-----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, LRHqYZJfaa22LwUCgNmeco0mjwUyX5r+A8rg9WSLvSwtistDI8JYWNi8lqcH+jMH ysRinNyMcLVRB9fVnBa5nQ== 0000950134-01-002487.txt : 20010323 0000950134-01-002487.hdr.sgml : 20010323 ACCESSION NUMBER: 0000950134-01-002487 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS SOLUTIONS INC CENTRAL INDEX KEY: 0001040261 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 752605174 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22935 FILM NUMBER: 1576726 BUSINESS ADDRESS: STREET 1: 3811 TURTLE CREEK BLVD STREET 2: STE 1100 CITY: DALLAS STATE: TX ZIP: 75219 BUSINESS PHONE: 2145285656 MAIL ADDRESS: STREET 1: 3811 TURTLE CREEK BLVD STREET 2: STE 1100 CITY: DALLAS STATE: TX ZIP: 75219 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS SYSTEMS INC DATE OF NAME CHANGE: 19970602 10-K 1 d84582e10-k.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------------- COMMISSION FILE NUMBER 0-22935 PEGASUS SOLUTIONS, INC. (Exact Name of Registrant as specified in its charter) DELAWARE 75-2605174 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3811 TURTLE CREEK BOULEVARD, SUITE 1100, DALLAS, TEXAS 75219 (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5656 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE RIGHTS TO PURCHASE SERIES A PREFERRED STOCK (TITLE OF CLASS) 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 on March 15, 2001 of voting stock held by non-affiliates of the registrant was $207,258,000. The number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of March 15, 2001 was 24,698,089. DOCUMENTS INCORPORATED BY REFERENCE Selected portions of our definitive proxy statement for the 2001 annual meeting of stockholders to be held on May 8, 2001 are incorporated by reference into Part III of this Form 10-K. We disclaim incorporation by reference of information contained on any Internet site. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS Except where expressly indicated or the context otherwise requires, the "Company," "Pegasus," "we," "our" or "us" when used in this report refers to Pegasus Solutions, Inc., a Delaware corporation, and its predecessors and consolidated subsidiaries. This report contains forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including those listed herein under "Risk Factors". OVERVIEW Pegasus is a leading provider of hotel room reservation services, reservation technology systems and hotel representation services for the global hotel industry. Pegasus provides services to: - More than 100,000 travel agencies, including nine of the 10 largest U.S.-based travel agencies based on revenues; - More than 40,000 hotels around the world, including 18 of the 20 largest hotel companies based on revenues and total number of guest rooms; and - Thousands of travel-related Web sites. On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader in providing distribution services and solutions for the hotel industry. The acquisition added hotel representation, central reservation system and property management system services to our existing electronic distribution, commission processing and business intelligence services. Pegasus is organized into two operating companies -- technology and hospitality. The technology company includes central reservation system, or CRS, electronic distribution, commission processing, property management systems, or PMS, TravelWeb.com and business intelligence services. The hospitality company includes hotel representation services offered under the Utell(R) and Golden Tulip(R) brand names as well as Paytell, a service that allows travelers' to prepay for reservations and manage their exposure to foreign currency exchange rate fluctuations. REORGANIZATION On January 30, 2001, Pegasus announced the reorganization of its corporate structure to realign its two business segments. We believe the reorganization will provide greater focus and accountability for each business. The key differences created by the reorganization are as follows: - The technology company and the hospitality company will operate separately. Each will have its own dedicated employees while some administrative functions will remain shared. - Commission Processing and TravelWeb.com, formerly within the hospitality company, will be part of the technology company. The new organizational structure will be used for segment reporting in the first quarter of 2001. All references to the two operating companies in Item 1 of this annual report on Form 10-K reflect the reorganization. All references to the two operating companies in Items 7 and 8 of this annual report on Form 10-K do not reflect the reorganization as these items contain historical information related to periods ending prior to the reorganization. 2 3 STRATEGY Our goal is for our technology company to be the leading provider of information services and technology solutions in the distribution of hotel rooms and for our hospitality company to be the leading provider of hotel representation and marketing services to independent hotels and small hotel chains. We believe our central role as a service provider to the hotel industry positions us to achieve this goal. Key elements of our strategy include the following: - Develop Leading Technologies. To be the leading provider of technology services to the hotel industry, we must develop new technologies and services to meet the changing needs of our current and prospective customers. One such technology that we are currently developing is a Web-based PMS with a comprehensive suite of hotel management, reservation processing and customer relationship management tools. - Grow Our Representation Business. To grow our hotel representation business, we plan to increase the number of reservations made on behalf of existing customers while expanding our customer base. - Expand Hotel Room Distribution Channels. We will strive to continue to expand our hotel information database and increase the number of distribution channels providing hotel room reservation services for individual travelers over the Internet, for convention and other large meeting organizers and for corporate travel departments. We will also work to continue to expand the use by third-party Web sites of our private-label reservation service. Our services continue to create transaction fee revenue opportunities through virtually all of the distribution channels by which electronic hotel room reservations occur. - Build Strategic Alliances and Pursue Acquisition Opportunities. To enhance the functionality and market presence of our services, we intend to build strategic alliances with other participants in the hotel industry, including those providing information technology services and travel-related Internet-based services. We believe that these relationships will increase brand recognition of our services and help to expand our customer base. We will also seek to acquire assets, technology and businesses that provide complementary services or access to new markets and customers. - Expand Our Technology Customer Base. We intend to expand our customer base domestically and internationally by adding customers and by cross-selling new and existing services to our current and future customers. Because of the fixed nature of many of our costs, the addition of new customers and the increase in transaction volumes of new and existing customers would enhance the profitability of our services. SEASONALITY Our business, particularly our hotel representation business, is sensitive to seasonal changes in the demand for hotel rooms. The demand for business and leisure travel is typically lower in the first and fourth quarters of the year; and therefore, these quarters have historically been our weakest quarters. Because the majority of our operating expenses are fixed, fluctuations in revenue from quarter to quarter have a material effect on operating income for the respective quarters. INTERNATIONAL OPERATIONS We derive a substantial portion of our revenue from customers located outside the United States, particularly in Europe. Approximately 60 percent of the hotels we represent within our hospitality company are in Europe. Fluctuations in the value of foreign currencies relative to the U.S. Dollar directly impact our revenues. More information regarding the specific risks associated with our foreign operations is available under the heading "Risk Factors". SERVICES Pegasus is organized into two operating companies -- technology and hospitality. 3 4 TECHNOLOGY The technology company includes CRS, electronic distribution, commission processing, PMS, TravelWeb.com and business intelligence services. Hotel companies are placing an increasing emphasis on the use of technology as a means of both increasing revenues as well as reducing costs. Increasingly, hotel companies are realizing that internally developing and operating their own technology solutions may not always be the most cost effective approach, particularly as this relates to CRS and PMS functions. These systems tend to be expensive to build, operate and update. As a result, many hotel companies have chosen to utilize the services of a third party to provide CRS and PMS capability. Central Reservation System. Pegasus' CRS is provided on an application service processing, or ASP, basis to more than 10,000 hotel properties, representing over 2 million hotel rooms worldwide. During 2000, we processed approximately 40 million hotel bookings through our CRS. Pegasus also provides CRS software licenses to an additional 20 hotel brands, representing 12,000 properties. Our CRS business provides hotel customers with a license for our RezView(TM) CRS software as well as the hardware and facilities necessary to run their CRS and process reservations. CRS also includes the following support services: - System administration - Database administration - Electronic distribution channel management - Telecommunications management - Private-label voice reservation services CRS revenues consist of transaction fees as well as license, maintenance and support fees related to our RezView software. Electronic Distribution. Pegasus Electronic Distribution provides the technology that facilitates electronic hotel room reservations. This technology connects travel industry global distribution systems, or GDSs, and travel-related Internet sites to a hotel's CRS. Pegasus Electronic Distribution supports a variety of distribution channels including the following: - GDS connectivity -- Pegasus Electronic Distribution is linked to all major GDSs and connects our hotel customers to travel agent terminals around the world. - Third-party Web sites -- We provide travel-related Web sites access to our hotel information database containing more than 40,000 properties and on-line hotel reservation capability. We provide this service to several of the top travel Web sites such as Expedia.com, HotWire.com, Lastminute.com, Oracle e-Travel, Continental.com, Orbitz.com and our own TravelWeb.com. - Hotel Web sites -- Our NetBooker(TM) service provides hotel companies with a hotel information database and Internet reservation capabilities. Hotel Web sites that are "Powered by Pegasus"(TM) offer brand-loyal Internet shoppers real-time rates, availability and booking capabilities. Pegasus Electronic Distribution revenues primarily consist of transaction fees, commissions and monthly subscription or maintenance fees. In addition, new hotel customers pay a one-time set-up fee for establishing the connection between the hotel's CRS and our electronic distribution technology. New third-party Web site customers pay a one-time set-up fee for establishing the connection between a hotel's CRS and the third-party Web site. Commission Processing. Pegasus Commission Processing provides a comprehensive and technologically advanced hotel commission processing service by collecting and consolidating check out information and travel agency commissions on behalf of more than 32,000 properties representing a significant number of major hotel brands. Each month Pegasus Commission Processing consolidates and distributes millions of 4 5 dollars in commission payments to its participating travel agencies, which number over 100,000 in more than 200 countries. This value-added commission consolidation and reporting service facilitates more efficient and effective operation for both hotel and travel agency participants by providing a single, monthly commission payment to member travel agencies from participating hotels. Pegasus Commission Processing processed approximately $488 million in hotel commission payments in 2000. Pegasus Commission Processing revenues consist of both travel agency and hotel fees. Travel agency fees are based on a percentage of the value of hotel commissions processed by Pegasus on behalf of participating travel agencies. Revenues from travel agency fees can vary substantially from period to period based on the types of hotels at which reservations are made and fluctuations in overall room rates. In addition, participating hotels generally pay fees based on the number of commissionable transactions that Pegasus processes for the respective hotel. Property Systems and Services. As part of the REZ acquisition, we obtained the GuestView PMS software. Although we are still servicing existing customers, we are not selling new licenses for the GuestView software. PMS revenues in 2000 consisted of maintenance and support fees related to the GuestView software. In November 2000, we entered into an agreement to purchase all or part of Global Enterprise Technology Solutions LLC, or GETS. As part of the transaction, Pegasus obtained an exclusive license to the new Internet-based ASP property management system currently under development by GETS. Pegasus is currently funding and directing the development of the new system. TravelWeb.com. TravelWeb.com is our interactive Internet site on which consumers can research and reserve hotel rooms around the world. TravelWeb.com contains detailed property information on more than 40,000 hotels and allows travelers to directly access hotels' CRSs to check room availability and make or cancel a reservation. Other features include hotel photos, maps, weather information and special discount programs. For hotel reservations that originate on the TravelWeb.com Web site, Pegasus charges the hotel either a transaction fee or a commission based on the value of the guest stay. Business Intelligence. Pegasus Business Intelligence provides customer relationship management and marketing research and information services. Pegasus Business Intelligence revenues consist of fees charged to hotels for the development of hotel databases and for consulting services. In March 2001, Pegasus notified employees and customers that it would not be renewing Business Intelligence contracts and would be winding down its Business Intelligence operations. HOSPITALITY The hospitality company includes hotel representation services offered under the Utell and Golden Tulip brand names as well as Paytell, a service that allows travelers' to prepay for reservations and manage their exposure to foreign currency exchange rate fluctuations. Representation Services. In order to sell their rooms in the marketplace, many independent hotels associate themselves with our hotel representation services and use our systems and infrastructure to market and make reservations for their rooms. Independent hotels join our hotel representation service for the following reasons: - To achieve a cost-effective presence in the primary electronic distribution channels -- GDS and Internet. - To obtain global voice reservation capability whereby travel agents can book their rooms over the telephone via a local call with local language capabilities. - To enhance the market image of the hotel by affiliation with a well-known name in hotel distribution. - To benefit from worldwide sales and marketing support. Our core hotel representation service, offered under the Utell brand name, provides hotel marketing, voice reservation as well as GDS and Internet representation services for approximately 6,400 hotels in more 5 6 than 180 countries. Utell is the oldest, largest and most diverse hotel representation company in the world. It operates the Unison CRS, a sophisticated CRS offering advanced electronic distribution capabilities, providing both a GDS and Internet presence for its member hotels. We also offer branded hotel representation services under the Golden Tulip and Tulip Inns(R) brand names. Affiliation with Golden Tulip allows member hotels to adopt the brand name and quality standards of the well-known Golden Tulip Worldwide brand. Golden Tulip Worldwide members include approximately 400 hotels worldwide. Branded representation service customers also receive hotel marketing, voice reservation as well as GDS and Internet representation services similar to our Utell representation customers. Paytell. Many international travelers who book rooms at hotels to which we provide representation services utilize Paytell to prepay for hotel stays and reduce their exposure to foreign currency fluctuations. Travelers using our Paytell service prepay for hotel rooms in the traveler's local currency. When a traveler arrives at the hotel, Pegasus remits the amount to the hotel in the hotel's local currency. Revenues for this service are derived from the difference in the exchange rate that the traveler actually paid and the exchange rate when the guest stay occurs. OTHER SERVICES Pegasus regularly seeks to develop new services to capitalize on its existing technology and customer base and to provide additional reservation-related capabilities and information services to its existing customers and to other participants in the hotel room distribution process. One such development recently involved a strategic investment in GETS, a company that is developing an Internet-based ASP property management system to which we have an exclusive license. Pegasus has not received a material amount of revenue from these services, and there can be no assurance that any of these services will produce a material amount of revenue in the future. COMPETITION Both of our operating companies face competition from within their respective markets. TECHNOLOGY Central Reservation System. Our CRS business competes with hotel companies that sell their own CRSs and third parties that provide CRSs. Our CRS competitors include Computer Sciences Corporation and MICROS Systems, Inc. Electronic Distribution. Pegasus Electronic Distribution supports a variety of distribution channels, each with its own competition. For example: - GDS connectivity -- Our GDS connectivity service competes with WizCom International, Ltd. Customers may change their electronic reservation interface to WizCom or to another similar service. Also, some hotels have established a direct connection to one or more GDSs rather than through an intermediary, such as Pegasus or WizCom. Other hotels may choose to take the same action. If hotels establish this direct connection, they would bypass our intermediary position and eliminate the need to pay our fees. - Third-party and hotel Web sites -- Our online distribution services face competition in the online hotel room reservation business from current competitors as well as potential new entrants, including other Web sites. Several competitors have Web-based reservation services offering a more comprehensive range of travel opportunities than we do. These Web sites include Hotel Reservation Network, Travelocity.com and Expedia.com. The costs of entry into the Internet hotel room reservation business are relatively low. Commission Processing. Pegasus Commission Processing faces competition principally from National Processing Company, Net Trans, Citicorp and Perot Systems, Inc. National Processing Company has traditionally provided car rental and cruise line commission processing services. Net Trans, Citicorp and Perot 6 7 Systems, Inc. have provided commission consolidation services to hotel chains. In addition, hotels that are current or prospective customers of Pegasus Commission Processing can decide to process commission payments without, or in competition with, Pegasus Commission Processing. Property Systems and Services. Our PMS business competes with hotel companies that sell their own PMSs and third parties that provide PMSs. Our PMS competitors include MICROS Systems, Inc., AremisSoft Hospitality and Ramesys Hospitality. TravelWeb.com. TravelWeb.com faces competition in the online hotel room reservation business from current competitors as well as potential new entrants, including other Web sites. Many competitors engage in significantly more marketing efforts for their Web sites than we do. Several competitors have Web sites offering a more comprehensive range of travel opportunities than we do. These Web sites include Hotel Reservation Network, Travelocity.com and Expedia.com. The costs of entry into the Internet hotel room reservation business are relatively low. HOSPITALITY Our hotel representation services compete with hotel groups, franchisers, consortia, reservation companies and other travel or hotel representation companies. Utell's principal competitors are Lexington Services Corporation, VIP International Corporation, SynXis Corporation, Unirez, Inc. and Sceptre Hospitality Resources. Golden Tulip competes with traditional hotel companies and hotel franchise companies like Choice Hotels International and Best Western International. There can be no assurance that any of our services will compete successfully. Several factors affecting the competitive success of our services include: - Reliability - Pricing structure - The number of hotel properties using the service - The ability of our technology services to provide a neutral, comprehensive interface between hotels and other participants in the distribution of hotel rooms - The ability of our technology services to develop new technological solutions INTELLECTUAL PROPERTY We are continually developing new technology and enhancing existing proprietary technology. We have no patents. We primarily rely on a combination of trademark, copyright, trade secrets, confidentiality procedures and contractual provisions to protect our technology and other intellectual property rights. Despite these protections, it may be possible for unauthorized parties to copy, obtain or use certain portions of our proprietary technology. Any misappropriation of our intellectual property could have a material adverse effect on our competitive position. RESEARCH AND DEVELOPMENT Our research and development activities primarily consist of software development, development of enhanced communication protocols and custom user interfaces and database design and enhancement. Our total research and development expense was $16.0 million, $2.5 million and $4.3 million for 2000, 1999 and 1998, respectively. Research and development expenses for 2000 included an $8.0 million write-off of purchased in-process research and development related to the acquisition of REZ, Inc. Research and development expenses for 1998 included a $1.5 million write-off of purchased in-process research and development related to the acquisition of Driving Revenue L.L.C. 7 8 EMPLOYEES At February 28, 2001, we had 2,003 employees, 1,275 of which are located in the United States and 728 of which are located outside the United States. We had 243 persons performing information technology functions, 1,511 persons performing sales and marketing, customer relations and business development functions and the remainder performing corporate, finance and administrative functions. We have no unionized employees. We believe that our employee relations are satisfactory. RISK FACTORS WE ARE GROWING RAPIDLY AND MAY NOT HAVE THE RESOURCES TO EFFECTIVELY MANAGE ADDITIONAL GROWTH. Our recent growth and potential future growth have placed significant demands on management as well as on our administrative, operational and financial resources. Expanding our business to take advantage of new market opportunities will require significant management attention and financial resources. To manage additional growth we must: - Expand our sales, marketing and customer support organizations - Attract and retain additional qualified personnel - Expand our physical facilities - Invest in the development or enhancement of our current services and develop new services that meet changing industry needs - Develop systems, procedures or controls to support the expansion of our operations Our inability to manage any additional growth could have a material adverse effect on our business, operating results and financial condition. BECAUSE OUR EXPENSES ARE LARGELY FIXED AND WE CANNOT ACCURATELY PREDICT OUR COMPETITIVE ENVIRONMENT, UNEXPECTED REVENUE SHORTFALLS AND QUARTERLY VARIATIONS MAY ADVERSELY AFFECT OUR BUSINESS. Our expense levels are based primarily on our estimate of future revenues and are largely fixed. In the future, we may not accurately predict the introduction of new or enhanced services by us or our competitors or the degree of customer acceptance of new services. We may also be unable to adjust spending rapidly enough to compensate for any unexpected revenue shortfall. In addition, our past and future operating results vary significantly from quarter to quarter due to a variety of factors, many of which are outside of our control. It is likely that in one or more future quarters our results may fall below the expectations of securities analysts or investors. Any significant shortfall in revenues in relation to our planned expenditures would reduce, and possibly eliminate, any operating income. Due to the fixed nature of our costs, and because operating costs are based on anticipated revenues, a decline in revenue from even a limited number of transactions, failure to achieve expected revenue in any fiscal quarter or unanticipated variation in the recognition of revenues can cause significant variations in operating results from quarter to quarter. This could result in losses in some future quarter or have a material adverse effect on our business, operating results and financial condition. We believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. OUR INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO CURRENCY FLUCTUATIONS. We derive a substantial portion of our revenue from customers located outside the United States, particularly in Europe. Approximately 60 percent of the hotels we represent within our hospitality business are in Europe. The majority of our representation service revenues are earned in the hotel's local currency. If the value of foreign currencies relative to the U.S. Dollar decreases, our revenues translate to a lower U.S. Dollar amount. A decrease in the value of foreign currencies relative to the U.S. Dollar would have a material adverse effect on our business, operating results and financial condition. 