction performed by any party ---------------------- in the Premises, including any Alterations (but not the Improvements), "Substantial Completion" or "Substantially Completed" means that such work has been completed, as reasonably determined by Landlord's architect, in accordance with (a) the provisions of this Lease applicable thereto, (b) the plans and specifications for such work, and (c) all applicable Requirements, except for minor details of construction, decoration and mechanical adjustments, if any, the noncompletion of which does not materially interfere with Tenant's use of the Premises. Superior Lease(s): Any ground or underlying lease of the Real ----------------- Property or any part thereof heretofore or hereafter made by Landlord and all renewals, extensions, supplements, amendments, modifications, consolidations, and replacements thereof. Tenant's Property: Tenant's movable fixtures and movable partitions, ----------------- telephone and other equipment, computer systems, trade fixtures, furniture, furnishings, and other items of personal property which are removable without material damage to the Premises or Building. 73 Unavoidable Delays: Any inability to fulfill or delay in fulfilling ------------------ any obligations of a party under this Lease expressly or impliedly to be performed by a party (including inability to make or delay in making any repairs, additions, alterations, improvements or decorations or Landlord's inability to supply or delay in supplying any equipment or fixtures), if such party's inability or delay is due to or arises by reason of strikes, labor troubles or by accident, or by any cause whatsoever reasonably beyond such party's control, including laws, governmental preemption in connection with a national emergency, Requirements or shortages, or unavailability of labor, fuel, steam, water, electricity or materials, or delays caused by others, mechanical breakdown, acts of God, enemy action, civil commotion, fire or other casualty. 74 EXHIBIT C PARKING RULES AND REGULATIONS 1. Tenant shall not store or permit Tenant's Invitees to store any automobiles in the Parking Area without the prior written consent of Landlord. Except for emergency repairs, neither Tenant nor any Tenant Invitee shall not perform any work on any automobiles while located in the Parking Area. If it is necessary for Tenant or a Tenant Invitee to leave an automobile in the Parking Area overnight, Tenant shall provide Landlord with prior notice thereof, designating the license plate number and model of such automobile. 2. Cars must be parked entirely within the stall lines painted on the floor, and only compact cars may be parked in areas reserved for compact cars. 3. All directional signs and arrows must be observed. 4. The speed limit shall be five (5) miles per hour. 5. Parking spaces reserved for handicapped parking must be used only by vehicles properly designated. 6. Parking is prohibited in all areas not expressly designated for parking, including, without limitation: a. in areas not striped for parking; b. in aisles; c. where "no parking" signs are posted; d. on ramps; e. in loading zones; f. in cross-hatched areas; and g. in such other areas as may be designated by Landlord, its agents, lessees or licensees. 7. Parking stickers, key cards or any other devices or forms of identification or entry supplied by Landlord shall remain the property of Landlord. Such parking identification devices must be displayed as requested, and any device in the possession of an unauthorized holder will be void. 8. Parking Area managers and attendants are not authorized to make or allow any exceptions to these Parking Rules and Regulations. 9. Every person visiting the Parking Area is required to park and lock his/her own car. 10. Loss or theft of parking identification, key cards or other such devices must be reported to Landlord and to any Parking Area manager immediately. Any parking 75 devices reported lost or stolen found on any authorized car will be confiscated, and the illegal holder will be subject to prosecution. Lost or stolen devices found by Tenant must be reported to the office of the garage immediately. 11. Washing, waxing, cleaning or servicing any vehicle by Tenant or any Tenant Invitee is prohibited. Parking spaces may be used only for parking automobiles. 12. NO LIABILITY. TENANT ACKNOWLEDGES AND AGREES THAT, TO THE ----------------------------------------------------------------- FULLEST EXTENT PERMITTED BY LAW, LANDLORD SHALL NOT BE RESPONSIBLE FOR ANY LOSS - -------------------------------------------------------------------------------- OR DAMAGE TO TENANT OR ANY TENANT INVITEE OR TO TENANT'S OR ANY TENANT INVITEE'S - -------------------------------------------------------------------------------- PROPERTY (INCLUDING, WITHOUT LIMITATIONS, ANY LOSS OR DAMAGE TO TENANT'S OR ANY - -------------------------------------------------------------------------------- TENANT INVITEE'S AUTOMOBILE OR THE CONTENTS THEREOF DUE TO THEFT, VANDALISM OR - -------------------------------------------------------------------------------- ACCIDENT) ARISING FROM OR RELATED TO TENANT'S OR ANY TENANT INVITEE'S USE OF THE - -------------------------------------------------------------------------------- PARKING AREA OR WHETHER OR NOT SUCH LOSS OR DAMAGE RESULTS FROM LANDLORD'S - -------------------------------------------------------------------------------- ACTIVE NEGLIGENCE OR NEGLIGENT OMISSION, BUT EXCLUDING LANDLORD'S GROSS - -------------------------------------------------------------------------------- NEGLIGENCE OR WILLFUL MISCONDUCT OR ANY FAILURE BY LANDLORD TO MAINTAIN AND - -------------------------------------------------------------------------------- REPAIR THE LANDLORD REPAIR AREAS. - --------------------------------- 13. Release of Liability. Without limiting the provisions of Paragraph 12 above and except where caused by the gross negligence or willful misconduct of Landlord or any failure by Landlord to maintain and repair the Landlord Repair Areas, Tenant hereby voluntarily releases, discharges, waives and relinquishes any and all actions or causes of action for personal injury or property damage occurring to Tenant or any Tenant Invitee arising as a result of parking in the Parking Area, or any activities incidental thereto, wherever or however the same may occur, and further agrees that Tenant will not prosecute any claim for personal injury or property damage against Landlord or any of its officers, agents, servants or employees for any said causes of action. It is the intention of Tenant by this instrument to exempt and relieve Landlord from liability for personal injury or property damage caused by negligence; provided that nothing set forth herein shall be construed to impose upon Tenant any liability or responsibility for claims made by third parties (and not a Tenant Invitee) with respect to the Parking Facility in circumstances where neither Tenant nor any Tenant Invitee was responsible therefor. 