8 9 OUR INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO GLOBAL ECONOMIC FACTORS, FOREIGN TAX LAW ISSUES AND FOREIGN BUSINESS PRACTICES. Our international operations are subject to particular risks, including: - Difficulties and costs of managing and staffing foreign operations - Inexperience in managing foreign operations - Impact of possible adverse political and economic conditions - Potentially adverse tax consequences - Impact of the policies of the United States and foreign governments on foreign trade - Reduced protection for intellectual property rights in some countries - Unexpected changes in regulatory requirements - Cost of adapting our services to foreign markets If we do not realize our expected results from international operations, it would have a material adverse effect on our business, operating results and financial condition. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW TECHNOLOGIES AND SERVICES TO MEET THE CHANGING NEEDS OF THE PARTICIPANTS IN THE INTENSELY COMPETITIVE HOTEL INDUSTRY. Our future success depends on our ability to develop leading technologies, enhance our existing services and develop and introduce new services. In particular, our technologies and services must meet the needs of our current and prospective customers. They also must continue to meet the demands of technological advances and emerging industry standards and practices on a timely and cost-effective basis. Although we strive to be a technological leader, future technology advances may not complement or be compatible with our services. In addition, we may be unable to economically and timely incorporate technology changes and advances into our business. We may be unsuccessful in effectively using new technologies, adapting our services to emerging industry standards or developing, introducing and marketing service enhancements or new services. We may also experience difficulties that could delay or prevent the successful development, introduction or marketing of these services. If we are unable to develop and introduce new services or enhance existing services on a timely and cost-effective basis or if new services do not achieve market acceptance, it could have a material adverse effect on our business, operating results and financial condition. WE MAY DEVELOP NEW SERVICES THAT WHILE TECHNOLOGICALLY SUCCESSFUL FAIL TO ACHIEVE MARKET ACCEPTANCE. We are continually evaluating new technologies and may develop new services that utilize such technologies. It is possible that a new service, while achieving a technological success, may fail to deliver sufficient benefit to customers to warrant their use of the service. The failure of new services to achieve market acceptance could have a material adverse effect on our business, operating results and financial condition. IF WE ARE UNABLE TO SUCCESSFULLY COMPETE IN THE INTENSELY COMPETITIVE HOTEL INDUSTRY, WE MAY LOSE MARKET SHARE AND BE FORCED TO REDUCE THE PRICES OF OUR SERVICES. We compete in markets that are rapidly evolving, intensely competitive and involve continually changing technology and industry standards. We may not be successful in competing against our current and future competitors. Competitors may be able to respond more quickly than we can to new or emerging technologies, services or changes in customer requirements. We may experience increased competition from current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources than we do. Other participants in the industries in which we participate, as well as new competitors, could create services that are more attractive than our services. Competitive pressures could reduce our market share or require us to reduce the prices of our services. Our inability to compete effectively with these services could have a material adverse effect on our business, operating results and financial condition. 9 10 Each of our services faces competition from within its respective market. For more information about the specific competitive forces facing our services see the section in this Item 1 entitled "Competition". AS NEARLY ALL OF OUR REVENUES ARE DERIVED FROM THE HOTEL INDUSTRY, A DOWNTURN IN THE HOTEL INDUSTRY WOULD LIKELY ADVERSELY AFFECT OUR BUSINESS. Nearly all of our revenues are directly or indirectly dependent on the hotel industry. The hotel industry could experience rapid and unexpected downturns. In the event of a downturn in the hotel industry, we would likely experience significantly reduced demand for our services and solutions. Any significant downturn in the hotel industry or any reduction in the demand for hotel rooms and travel generally, would negatively impact our business, operating results and financial condition. For instance, the hotel industry is highly sensitive to any change in the economic conditions affecting business and leisure travel as well as other unforeseen events. Many factors affect the hotel industry, most of which are beyond our control. The hotel industry and demand for hotel rooms or travel may be affected by, among other things: - Political instability - Regional hostilities - Recession - Gasoline and aviation fuel price escalation - Inflation - Labor strikes We may experience substantial period-to-period fluctuations in our results of operations as a consequence of these factors and others and the general economic conditions affecting the demand for hotel rooms and travel. A DECREASE IN AVAILABLE ROOM INVENTORY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR HOTEL REPRESENTATION BUSINESS. We have little control over the number of rooms we can sell on behalf of our hotel representation customers. Hotels may choose to not make rooms available for us to sell. A decrease in the available room inventory would have a material adverse effect on our business, operating results and financial condition. OUR BUSINESS IS SUBJECT TO SEASONALITY. Our sales and earnings fluctuate based on seasonal patterns that vary in different geographical markets. Historically, the demand for business and leisure travel is typically lower in the first and fourth quarters. Because the majority of our operating expenses are fixed, fluctuations in revenue from quarter to quarter have a material effect on operating income for the respective quarters. However, because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year and cannot be used to indicate financial performance for the entire year. REDUCTIONS IN HOTEL COMMISSION PAYMENTS WOULD REDUCE OUR REVENUES AND NET INCOME. Pegasus Commission Processing derives revenues based on the dollar value of travel agency commissions paid by hotels. Approximately 15 percent of our revenues is attributable to Pegasus Commission Processing. If there is any change in the commission payment process, a reduction in the amount of commissions paid to travel agencies or any increase in the direct distribution of rooms by hotels, our revenues and net income could substantially decrease. Hotels typically are under no contractual obligation to pay room reservation commissions to travel agencies. Hotels could elect to reduce the current industry customary commission rate of 10 percent, limit the maximum commission generally paid for a hotel room reservation or eliminate commissions entirely. For example, Marriott Hotels, a significant customer, has required travel agencies to complete a training course and to sign an agreement in order to continue to receive a 10 percent commission. Failure to do so may result in the travel agency receiving reduced commissions. Hotels increasingly are 10 11 utilizing other direct distribution channels, like the Internet, or offering negotiated rates to major corporate customers that are non-commissionable to travel agencies. Although we have not to date experienced any material reduction in revenues due to these events, there can be no assurance that these or any other efforts to reduce hotel reservation commissions would not adversely affect our business, operating results and financial condition. LOSS OF OUR ARRANGEMENTS WITH KEY CUSTOMERS AND THIRD-PARTY SERVICE ARRANGEMENTS COULD ADVERSELY AFFECT OUR BUSINESS. Our business is dependent upon our customer arrangements with hotel chains, independent hotels, hotel representation firms, travel management companies, travel agencies, travel agency consortia, global distribution systems and Internet-based information and reservation systems. In the future, we may be unable to continue or renew these arrangements on favorable terms or initiate new arrangements. If we are unable to renew, continue or initiate customer arrangements on a favorable basis, it could result in a significant reduction in our customer base and revenue sources. We have not entered into any written agreements with most of our travel agency customers relating to Pegasus Commission Processing. We also rely on third parties to provide remittance and worldwide currency exchange services for Pegasus Commission Processing and for facility maintenance and disaster recovery services for the computer and voice/data communications systems used in all of our services. If we are unable to renew or extend our contracts with existing third-party service providers or enter into contracts with alternate service providers on favorable terms, it could have a material adverse effect on our business, operating results and financial condition. RAPID CONSOLIDATION IN THE HOTEL INDUSTRY COULD LOWER THE VALUE OF OUR SERVICES. We offer volume-based discounting of our fees. The recent consolidation in the hotel industry has resulted in a higher percentage of discounted fees, and this trend could continue. In addition, the GDS industry has consolidated into four major GDS. If further consolidation occurs, the value of our services and the benefits to hotel operators of utilizing our GDS electronic distribution service would be reduced. Any potential decrease in our customer base or any potential increase in the percentage of discounted fees may have a material adverse effect on our business, operating results and financial condition. OUR LIMITED EXPERIENCE IN MANAGING AND INTEGRATING ORGANIZATIONS MAY RESULT IN FUTURE ACQUISITIONS OR JOINT VENTURES BEING DIFFICULT AND DISRUPTIVE. We regularly evaluate acquisition and joint venture opportunities and in the future expect to make acquisitions of other companies or technologies or enter into joint ventures. These acquisitions or joint ventures may divert the time and resources of our management. Further, we have limited experience in integrating newly acquired organizations into our operations. Acquisitions involve many risks including: - Difficulty in integrating or otherwise assimilating technologies, products, personnel and operations - Diversion of management's attention from other business concerns - Issuance of dilutive equity securities and incurrence of debt or contingent liabilities - Large write-offs and amortization expense related to goodwill and other intangible assets - Loss of key employees of acquired organizations - Risks of entering markets in which we have no or limited prior experience - Payments of cash, incurrence of debt or assumption of other liabilities to acquire other businesses The result of one or more of these factors could have a material adverse effect on our business, operating results and financial condition. 11 12 THE LOSS OF OUR BRAND LICENSE AGREEMENT FOR GOLDEN TULIP WOULD REDUCE OUR REVENUES AND NET INCOME. We operate Golden Tulip under a brand license agreement with NH Hotels of Madrid, or NH. Pursuant to the agreement, we are required to have at least 500 participating hotels by the end of 2001. We do not expect to meet that requirement. While we continue to discuss alternatives with NH, we expect to return the licenses and the brand business back to NH at the end of 2001. The loss of revenues generated from our Golden Tulip brand business could have a material adverse effect on our business, operating results and financial condition. WE ARE EXPOSED TO CREDIT RISK FROM INDEPENDENT HOTELS. Our hotel representation customers primarily consist of independent hotels some of which may not be as financially viable as larger hotel chains. Even though we have policies in place to reduce our exposure to credit risk, our inability to collect payments from these independent hotels could negatively impact the results of operations for our hotel representation business and may result in a material adverse effect on our business, operating results and financial condition. OUR COMPUTER SYSTEMS AND DATABASES MAY SUFFER SYSTEM FAILURES, BUSINESS INTERRUPTIONS OR SECURITY RISKS. Our operations depend on our ability to protect our computer systems and databases against damage or system interruptions from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events beyond our control. A significant amount of our computer equipment is located at a single site in Phoenix, Arizona. Any unanticipated problems may cause a significant system outage or data loss. Despite the implementation of security measures, our infrastructure may also be vulnerable to break-ins, computer viruses or other disruptions caused by our customers or others. Any damage to our databases, failure of communication links, security breach or other loss that causes interruptions in our operations could have a material adverse effect on our business, operating results and financial condition. MINORITY INTEREST INVESTMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We may from time to time make investments in other companies and ventures. If we do, we may have little or no control over the success of the company or venture. There can be no assurance of the success of any such investment. On November 1, 2000, we acquired a 20 percent interest in Global Enterprise Solutions LLC, or GETS, a provider of hotel property management systems. Our investment in GETS is accounted for under the equity method of accounting. We have little control over the success of GETS, and there can be no assurance of the success of this investment. The failure of GETS or any other company or venture in which we invest could have a material adverse effect on our financial condition and results of operations. OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE TO MANY FACTORS. Several factors have caused our stock price to be and in the future may be extremely volatile. Our stock price could be subject to wide fluctuations in response to a variety of factors including the following: - Actual or anticipated variations in our quarterly operating results - Our ability to successfully develop, introduce and market new or enhanced products and services to the hotel industry on a timely basis - Unexpected changes in demand for our services and solutions due to the fixed nature of a large portion of our expenses - Unpredictable volume and timing of customer revenues due to seasonality in the travel industry, the terms of customer contracts and other factors - Purchasing and payment patterns, as well as pricing policies, of our competitors 12 13 - Announcements of technological innovations or new services by us or our competitors - Changes in financial estimates by securities analysts - Conditions or trends in the Internet and online commerce industries - Changes in the market valuations of other similarly situated companies - Development in Internet regulations - Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments - Market fluctuations and performance of the hotel industry - Unscheduled system downtime In addition, the trading prices of Internet and technology stocks in general have experienced extreme price and volume fluctuations in recent months. Any negative changes in the public's perception of the prospects of Internet or electronic commerce companies or other broad market and industry factors could depress our stock price regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as recession or interest rate or currency rate fluctuations, also may decrease the market price of our common stock. WE RELY ON TECHNOLOGY LICENSES FROM THIRD PARTIES, THE LOSS OF WHICH MAY HARM OUR ABILITY TO DEVELOP AND SELL OUR SERVICES. We currently and in the future may procure licenses from third parties relating to our services or technology. Our inability to obtain or maintain such licenses could impair our ability to develop and sell our services. Our competitors may obtain licenses with lower royalty obligations or other terms more favorable than those received by us. If we or our suppliers are unable to obtain licenses, we could be forced to market services without certain technological features. Our inability to obtain licenses or to obtain such licenses on competitive terms could have a material adverse effect on our business, operating results and financial condition. WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR PREVENT THEIR UNAUTHORIZED USE, WHICH COULD DIVERT OUR FINANCIAL RESOURCES AND HARM OUR BUSINESS. Our success depends upon our proprietary technology and other intellectual property rights. We rely upon a combination of trademark, copyright, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology and other intellectual property. Despite our current efforts to protect our proprietary rights, these protective measures may not be enforceable or adequate to prevent misappropriation or independent third-party development of our technology. Many foreign jurisdictions offer less protection of intellectual property rights than the United States. Effective copyright, trademark and trade secret protection may not be available in other jurisdictions. In addition, we may need to litigate claims against third parties to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. This litigation could result in substantial cost and diversion of management resources. A successful claim against us could effectively block our ability to use or license our technology and other intellectual property in the United States or abroad. If we cannot adequately protect our proprietary rights, it could have a material adverse effect on our business, operating results and financial condition. OUR SUCCESS SIGNIFICANTLY DEPENDS ON THE EXPERIENCE OF OUR KEY PERSONNEL AND OUR ABILITY TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL. Our success depends on the continued service of our executive officers and other key personnel including our Chief Executive Officer John F. Davis, III and our President Joseph W. Nicholson. Even though we currently have "key-man" insurance covering Messrs. Davis and Nicholson, this insurance amount may not 13 14 adequately compensate for the loss of their services. We believe that our future business results also depend on our ability to identify, attract, motivate and retain skilled technical personnel. Competition for personnel in the electronic commerce industry is intense. We cannot guarantee that we will be able to successfully identify, attract, motivate and retain other highly-skilled personnel in a timely and effective manner. Our failure to retain our officers and key personnel or to recruit new personnel could have a material adverse effect on our business, operating results and financial condition. LITIGATION MAY DIVERT OUR RESOURCES AND REDUCE THE MARKET PRICE OF OUR COMMON STOCK. In some instances, following declines in the market price of a company's securities, securities class-action litigation often has been instituted against that company. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on our business, operating results and financial condition. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD FORCE US TO CHANGE OUR OPERATIONS. Although several aspects of the travel industry are heavily regulated by the United States and other governments, we do not believe the services we offer are currently subject to any material industry-specific government regulation. Any future regulations implemented by federal, state or foreign governmental authorities or affecting one or more of our current or future services could have a material adverse effect on our operations. Our primary customers are hotel chains, independent hotels, hotel representation firms and travel agencies. Any federal, state or foreign governmental authorities, competitors or consumers could raise anti-competitive concerns regarding our relationship with our customers or otherwise. Any such action or similar allegations by third parties could have a material adverse effect on our business, operating results and financial condition. WE COULD BE SUBJECT TO NEW LAWS AND REGULATIONS RELATING TO THE INTERNET. We are subject to the same federal, state and local laws as other companies conducting business on the Internet. Many of these laws and regulations are new and have not yet been thoroughly interpreted by the courts. Accordingly, we face numerous risks related to conducting business on the Internet that include: - The applicability and reach of various laws and regulations is uncertain. - Changes to existing laws or the passage of new laws intended to address privacy issues could directly affect the way we do business and could create uncertainty in the marketplace. - Since our services are accessible worldwide via the Internet, foreign jurisdictions may require that we comply with their laws. Our failure to comply with foreign laws could subject us to penalties ranging from fines to bans on our ability to offer our services. - In the United States, companies are required to qualify as foreign corporations in states where they are conducting business. As an Internet company, it is unclear in which states we are actually doing business. Our failure to qualify as a foreign corporation in a jurisdiction where we are required to do so could subject us to taxes and penalties and could result in our inability to enforce contracts in those jurisdictions. Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could adversely affect our business, operating results and financial condition. THERE ARE DETERRENTS THAT MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING CONTROL OF PEGASUS, EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Provisions in our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us. Our certificate of incorporation and bylaws provide for a classified board of directors serving 14 15 staggered terms of three years, prevent stockholders from calling a special meeting of stockholders and prohibit stockholder action by written consent. Our certificate of incorporation also authorizes only the board of directors to fill director vacancies, including newly created directorships, and states that directors may be removed only for cause and only by the affirmative vote of holders of at least two-thirds of the outstanding shares of the voting stock voting together as a single class. On September 28, 1998, our board of directors adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of our common stock to stockholders of record at the close of business on October 13, 1998. The rights are exercisable only if a person or group of affiliated persons acquires, or has announced the intent to acquire, 20 percent or more of our common stock. In addition, we are subject to the provisions of Delaware law that restrict certain business combinations with interested stockholders even if such a combination would be beneficial to stockholders. These provisions may inhibit a non-negotiated merger or other business combination. The anti-takeover provisions of the Delaware General Corporation Law prevent us from engaging in a "business combination" with any "interested stockholder" for three years following the date that the stockholder became an interested stockholder. Under Delaware law, a Delaware corporation may opt out of the anti-takeover provisions. We do not intend to opt out of these anti-takeover provisions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also discourage others from making tender offers for our shares. As a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent significant changes in our board of directors and our management. ITEM 2. PROPERTIES Our corporate headquarters is located in a leased facility with approximately 59,000 square feet of space in Dallas, Texas. We also have regional hubs in Phoenix, London and Singapore with approximately 121,000, 35,000 and 11,000 square feet of leased office space, respectively. In total, we have 35 offices in 22 countries, all of which are leased facilities. We believe that our existing facilities are well maintained and in good operating condition and are adequate for our present anticipated levels of operations. ITEM 3. LEGAL PROCEEDINGS We are a party from time to time to certain routine legal proceedings arising in the ordinary course of our business. Although the outcome of any legal proceeding cannot be predicted accurately, we do not believe any liability that might result from such proceedings could have a material adverse effect on our business, operating results and financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our stockholders during the fourth quarter of the fiscal year ended December 31, 2000. 15 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Our common stock has been traded on the Nasdaq National Market under the symbol "PEGS" since August 7, 1997. At March 15, 2001, there were approximately 438 record holders of our common stock although we believe that the number of beneficial owners of our common stock is substantially greater. The market prices set forth below have been adjusted to reflect a three-for-two stock split effected on January 7, 2000 in the form of a stock dividend to all stockholders of record on December 20, 1999.
HIGH LOW ------ ------ 2000 Fourth quarter.............................................. $19.31 $ 5.81 Third quarter............................................... $21.00 $ 9.94 Second quarter.............................................. $20.75 $10.50 First quarter............................................... $40.67 $14.25 1999 Fourth quarter.............................................. $54.42 $24.17 Third quarter............................................... $29.75 $19.33 Second quarter.............................................. $32.92 $20.75 First quarter............................................... $30.67 $16.67 1998 Fourth quarter.............................................. $24.17 $ 5.92 Third quarter............................................... $17.92 $ 7.17 Second quarter.............................................. $20.67 $14.67 First quarter............................................... $18.08 $ 9.08
We intend to retain any future earnings for use in our business and do not intend to pay cash dividends in the foreseeable future. The payment of future dividends, if any, will be at the discretion of our board of directors and will depend, among other things, upon future earnings, operations, capital requirements, restrictions in financing agreements, our general financial condition and general business conditions. On September 28, 1998, our board of directors declared a dividend distribution of one right for each outstanding share of our common stock to stockholders of record at the close of business on October 13, 1998. Each right entitles the registered holder to purchase from us one one-thousandth of a share of our Series A Preferred Stock for each share of our common stock held at a price of $90. The number of rights associated with shares of common stock has been proportionally adjusted for the stock split effected in January 2000. The rights are exercisable only if a person or group of affiliated persons acquires, or has announced the intent to acquire, 20 percent or more of our common stock. (b) The Securities and Exchange Commission on August 6, 1997 declared effective the Registration Statement on Form S-1 (File No. 333-28595) relating to the initial public offering of our common stock. 16 17 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data as of and for the years ended December 31, 2000 and 1999 and for the year ended December 31, 1998 are derived from the consolidated financial statements of Pegasus that have been audited by PricewaterhouseCoopers LLP, independent accountants, and are included as Item 8 of this annual report on Form 10-K. Selected consolidated financial data as of December 31, 1998 and as of and for the years ended December 31, 1997 and 1996 are derived from Pegasus' financial statements that have been audited by PricewaterhouseCoopers LLP, but are not included herein. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7 of this annual report on Form 10-K and with Pegasus' consolidated financial statements and notes thereto included as Item 8 of this annual report on Form 10-K.
2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues(1)............................ $161,534 $ 38,036 $29,064 $20,903 $15,869 Net income (loss)(2)....................... (26,582) 8,666 5,396 589 (3,485) Net income (loss) per share(2)(3) Basic.................................... (1.14) 0.47 0.34 0.05 (0.44) Diluted.................................. (1.14) 0.44 0.32 0.05 (0.44) Working capital............................ 6,205 143,606 44,398 38,397 2,068 Total assets............................... 357,705 163,540 60,320 49,923 13,892 Long-term obligations, net of current portion.................................. 20,000 -- 58 661 6,353 Total stockholders' equity................. 260,572 156,772 54,264 43,478 1,954
- --------------- (1) Pegasus' selected consolidated financial data includes net revenues related to the acquisition of REZ, Inc. of $113.8 million in 2000. (2) Pegasus' selected consolidated financial data includes the depreciation and amortization of the following: - Acquisition of 83.3% of the outstanding capital stock of The Hotel Clearing Corporation, or HCC, in July 1995 - Acquisition of the remaining 16.7% of the outstanding capital stock of HCC in June 1996 - Acquisition of Driving Revenue L.L.C. in August 1998 - Acquisition of REZ, Inc. in April 2000 Amortization applicable to the acquisition of HCC totaled approximately $798,000, $1,534,000 and $1,412,000 in 1998, 1997 and 1996, respectively. Amortization applicable to Driving Revenue totaled approximately $337,000, $416,000 and $125,000 in 2000, 1999 and 1998, respectively. Amortization applicable to REZ totaled approximately $41.0 million in 2000. (3) Certain net income (loss) per share amounts were retroactively adjusted for a one hundred-for-one stock split that occurred in June 1996, a four-for-three stock split that occurred in August 1997 and a three-for-two stock split that occurred in January 2000. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the selected consolidated financial data included as Item 6 of this annual report on Form 10-K and the consolidated financial statements and notes thereto included as Item 8 of this annual report on Form 10-K. This discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Pegasus' actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements as a result of many factors including those set forth in Pegasus' filings with the Securities and Exchange Commission, specifically including the risk factors set forth under Item 1 of this annual report on Form 10-K. REORGANIZATION On January 30, 2001, Pegasus announced the reorganization of its corporate structure to realign its two business segments. We believe the reorganization will provide greater focus and accountability for each business. The key differences created by the reorganization are as follows: - The technology company and the hospitality company will operate separately. Each will have its own dedicated employees while some functions will remain shared. - Commission Processing and TravelWeb.com, formerly within the hospitality company, will be part of the technology company. The new organizational structure will be used for segment reporting in the first quarter of 2001. All references to the two operating companies in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" do not reflect the reorganization as this discussion contains historical information related to periods ending prior to the reorganization. OVERVIEW Pegasus is a leading provider of hotel room reservation services, reservation technology systems and hotel representation services for the global hotel industry. Pegasus provides services to: - More than 100,000 travel agencies, including nine of the 10 largest U.S.-based travel agencies based on revenues; - More than 40,000 hotels around the world, including 18 of the 20 largest hotel companies based on revenues and total number of guest rooms; and - Thousands of travel-related Web sites. On April 3, 2000, Pegasus completed the acquisition of REZ, Inc., a leader in providing distribution services and solutions for the hotel industry. The acquisition added hotel representation, central reservation system and property management system services to our existing electronic distribution, commission processing and business intelligence services. Pegasus is organized into two operating companies -- hospitality and technology. The hospitality company includes hotel representation services offered under the Utell, Summit Hotels & Resorts(R), Sterling(TM) Hotels & Resorts and Golden Tulip brand names, commission processing, TravelWeb.com and Paytell. The technology company includes CRS, electronic distribution, PMS and business intelligence services. In 2000, approximately 64 percent and 36 percent of Pegasus' consolidated revenue was derived from the hospitality and technology groups, respectively. 18 19 SERVICES HOSPITALITY The hospitality company includes hotel representation services offered under the Utell, Summit, Sterling and Golden Tulip brand names, Commission Processing, TravelWeb.com and Paytell. Representation Services. In order to sell their rooms in the marketplace, many independent hotels associate themselves with our hotel representation services and use our systems and infrastructure to market and make reservations for their rooms. Independent hotels join our hotel representation service for the following reasons: - To achieve a cost-effective presence in the primary electronic distribution channels -- GDS and Internet. - To obtain global voice reservation capability whereby travel agents can book their rooms over the telephone via a local call with local language capabilities. - To enhance the market image of the hotel by affiliation with a well-known name in hotel distribution. - To benefit from worldwide sales and marketing support. Our core hotel representation service, offered under the Utell brand name, provides hotel marketing, voice reservation as well as GDS and Internet representation services for approximately 6,400 hotels in more than 180 countries. Utell is the oldest, largest and most diverse hotel representation company in the world. It operates the Unison CRS, a sophisticated CRS offering advanced electronic distribution capabilities, providing both a GDS and Internet presence for its member hotels. We also offer branded hotel representation services under the Sterling Hotels & Resorts, Summit Hotels & Resorts, Golden Tulip and Tulip Inns brand names. Both the Sterling and Summit brands are "soft" brands offering independent hotels the ability to maintain their own identity while being affiliated with the Sterling or Summit brand. Sterling Hotels & Resorts include over 150 independent luxury hotels, and Summit Hotels & Resorts include over 150 independent luxury hotels. Affiliation with Golden Tulip allows member hotels to adopt the brand name and quality standards of the well-known Golden Tulip Worldwide brand. Golden Tulip Worldwide members include approximately 400 hotels worldwide. Branded representation service customers also receive hotel marketing, voice reservation as well as GDS and Internet representation services similar to our Utell representation customers. Representation service revenues consist of reservation processing fees, membership fees and fees for various marketing services. Our hotel representation services represented approximately 44 percent of revenues in 2000. Commission Processing. Pegasus Commission Processing provides a comprehensive and technologically advanced hotel commission processing service by collecting and consolidating check out information and travel agency commissions on behalf of more than 32,000 properties representing a significant number of major hotel brands. Each month Pegasus Commission Processing consolidates and distributes millions of dollars in commission payments to its participating travel agencies, which number over 100,000 in more than 200 countries. This value-added commission consolidation and reporting service facilitates more efficient and effective operation for both hotel and travel agency participants by providing a single, monthly commission payment to member travel agencies from participating hotels. Pegasus Commission Processing processed approximately $488 million in hotel commission payments in 2000. Pegasus Commission Processing revenues consist of both travel agency and hotel fees. Travel agency fees are based on a percentage of the value of hotel commissions processed by Pegasus on behalf of participating travel agencies. Revenues from travel agency fees can vary substantially from period to period based on the types of hotels at which reservations are made and fluctuations in overall room rates. In addition, participating hotels generally pay fees based on the number of commissionable transactions that Pegasus processes for the 19 20 respective hotel. Our commission processing revenues represented approximately 15 percent of revenues in 2000. TravelWeb.com. TravelWeb.com is our interactive Internet site on which consumers can research and reserve hotel rooms around the world. TravelWeb.com contains detailed property information on more than 40,000 hotels and allows travelers to directly access hotels' CRS's to check room availability and make or cancel a reservation. Other features include hotel photos, maps, weather information and special discount programs. For hotel reservations that originate on the TravelWeb.com Web site, Pegasus charges the hotel either a transaction fee or a commission based on the value of the guest stay. Paytell. Many international travelers who book rooms at hotels to which we provide representation services utilize Paytell to prepay for hotel stays and reduce their exposure to foreign currency fluctuations. Travelers using our Paytell service prepay for hotel rooms in the traveler's local currency. When a traveler arrives at the hotel, Pegasus remits the amount to the hotel in the hotel's local currency. Revenues for this service are derived from the difference in the exchange rate that the traveler actually paid and the exchange rate when the guest stay occurs. TECHNOLOGY The technology company includes CRS, electronic distribution, PMS and business intelligence services. Hotel companies are placing an increasing emphasis on the use of technology as a means of both increasing revenues as well as reducing costs. Increasingly, hotel companies are realizing that internally developing and operating their own technology solutions may not always be the most cost effective approach, particularly as this relates to CRS and PMS functions. These systems tend to be expensive to build, operate and update. As a result, many hotel companies have chosen to utilize the services of a third party to provide CRS and PMS capability. Central Reservation System. Pegasus' CRS is provided on an ASP basis to more than 10,000 hotel properties, representing over 2 million hotel rooms worldwide. During 2000, we processed approximately 40 million hotel bookings through our CRS. Pegasus also provides CRS software licenses to an additional 20 hotel brands, representing 12,000 properties. Our CRS business provides hotel customers with a license for our RezView CRS software as well as the hardware and facilities necessary to run their CRS and process reservations. CRS also includes the following support services: - System administration - Database administration - Electronic distribution channel management - Telecommunications management - Private-label voice reservation services CRS revenues consist of transaction fees as well as license, maintenance and support fees related to our RezView software. CRS revenues represented approximately 22 percent of revenues for 2000. Electronic Distribution. Pegasus Electronic Distribution provides the technology that facilitates electronic hotel room reservations. This technology connects travel industry GDSs and travel-related Internet sites to a hotel's CRS. Pegasus Electronic Distribution supports a variety of distribution channels including the following: - GDS connectivity -- Pegasus Electronic Distribution is linked to all major GDSs and connects our hotel customers to travel agent terminals around the world. - Third-party Web sites -- We provide travel-related Web sites access to our hotel information database containing more than 40,000 properties and on-line hotel reservation capability. We provide this service 20 21 to several of the top travel Web sites such as Expedia.com, HotWire.com, Lastminute.com, Oracle e-Travel, Continental.com, Orbitz.com and our own TravelWeb.com. - Hotel Web sites -- Our NetBooker service provides hotel companies with a hotel information database and Internet reservation capabilities. Hotel Web sites that are "Powered by Pegasus" offer brand-loyal Internet shoppers real-time rates, availability and booking capabilities. Pegasus Electronic Distribution revenues primarily consist of transaction fees, commissions and monthly subscription or maintenance fees. In addition, new hotel customers pay a one-time set-up fee for establishing the connection between the hotel's CRS and our electronic distribution technology. New third-party Web site customers pay a one-time set-up fee for establishing the connection between a hotel's CRS and the third-party Web site. Electronic Distribution revenues represented approximately 12 percent of revenues for 2000. Property Systems and Services. As part of the REZ acquisition, we obtained the GuestView PMS software. Although we are still servicing existing customers, we are not selling new licenses for the GuestView software. PMS revenues in 2000 consisted of maintenance and support fees related to the GuestView software. In November 2000, we entered into an agreement to purchase all or part of GETS. As part of the transaction, Pegasus obtained an exclusive license to the new Internet-based ASP property management system currently under development by GETS. Pegasus is currently funding and directing the development of the new system. Business Intelligence. Pegasus Business Intelligence provides customer relationship management and marketing research and information services. Pegasus Business Intelligence revenues consist of fees charged to hotels for the development of hotel databases and for consulting services. OTHER SERVICES Pegasus regularly seeks to develop new services to capitalize on its existing technology and customer base and to provide additional electronic hotel reservation capabilities and information services to its existing customers and to other participants in the hotel room distribution process. One such development recently involved a strategic investment in GETS, a company that is developing an Internet-based ASP property management system to which we have an exclusive license. Pegasus has not received a material amount of revenue from these services, and there can be no assurance that any of these services will produce a material amount of revenue in the future. COSTS Pegasus' cost of services consists principally of personnel costs relating to information technology, customer service and telemarketing and facilities and equipment maintenance costs. Research and development costs consist principally of personnel costs, related overhead costs and fees paid to outside consultants. General and administrative expenses are primarily personnel, office, legal and accounting related. Marketing and promotion expenses consist primarily of personnel costs, advertising, amortization of customer incentive contracts, public relations and participation in trade shows and other industry events. Depreciation and amortization expense includes depreciation of computer equipment, office furniture, office equipment and leasehold improvements as well as amortization of software, goodwill and other intangible assets. Interest expense includes interest on a note payable to Utell and interest on payments made under capital equipment leases. REZ, INC. ACQUISITION On April 3, 2000, Pegasus completed the acquisition of REZ, Inc. REZ now operates as a wholly owned subsidiary of Pegasus. The acquisition was accounted for under the purchase method of accounting. Accordingly, REZ's results of operations subsequent to the acquisition date are included in the Company's consolidated financial statements. 21 22 The $245.3 million purchase price includes approximately $11.0 million in acquisition costs and was allocated to assets acquired and liabilities assumed based on estimated fair value at the acquisition date. The approximate fair value of assets acquired and liabilities assumed at the acquisition date, excluding a write-off of purchased in-process research and development, is summarized below (in thousands): Estimated fair value of REZ net tangible assets purchased... $ 996 Deferred tax liability associated with the intangibles acquired.................................................. (42,179) Customer relationships...................................... 59,600 Software.................................................... 33,300 Workforce in-place.......................................... 20,200 Non-compete agreement....................................... 3,700 Goodwill.................................................... 161,708
The allocation of the purchase price to intangibles was based upon an independent, third-party appraisal and management's estimates. The intangible assets and goodwill have estimated useful lives and estimated annual amortization as follows (in thousands):
CALCULATED ESTIMATED ANNUAL AMOUNT USEFUL LIFE AMORTIZATION -------- ----------- ------------ Customer relationships............................. $ 59,600 3 years $19,733 Software........................................... 33,300 3 years 11,048 Workforce in-place................................. 20,200 3 years 6,815 Non-compete agreement.............................. 3,700 5 years 737 Goodwill........................................... 161,708 10 years 16,191