14. The garage management reserves the right to refuse the issuance of monthly stickers or other parking identification devices to Tenant or and Tenant Invitee who willfully refuses to comply with the above Parking Rules and Regulations or any City, State or Federal ordinance, law or agreement. 15. Neither Tenant nor any Tenant Invitee shall load or unload in areas other than those designated by Landlord for such activities. 16. Tenant, any Tenant Invitee and unauthorized users parked in prohibited areas are subject to towing at their own expense. 76 EXHIBIT D WORKLETTER AGREEMENT This Workletter Agreement (the "Agreement") is an exhibit to that certain Lease (the "Lease"), dated as of the date hereof, between TST Cupertino, L.L.C. ("Landlord"), and Portal Software, Inc. ("Tenant"), wherein Tenant is leasing certain office space (the "Premises") at 10201 Torre Avenue (the "Building"), in Cupertino, California, as more particularly described in the Lease. Unless otherwise defined herein, any defined term used in this Agreement has the meaning set forth in the Lease. In consideration of the parties entering into the Lease and of the mutual promises and covenants herein contained, Landlord and Tenant hereby agree as follows: 1. Proposed and Final Plans. (a) Prior to commencement of any work within the Premises, Tenant shall cause to be prepared and delivered to Landlord, for Landlord's approval, the following proposed drawings ("Proposed Plans") for all improvements Tenant desires to complete or have completed in the Premises (the "Improvements"): (i) Architectural drawings (consisting of floor construction plan, ceiling lighting and layout, power, and telephone plan). (ii) Mechanical drawings (consisting of HVAC, electrical, telephone, and plumbing). (iii) Finish schedule (consisting of wall finishes and floor finishes and miscellaneous details). (b) All architectural drawings shall be prepared at Tenant's sole cost and expense by a licensed architect designated by Tenant and approved by Landlord, which approval shall not be unreasonably withheld, whom Tenant shall employ. Tenant shall deliver one set of reproducible architectural drawings to Landlord. All mechanical drawings shall be prepared at Tenant's sole cost and expense by a licensed engineer designated by Tenant and approved by Landlord, which approval shall not be unreasonably withheld, whom Tenant shall employ. (c) Within five (5) days after Landlord's receipt of the architectural drawings, Landlord shall advise Tenant of any changes or additional information required to obtain Landlord's approval. (d) Within five (5) days after receipt of mechanical drawings, Landlord shall advise Tenant of any changes required to obtain Landlord's approval. (e) If Landlord disapproves of, or requests additional information regarding the Proposed Plans, Tenant shall, within five (5) days thereafter (or such longer period as may be reasonably required as a result of the nature or extent of Landlord's comments, but in no event more than ten (10) days), revise the Proposed Plans disapproved by Landlord and resubmit such plans to Landlord or otherwise provide such additional information to Landlord. 77 Landlord shall, within ten (10) days after receipt of Tenant's revised plans, advise Tenant of any additional changes which may be required to obtain Landlord's approval. If Landlord disapproves the revised plans specifying the reason therefor, or requests further additional information, Tenant shall, within five (5) days (or such longer period as may be reasonably required as a result of the nature or extent of Landlord's comments, but in no event more than ten (10) days) of receipt of Landlord's required changes, revise such plans and resubmit them to Landlord or deliver to Landlord such further information as Landlord has requested. Landlord shall, again within five (5) days after receipt of Tenant's revised plans, advise Tenant of further changes, if any, required for Landlord's approval. This process shall continue until Landlord has approved Tenant's revised Proposed Plans. "Final Plans" shall mean the Proposed Plans, as revised, which have been approved by Landlord and Tenant in writing. Landlord agrees not to withhold its approval unreasonably. (f) All Proposed Plans and Final Plans shall comply with all applicable Requirements. Neither review nor approval by Landlord of any Proposed Plans and resulting Final Plans shall constitute a representation or warranty by Landlord that such plans either (i) are complete or suitable for their intended purpose, or (ii) comply with applicable Requirements, it being expressly agreed by Tenant that Landlord assumes no responsibility or liability whatsoever to Tenant or to any other person or entity for such completeness, suitability or compliance. No changes in the Final Plans shall be made without Landlord's prior written approval, which shall not be unreasonably withheld, conditioned or delayed with respect to any such proposed changes that are non-structural, do not adversely affect any Building System, do not involve construction that would be visible from outside the Premises or would affect the certificate of occupancy for the Building. (g) Promptly following Landlord's approval of the Final Plans and receipt of Landlord's invoice therefor, but in no event prior to the Delivery Date, Tenant shall (A) reimburse to Landlord the actual third-party costs reasonably incurred by Landlord to approve all plans, specifications and materials submitted pursuant to this Section 1 and (B) pay to Landlord a fee (the "Review Fee") in the amount of Twenty-Five Thousand Dollars ($25,000.00) to compensate Landlord for Landlord's review of the Proposed Plans. 2. Landlord's Work. Concurrently with Tenant's planning and construction of the Improvements, Landlord shall, at Landlord's sole cost and expense, complete the work described on Schedule 1 attached hereto and incorporated herein ("Landlord's Work"). Landlord agrees to use reasonable efforts to complete all such Landlord's Work at the Building or in the Premises, as applicable, on or before the Scheduled Commencement Date, subject to Unavoidable Delays, including, without limitation, any delay caused by Tenant or Tenant's Contractors (as hereinafter defined). 