The value assigned to purchased in-process research and development, or IPR&D, was determined by identifying research projects in areas for which technological feasibility had not yet been established. These projects totaled $8.0 million and include a customer reporting system and Corporate Direct, a program for discounted corporate room rates on the Internet. The value was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value as defined below. Net Cash Flows. The net cash flows from the identified projects are based on our estimates of revenues, cost of services, research and development costs, marketing and promotion expenses, and general and administrative expenses associated with each project. The research and development costs included in the model reflect costs to sustain projects, but exclude costs to bring in-process projects to technological feasibility. Discount Rate. The net cash flows were discounted back to their present value using a 25 percent discount rate. This discount rate is higher than the industry weighted average cost of capital due to inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of such technology and the uncertainty of technological advances which could potentially impact the estimates described above. Percentage of Completion. The percentage of completion for each project was determined using costs incurred to date on each project as compared to the remaining research and development to be completed to bring each project to technological feasibility. The percentage of completion applied to the customer reporting and Corporate Direct projects were 65 percent and 80 percent, respectively. Both projects were completed during 2000 although the scope of the customer reporting project was reduced. Management does not expect this change in scope to have a material impact on the Company's revenues, operating results and financial condition. 22 23 RECENT DEVELOPMENTS On January 10, 2001, Pegasus sold its Summit Hotels & Resorts and Sterling Hotels & Resorts brand business to IndeCorp Corporation for an estimated $12 million. IndeCorp is a Chicago-based holding company that owns and operates the luxury hotel brand Preferred Hotels & Resorts Worldwide. In the first quarter of 2001, Pegasus will recognize an after-tax gain of approximately $3 million related to the sale of these two brands. In addition, IndeCorp signed a five-year technology services agreement with Pegasus with an estimated value of $40 million. As part of the agreement, Pegasus will be the exclusive provider of reservation technology, voice and electronic reservation processing, commission processing and a host of other ancillary services to IndeCorp brands, which includes all Preferred Hotels & Resorts, Summit Hotels & Resorts and Sterling Hotels & Resorts member hotels. On January 30, 2001, Pegasus announced the reorganization of its corporate structure to realign its two business segments. As part of the reorganization, our hotel representation business will operate under the Utell name as a wholly owned subsidiary of Pegasus Solutions, Inc. and will represent our hospitality segment. Our technology segment will consist of CRS, electronic distribution, commission processing, PMS, TravelWeb.com and business intelligence services. We will begin using this new organizational structure for segment reporting in the first quarter of 2001. We operate Golden Tulip under a brand license agreement with NH Hotels of Madrid, or NH. Pursuant to the agreement, we are required to have at least 500 participating hotels by the end of 2001. We do not expect to meet that requirement. While we continue to discuss alternatives with NH, we expect to return the licenses and the brand business back to NH at the end of 2001. Because of significant net operating losses, management decided in the fourth quarter of 2000 not to seek new Business Intelligence customers and only to service existing contracts. At that time, the Company determined that the net book values of goodwill and certain other assets were impaired, and recorded asset impairment costs of $2.0 million in the fourth quarter of 2000. At December 31, 2000, Pegasus was in negotiations to sell Business Intelligence. In March 2001, these negotiations were terminated, and Pegasus notified employees and customers that it would not be renewing contracts and would be winding down its Business Intelligence operations. As a result, Pegasus recorded additional asset impairment costs of $1.0 million in its statement of operations for the year ended December 31, 2000. In addition, Pegasus expects to incur related severance costs of approximately $300,000 in the first quarter of 2001. YEARS ENDED DECEMBER 31, 2000 AND 1999 The results of operations for the year ended December 31, 2000 include the effect of the REZ acquisition, which was completed on April 3, 2000 and is discussed in Note 2 to the consolidated financial statements contained herein. Accordingly, REZ's results of operations subsequent to the acquisition are included in the accompanying consolidated financial statements. Weakness of the Euro. Since the REZ acquisition, Pegasus derives a substantial portion of its revenue from customers located outside the United States, particularly in Europe. The weakness of the Euro relative to the U.S. Dollar resulted in Pegasus earning less in revenue during the year ended December 31, 2000 than it otherwise might have earned if currency rates had remained comparable with currency rates for the year ended December 31, 1999. Net Revenues. Net revenues in 2000 increased to $161.5 million from $38.0 million in 1999, primarily due to the acquisition of REZ. Excluding the effect of REZ, revenues increased $9.7 million, or 25.5 percent, primarily due to higher transaction levels for Electronic Distribution and Commission Processing. Revenues for our hospitality segment were $103.3 million in 2000, including $76.9 million in hospitality revenue related to REZ's operations subsequent to the April 3, 2000 effective date of the acquisition. Excluding the effect of REZ, hospitality revenues increased $6.4 million, or 32.2 percent, in 2000 compared to 1999. 23 24 Commission Processing revenues increased 36.5 percent in 2000 compared to 1999 primarily as a result of a 32.6 percent increase in the value of commissions paid to member travel agencies through our commission processing service. The value of commissions paid increased because of an increase in the number of hotel commission transactions processed combined with an increase in the average value of commissions processed. In addition, revenue earned on the spread between the currency in which the hotel commission is earned and the currency paid to the travel agency increased. Incremental reconciliation and tracking services revenue also contributed to the increase in commission processing revenues. Net revenues arising from the increase in commissions paid was offset by a reduction in the average fee received from participating travel agencies for consolidating and remitting hotel commission payments, primarily due to consolidation within the travel agency industry. Pegasus expects this trend to continue. Revenues for our technology segment were $58.2 million in 2000, including $36.9 million related to REZ's operations. Excluding the effect of REZ, technology revenues increased $3.3 million, or 18.1 percent, in 2000 compared to 1999. Electronic Distribution revenues increased 23.5 percent in 2000 as compared to 1999, resulting primarily from a 17.2 percent increase in the number of hotel reservations made through our GDS and Internet-based distribution services. Transaction revenue per transaction increased 3.9 percent in 2000 as compared to 1999 due to an increase in the number of Internet-based transactions, which generate more revenue per transaction. Business Intelligence revenues decreased $506,000, or 25.8 percent, to $1.5 million in 2000 compared to $2.0 million in 1999. Pegasus Business Intelligence revenues consisted of fees charged to hotels for the development and maintenance of hotel databases and for consulting services. Business Intelligence had net pretax losses of approximately $8.4 million and $4.0 million in 2000 and 1999, respectively. Included in the 2000 pretax loss for Business Intelligence was a $3.0 million charge related to asset impairment. Cost of services. Cost of services were $79.7 million in 2000, including $64.1 million attributable to REZ's operations. Excluding the effect of REZ, cost of services increased $2.9 million in 2000 compared to 1999 due to an increase in headcount for Electronic Distribution and Commission Processing. Restructure and asset impairment costs. During the fourth quarter of 2000, we incurred $3.4 million of restructuring and asset impairment charges. Approximately $3.0 million related to a write-down of goodwill and other assets associated with Pegasus Business Intelligence, and approximately $419,000 related to consolidation of reservation centers in Europe and Latin America. Research and development. Research and development expenses were $8.0 million in 2000, including $4.9 million related to REZ's operations. Excluding the effect of REZ, research and development expenses increased $541,000 in 2000 compared to 1999. Write-off of purchased in-process research and development. During 2000, Pegasus wrote off $8.0 million for REZ research and development projects that had not yet reached technological feasibility at the time of acquisition. For more information on the write-off of purchased in-process research and development see the caption "REZ, Inc. Acquisition" in this Management's Discussion and Analysis. General and administrative expenses. General and administrative expenses were $20.4 million in 2000, including $11.9 million related to REZ. Excluding the effect of REZ, general and administrative expenses increased $3.8 million in 2000 compared to 1999 due to an increase in headcount as well as other expenses that were incurred as a result of the acquisition but did not meet the criteria for capitalization. Marketing and promotion expenses. Marketing and promotion expenses were $24.8 million in 2000, including $17.9 million attributable to REZ. Excluding the effect of REZ, marketing and promotion expenses increased $884,000 in 2000 compared to 1999 due to an increase in headcount for commission processing, business intelligence and corporate marketing. Depreciation and amortization. Depreciation and amortization expenses were $51.5 million in 2000. In 2000, depreciation and amortization expense for property and equipment increased to $18.6 million from 24 25 $2.0 million in 1999 primarily due to $16.2 million of depreciation and amortization expense related to REZ property and equipment. In 2000, amortization expense related to purchased intangibles and goodwill increased to $32.9 million from $416,000 in 1999 because of the REZ acquisition. Interest income. Interest income decreased $1.4 million in 2000 compared to 1999 as we had less marketable securities during the second, third and fourth quarters of 2000 due to the REZ acquisition. Interest expense. Interest expense increased $1.7 million in 2000 compared to 1999 primarily due to $1.2 million accrued interest on a note payable to Reed Elsevier plc, the majority REZ shareholder, as well as interest expense for outstanding balances on our Chase line of credit and capital leases. Provision for Income Taxes. Pegasus recorded an income tax benefit of $5.9 million in 2000. Our effective rate differed from the statutory rate primarily due to large non-deductible expenses related to purchase accounting. Pegasus recorded an income tax provision of $4.7 million in 1999, an effective tax rate of 35.1 percent of pretax income. The effective tax rate for 1999 differed from the statutory rate primarily due to state income taxes. YEARS ENDED DECEMBER 31, 1999 AND 1998 Net revenues. Net revenues for 1999 increased to $38.0 million from $29.1 million in 1998, an increase of 30.9 percent. The increase in revenues was primarily driven by higher transaction levels for Electronic Distribution and Commission Processing as well as the acquisition of Driving Revenue in August 1998, which provided the majority of Business Intelligence revenues for 1999. Electronic Distribution revenues increased $5.6 million, or 45.3 percent, in 1999 compared to 1998. The increase resulted primarily from a 28.2 percent increase in the number of hotel reservations made through the GDS and Internet-based distribution services. Although GDS revenue per transaction decreased in 1999 compared to 1998, total transaction revenue per transaction increased 7.2 percent due to a higher percentage of Internet-based transactions, which generate more revenue per transaction. A $1.7 million increase in non- transaction related revenues also contributed to the increase in total electronic distribution revenues. Non-transaction related revenues include implementation fees, subscription fees and advertising revenues. Commission Processing revenues increased 14.7 percent in 1999 compared to 1998 as a result of a 22.4 percent increase in the number of hotel commission transactions processed. The increase in the number of transactions was due in part to an increase in the number of hotel properties and travel agencies participating in Pegasus Commission Processing. The value of commissions paid by Pegasus increased 25.6 percent in 1999 compared to 1998 because of an increase in the number of hotel commission transactions processed combined with an increase in the average value of commissions processed. Net revenues arising from the increase in commissions paid was somewhat offset by a reduction in the average fee received from participating travel agencies for consolidating and remitting hotel commission payments. Pegasus expects this trend to continue. Business Intelligence revenues increased $1.1 million to $2.0 million in 1999 from $0.9 million for 1998 due to the acquisition of Driving Revenue L.L.C. in August 1998. Business Intelligence revenues consisted of fees charged to hotels for the development and maintenance of hotel databases and for consulting services. Business Intelligence had net pretax losses of approximately $4.0 million and $2.8 million for 1999 and 1998, respectively. During 1999, Pegasus continued to invest in technology and personnel to grow this segment. During 1999, Pegasus also invested heavily in the development of marketing and sales personnel to increase customer awareness of Business Intelligence services and products. Pegasus expects this segment to continue to have losses in the foreseeable future. Cost of services. Cost of services increased by $2.7 million, or 26.8 percent, to $12.7 million in 1999 from $10.0 million in 1998. Cost of services increased due to additional staffing primarily related to new business intelligence services. The number of technology personnel increased 25.6 percent at December 31, 1999 compared to December 31, 1998. In addition, Pegasus incurred approximately $104,000 in 1999 for 25 26 enhancing its infrastructure. These enhancements included upgrades to e-mail and wide area networks. This increase was partially offset by a $727,000 decrease in costs associated with Pegasus Commission Processing during the first half of 1999 as some functions that were previously outsourced were brought in-house at a lower cost during the third quarter of 1998. Research and development. Research and development expenses decreased $263,000, or 9.4 percent, to $2.5 million in 1999 from $2.8 million in 1998. In 1999, research and development expenses were primarily related to the development of business intelligence services while 1998 expenses included a major commission processing project, which was completed in the third quarter 1998. This commission processing project was comprised of internally developed software and procedures to sort and consolidate commissions by travel agency. Prior to the completion of this project, this process was outsourced. Write-off of purchased in-process research and development. During 1998, Pegasus incurred a charge of $1.5 million to write-off purchased in-process research and development related to the acquisition of Driving Revenue in August 1998. Based on a third party valuation, approximately $1.5 million of the purchase price was allocated to in-process research and development projects that at the time of the acquisition had not reached technological feasibility and had no probable alternative future use. In determining the valuation Pegasus identified eight projects as in-process research and development. Of these eight, three were associated with a market planner product, three with a database product and two were Internet-enabled query tools. Each project was estimated to have a specific revenue stream that was assumed to generate a 20 percent cash flow margin over a ten-year period. Each project was determined to be at a certain stage of completion ranging from 10 to 70 percent, and these factors were applied to the present value of each project's future cash flows using a 30 percent discount rate. The resulting $1.5 million valuation was charged to operations in 1998. Subsequent to the Driving Revenue acquisition, Pegasus re-evaluated the role of the market planner product. Since the market planner is a stand-alone software sale that does not fit with Pegasus' business strategy, Pegasus has elected to stop selling it and terminated work on the development of the three market planner projects. Pegasus has elected to focus its efforts on projects that better fit with its strategy of producing recurring revenues form customers. Pegasus management believes that the decision not to develop the acquired technology will have no impact on future results of operations or financial position. Pegasus has continued developing new database tools and has completed the major elements of the new database project as of January 2000. The cost to complete the project was approximately $1.0 million, which is roughly consistent with Pegasus' earlier projections. The new database capability is being rolled out to Pegasus' customer base. Pegasus is continuing to work on Internet enabled query tools and expects that these will be available in future years as estimated in the original cash flows used in determining the purchased in-process research and development charge in 1998. General and administrative expenses. General and administrative expenses increased $711,000, or 18.1 percent, to $4.6 million in 1999 from $3.9 million in 1998. The increase was primarily due to higher personnel expenses and office costs including telephone, travel and supplies associated with increased headcount. Personnel and office costs increased approximately $841,000 in 1999 compared to 1998. In addition, accounting and legal expenses increased approximately $113,000 as a result of additional reporting and consulting services necessary due to increasingly complex tax, legal and reporting issues associated with Pegasus' growth over the past year. Marketing and promotion expenses. Marketing and promotion expenses increased $1.2 million, or 23.6 percent, to $6.1 million in 1999 from $4.9 million in 1998. Marketing and promotion expenses increased primarily due to a 26.1 percent increase in the number marketing and sales personnel and the related recruiting and relocation costs. The additional sales and marketing personnel were needed to promote commission processing services, Internet-based distribution services and new business intelligence services. 26 27 Depreciation and amortization. Depreciation and amortization expenses decreased $252,000, or 9.4 percent, to $2.4 million in 1999 from $2.7 million in 1998. Amortization expense decreased $507,000 in 1999 as compared to 1998 because goodwill and capitalized software associated with the purchase accounting transaction that formed Pegasus was fully amortized as of the beginning of the fourth quarter of 1998. The related amortization expense was $798,000 in 1998. The decrease in amortization expense was somewhat offset of by an additional $291,000 for the amortization of goodwill and software related to the acquisition of Driving Revenue in August 1998. Depreciation expense increased $253,000 in 1999 as compared to 1998 due to additions of property and equipment. The increase in depreciation expense was partially offset because the former computing platform for Pegasus Electronic Distribution was fully depreciated and replaced in 1999 with less expensive equipment resulting in lower depreciation expense. Interest income. Interest income increased $2.3 million, or 92.9 percent, to $4.8 million in 1999 from $2.5 million in 1998. Interest income increased as Pegasus had additional cash available for short-term investment as of result of the secondary public offering of common stock in May 1999. The increase was partially offset by a decline in the prevailing interest rate level for short-term investments during the first three quarters of 1999 combined with a shift in the investment portfolio to include tax-exempt securities with lower pre-tax yields. Interest expense. Interest expense decreased $120,000, or 81.8 percent, to $27,000 in 1999 from $147,000 in 1998. Interest expense reflects payments made under capital equipment leases, and the decrease is due to the expiration of some leases. Write-off of minority interest investment. In September 1998, Pegasus purchased a minority interest in Intermezzo, Inc. The Intermezzo board of directors elected to cease operations in July 1999 and entered into an orderly plan of liquidation. Pegasus wrote-off $1.1 million in the second quarter of 1999 representing its entire investment in Intermezzo. Income taxes. Income taxes for 1999 reflect federal, state and foreign income taxes payable. Income taxes for 1998, include only state and foreign as Pegasus was able to realize the benefit of its federal net operating loss carryforwards in 1998. The effective tax rate of approximately 35.1 percent for 1999 increased from the effective tax rate of approximately 3.5 percent for 1998. The lower effective tax rate in 1998 was due to Pegasus' ability to realize the benefit of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Pegasus' principal sources of liquidity at December 31, 2000 included cash and cash equivalents of $32.6 million, short-term investments of $1.6 million, restricted cash of $4.6 million and an unused revolving credit facility of $30.0 million. Pegasus' principal sources of liquidity at December 31, 1999 included cash and cash equivalents of $104.6 million, short-term investments of $35.3 million and restricted cash of $2.9 million. Restricted cash represents funds for travel agency commission checks that were never submitted to the bank by travel agencies for payment within one year of their original issuance. After one year, the bank places a stop on the outstanding travel agency commission checks and returns the funds to Pegasus. Pegasus records, in an accrued liability account, an amount equal to the restricted cash recorded upon receipt of the funds from the bank. The reasons for the checks not clearing include travel agencies going out of business, change in address or the checks being lost. The returned funds are repaid to the original travel agency if they can be located or if not then to their state of residence as required by the unclaimed property laws of their sate. Working capital decreased to $6.2 million in 2000 from $143.6 million in 1999, and net cash provided by operating activities increased to $22.7 million in 2000 from $13.9 million in 1999 due to the REZ acquisition. Capital expenditures consisted of purchases of software, furniture and computer equipment as well as internally developed software costs and amounted to $16.7 million in 2000 compared to $3.4 million in 1999. Additional uses of cash for investing activities in 2000 included the purchase of REZ and a strategic minority equity investment. Additional uses of cash for investing activities in 1999 included the purchase of marketable securities. Pegasus has financed its cash requirements for investments primarily through cash generated from operations, the sale of capital stock and borrowings from its revolving credit facility. Pegasus estimates that its 27 28 capital expenditures during 2001 will range from approximately $12 to $14 million primarily related to adding capacity to existing systems. Proceeds from the exercise of stock options were $1.3 million and $2.2 million in 2000 and 1999, respectively. Pegasus completed secondary public offerings of its common stock in February 1998, raising net proceeds to Pegasus of $4.2 million, and in May 1999, raising net proceeds to Pegasus of $84.4 million. A portion of the proceeds was used at the time of each offering to repay certain lease obligations, for working capital and other general corporate purposes, with the remaining proceeds placed in short-term marketable securities. On April 3, 2000, Pegasus completed the acquisition of REZ, Inc. utilizing approximately $89 million of the net proceeds from its initial and secondary public offerings. Other consideration included an aggregate of 3.99 million shares of Pegasus common stock and a $20 million note payable to Reed Elsevier, the majority REZ stockholder. In conjunction with the REZ acquisition, Pegasus entered into a credit agreement on April 17, 2000. Under the terms of the credit agreement, Pegasus has an aggregate $30 million revolving credit facility with Chase Bank of Texas, Compass Bank and Wells Fargo Bank (Texas). The credit agreement has a two-year term, and a current interest rate of LIBOR plus two percent. There was no amount outstanding under the credit facility at March 15, 2001. On August 9, 2000, the board of directors authorized the repurchase of up to two million shares of Pegasus common stock. The repurchase is at the discretion of the board of directors' Stock Repurchase Committee and may be made on the open market, in privately negotiated transactions or otherwise, depending on market conditions, price, share availability and other factors. Shares repurchased may be reserved for later reissue in connection with employee benefit plans and other general corporate purposes. As of March 15, 2001, Pegasus had repurchased 126,000 shares at a cost of $1.3 million. On November 1, 2000, Pegasus entered into an agreement to acquire all or part ownership of Global Enterprise Technology Solutions, a provider of hotel property management systems. Under the terms of the agreement, Pegasus initiated the acquisition by acquiring a 20 percent interest for a combination of Pegasus common stock and cash totaling $5 million. Pegasus has the right to acquire full ownership of Phoenix-based GETS within the next 24 months for Pegasus common stock and cash. As part of the transaction, Pegasus obtained an exclusive license for the new Internet-based ASP property management system currently under development by GETS. Pegasus is currently funding and directing the development of the system. As of March 15, 2001, Pegasus had funded development costs of $2.9 million. Our future liquidity and capital requirements will depend on numerous factors, including: - Our profitability - Operational cash requirements - Competitive pressures - Development of new services and applications - Acquisition of complimentary businesses or technologies - Response to unanticipated cash requirements Pegasus believes that its cash flows from operations, together with funds available from debt financing, will be sufficient to meet its foreseeable operating and capital requirements through at least the end of 2001. Pegasus may consider other financing alternatives to fund its requirements, including possible public or private debt or equity offerings. However, there can be no assurance that any financing alternatives sought by Pegasus will be available or will be on terms that are attractive to Pegasus. Further, any debt financing may involve restrictive covenants, and any equity financing may be dilutive to stockholders. 