3. Performance of the Improvements. (a) Filing of Final Plans, Permits. Tenant, at its sole cost and expense, shall file the Final Plans with the governmental agencies having jurisdiction over the Improvements. Tenant shall furnish Landlord with copies of all documents submitted to all such governmental agencies and of all authorizations to commence work and all permits for the Improvements issued by such governmental agencies. Tenant shall not commence the 78 Improvements until the required governmental authorizations for such work are obtained and delivered to Landlord; provided, however, that Tenant may commence demolition within the Premises once Landlord has approved Tenant's demolition plans (which approval shall not be unreasonably withheld, delayed or conditioned) and Tenant has in hand any necessary permits or approvals from the City of Cupertino with respect to such demolition. (b) Landlord Approval of Contractors. Following Landlord's approval of the Final Plans, Tenant shall enter into a contract ("Construction Contract") for construction of the Improvements with a general contractor acceptable to Landlord (the "Contractor"). The Construction Contract shall contain the indemnity of the Contractor to Landlord and Landlord's Agent, substantially in the same manner as Tenant's indemnity as provided in Section 5(j) below and shall otherwise be subject to Landlord's prior approval, which approval shall not be unreasonably withheld, delayed or conditioned. (c) Tenant's Contractor. The Contractor shall be responsible for all required construction, management and supervision, including bidding by subcontractors for the various components of the work of the Improvements. Tenant shall submit to Landlord not less than ten (10) days prior to commencement of construction the following information and items: (i) The names and addresses of the subcontractors (collectively, together with the Contractor, the "Tenant's Contractors") Tenant intends to employ in the construction of the Improvements; provided that Tenant shall not be required to advise Landlord in advance of the identity of those subcontractors performing work within the Premises for a contract amount reasonably anticipated to be less than Fifty Thousand Dollars ($50,000.00). Landlord shall have the right to disapprove any of Tenant's Contractors, provided that Landlord's approval shall not be unreasonably withheld, and Tenant shall employ, as Tenant's Contractors, only those persons or entities approved by Landlord. All contractors and subcontractors engaged by or on behalf of Tenant for the Premises shall be licensed contractors, possessing good labor relations, capable of performing quality workmanship and working in harmony with Landlord's contractors and subcontractors and with other contractors and subcontractors on the job site. All work by Tenant's Contractors shall be coordinated with Landlord's completion of Landlord's Work, as delineated on Landlord's proposed schedule for performance of Landlord's Work, which shall be furnished to Tenant as soon as reasonably possible following the Effective Date, but in any event by November 1, 1999. (ii) The scheduled commencement date of construction, the estimated date of completion of construction work, fixturing work, and date of occupancy of the Premises by Tenant. (iii) Itemized statement of estimated construction cost, including permits and fees, architectural, engineering, and contracting fees ("Estimated Total Construction Cost"). (iv) Certified copies of insurance policies or certificates of insurance as hereinafter described. Tenant shall not permit Tenant's Contractors to commence work until the required insurance has been obtained and certified copies of policies or certificates have been delivered to Landlord. 79 (d) Access to Premises. Tenant, its employees, designers, contractors and workmen shall have access to and primary use of the Premises prior to the Commencement Date to construct the Improvements, provided that Tenant and its employees, agents, contractors, and suppliers only access the Premises in such a manner so as not to unreasonably interfere with the completion of Landlord's Work by Landlord or Landlord's contractors. If at any time such entry shall cause, or in Landlord's reasonable judgment threaten to cause, such disharmony or interference, Landlord shall advise Tenant of Landlord's concerns, and Tenant shall use its commercially reasonable efforts to eliminate such disharmony or interference. (e) Landlord's Right to Perform. Landlord shall have the right, but not the obligation, to perform, on behalf of and for the account of Tenant, subject to reimbursement by Tenant, any of the Improvements which Landlord reasonably deems necessary to be done on an emergency basis. (f) Landlord Delay. As used herein, the term "Landlord Delay" shall mean any delay in substantially completing construction of the Improvements by May 1, 2000 which is due to any act or omission of Landlord (wrongful, negligent or otherwise), its agents or contractors (including acts or omissions while acting as agent or contractor for Tenant). The term "Landlord Delay" shall include, but shall not be limited to, any: (i) delay in the giving of authorizations or approvals by Landlord within the prescribed time period (it being understood that it shall not be a Landlord Delay if Landlord, within any prescribed time period, reasonably withholds its consent or refuses to grant its consent where the granting of such consent was not subject to an express standard of reasonableness); (ii) delay attributable to the acts or failures to act, whether willful or negligent, of Landlord, its agents or contractors, where such acts or failures to act delay the substantial completion of the Improvements; and (iii) delay attributable to the unreasonable interference of Landlord, its agents or contractors with the design of the Improvements or the failure or refusal of any such party to permit Tenant, its agents or contractors, access to and use of the Building or any Building facilities or services after the Delivery Date, which access and use are required for the orderly and continuous performance of the work necessary for Tenant to substantially complete the Improvements. Tenant shall be responsible for documenting all asserted Landlord Delays, which documentation shall be available to Landlord upon request. Tenant shall use its good faith efforts to advise Landlord within one (1) Business Day of the occurrence of any event constituting Landlord Delays. Notwithstanding the foregoing, no Landlord Delay shall be deemed to have occurred unless and until Tenant has provided notice to Landlord (the "Delay Notice") within five (5) days of the occurrence of the alleged Landlord Delay, specifying the action or inaction by Landlord that Tenant contends constitutes the Landlord Delay. If such action or inaction is not cured by Landlord within two (2) Business Days of receipt of such Delay Notice (the "Grace Period"), than a Landlord Delay, as set forth in such Delay Notice, shall be deemed to have occurred commencing as of the expiration of the Grace Period; provided that there shall be no Grace Period in circumstances where Landlord is obligated under the terms hereof to grant its consent or approval within a prescribed period of time and Landlord fails to advise Tenant of its consent or rejection within such period. Notwithstanding the foregoing, nothing set forth in this Section 3, shall be deemed a waiver of Landlord's right, by any means available pursuant to the terms of the Lease or applicable law, to dispute whether the facts as described by Tenant in the Delay Notice constitute a Landlord Delay. 80 4. Payment of Total Construction Cost. Prior to commencement of construction of the Improvements, Tenant shall (i) enter into a guaranteed maximum price amendment (the "GMP Amendment") to the Construction Contract, providing for a guaranteed maximum price for construction of the Improvements ("GMAX Price") and progress payments and (ii) provide to Landlord a revised itemized statement of the Estimated Total Construction Cost based upon such GMAX Price and estimates of the other components thereof as reasonably determined by Tenant. Tenant shall timely make all payments to the Contractor as and when required under the terms of the Construction Contract and the GMP Amendment. 5. Miscellaneous. (a) Use of Premises. Tenant agrees that, in connection with the Improvements and its use of the Premises prior to the Commencement Date, Tenant shall have those duties and obligations with respect thereto that it has pursuant to the Lease during the Term, except the obligation for payment of Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment and further agrees that Landlord shall not be liable in any way for injury, loss, or damage which may occur to any of the Improvements or installations made in the Premises, or to any personal property placed therein, the same being at Tenant's sole risk. In addition, Tenant shall not be obligated to reimburse Landlord for any electricity, water, gas or other utilities consumed at the Premises by Tenant's Contractors. (b) No Other Landlord Work. Except as expressly set forth herein, Landlord has no other agreement with Tenant and Landlord has no other obligation to do any other work or pay any amounts with respect to the Premises. Any other work in the Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease shall be done at Tenant's sole cost and expense and in accordance with the terms and conditions of the Lease. (c) Limited Application. This Agreement shall not be deemed applicable to any additional space added to the original Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions thereto in the event of a renewal or extension of the initial term of the Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement thereto. (d) Payment Default. The failure by Tenant to pay any monies due Landlord pursuant to this Agreement within the time period herein stated shall be deemed an Event of Default under the terms of the Lease and for which Landlord shall be entitled to exercise all remedies available to Landlord for nonpayment of Rent. All late payments shall bear interest pursuant to Section 2.6 of the Lease. (e) Building Upgrades. Tenant hereby acknowledges and agrees that the Improvements shall include, without limitation, the following items for the Building, each of which shall be subject to Landlord's reasonable approval with respect thereto: (1) upgrading of the main Building lobby, including, without limitation, installation of a new lobby desk, (2) upgrading of all Building restrooms and (3) a card-key secured building-access system. In addition, if required by the City of Cupertino in connection with the construction of the 81 Improvements, Tenant shall be required, at its sole cost and expense, for performing any and all modifications to the Building, including, without limitation, any Building System, necessary to bring the Building into compliance with all Requirements in effect on the Commencement Date (including the Americans With Disabilities Act, 42 U.S.C. (S) 12,101 et seq.), but specifically excluding any such modifications (i) to the structural elements of the Building floors, exterior walls and interior load bearing walls and/or (ii) that involve the removal, encapsulation or other treatment of Hazardous Materials ((i) and (ii) collectively, the "Landlord Compliance Items"). (f) Warranties. Upon completion of the Improvements, Tenant shall provide Landlord with copies of all warranties of at least one (1) year duration on all components of the Improvements. (g) Protection of Building. Tenant will take all reasonable and customary precautionary steps to protect its facilities and the facilities of others affected by the Improvements and properly to police same and Landlord shall have no responsibility for any loss by theft or otherwise. Tenant shall at all times keep the Premises and adjacent areas free from accumulations of waste materials or rubbish caused by its suppliers, contractors or workmen. Landlord may require daily clean-up if required for fire prevention and life safety reasons or applicable laws and reserves the right to do clean-up at the expense of Tenant if Tenant fails to comply with Landlord's cleanup requirements. At the completion of the Improvements, Tenant's Contractors shall forthwith remove all rubbish and all tools, equipment and surplus materials from and about the Premises and Building. Any damage caused by Tenant's Contractors to any portion of the Building or to any property of Landlord shall be repaired forthwith after written notice from Landlord to its condition prior to such damage by Tenant at Tenant's expense. (h) Compliance by all Tenant Contractors. Tenant shall impose and enforce all terms hereof on Tenant's Contractors and Tenant's designers, architects and engineers. Landlord shall have the right (after first making reasonable efforts to contact telephonically Tenant or its construction representative, CB Richard Ellis, Inc. or any other representative appointed by Tenant, regarding such concerns) to order Tenant or any of Tenant's Contractors, designers, architects or engineers who willfully violate the provisions of this Agreement to cease work and remove himself or itself and his or its equipment and employees from the Building. (i) Accidents, Notice to Landlord. Tenant's Contractors shall assume responsibility for the prevention of accidents to its agents and employees and shall take all reasonable safety precautions with respect to the work to be performed and shall comply with all reasonable safety measures initiated by the Landlord and with