28 29 INFLATION Pegasus does not believe that inflation has materially impacted results of operations during the past three years. Substantial increases in costs and expenses could have a significant impact on its results of operations to the extent such increases are not passed along to customers. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," or FAS 133. FAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction. FAS 133, as amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FAS 133," is effective for Pegasus' first quarter financial statements in fiscal 2001. Pegasus currently accounts for its hedging activities in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Pegasus does not believe the adoption of FAS 133 will have a material impact on our consolidated financial statements. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements," which summarizes some of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Staff is providing this guidance due, in part, to the large number of revenue recognition issues that registrants encounter. The application of SAB 101 to revenue recognition for one-time set-up fees had an immaterial effect on Pegasus' consolidated statement of operations. Pegasus applied SAB 101 on a prospective basis for fiscal years beginning after December 31, 1999. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25," or FIN 44. FIN 44 clarifies the application of APB No. 25 for (a) the definition of an employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000, but certain conclusions cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN 44 will not have a significant impact on the Company's financial statements. 29 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pegasus is exposed to certain market risks, including the effects of movements in foreign currency exchange rates and uses derivative financial instrument contracts to manage foreign exchange risks. Pegasus has established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. Company policy prohibits holding or issuing derivative financial instruments for trading purposes. Pegasus has various foreign operations, primarily in North America, Europe, Latin America and Asia. The U.S. Dollar is the functional currency for Pegasus' foreign operations. To reduce the impact of changes in foreign exchange rates on consolidated results of operations and future foreign currency denominated cash flows, Pegasus was a party to various forward exchange contracts at December 31, 2000. These contracts reduce exposure to currency movements affecting existing foreign currency denominated assets and liabilities primarily trade receivables and payables. A summary of forward exchange contracts in place at December 31, 2000 follows (in thousands):
SELL PURCHASE ------- -------- Australian Dollar........................................... $ 233 $ -- Canadian Dollar............................................. 623 -- Swiss Franc................................................. 502 270 Danish Krone................................................ 145 113 Euro........................................................ 7,734 -- British Pound............................................... 1,684 1,993 Greek Drachma............................................... -- 83 Hong Kong Dollar............................................ 63 -- Japanese Yen................................................ 842 -- Korean Won.................................................. 123 -- Norwegian Krona............................................. 489 -- New Zealand Dollar.......................................... 58 56 Swedish Krona............................................... 939 -- Singapore Dollar............................................ -- 253 Thai Baht................................................... 129 -- South African Rand.......................................... 64 -- ------- ------ Total............................................. $13,628 $2,768 ======= ======
A $338,000 contract to sell Japanese Yen has a contract maturity of March 2001. All other contracts mature in January 2001. Because of the short-term nature of these contracts, the fair value approximates the contract value. The difference between the fair value and contract value is included in the consolidated balance sheet as accounts receivable and was not material at December 31, 2000. For more information on derivative financial instruments see Notes 1 and 7 to the consolidated financial statements included in Item 8 to this annual report on Form 10-K. 30 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Pegasus Solutions, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Pegasus Solutions, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Dallas, Texas February 6, 2001, except as to Note 19, which is as of March 7, 2001 31 32 PEGASUS SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS) ASSETS
2000 1999 -------- -------- Cash and cash equivalents................................... $ 32,576 $104,616 Restricted cash............................................. 4,574 2,929 Short-term investments...................................... 1,563 35,283 Accounts receivable, net of allowance for doubtful accounts of $7,159 and $82 at December 31, 2000 and 1999, respectively.............................................. 29,889 4,854 Other current assets........................................ 4,189 2,585 -------- -------- Total current assets.............................. 72,791 150,267 Goodwill, net of accumulated amortization of $11,944 and $938, respectively........................................ 149,764 2,890 Intangible assets, net of accumulated amortization of $20,638................................................... 62,909 -- Property and equipment, net................................. 64,434 4,856 Other noncurrent assets..................................... 7,807 5,527 -------- -------- Total assets...................................... $357,705 $163,540 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 17,727 $ 3,523 Deferred tax liability...................................... 12,078 -- Accrued liabilities......................................... 11,651 1,527 Unearned income............................................. 9,428 63 Accrued payroll and benefits................................ 6,719 1,112 Income tax payable.......................................... 6,212 -- Other current liabilities................................... 2,771 436 -------- -------- Total current liabilities......................... 66,586 6,661 Note payable................................................ 20,000 -- Deferred tax liability...................................... 8,961 -- Other noncurrent liabilities................................ 1,586 107 Commitments and contingencies............................... -- -- Stockholders' equity: Preferred stock, $.01 par value; 2,000 shares authorized; Zero shares issued and outstanding..................... -- -- Common stock, $.01 par value; 50,000 shares authorized, 24,873 and 20,515 shares issued at December 31 2000 and 1999, respectively..................................... 249 205 Additional paid-in capital................................ 288,422 156,978 Unearned compensation..................................... (157) (442) Accumulated comprehensive loss............................ (265) (25) Retained earnings (deficit)............................... (26,501) 82 Treasury stock at cost; 245 and 175 shares at December 31, 2000 and 1999, respectively............................ (1,176) (26) -------- -------- Total stockholders' equity........................ 260,572 156,772 -------- -------- Total liabilities and stockholders' equity........ $357,705 $163,540 ======== ========
See accompanying notes to consolidated financial statements. 32 33 PEGASUS SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 -------- ------- ------- Net revenues................................................ $161,534 $38,036 $29,064 Cost of services............................................ 79,712 12,691 10,008 Restructure and asset impairment costs...................... 3,421 -- -- Research and development.................................... 8,033 2,546 2,809 Write-off of purchased in-process research and development............................................... 8,000 -- 1,480 General and administrative expenses......................... 20,404 4,630 3,919 Marketing and promotion expenses............................ 24,843 6,079 4,920 Depreciation and amortization............................... 51,549 2,438 2,690 -------- ------- ------- Operating income (loss)..................................... (34,428) 9,652 3,238 Other income (expense): Interest income........................................... 3,464 4,828 2,503 Interest expense.......................................... (1,687) (27) (147) Other..................................................... 151 (1,100) -- -------- ------- ------- Income (loss) before income taxes........................... (32,500) 13,353 5,594 Income tax expense (benefit)................................ (5,918) 4,687 198 -------- ------- ------- Net income (loss)........................................... $(26,582) $ 8,666 $ 5,396 ======== ======= ======= Other comprehensive loss -- change in unrealized loss, net of tax of $171 and $13 in 2000 and 1999, respectively..... (240) (25) -- -------- ------- ------- Comprehensive income (loss)................................. $(26,822) $ 8,641 $ 5,396 ======== ======= ======= Basic net income (loss) per share: Basic..................................................... $ (1.14) $ 0.47 $ 0.34 ======== ======= ======= Diluted................................................... $ (1.14) $ 0.44 $ 0.32 ======== ======= ======= Weighted average shares outstanding: Basic..................................................... 23,380 18,576 15,691 ======== ======= ======= Diluted................................................... 23,380 19,689 16,795 ======== ======= =======
See accompanying notes to consolidated financial statements. 33 34 PEGASUS SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
COMMON STOCK TREASURY STOCK UNREALIZED ------------------ ADDITIONAL ------------------- GAIN (LOSS) ON NUMBER OF PAID-IN UNEARNED NUMBER OF MARKETABLE SHARES AMOUNT CAPITAL COMPENSATION SHARES AMOUNT SECURITIES --------- ------ ---------- ------------ --------- ------- -------------- (IN THOUSANDS) Balance at December 31, 1997....... 15,446 $155 $ 58,068 $(739) (175) $ (26) $ -- ------ ---- -------- ----- ---- ------- ----- Secondary offering................. 421 4 4,221 -- -- -- -- Windfall tax benefit of stock options.......................... -- -- 404 -- -- -- -- Net change in unearned compensation..................... -- -- 146 123 -- -- -- Exercise of stock options.......... 96 1 330 -- -- -- -- Issuance for stock purchase plan... 17 -- 161 -- -- -- -- Net income......................... -- -- -- -- -- -- -- ------ ---- -------- ----- ---- ------- ----- Balance at December 31, 1998....... 15,980 160 63,330 (616) (175) (26) -- ------ ---- -------- ----- ---- ------- ----- Secondary offering................. 3,450 35 84,408 -- -- -- -- Windfall tax benefit of stock options.......................... -- -- 4,196 -- -- -- -- Net change in unearned compensation..................... -- -- 150 174 -- -- -- Exercise of stock options.......... 542 5 2,191 -- -- -- -- Issuance of stock warrant.......... 519 5 2,484 -- -- -- -- Issuance for stock purchase plan... 24 -- 219 -- -- -- -- Change in unrealized gain (loss) on marketable securities............ -- -- -- -- -- -- (25) Net income......................... -- -- -- -- -- -- -- ------ ---- -------- ----- ---- ------- ----- Balance at December 31, 1999....... 20,515 205 156,978 (442) (175) (26) (25) ------ ---- -------- ----- ---- ------- ----- Windfall tax benefit of stock options.......................... -- -- 397 -- -- -- -- Net change in unearned compensation..................... -- -- (6) 285 -- -- -- Exercise of stock options.......... 116 1 504 -- -- -- -- Issuance for stock purchase plan... 72 1 809 -- -- -- -- Issuance for REZ, Inc. acquisition...................... 3,990 40 126,742 -- -- -- -- Issuance for investment in Global EnterpriseTechnology Solutions LLC.............................. 180 2 2,998 -- -- -- -- Shares received from REZ, Inc. escrow settlement................ -- -- -- -- (70) (1,150) -- Change in unrealized gain (loss) on marketable securities............ -- -- -- -- -- -- (240) Dividend payable................... -- -- -- -- -- -- -- Net loss........................... -- -- -- -- -- -- -- ------ ---- -------- ----- ---- ------- ----- Balance at December 31, 2000....... 24,873 $249 $288,422 $(157) (245) $(1,176) $(265) ====== ==== ======== ===== ==== ======= ===== RETAINED EARNINGS (DEFICIT) TOTAL --------- -------- (IN THOUSANDS) Balance at December 31, 1997....... $(13,980) $ 43,478 -------- -------- Secondary offering................. -- 4,225 Windfall tax benefit of stock options.......................... -- 404 Net change in unearned compensation..................... -- 269 Exercise of stock options.......... -- 331 Issuance for stock purchase plan... -- 161 Net income......................... 5,396 5,396 -------- -------- Balance at December 31, 1998....... (8,584) 54,264 -------- -------- Secondary offering................. -- 84,443 Windfall tax benefit of stock options.......................... -- 4,196 Net change in unearned compensation..................... -- 324 Exercise of stock options.......... -- 2,196 Issuance of stock warrant.......... -- 2,489 Issuance for stock purchase plan... -- 219 Change in unrealized gain (loss) on marketable securities............ -- (25) Net income......................... 8,666 8,666 -------- -------- Balance at December 31, 1999....... 82 156,772 -------- -------- Windfall tax benefit of stock options.......................... -- 397 Net change in unearned compensation..................... -- 279 Exercise of stock options.......... -- 505 Issuance for stock purchase plan... -- 810 Issuance for REZ, Inc. acquisition...................... -- 126,782 Issuance for investment in Global EnterpriseTechnology Solutions LLC.............................. -- 3,000 Shares received from REZ, Inc. escrow settlement................ -- (1,150) Change in unrealized gain (loss) on marketable securities............ -- (240) Dividend payable................... (1) (1) Net loss........................... (26,582) (26,582) -------- -------- Balance at December 31, 2000....... $(26,501) $260,572 ======== ========
See accompanying notes to consolidated financial statements. 34 35 PEGASUS SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss)......................................... $(26,582) $ 8,666 $ 5,396 Adjustments to reconcile net income to net cash provided by operating activities: Write-off of purchased in-process research and development.......................................... 8,000 -- 1,480 Depreciation and amortization.......................... 51,549 2,438 2,690 Asset impairment....................................... 3,003 -- -- Bad debt expense....................................... 2,874 -- 35 Write-off of minority interest investment.............. -- 1,100 -- Deferred income taxes.................................. (9,865) (661) (2,084) Decrease goodwill due to release of valuation allowance............................................ -- -- 1,467 Other.................................................. 1,153 4,621 705 Changes in assets and liabilities, net of effects of acquisitions: Restricted cash...................................... (1,645) (822) (820) Accounts receivable.................................. 6,664 (1,167) (1,601) Other current and noncurrent assets.................. 2,438 (1,494) (808) Accounts payable and accrued liabilities............. (11,741) 1,484 610 Unearned income...................................... (2,046) (196) (414) Income tax payable................................... 1,827 -- 184 Other noncurrent liabilities......................... (2,897) (36) 9 -------- -------- -------- Net cash provided by operating activities......... 22,732 13,933 6,849 -------- -------- -------- Cash flows from investing activities: Purchase of REZ, Inc., net of cash acquired............... (93,115) -- -- Purchase of software, property and equipment.............. (16,678) (3,383) (1,700) Purchase of marketable securities......................... -- (54,536) (33,832) Proceeds from maturity of marketable securities........... 35,294 34,893 27,416 Cash paid for customer advance............................ (1,500) -- -- Purchase of Driving Revenue L.L.C. ....................... -- -- (5,998) Purchase of investments in unconsolidated companies....... (2,000) (100) (1,500) -------- -------- -------- Net cash used in investing activities............. (77,999) (23,126) (15,614) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock.................... 1,301 89,347 4,717 Proceeds from line of credit.............................. 10,000 -- -- Repayments of line of credit.............................. (10,000) -- -- Repayments of notes payable assumed from acquisition...... (18,021) -- -- Repayments of capital leases.............................. (53) (540) (1,117) -------- -------- -------- Net cash provided by (used in) financing activities...................................... (16,773) 88,807 3,600 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (72,040) 79,614 (5,165) Cash and cash equivalents, beginning year................... 104,616 25,002 30,167 -------- -------- -------- Cash and cash equivalents, end of year...................... $ 32,576 $104,616 $ 25,002 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid............................................. $ 449 $ 28 $ 145 ======== ======== ======== Income taxes paid......................................... $ 1,167 $ 1,117 $ 256 ======== ======== ======== Supplemental schedule of noncash investing and financing activities: Common stock issued for purchase of REZ, Inc. ............ $125,632 $ -- $ -- ======== ======== ======== Note payable issued for purchase of REZ, Inc. ............ $ 20,000 $ -- $ -- ======== ======== ======== Common stock issued for investment in unconsolidated company................................................ $ 3,000 $ -- $ -- ======== ======== ========