all applicable laws, ordinances, rules, regulations and orders of any public authority for the safety of persons or property. Tenant shall advise the Tenant's Contractors to report to Landlord any injury to any of its agents or employees and shall furnish Landlord a copy of the accident report filed with its insurance carrier within three (3) days of its occurrence. (j) Required Insurance. Tenant shall cause Tenant's Contractors to secure, pay for, and maintain during the performance of the construction of the Improvements, insurance in the following minimum coverages and limits of liability: 82 (i) Workmen's Compensation and Employer's Liability Insurance as required by law. (ii) With respect to (A) the General Contractor, Commercial General Liability Insurance (including Owner's and Contractors' Protective Liability) in an amount not less than Two Million Dollars ($2,000,000) per occurrence, whether involving bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof with a minimum aggregate limit of Two Million Dollars ($2,000,000), and with umbrella coverage with limits not less than Ten Million Dollars ($10,000,000); (B) all other of Tenant's Contractors, Commercial General Liability Insurance (including Owners' and Contractors' Protective Liability) in an amount not less than One Million Dollars ($1,000,000) per occurrence, whether including bodily injury liability (or death resulting therefrom) or property damage liability or a combination thereof. Such insurance shall provide for explosion and collapse, completed operations coverage with a two-year extension after completion of the work, and broad form blanket contractual liability coverage and shall insure Tenant's Contractors against any and all claims for bodily injury, including death resulting therefrom and damage to the property of others and arising from its operations under the contracts whether such operations are performed by Tenant's Contractors, or by anyone directly or indirectly employed by any of them. (iii) Comprehensive Automobile Liability Insurance, including the ownership, maintenance, and operation of any automotive equipment, owned, hired, or non-owned in an amount not less than Five Hundred Thousand Dollars ($500,000) for each person in one accident, and One Million Dollars ($1,000,000) for injuries sustained by two or more persons in any one accident and property damage liability in an amount not less than One Million Dollars ($1,000,000) for each accident. Such insurance shall insure Tenant's Contractors against any and all claims for bodily injury, including death resulting therefrom, and damage to the property of others arising from its operations under the contracts, whether such operations are performed by Tenant's Contractors, or by anyone directly or indirectly employed by any of them. (iv) "All-risk" builder's risk insurance upon the entire Improvements to the full insurance value thereof. Such insurance shall include the interest of Landlord and Tenant (and their respective contractors and subcontractors of any tier to the extent of any insurable interest therein) in the Improvements and shall insure against the perils of fire and extended coverage and shall include "all-risk" builder's risk insurance for physical loss or damage including, without duplication of coverage, theft, vandalism, and malicious mischief. If portions of the Improvements are stored off the site of the Building or in transit to such site are not covered under such "all-risk" builder's risk insurance, then Tenant shall effect and maintain similar property insurance on such portions of the Improvements. Any loss insured under such "all-risk" builder's risk insurance is to be adjusted with Landlord and Tenant and made payable to Landlord as trustee for the insureds, as their interest may appear, subject to the agreement reached by such parties in interest, or in the absence of any such agreement, then in accordance with a final, nonappealable order of a court of competent jurisdiction. If after such loss no other special agreement is made, the decision to replace or not replace any such damaged the Improvements shall be made in accordance with the terms and provisions of the Lease including, without limitation, this Agreement. The waiver of subrogation provisions contained in the Lease shall apply to the "all-risk" builder's risk insurance policy to be obtained by Tenant pursuant to this paragraph. 83 All policies (except the workmen's compensation policy) shall be endorsed to include as additional named insureds Landlord and its officers, employees, and agents, Landlord's contractors, Landlord's architect, and such additional persons as Landlord may designate. Such endorsements shall also provide that all additional insured parties shall be given thirty (30) days' prior written notice of any reduction, cancellation, or nonrenewal of coverage by certified mail, return receipt requested (except that ten (10) days' notice shall be sufficient in the case of cancellation for nonpayment of premium) and shall provide that the insurance coverage afforded to the additional insured parties thereunder shall be primary to any insurance carried independently by such additional insured parties. At Tenant's request, Landlord shall furnish a list of names and addresses of parties to be named as additional insureds. The insurance policies required hereunder shall be considered as the primary insurance and shall not call into contribution any insurance then maintained by Landlord. Additionally, where applicable, such policy shall contain a crossliability and severability or interest clause. To the fullest extent permitted by law, Tenant and Landlord (and its contractors) shall indemnify and hold harmless the other party, its officers, agents and employees, from and against all claims, damages, liabilities, losses and expenses of whatever nature, including but not limited to reasonable attorneys' fees, the cost of any repairs to the Premises or Building necessitated by activities of the indemnifying party's contractors, bodily injury to persons or damage to property of the indemnified party, its employees, agents, invitees, licensees, or others, arising out of or resulting from the performance of work by the indemnifying party or its contractors. The foregoing indemnity shall be in addition to the insurance requirements set forth above and shall not be in discharge or substitution of the same, and shall not be limited in any way by any limitations on the amount or type of damages, compensation or benefits payable by or for Tenant's Contractors under Workers' or Workmen's Compensation Acts, Disability Benefit Acts or other Employee Benefit Acts. (k) Quality of Work. The Improvements shall be constructed in a first-class workmanlike manner using only good grades of material and in compliance with the Final Plans, and all Requirements. (l) "As-Built" Plans. Upon completion of the Improvements, Tenant shall furnish Landlord with "as built" plans for the Premises, final waivers of lien for the Improvements, a detailed breakdown of the costs of the Improvements (which may be in the form of an owner's affidavit) and evidence of payment reasonably satisfactory to Landlord, and an occupancy permit for the Premises. (m) Mechanics' Liens. Tenant shall not permit any of the Tenant's Contractors to place any lien upon the Building, and if any such lien is placed upon the Building, Tenant shall within ten (10) days of notice thereof, cause such lien to be discharged of record, by bonding or otherwise. If Tenant shall fail to cause any such lien to be discharged, Landlord shall have the right to have such lien discharged and Landlord's expense in so doing, including bond premiums, reasonable legal fees and filing fees, shall be immediately due and payable by Tenant. (n) Exculpation. Neither Landlord's Agent nor the members or partners compromising Landlord or Landlord's Agent, nor the shareholders (nor any of the partners comprising same), directors, officers, or shareholders of any of the foregoing (collectively, the 84 "Parties") shall be liable for the performance of Landlord's obligations under this Agreement. Tenant shall look solely to Landlord to enforce Landlord's obligations hereunder and shall not seek any damages against any of the Parties. The liability of Landlord for Landlord's obligations under this Agreement shall not exceed and shall be limited to Landlord's interest in the Building and Tenant shall not look to the property or assets of any of the Parties in seeking either to enforce Landlord's obligations under this Agreement or to satisfy a judgment for Landlord's failure to perform such obligations. Upon a sale of the Building by Landlord, Tenant shall look solely to the buyer to enforce its rights under this Agreement, and, if and to the extent such buyer has not assumed Landlord's duties, obligations and liabilities hereunder, Tenant may only look to the actual cash proceeds received by Landlord in connection with such sale in seeking to satisfy a judgment for Landlord's failure to perform its obligations under this Agreement. (o) Measurements. Tenant shall be solely responsible to determine at the site all dimensions of the Premises and the Building which affect any work to be performed by Tenant hereunder. 85 Schedule 1 to Workletter Agreement LANDLORD'S WORK --------------- Landlord shall perform the following work at the Building or in the Premises, as applicable: 1. The existing HVAC System shall be rehabilitated on the following basis: (a) Disconnect the third floor trunk ductwork from the existing central built-up dx systems. (b) Remove existing pressure dependent VAV and specially adapted VAV terminal zoning units, existing low pressure ductwork downstream of VAV units and supply air diffusers connected thereto. (c) Install two nominal 60-ton rooftop packaged water cooled dx air handling units to provide cooling air supply for the third floor. Replace the central spine portion of the third floor main supply air trunk ductwork and connect to the new rooftop package units. Recondition existing supply air branch ductwork. Install new supplemental branch duct mains, two per side. (d) Reconfigure the existing central built-up dx systems to provide cooling air supply for only the first and second floors. Remove portions of the existing supply air risers and replace with enlarged ductwork. (e) Replace the central spine portion of the first and second floor(s) main supply air trunk ductwork and connect to the new cooling supply air risers. Recondition existing supply air branch ductwork. Install new supplemental branch duct mains, two per side per floor (f) Clean, recondition and maintain existing central built-up dx system equipment, controls and actuators to ensure optimal operation. (g) Access to plenum space for existing ductwork and terminal unit removal and installation of new ductwork shall be by selective demolition of portions of existing ceiling systems. Replacement of ceiling tile and grid shall be Tenant Improvement Scope. (h) The existing heating system utilizing perimeter fan coil units with hot water heating coils will remain as-is. Fan coil unit coils and ductwork shall be cleaned. 86 (i) The existing condenser water piping system and cooling tower will remain as-is, except for disconnecting the two second floor self-contained water cooled dx units and for pipe modifications to serve the two new rooftop packaged water cooled dx units. This system may be used (Tenant Improvement Scope) for condenser water supply for 7/24 supplemental cooling systems. (j) With the exception of partial replacement of portions of trunk duct supply air mains and installation of supplemental branch supply air mains, the existing air distribution system will remain as-is. (k) Tenant Improvement Scope will require the addition of pressure independent VAV terminal units, pneumatic controls, downstream ductwork, supply diffusers, etc. as may be necessary to accommodate tenant cooling criteria utilizing upgraded cooling system capacity. (l) The existing nominal 25 ton rooftop packaged dx air handling unit serving the existing third floor computer room will remain in place. Other existing small packaged units shall be removed. 2. Remove the existing party deck located on the Building roof (the "Roof Deck") and repair, resurface or replace those portions of the roof membranes and/or roof coatings in need of such repair or replacement, all as reasonably determined by Landlord 87 EXHIBIT E HVAC SPECIFICATIONS The Building HVAC System serving the Premises is designed (at a minimum) to maintain average temperatures within the Premises during the hours of 8:00 a.m. to 6:00 p.m. on Business Days of (i) not less than 68 degrees F. during the heating season when the outdoor temperature is 34 degrees F. or more and (ii) not more than 78 degrees F. and 50% humidity + 5% during the cooling season, when the outdoor temperatures are at 85 degrees F. dry bulb and 66 degrees F. wet bulb, with, in the case of clauses (i) and (ii), a population load per floor of not more than one person per 150 square feet of useable area, other than in dining and other special use areas per floor for all purposes, and shades fully drawn and closed, including lighting and power, and to provide at least .15 CFM of outside ventilation per square foot of rentable area. Use of the Premises, or any part thereof, in a manner exceeding the foregoing design conditions or rearrangement of partitioning after the initial preparation of the Premises which interferes with normal operation of the air-conditioning service in the Premises may require changes in the air-conditioning system serving the Premises. 