See accompanying notes to consolidated financial statements. 35 36 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On May 2, 2000, the stockholders of Pegasus Systems, Inc. approved changing the Company's name to Pegasus Solutions, Inc. As a result of the April 3, 2000 acquisition of REZ, Inc., the new name is more descriptive of the combined entity and its services. Pegasus' common stock is traded on the Nasdaq National Market under the symbol PEGS. Pegasus is a leading provider of end-to-end reservation distribution systems, reservation technology systems and hotel representation services for the global hotel industry. Pegasus is organized into two business segments -- hospitality and technology. The consolidated financial statements include the accounts of Pegasus Solutions, Inc. and its wholly owned subsidiaries ("Pegasus" or "the Company"). All significant intercompany balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation. MANAGEMENT ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. Actual results may differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. RESTRICTED CASH Funds for travel agency commission checks that have not cleared the Company's processing bank after certain time periods are returned to the Company. Any amounts that are not remitted to travel agents will be escheated to the appropriate states, as required by the respective unclaimed property laws. A liability equal to the restricted cash is recorded upon receipt of the funds from the bank and is included in accrued liabilities on the consolidated balance sheets. INVESTMENTS IN DEBT AND EQUITY SECURITIES Marketable securities consist of corporate debt and equity securities. By policy, the Company invests primarily in high-grade marketable securities. All marketable securities are defined as available-for-sale under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such determination at each balance sheet date. Debt securities that are bought with the intent and ability to hold until maturity are classified as held-to-maturity securities and are recorded at amortized cost. Debt securities that the Company does not have the intent or ability to hold until maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with changes in the unrealized gain or loss reported as a separate component of stockholders' equity, net of tax. CAPITALIZED SOFTWARE Software development costs are accounted for in accordance with either Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or 36 37 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Otherwise Marketed," or with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized software development costs are amortized on a product-by-product basis using the greater of the amount computed by the ratio of current year net revenue to estimated future net revenue, or the amount computed by the straight-line method over a period which approximates the estimated economic life of the product. In the event unamortized software costs exceed the net realizable value of the software, the excess is written-off in the period the excess is determined. Additionally, capitalized software includes software purchased from third parties used in the operations of the Company. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, ranging from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the life of the lease. Expenditures for maintenance and repairs, as well as minor renewals, are charged to operations as incurred, while betterments and major renewals are capitalized. Any gain or loss resulting from the retirement or sale of an asset is credited or charged to operations. The Company evaluates long-lived assets, including intangibles, to be held and used in the business, or to be disposed of, for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. Impairment is determined by comparing expected future cash flows (undiscounted and before interest) to the net book value of the assets. If impairment exists, the amount of impairment is measured as the difference between the net book value of the assets and the estimated fair value of the related assets. GOODWILL Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Goodwill is amortized on a straight-line basis over 10 to 15 years. Unamortized goodwill at December 31, 2000 and 1999, was $149.8 million and $2.9 million, respectively. The carrying value of goodwill is evaluated periodically in relation to the operating performance and anticipated future undiscounted net cash flows of the related business. Amortization of goodwill was approximately $12,280,000, $416,000 and $218,000 in 2000, 1999 and 1998, respectively. OTHER INVESTMENTS In June 1998, the Company purchased 250,000 shares of Series A Convertible Preferred Stock of Customer Analytics, Inc. for $500,000 representing approximately 7.1 percent interest. At December 31, 1999, the investment was accounted for based on the lower of cost or fair value. After a series of mergers, the Company's $500,000 investment is currently in Exchange Applications, Inc., a provider of customer relationship marketing solutions. Because Exchange Applications, Inc. is a public company traded on the Nasdaq National Market under the symbol EXAP, the investment was classified as an available-for-sale marketable security under the provisions of FAS 115 at December 31, 2000. In September 1998, the Company purchased 225,225 shares of Series B Convertible Preferred Stock of Intermezzo Systems, Inc. for $1.0 million representing approximately 10.6 percent interest. Intermezzo is a developer of enterprise software solutions for the hospitality industry. The Intermezzo board of directors elected to cease operations in July 1999 and entered into an orderly plan of liquidation. As a result, Pegasus wrote-off $1.1 million in 1999 representing the Company's entire investment in Intermezzo. 37 38 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On November 1, 2000, Pegasus entered into an agreement to acquire all or part ownership of Global Enterprise Technology Solutions LLC ("GETS"), a provider of hotel property management systems. Under the terms of the agreement, Pegasus initiated the acquisition by acquiring a 20 percent interest for a combination of Pegasus common stock and cash totaling $5 million. Pegasus has the right to acquire full ownership of Phoenix-based GETS within the next 24 months for Pegasus common stock and cash. The Company's investment in GETS will be accounted for under the equity method. At December 31, 2000, the Company had advanced $1.5 million to a customer. The amount was included in short-term investments at December 31, 2000, and the entire amount plus accrued interest at nine percent was repaid during the first quarter of 2001. REVENUES Pegasus primarily derives its revenues from transaction fees, commissions, membership fees, license fees and maintenance fees charged to participating hotels and travel agencies. The Company's revenues are predominantly transaction-based. Hotel Representation. Hotel representation revenues consist of reservation processing fees, membership fees and fees for various marketing services. Reservation processing fees are recognized when the guest stay occurs or transaction date depending on the contract terms. Membership fees are generally billed quarterly and recognized ratably over the service period. Marketing service revenues are recognized as the marketing services are provided. Central Reservation Systems. Central Reservation System revenues consist of transaction fees as well as license, maintenance and support fees related to the Company's RezView software. Transaction fees are recognized when the guest stay occurs or transaction date depending on the contract terms. License, maintenance and support fees are recognized ratably over the term of the customer contract. Property Systems. Property system revenues consist of maintenance and support fees related to the Company's GuestView software and are recognized ratably over the term of the customer contract. Pegasus Electronic Distribution. Pegasus derives revenues from its GDS distribution service by charging hotel customers a fee based on the number of reservations made, less the number cancelled ("net reservations"). In addition, hotels pay fees for status messages sent to global distribution systems ("GDS") through the GDS distribution service. Status messages are electronic messages sent by hotels to GDS to update room rates, features and availability information in GDS databases. As a hotel's cumulative volume of net reservations increases during the course of the calendar year, its fee per transaction decreases after predetermined transaction volume hurdles have been met. As a result, for higher volume customers, unit transaction fees are higher at the beginning of the year, when cumulative transactions are lower. The Company recognizes revenues based on the fee per transaction that a customer is expected to pay during the entire year. The Company's interim balance sheets reflect a liability for the difference between the fee per transaction that Pegasus actually bills a customer during the period and the average fee per transaction that a customer is expected to pay for the entire year. The liability created during the early periods of the year is eliminated by the end of the year as the fee per transaction that Pegasus actually bills a customer falls below the average fee per transaction for the entire year. Additionally, Pegasus generally charges new participants in the GDS distribution service a one-time set-up fee for work performed to establish the connection between a hotel's central reservation system and the Pegasus electronic distribution technology. In 1999 and 1998, revenue for these one-time set-up fees was recognized ratably over the set-up period, which generally ranges from two to four months. In 2000, the Company recognized these one-time set-up fees over the life of the customer contract in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." The application of SAB 101 to revenue recognition for one-time set-up fees had an immaterial effect on the Company's consolidated statement of operations. The Company also charges certain 38 39 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) GDS a fee based on either the number of net reservations or the number of hotel chains connected to the GDS through the Pegasus electronic distribution technology to compensate for the management and consolidation of multiple interfaces. Pegasus derives its TravelWeb.com revenues by charging participating hotels a combination of transaction fees or commissions. For reservations that originate on the TravelWeb.com Web site, Pegasus charges either a transaction fee for each net reservation made at participating properties or a commission based on the value of the guest stay. For reservations that originate on Web sites using the private-label reservation service, Pegasus charges hotels transaction fees based on the number of net reservations made at participating properties. Private-label reservation customers also pay initial development fees and monthly subscription or maintenance fees. In 1999 and 1998, initial development fees were recognized ratably over the set-up period. In 2000, the Company recognized these initial development fees over the life of the customer contract in accordance with SAB 101. The application of SAB 101 to revenue recognition for initial development fees had an immaterial effect on the Company's consolidated statement of operations. Pegasus Commission Processing. Pegasus derives commission processing revenues by charging each participating travel agency a fee equal to a percentage of commissions paid to that agency through the commission processing service. The Company also generally charges participating hotels a fee based on the number of commissionable transactions processed. Revenues from travel agency fees can vary substantially from period to period based on the types of hotels at which reservations are made and fluctuations in overall room rates. Pegasus recognizes revenues from its commission processing service in the month in which the hotel stay occurs. In the immediate following month, Pegasus collects commissions from the hotels by the 12th business day of such month and pays commissions to travel agencies by the 15th business day of such month. If a hotel fails to deliver funds to the Company, Pegasus is not obligated to deliver commission payments on behalf of the hotel to travel agencies. For the years ended December 31, 2000, 1999 and 1998, Pegasus Commission Processing revenues from hotels are presented net of commission payments to travel agencies of approximately $469 million, $352 million and $255 million, respectively. Pegasus Business Intelligence. Pegasus derives its business intelligence revenues by charging hotels fees for the development and maintenance of hotel databases and for consulting services. Pegasus Business Intelligence recognizes as revenue the portion of the total contract price that the cost expended to date bears to the anticipated final cost, based on current estimates to complete. Contract costs include all direct labor and benefits and direct materials. Additional billings are included in revenues when awarded or received. Revisions in estimates of costs and earnings during the course of the work are reflected in the accounting period in which the facts that require the revision become known. At the time a loss becomes known, the entire amount of the estimated ultimate loss is recognized in the financial statements. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. 39 40 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ADVERTISING COSTS Advertising and promotion-related expenses are charged to operations when incurred. Advertising expense for 2000, 1999 and 1998 was approximately $5,091,000, $982,000 and $1,105,000, respectively. RESEARCH AND DEVELOPMENT Research and development expenses are charged to operations when incurred. FOREIGN CURRENCY The Company has various foreign operations, primarily in North America, Europe, Latin America and Asia. The U.S. Dollar is the functional currency for the Company's foreign operations. Gains and losses from foreign currency transactions are recognized in the period in which they occur and are included in other income (expense). FINANCIAL INSTRUMENTS The Company uses derivative financial instrument contracts to manage foreign exchange risks. Amounts receivable or payable under derivative financial instrument contracts, are reported on the consolidated balance sheet. As exchange rates fluctuate, gains and losses on contracts designated as hedges of existing assets and liabilities are recognized in the statement of operations as other income (expense). The carrying amounts of the Company's financial instruments reflected in the consolidated balance sheets at December 31, 2000 and 1999 approximate their respective fair values. CONCENTRATIONS OF CREDIT AND MARKET RISK The Company's financial instruments exposed to concentrations of credit risk consist primarily of cash, receivables and forward contracts to purchase or sell foreign currencies. Cash. Cash balances exceeding the federally insured limits are maintained in financial institutions. However, management believes the institutions are of high credit quality. Accounts Receivable. Although the Company's largest hotel customers are well-established entities in the travel industry, most of the Company's representation customers are independent hotels, some of which are located outside the United States and may not be as financially viable as larger hotel companies. Even though the Company has policies in place to limit exposure from concentrations of credit risks, management believes the Company has moderate exposure to credit risk related to accounts receivable from its hotel representation customers. Foreign Currency Contracts. The counterparties to the Company's foreign exchange contracts are substantial and creditworthy multinational commercial banks or other financial institutions that are recognized market makers. Neither the risks of counterparty nonperformance nor the economic consequences of counterparty nonperformance associated with these contracts are considered by the Company to be material. The Company is exposed to certain market risks, including the effects of movements in foreign currency exchange rates. The Company uses derivative financial instrument contracts to manage foreign exchange risks. The Company has established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. Company policy prohibits holding or issuing derivative financial instruments for trading purposes. 40 41 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTING FOR 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. Pro forma disclosure of net income based on the provisions of FAS 123 is presented in Note 10. For financial reporting purposes, the Company has elected 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" ("APB 25"), and related Interpretations. NET INCOME (LOSS) PER SHARE Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury stock method. The effect of stock options would not be included in the calculation of diluted net loss per share as the inclusion of stock options would be anti-dilutive. The Company has no other potentially dilutive securities. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the years ended December 31, 2000 and 1999, the Company had marketable securities classified as available-for-sale. The change in the unrealized gain (loss) is included as a component of stockholders' equity and other comprehensive income, net of taxes. There were no items that qualified for treatment as components of other comprehensive income for 1998. CHANGE IN ACCOUNTING POLICY On December 3, 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which summarizes certain of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Staff provided this guidance due, in part, to the large number of revenue recognition issues that registrants encounter. The application of SAB 101 to revenue recognition for one-time set-up fees had an immaterial effect on the Company's consolidated statement of operations for the years ended December 31, 1999 and 1998. The Company applied SAB 101 on a prospective basis for fiscal years beginning after December 31, 1999. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("FAS 133"). FAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction. FAS 133, as amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FAS 133," is effective for Pegasus' first quarter financial statements in fiscal 2001. Pegasus currently accounts for its hedging activities in accordance 41 42 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The adoption of FAS 133 will not have a material impact on our consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25," ("FIN 44"). FIN 44 clarifies the application of APB No. 25 for (a) the definition of an employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000, but certain conclusions cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN 44 will not have a significant impact on the Company's financial statements. 2. ACQUISITIONS DRIVING REVENUE L.L.C. In August 1998, the Company acquired all of the equity interest in Driving Revenue L.L.C. for approximately $6.0 million plus estimated expenses of less than $100,000. The acquisition was recorded under the purchase method of accounting. Accordingly, Driving Revenue's results of operations subsequent to the acquisition date are included in the accompanying consolidated financial statements. The purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair value at the date of acquisition. The approximate fair value of assets acquired and liabilities assumed at the date of acquisition, after giving effect to the write-off of certain purchased research and development, is summarized as follows (in thousands): Current assets.............................................. $ 176 Software.................................................... $ 344 Property and equipment...................................... $ 42 Goodwill.................................................... $4,296 Current liabilities......................................... $ 338
Approximately $1,480,000, based on a valuation performed by a third party, was allocated to in-process research and development ("IPR&D") projects that at the time of the acquisition had not reached technological feasibility and had no probable alternative future use. Factors considered in determining the amount of the purchase price allocated to IPR&D include the estimated stage of development for each project at the acquisition date, the projected cash flows from the expected revenues to be generated from each project and discounting the net cash flows. Such amount of IPR&D was charged to expense at the date of acquisition. The balance of the purchase price, approximately $4,296,000, was recorded as goodwill and is being amortized on a straight-line basis over a ten year period ending August 2008. Subsequent to the acquisition, Business Intelligence, the Company's business unit that includes Driving Revenue's operations, had significant net operating losses. As a result, management decided not to seek new Business Intelligence customers and only to service existing contracts. The Company determined that the net book values of goodwill and certain other assets were impaired, and recorded asset impairment costs of $2.0 million in the fourth quarter of 2000 (see Note 19). REZ, INC. On April 3, 2000, Pegasus completed the acquisition of REZ, Inc. REZ now operates as a wholly owned subsidiary of Pegasus. The acquisition was accounted for under the purchase method of accounting. Accordingly, REZ's results of operations subsequent to the acquisition date are included in the Company's audited consolidated financial statements. 42 43 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The $245.3 million purchase price includes approximately $11.0 million in acquisition costs and was allocated to assets acquired and liabilities assumed based on estimated fair value at the acquisition date. The approximate fair value of assets acquired and liabilities assumed at the acquisition date, excluding a write-off of purchased IPR&D, is summarized below (in thousands): Estimated fair value of REZ net tangible assets purchased... $ 996 Deferred tax liability associated with the intangibles acquired.................................................. (42,179) Customer relationships...................................... 59,600 Software.................................................... 33,300 Workforce in-place.......................................... 20,200 Non-compete agreement....................................... 3,700 Goodwill.................................................... 161,708
The allocation of the purchase price to intangibles was based upon an independent, third-party appraisal and management's estimates. The intangible assets and goodwill have estimated useful lives and estimated annual amortization as follows (in thousands):
CALCULATED ESTIMATED ANNUAL AMOUNT USEFUL LIFE AMORTIZATION -------- ----------- ------------ Customer relationships............................. $ 59,600 3 years $19,733 Software........................................... 33,300 3 years 11,048 Workforce in-place................................. 20,200 3 years 6,815 Non-compete agreement.............................. 3,700 5 years 737 Goodwill........................................... 161,708 10 years 16,191
The value assigned to purchased IPR&D was determined by identifying research projects in areas for which technological feasibility had not yet been established. These projects totaled $8.0 million and include a customer reporting system and Corporate Direct, a program for discounted corporate room rates on the Internet. The value was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value. The following unaudited pro forma summary combines the consolidated results of operations of Pegasus and REZ for the year ended December 31, 2000 and 1999 as if the acquisition had occurred at the beginning of 2000 and 1999 after giving effect to certain pro forma adjustments. The pro forma adjustments include: - amortization of excess purchase price allocated to other intangibles - amortization of goodwill - elimination of REZ's amortization expense related to existing intangible assets - financing costs including increased interest expense on note payable and line of credit borrowings and decreased interest income - elimination of intercompany amounts - elimination of IPR&D due to its nonrecurring nature - related income tax effects 43 44 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) This pro forma financial information is provided for informational purposes only and may not be indicative of the results of operations as they would have been had the transaction been effected on the assumed dates nor is it indicative of the results of operations which may occur in the future.