88 EXHIBIT F CLEANING SPECIFICATIONS GENERAL CLEANING - ---------------- NIGHTLY General Offices: --------------- 1. All hard surfaced flooring to be swept using approved dustdown preparation. 2. Carpet sweep all carpets, moving only light furniture (desks, file cabinets, etc. not to be moved). 3. Hand dust and wipe clean all furniture, fixtures and window sills. 4. Empty all waste receptacles and remove wastepaper. 5. Wash and sanitize all Building water fountains and coolers. 6. Sweep all private stairways. 7. Hand dust and sweep all Building elevators. Lavatories: ---------- 1. Sweep and wash all floors, using proper disinfectants. 2. Wash and polish all mirrors, shelves, bright work and enameled surfaces. 3. Wash and disinfect all basins, bowls and urinals. 4. Wash all toilet seats. 5. Hand dust and clean all partitions, tile walls, dispensers and receptacles in lavatories and restrooms. 6. Empty paper receptacles, fill receptacles from tenant supply and remove wastepaper. 7. Fill toilet tissue holders from Tenant supply and fill sanitary napkin dispenser from Tenant supply. 8. Empty and clean sanitary disposal receptacles. 89 WEEKLY 1. Vacuum all carpeting and rugs. 2. Dust all door louvers and other ventilating louvers within a person's normal reach. 3. Wipe clean all brass and other bright work. QUARTERLY High dust premises complete including the following: 1. Dust all pictures, frames, charts, graphs and similar wall hangings not reached in nightly cleaning. 2. Dust all vertical surfaces, such as walls, partitions, doors and other surfaces not reached in nightly cleaning. 3. Dust all venetian and horizontal blinds. 4. Wash the interior and exterior of all windows. 90 EXHIBIT G RULES AND REGULATIONS 1. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades, screens or other obstructions shall be attached to or hung in or used in connection with any exterior window or entry door of the Premises, without the prior written consent of Landlord. 2. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed to any part of the outside of the Premises or Building or on the inside of the Premises if the same can be seen from the outside of the Premises without the prior written consent of Landlord. Lettering on doors, if and when approved by Landlord, shall be inscribed, painted or affixed for Tenant in a size, color and style acceptable to Landlord. 3. The grills, louvers, skylights, windows and doors that reflect or admit light and/or air into the Premises, halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other article be placed on the window sills, radiators or convectors so as to be visible from the exterior of the Building. 4. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's opinion, tends to impair the reputation of the Building or its desirability as a Building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 5. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purposed other than ingress of egress to and from the Premises and for delivery of merchandise and equipment in a prompt and efficient manner, using elevators and passageways designated for such delivery by Landlord. 6. Except in those areas designated by Tenant as "security areas," all locks or bolts of any kind shall be operable by the Grand Master Key. No locks shall be placed upon any of the doors or windows by Tenant, nor shall any changes be made in locks or the mechanism thereof which shall make such locks inoperable by said Grand Master Key. Tenant shall, upon the termination of its tenancy, turn over to Landlord all keys of stores, offices and toilet rooms, either furnished to or otherwise procured by Tenant and in the event of the loss of any keys furnished by Landlord, Tenant shall pay to Landlord the cost thereof. 7. Tenant shall keep the entrance door to the Premises closed at all times. 8. Except in connection with Tenant's initial move-in to the Premises which may occur at such times as Tenant may reasonably require, all removal or the carrying in or out of any freight, furniture, package boxes, crates or any other object or matter of any description must take place other than during the hours of 8:00 a.m. and 6:00 p.m. on Business Days and in such elevators as Landlord or its Agent may reasonably determine from time to time; provided that the provisions of this Section 8 shall not be deemed to apply to Tenant so long as the sole occupant 91 of the Building is Portal Software, Inc. or a Related Entity, or in any case to the receipt or dispatch by Tenant during ordinary business hours of packages from a recognized courier service such as Federal Express, United Parcel or DHL. 9. There shall not be used in any space or in the public halls of the Building, either by Tenant or by jobbers or any others in the moving or delivery or receipt of safes, freight, furniture, packages, boxes, crates, paper, office material or any other matter or thing, any hand trucks except those equipped with rubber tires, side guards and such other safeguards as Landlord requires. 10. None of Tenant's employees, visitors or contractors shall be permitted to have access to the Building's roof, mechanical, electrical or telephone rooms without permission from Landlord. 11. Tenant shall not make or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them. 12. If Tenant elects to lay floor tile, or other similar floor covering so that the same shall come in direct contact with the floor of the Premises, an interlining of builder's deadening felt shall be first affixed to the floor by a paste or other material, soluble in water; the use of cement or other similar adhesive material being expressly prohibited. 13. Neither Tenant nor any of Tenant's servants, employees, agents, visitors or licensees shall at any time bring or keep upon the Premises any hazardous material, inflammable, combustible or explosive fluid, chemical or substance except such minimal quantities that are incidental to normal office occupancy. 14. Tenant shall not use or keep, or permit to be used or kept, any hazardous or toxic materials or any foul or noxious gas or substance in the Premises or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, vibrations or interfere in any way with other tenants or those having business therein. 15. Tenant shall not cause or permit any odors of cooking or other processes or any unusual or objectionable odors to emanate from the demised Premises which would annoy other tenants or create a public or private nuisance. 