UNAUDITED ------------------- 2000 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- Net revenues................................................ $196,200 $184,024 Net loss.................................................... $(26,349) $(37,105) Net loss per share.......................................... $ (1.13) $ (1.64)
In 2000, the Company incurred a $419,000 restructuring charge related to consolidation of certain REZ reservation centers in Europe and Latin America. Pegasus operates Golden Tulip under a brand license agreement with NH Hotels of Madrid ("NH"). Pursuant to the agreement, the Company is required to have at least 500 participating hotels by the end of 2001. Pegasus does not expect to meet that requirement. While the Company continues to discuss alternatives with NH, it expects to return the licenses and the brand business back to NH at the end of 2001. 3. ACCOUNTS RECEIVABLE The Company collects travel agents' commissions from hotel chains and, after retaining a portion of these commissions as a fee, remits the net commissions to the travel agents. At December 31, 2000 and 1999, trade accounts receivable were stated net of commissions of approximately $32.8 million and $29.2 million, respectively. 4. MARKETABLE SECURITIES Marketable securities held by the Company at December 31, 2000 and 1999 are classified as available-for-sale and consist of short-term corporate debt and equity securities. The cost and fair value of marketable securities at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999 ----- ------- Cost........................................................ $ 500 $35,320 Gross unrealized holding losses............................. (437) (37) ----- ------- Fair value.................................................. $ 63 $35,283 ===== =======
Realized gains and losses are determined on a specific identification basis. There were no realized gains or losses from investment transactions in 2000, 1999 or 1998. 44 45 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT Property and equipment at December 31 consisted of the following (in thousands):
2000 1999 -------- -------- Software.................................................... $ 65,941 $ 10,921 Computer equipment.......................................... 20,974 6,086 Furniture and equipment..................................... 2,868 1,032 Office equipment............................................ 4,925 1,796 Leasehold improvements...................................... 2,331 204 -------- -------- 97,039 20,039 Less: accumulated depreciation.............................. (32,605) (15,183) -------- -------- Property and equipment, net................................. $ 64,434 $ 4,856 ======== ========
Depreciation expense for property and equipment was $18.6 million, $2.0 million and $1.8 million for 2000, 1999 and 1998, respectively. 6. CAPITAL LEASES Assets recorded under capital leases, primarily consisting of computer equipment, are recorded at the lower of the present value of future minimum lease payments or the fair value of the asset. Total assets recorded under capital leases in 2000 and 1999 were approximately $626,000 and $470,000, respectively, net of accumulated amortization of $612,000 and $470,000, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense. Future minimum lease payments total $141,000 and are all due in 2001. Interest rates on capital leases range from approximately 7 percent to 23 percent. Interest expense on capital leases for the years ended December 31, 2000, 1999 and 1998 was approximately $103,000, $17,000 and $144,000, respectively. 7. DERIVATIVE FINANCIAL INSTRUMENTS To reduce the impact of changes in foreign exchange rates on consolidated results of operations and future foreign currency denominated cash flows, the Company was a party to various forward exchange contracts at December 31, 2000. These contracts reduce exposure to currency movements affecting existing foreign currency denominated assets and liabilities primarily trade receivables and payables. 45 46 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of forward exchange contracts in place at December 31, 2000 follows (in thousands):
SELL PURCHASE ------- -------- Australian Dollar........................................... $ 233 $ -- Canadian Dollar............................................. 623 -- Swiss Franc................................................. 502 270 Danish Krone................................................ 145 113 Euro........................................................ 7,734 -- British Pound............................................... 1,684 1,993 Greek Drachma............................................... -- 83 Hong Kong Dollar............................................ 63 -- Japanese Yen................................................ 842 -- Korean Won.................................................. 123 -- Norwegian Krona............................................. 489 -- New Zealand Dollar.......................................... 58 56 Swedish Krona............................................... 939 -- Singapore Dollar............................................ -- 253 Thai Baht................................................... 129 -- South African Rand.......................................... 64 -- ------- ------ Total............................................. $13,628 $2,768 ======= ======
A $338,000 contract to sell Japanese Yen has a contract maturity of March 2001. All other contracts mature in January 2001. Because of the short-term nature of these contracts, the fair value approximates the contract value. The difference between the fair value and contract value is included in the consolidated balance sheet as accounts receivable and was not material at December 31, 2000. 8. DEBT As part of the consideration paid for REZ, the Company has a $20 million note payable to Reed Elsevier plc, the majority REZ shareholder. The note bears an eight percent interest rate and is payable on April 3, 2002. The note was issued in lieu of cash consideration otherwise receivable by Reed Elsevier. The Company entered into a credit agreement in April 2000. Under the terms of the agreement, the Company has an aggregate $30 million revolving credit facility with Chase Bank of Texas, Compass Bank and Wells Fargo Bank (Texas). The credit agreement has a two-year term and a current interest rate of LIBOR plus two percent. There was no amount outstanding under the credit facility at December 31, 2000. 9. STOCKHOLDERS' EQUITY Effective February 11, 1998, the Company completed a secondary public offering of common stock. The Company sold 420,481 shares of common stock at $11.67 per share. Net proceeds, after deducting the underwriting discount and estimated offering expenses, were approximately $4.2 million. Selling stockholders also sold 3,202,019 shares at $11.67 per share. The Company did not receive any proceeds from the sales of shares by the selling stockholders. In September 1998, the board of directors declared a dividend distribution of one preferred stock purchase right for each outstanding share of the Company's common stock. Each right will entitle stockholders to buy one one-thousandth of a share of the Company's Series A preferred stock for each share of the Company's common stock held at a price of $90.00. The number of rights associated with shares of common stock has been proportionally adjusted for the stock split effected in January 2000. The rights will be 46 47 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) exercisable only if a person or group of affiliated or associated persons acquires, or has announced the intent to acquire, 20 percent or more of the Company's common stock. In May 1999, Pegasus completed a secondary public offering of common stock. The effective date of the registration statement on Form S-3 was May 6, 1999. Pegasus sold 3,450,000 shares of common stock at a price of $25.92 per share. After deducting the underwriters' discounts and offering expenses, net proceeds to Pegasus were approximately $84.4 million. On December 8, 1999, the board of directors approved a three-for-two stock split to be effected in the form of a stock dividend on January 7, 2000 to stockholders of record on December 20, 1999. All references in the consolidated financial statements to shares, share prices, per share amounts and stock plans have been retroactively adjusted for the three-for-two stock split. In connection with the stock split, $68,383 was reclassified to common stock from additional paid-in capital in the December 31, 1999 balance sheet. On August 9, 2000, the board of directors authorized the repurchase of up to two million shares of the Company's common stock. The repurchase is at the discretion of the board of directors' Stock Repurchase Committee and may be made on the open market, in privately negotiated transactions or otherwise, depending on market conditions, price, share availability and other factors. Shares repurchased may be reserved for later reissue in connection with employee benefit plans and other general corporate purposes. As of December 31, 2000, no shares were repurchased by the Company. 10. STOCK-BASED COMPENSATION In accordance with the Company's 1996 stock option plan ("1996 Plan"), amended and approved in March 1997, options to purchase 1.3 million shares of the Company's common stock may be granted to Company employees. In accordance with the Company's 1997 stock option plan ("1997 Plan"), approved in March 1997, options to purchase shares of the Company's common stock may be granted to Company employees, non-employee directors and contractors. The 1997 Plan was amended in May 2000 to provide that the number of shares reserved for issuance would equal 15 percent of the number of shares outstanding as of the last business day in April each year, less the number of shares reserved under all Company stock option plans as of that date. The number of shares reserved for issuance under both the 1996 and 1997 Plans (collectively, "Plans") as of December 31, 2000 was approximately 3.9 million. Options granted under the Plans may be in the form of incentive stock options or nonqualified stock options. The compensation committee of the board of directors ("Committee") administers the Plans and determines grant prices. Options granted to Company employees generally vest over a four-year period. Options granted to non-employee directors and contractors vest and expire as determined by the Committee. Options granted under the 1996 Plan before September 15, 1999 expire in December 2005. Options granted to Company employees under the 1997 Plan before September 15, 1999 expire in December 2006. Options granted to Company employees on or after September 15, 1999 under the Plans expire ten years from the date of grant. The Company's authorized but unissued or reacquired common stock is used for issuance of shares as stock options are exercised. In accordance with APB 25, the Company recorded unearned compensation of approximately $250,000 and $241,000 in 1999 and 1998, respectively, related to stock option grants. No unearned compensation was recorded in 2000. Unearned compensation is being recognized ratably over the vesting period for the stock option grants. Compensation expense of approximately $279,000, $323,000 and $269,000 was charged to operations in 2000, 1999 and 1998, respectively. As discussed in Note 1, the Company has adopted the disclosure-only provision of FAS 123. Had compensation cost for the Company's stock option plans been determined based on the fair value provisions of 47 48 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FAS 123, the Company's net income (loss) and net income (loss) per share would have been decreased (increased) to the pro forma amounts indicated below (in thousands, except per share amounts):
2000 1999 1998 -------- ------ ------ Net income (loss) -- as reported......................... $(26,582) $8,666 $5,396 Net income (loss) -- pro forma........................... $(30,267) $7,572 $4,860 Net income (loss) per share -- as reported: Basic.................................................. $ (1.14) $ 0.47 $ 0.34 Diluted................................................ $ (1.14) $ 0.44 $ 0.32 Net income (loss) per share -- pro forma: Basic.................................................. $ (1.29) $ 0.41 $ 0.31 Diluted................................................ $ (1.29) $ 0.38 $ 0.29
The pro forma disclosures provided are not likely to be representative of the effects on reported net income (loss) for future years due to future grants and the vesting requirements of the Company's stock option plans. The weighted average fair value for options with exercise prices equal to the market price of stock at the grant date was $10.88, $14.55 and $4.54 in 2000, 1999 and 1998, respectively. The weighted average fair value for options with exercise prices below the market price of stock at the grant date was $13.72 in 1999 and $8.99 in 1998. There were no options granted in 2000 with exercise prices below the market price of stock at the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 1998 --------- --------- --------- Dividend yield..................................... -- -- -- Expected volatility................................ 83.0% 72.0% 72.8% Risk-free rate of return........................... 6.4% 5.7% 4.6% Expected life...................................... 4.0 years 4.0 years 4.0 years
The following table summarizes activity under the Company's stock option plans during the years ended December 31 (in thousands, except per share amounts):
WEIGHTED AVERAGE EXERCISE NUMBER OF COMPANY OPTIONS PRICE PER SHARE -------------------------- -------------------------- 2000 1999 1998 2000 1999 1998 ------ ------ ------ ------- ------- ------ Options outstanding at beginning of year............................. 1,859 2,001 1,623 $10.71 $ 4.91 $3.83 Granted............................ 1,586 525 596 16.89 24.93 8.29 Exercised.......................... 110 544 100 4.26 4.02 3.73 Canceled........................... 266 123 118 17.69 6.64 8.13 ----- ----- ----- ------ ------ ----- Options outstanding at end of year............................. 3,069 1,859 2,001 $13.53 $10.71 $4.91 ===== ===== ===== ====== ====== ===== Options exercisable at end of year............................. 1,073 707 736 $ 6.99 $ 3.63 $2.95 ===== ===== ===== ====== ====== =====
48 49 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information for stock options outstanding at December 31, 2000 (in thousands, except per share amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE - --------------- --------- ---------------- -------------- --------- -------------- $1.34.................. 464 5.0 years $ 1.34 464 $ 1.34 $2.07.................. 119 5.0 years 2.07 119 2.07 $6.33-$8.93............ 497 7.0 years 7.05 180 6.96 $9.69-$14.17........... 269 6.5 years 10.96 149 10.59 $14.66-$20.33.......... 1,203 9.2 years 17.79 26 16.88 $22.45-$29.02.......... 517 6.8 years 24.76 135 24.93 ----- --------- ------ ----- ------ 3,069 7.4 years $13.53 1,073 $ 6.99 ===== ========= ====== ===== ======
The pro forma disclosures for 2000 and 1999 include approximately $366,000 and $108,000, respectively, of compensation expense related to the Company's Employee Stock Purchase Plan. There was no compensation expense related to the Company's Employee Stock Purchase Plan included in the pro forma disclosures for 1998. The fair value of shares issued under this plan was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2000 1999 -------- -------- Dividend yield.............................................. -- -- Expected volatility......................................... 83.0% 72.0% Risk-free rate of return.................................... 6.3% 4.5% Expected life............................................... 1.0 year 1.0 year
11. INCOME TAXES Pretax income (loss) from continuing operations for the years ended December 31 was taxed under the following jurisdictions (in thousands):
2000 1999 1998 -------- ------- ------ Domestic................................................ $(34,325) $13,260 $5,496 Foreign................................................. 1,825 93 98 -------- ------- ------ $(32,500) $13,353 $5,594 ======== ======= ======
49 50 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes consisted of the following at December 31 (in thousands):
2000 1999 -------- ------ Deferred tax assets: Net operating loss carryforward........................... $ 7,506 $1,721 Bad debt reserves......................................... 3,006 25 Income tax credits........................................ 800 192 Various expense accruals.................................. 1,045 81 Capital loss carryforward................................. 385 374 Stock option compensation expense......................... 213 128 Depreciation and amortization............................. -- 845 Other..................................................... 1,298 80 -------- ------ Gross deferred tax assets......................... 14,253 3,446 Valuation allowance............................... (50) -- -------- ------ Gross deferred tax assets, net of valuation allowance....................................... 14,203 3,446 -------- ------ Deferred tax liabilities: Acquired intangible assets................................ (34,309) -- Depreciation and amortization............................. (933) -- -------- ------ Gross deferred tax liabilities.................... (35,242) -- -------- ------ Net deferred tax assets (liabilities)....................... $(21,039) $3,446 ======== ======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2000, management believes it is more likely than not that the net deferred tax assets will be realized; therefore, except as noted below, no valuation allowance is necessary. The valuation allowance at December 31, 2000 is related to various deferred tax assets established with the acquisition of REZ. At December 31, 2000 and 1999, the Company had federal net operating loss carryforwards of approximately $18,343,000 and $5,062,000, respectively. The net operating loss carryforwards that existed at December 31, 2000 will begin to expire in 2010. Utilization of the net operating loss carryforwards may be limited by the separate return loss year rules and could be affected by ownership changes which have occurred or could occur in the future. In 1997, the net deferred tax asset was fully reserved because of uncertainty regarding the Company's ability to recognize the benefit of the asset in future years. In the fourth quarter of 1998, the Company released a significant portion of the valuation allowance as management believed it was more likely than not that the net deferred tax asset would be realized. The valuation allowance remaining at December 31, 1998 related to state net operating loss carryforwards. This valuation allowance was removed in 1999 because the related state net operating loss carryforward expired. A portion of the 1997 deferred tax asset was related to the net operating loss carryforwards of The Hotel Clearing Corporation ("HCC") that existed at the time HCC was acquired by the Company in 1995. Accordingly, approximately $1,467,000 of the valuation allowance released in 1998 eliminated the remaining goodwill related to the purchase of HCC. The Company has not provided for foreign withholding taxes or United States deferred income taxes on accumulated undistributed earnings of foreign subsidiaries, as management does not intend to repatriate such 50 51 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) earnings. If such earnings were to be repatriated, such earnings could be subject to foreign withholding tax and United States residual tax. In 1999, the Company determined that amortization expense related to the Driving Revenue acquisition would be deductible for tax purposes. As a result, the Company established a deferred tax asset in the amount of approximately $932,000 and reduced goodwill accordingly. The components of the income tax provision for the years ended December 31 were as follows (in thousands):