16. [Intentionally Deleted] 17. Tenant may, at its sole cost and expense and subject to compliance with all applicable requirements of the Lease, install and maintain vending machines for the exclusive use by Tenant, its officers, employees and business guests, provided that each machine, where necessary, shall have a waterproof pan thereunder and be connected to a drain. 18. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to by Landlord in writing or as permitted by Section 11.8 of the Lease. Tenant shall not cause any unnecessary 92 labor by reason of such Tenant's carelessness or indifference in the preservation of good order and cleanliness. Tenant shall not clean or permit the cleaning of any window in the Premises from the outside, in violation of any requirements. 19. Tenant shall store all its trash, garbage and recyclables within its Premises. No material shall be disposed of which may result in a violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only though entry ways and elevators provided for such purposes and at such times as Landlord shall designate. Tenant shall use the Building's hauler. 20. Tenant shall, at its expense, provide artificial light for the employees of Landlord while doing janitor service or other cleaning, and in making repairs or alterations in the Premises. 21. Except for the normal hanging of pictures on the interior walls of the Premises or the installation of millwork or wall coverings, Tenant shall not maliciously mark, paint, drill into or in any way deface any part of the Premises or the Building. No boring, cutting or stringing of wires shall be permitted, except with prior written consent of Landlord, and as Landlord may direct. 22. The water and wash closets, electrical closets, mechanical rooms, fire stairs and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein. All damages resulting from any misuse of the fixtures shall be borne by Tenant where its servants, employees, agents, visitors or licensees shall have caused the same, other than wear and tear. 23. Tenant, before closing and leaving the Premises at any time, shall see that all lights, water, faucets, etc. are turned out. All entranced doors in the Premises shall be left locked by Tenant when the Premises are not in use. 24. No animals of any kind (except for seeing eye dogs) shall be brought into or kept by any Tenant in or about the Premises or the Building. 25. Canvassing, soliciting and peddling in the Building is prohibited and each Tenant shall cooperate to prevent the same. 26. The Premises shall not be used for lodging or sleeping or for any immoral or illegal purposes. 27. The Premises shall not be used for manufacturing (other than software manufacturing), for the storage of merchandise, or for the sale of merchandise, goods or property of any kind at auction or otherwise, except as specifically permitted by the Lease. 28. Tenant shall not occupy or permit any portion of the Premises to be occupied as an office for a public stenographer or public typist or for the possession, storage, manufacture or sale of narcotics in any form or as a barber or manicure shop or as an employment bureau. 93 Tenant shall not engage or pay any employees on the Premises, except those actually working for such Tenant on said Premises, nor advertise for labor giving an address at said Premises. 29. Tenant shall not accept barbering or bootblacking services in the Premises, from any company or persons not approved by Landlord, which approval shall not be unreasonably withheld, and at hours and under regulations other than as reasonably fixed by Landlord. 30. The requirements of Tenant will be attended to only upon written application at the office of the Building (or by a telephone request by an authorized employee of Tenant), except in the event of any emergency condition. Employees of Landlord or Landlord's Agent shall not perform any work or do anything outside of the regular duties, unless under special instructions from of office of Landlord or in response to an emergency condition. 31. Tenant shall be responsible for the delivery and pick up of all mail from the United States Post Office. 32. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 8 a.m. and at all hours on Saturdays, Sundays and holidays observed by the Building all persons who do not present a pass to the Building signed or approved by Landlord, which approval shall not be unreasonably withheld. Tenant shall be responsible for all persons for whom a pass shall be issued at the request of Tenant and shall be liable to Landlord for all acts of such persons. 33. Tenant shall not invite to the Premises, or permit the visit of, persons in such number or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, elevators and other facilities of the Building by other tenants. 34. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor or any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 35. Landlord shall not be responsible to Tenant or to any other person for the non-observance or violation of these Rules and Regulations by any other tenant or other person. Tenant shall be deemed to have read Rules and Regulations and to have agreed to abide by them as a condition to its occupancy of the Premises. 36. These Rules and Regulations are in addition to, and shall not be constructed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. 94 95 EX-21.1 3 SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1 Subsidiaries of Registrant Company Name Jurisdiction Portal Software International Pty Limited Australia Portal Software Foreign Sales Corporation Barbados Portal Software Canada Inc. Canada Portal Software Cayman Islands, Inc. Cayman Islands Portal International Holdings, Inc. Delaware Portal Software (Europe) Limited England and Wales Portal Software France, SARL France Portal Software Germany GmbH Germany Portal Software (Asia Pacific) Limited Hong Kong Portal Software Japan K.K. Japan Portal Software Informatica S.L. Spain
EX-23.1 4 CONSENT OF ERNST & YOUNG Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-77851, 333-32436) pertaining to the 1999 Stock Incentive Plan and 1999 Employee Stock Purchase Plan of Portal Software, Inc. of our report dated February 16, 2000, except for paragraph 4 of Note 4, as to which the date is March 13, 2000, with respect to the consolidated financial statements of Portal Software, Inc. included in this Annual Report (Form 10-K) for the year ended January 31, 2000. /s/ Ernst & Young LLP Palo Alto, California April 27, 2000 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-31-2000 FEB-01-1999 JAN-31-2000 43,887 157,402 29,733 (1,187) 0 234,351 23,091 (4,306) 265,529 55,634 0 0 0 159 208,211 265,529 103,049 103,049 0 118,749 0 0 382 (6,004) 1,616 (7,620) 0 0 0 (7,620) (0.06) (0.06)
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