2000 1999 1998 ------- ------ ----- Current provision: Federal.................................................. $ 3,185 $4,792 $ 381 State.................................................... 90 519 463 Foreign.................................................. 672 37 38 ------- ------ ----- 3,947 5,348 882 ------- ------ ----- Deferred benefit: Federal.................................................. (8,249) (579) (641) State.................................................... (1,616) (82) (43) ------- ------ ----- (9,865) (661) (684) ------- ------ ----- Provision (benefit) for income taxes....................... $(5,918) $4,687 $ 198 ======= ====== =====
A reconciliation of taxes based on the federal statutory rate of 35.0% or 34.0% and the provision (benefit) for income taxes is summarized as follows for the years ended December 31:
2000 1999 1998 ----- ---- ----- Expected income tax provision (benefit).................... (35.0)% 34.0% 34.0% Non-deductible amortization of goodwill.................... 12.9% -- -- Write-off of purchased in-process research and development.............................................. 8.6% -- 9.0% Other permanent differences................................ (1.6)% (2.0)% 1.9% Valuation allowance........................................ -- -- (46.7)% State income taxes......................................... (3.1)% 2.2% 5.0% Other, net................................................. -- 0.9% 0.3% ----- ---- ----- Provision (benefit) for income taxes....................... (18.2)% 35.1% 3.5% ===== ==== =====
12. COMMITMENTS AND CONTINGENCIES The Company leases its corporate office space and certain office equipment under non-cancelable operating leases. The Company incurred rent expense of approximately $6,745,000, $1,039,000 and $731,000 in 2000, 1999 and 1998, respectively. 51 52 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Approximate future minimum lease payments at December 31, 2000, under non-cancelable operating leases with original terms exceeding one year, were as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 2001........................................................ $ 9,652 2002........................................................ 7,778 2003........................................................ 2,855 2004........................................................ 2,210 2005........................................................ 1,357 Thereafter.................................................. 4,492 ------- $28,344 =======
Future minimum lease payments due in foreign currencies were translated at the rate in effect at December 31, 2000. 13. EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) defined contribution retirement plan ("401(k) Plan") covering full-time employees who have attained the age of twenty-one. The 401(k) Plan allows eligible employees to defer receipt of up to 17 percent of their compensation and contribute such amounts to various investment funds. Eligible employees may elect to participate at the beginning of any quarter after their hire date. Employee contributions vest immediately. The Company makes discretionary matching contributions for employees' annual contributions of up to five percent of employees' compensation. The Company's matching contributions vest one-third a year for three years. After three years of employment, an employee is fully vested in all matching contributions. During 2000, 1999 and 1998, the Company contributed approximately $1,050,000, $363,000 and $292,000, respectively, to the 401(k) Plan. Pursuant to their employment agreements, certain Company officers are eligible for additional retirement benefits to be paid by the Company under the Supplemental Employee Retirement Plan ("SERP"). The SERP was effective January 1, 2000 and provides supplemental retirement benefits to certain officers of the Company based on final average compensation. 52 53 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide a summary of the changes in the SERP's benefit obligation and fair value of assets for the year ended December 31, 2000 and a statement of funded status as of December 31, 2000 (in thousands):
2000 ------- Benefit obligation at beginning of year..................... $ -- Service cost................................................ 244 Interest cost............................................... 150 Plan participants' contributions............................ -- Amendments.................................................. 1,880 Actuarial loss.............................................. 240 Benefits paid............................................... -- ------- Benefit obligation at end of year........................... $ 2,514 ======= Fair value of plan assets at beginning of year.............. $ -- Actual return on plan assets................................ -- Employer contribution....................................... -- Plan participants' contributions............................ -- Benefits paid............................................... -- ------- Fair value of plan assets at end of year.................... $ -- ======= Funded status............................................... $(2,514) Unrecognized actuarial loss................................. 240 Unrecognized prior service cost............................. 1,738 ------- Net amount recognized....................................... $ (536) =======
The weighted average assumptions used in the measurement of the Company's benefit obligation as of December 31, 2000 are as follows:
2000 ---- Discount rate............................................... 7.5% Expected return on plan assets.............................. N/A Rate of compensation increase............................... 5.0%
The following table provides the components of net periodic benefit costs, based on a discount rate of eight percent, for the year ended December 31, 2000 (in thousands):
2000 ---- Service cost................................................ $244 Interest cost............................................... 151 Expected return on plan assets.............................. -- Amortization of prior service cost.......................... 141 Recognized net actuarial loss............................... -- ---- Net periodic benefit cost................................... $536 ====
14. STOCK PURCHASE PLAN In May 1998, the Company's stockholders approved the Pegasus Solutions, Inc. 1997 Employee Stock Purchase Plan ("Stock Plan"). The Company has reserved 750,000 shares of its common stock for purchase 53 54 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) by employees pursuant to the terms of the Stock Plan. Eligible participating employees of the Company may elect to have an amount up to, but not in excess of, 10 percent of their regular salary or wages withheld for the purpose of purchasing the Company's common stock. Under the Stock Plan, an eligible participating employee will be granted an option at the beginning of each plan year (the "Offering Commencement Date") to purchase at the end of the plan year (the "Offering Termination Date") shares of common stock using the amounts that have accumulated from the employee's payroll deductions made during the plan year at a price that is 85 percent of the closing price of the common stock on the Nasdaq National Market or any other national securities exchange on the Offering Commencement Date or the Offering Termination Date, whichever is lower. 15. RELATED PARTIES Pegasus incurred rent expense of $630,000 in 2000 for an office lease owned by Reed Elsevier Inc. The Company has a $20 million note payable to an affiliate of Reed Elsevier Inc. Persons related to an officer of the Company have provided printing, interior design and procurement services to the Company. During 2000, 1999 and 1998, the Company paid approximately $7,000, $34,000 and $3,000, respectively, related to these services, the majority of which related to capitalized furniture purchases. 16. NET INCOME (LOSS) PER SHARE Basic net income (loss) per share for the years ended December 31, 2000, 1999 and 1998 has been computed in accordance with FAS 128 using the weighted average number of common shares outstanding after giving retroactive effect to stock splits. Diluted net income (loss) per share for the years ended December 31, 2000, 1999 and 1998 gives effect to all dilutive potential common shares that were outstanding during the respective periods. Outstanding options and warrants with strike prices below the average fair market value of the Company's common stock for the years ended December 31, 1999 and 1998 were included in the diluted earnings per share ("EPS") calculations for the respective periods. Due to the Company's net loss position for the year ended December 31, 2000, all outstanding options were excluded in the calculation of diluted net loss per share because their effect would be anti-dilutive. Weighted average shares issuable upon the exercise of stock options that were not included in the calculation were 3.1 million in 2000. The following table sets forth the basic and diluted net income (loss) per share computation for the years ended December 31 (in thousands, except per share amounts):
2000 1999 1998 -------- ------- ------- Net income (loss)...................................... $(26,582) $ 8,666 $ 5,396 ======== ======= ======= Basic: Weighted average number of shares outstanding........ 23,380 18,576 15,691 -------- ------- ------- Net income (loss) per share.......................... $ (1.14) $ 0.47 $ 0.34 ======== ======= ======= Diluted: Weighted average number of shares outstanding........ 23,380 18,576 15,691 Additional weighted average shares from assumed exercise of dilutive stock options and warrants, net of shares to be repurchased with exercise proceeds.......................................... -- 1,113 1,104 -------- ------- ------- Weighted average number of shares outstanding used in the diluted net income (loss) per share calculation....................................... 23,380 19,689 16,795 -------- ------- ------- Net income (loss) per share.......................... $ (1.14) $ 0.44 $ 0.32 ======== ======= =======
54 55 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. SEGMENT INFORMATION Based on the criteria set forth under FAS 131, the Company was organized into three reportable segments prior to the REZ acquisition -- electronic distribution, commission processing and business intelligence. As a result of the REZ acquisition, the Company is now organized into two reportable segments -- hospitality and technology. - The hospitality segment provides representation, commission processing and other financial services to the hotel industry worldwide. The hospitality segment also includes our TravelWeb.com Web site. - The technology segment provides central reservation systems, GDS connectivity, alternative distribution and data warehousing services to the global hotel industry. The Company is organized primarily on the basis of services provided. The accounting policies of the segments are the same as those described in the Note 1. Prior years' segment information has been reclassified to conform with current year presentation. Segment data includes a charge allocating all corporate costs to the operating segments. The Company evaluates the performance of its segments based on earnings before interest, income tax, depreciation and amortization ("EBITDA"). Although EBITDA is not calculated in accordance with generally accepted accounting principles, the Company believes that EBITDA is widely used by analysts, investors and others as a measure of operating performance. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. In addition, the Company's calculation of EBITDA is not necessarily comparable to similarly titled measures reported by other companies. The following table presents information about reported segments for the years ending December 31:
RECONCILING HOSPITALITY TECHNOLOGY ITEMS TOTAL ----------- ---------- ----------- -------- 2000 Net revenues.............................. $103,332 $58,202 $ -- $161,534 EBITDA.................................... 21,780 3,442 (101) 25,121 1999 Net revenues.............................. 20,016 18,020 -- 38,036 EBITDA.................................... 7,747 4,359 (16) 12,090 1998 Net revenues.............................. 17,041 12,023 -- 29,064 EBITDA.................................... 5,283 2,125 -- 7,408
Reconciling items for 2000 and 1999 include acquisition costs that did not meet the criteria for capitalization and certain bank charges. 55 56 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of total segment EBITDA to total consolidated income (loss) before income taxes for the years ended December 31 is as follows:
2000 1999 1998 -------- ------- ------- Total EBITDA for reportable segments................... $ 25,121 $12,090 $ 7,408 Write-off of purchased in-process research and development.......................................... (8,000) -- (1,480) Depreciation and amortization.......................... (51,549) (2,438) (2,690) Interest income........................................ 3,464 4,828 2,503 Interest expense....................................... (1,687) (27) (147) Other.................................................. 151 (1,100) -- -------- ------- ------- Consolidated income (loss) before income taxes......... $(32,500) $13,353 $ 5,594 ======== ======= =======
The Company does not utilize or measure revenues by geographic location to evaluate its business segments. A significant portion of the Company's revenues for the year ended December 31, 2000 was derived from customers based outside the United States, particularly in Europe. Prior to the REZ acquisition, the Company's business was conducted principally in the United States. Because of reporting procedures in place at REZ, it was impracticable to provide revenues by geographic location for the year ended December 31, 2000. The Company intends to provide revenue by geographic location for the year ended December 31, 2001. 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the unaudited consolidated quarterly results of operations for 2000 and 1999 after giving retroactive effect to a three-for-two stock split (in thousands, except per share amounts):
QUARTERS ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 2000 Revenues........................................ $10,661 $ 52,364 $52,418 $ 46,092 Income (loss) before provision for income taxes......................................... $ 4,111 $(14,964) $(5,914) $(15,733) Net income (loss)............................... $ 3,021 $(13,150) $(5,052) $(11,401) Basic net income (loss) per share............... $ 0.15 $ (0.54) $ (0.21) $ (0.46) Diluted net income (loss) per share............. $ 0.14 $ (0.54) $ (0.21) $ (0.46) Basic weighted average shares outstanding....... 20,356 24,157 24,395 24,588 Diluted weighted average shares outstanding..... 21,048 24,157 24,395 24,588 1999 Revenues........................................ $ 8,372 $ 9,189 $10,075 $ 10,400 Income before provision for income taxes........ $ 2,432 $ 2,029 $ 4,136 $ 4,756 Net income...................................... $ 1,501 $ 1,253 $ 2,730 $ 3,182 Basic net income per share...................... $ 0.09 $ 0.07 $ 0.14 $ 0.16 Diluted net income per share.................... $ 0.09 $ 0.06 $ 0.13 $ 0.15 Basic weighted average shares outstanding....... 15,862 18,115 20,049 20,214 Diluted weighted average shares outstanding..... 17,304 19,363 20,916 21,120
In accordance with FAS 128, earnings per share are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share. 56 57 PEGASUS SOLUTIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. SUBSEQUENT EVENTS In January 2001, Pegasus sold its Summit Hotels & Resorts and Sterling Hotels & Resorts brands to IndeCorp Corporation for an estimated $12 million. As a result of this transaction, Pegasus will recognize a gain of $3 million, net of tax, in the first quarter of 2001. In January 2001, Pegasus reorganized its corporate structure, realigning into two distinct companies. Under the new organization, the Company's two operating segments will remain technology and hospitality, but their components will be different. The technology company includes Commission Processing, TravelWeb.com, Electronic Distribution, Central Reservation Systems and Services, Property Systems and Services and Business Intelligence and will operate under Pegasus Solutions, Inc. Utell, the hospitality company, includes the Utell and Golden Tulip hotel representation services and the Paytell pre-payment service and will operate as a wholly owned subsidiary of the Company. The Company's segment reporting will be changed to reflect the reorganization in the first quarter of 2001. At December 31, 2000, the Company was in negotiations to sell Business Intelligence. In March 2001, these negotiations were terminated, and the Company notified employees and customers that it would not be renewing contracts and would be winding down its Business Intelligence operations. As a result, an additional $1.0 million of asset impairment costs was recorded in the Company's statement of operations for the year ended December 31, 2000. In addition, the Company expects to incur related severance costs of approximately $300,000 in the first quarter of 2001. 57 58 ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item appears in our definitive proxy statement for our 2001 annual meeting of stockholders under the captions "Nominees for Directors," "Directors Continuing in Office" and "Executive Officers," which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in our definitive proxy statement for our 2001 annual meeting of stockholders under the caption "Executive Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears in our definitive proxy statement for our 2001 annual meeting of stockholders under the caption "Directors' and Officers' Ownership of Our Common Stock," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears in our definitive proxy statement for our 2001 annual meeting of stockholders under the caption "Certain Transactions," which information is incorporated herein by reference. 58 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. The following Financial Statement Schedule is filed as part of this annual report: Report of Independent Accountants on Financial Statement Schedule.................................................. Page S-1 Consolidated Valuation and Qualifying Accounts.............. Page S-2
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchanges Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 2. The following documents are filed or incorporated by reference as exhibits to this annual report:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Contribution and Restructuring Agreement dated effective as of July 21, 1995 by and among the Company and all of the stockholders of the Company 2.2 -- Agreement and Plan of Merger dated November 16, 1999, as amended and restated, among the Company, Pegasus Worldwide, Inc., Rez, Inc., Reed Elsevier, Inc. and Utell International Group, LTD. (incorporated by reference from Appendix A of the Company's Registration Statement (File No. 333-92683) on Form S-4 filed on December 14, 1999) 3.1 -- Fourth Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of the Company's Form 10-Q filed with the Commission on May 15, 2000) 3.2 -- Second Amended and Restated Bylaws 3.3 -- Form of Certification of Designation, Preferences and Rights of Series A Preferred Stock of Pegasus Systems, Inc. (incorporated by reference from Exhibit 2 of the Company's Form 8-A filed with the Commission on October 9, 1998) 4.1 -- Specimen of Common Stock certificate 4.2 -- Fourth Amended and Restated Certificate of Incorporation (See Exhibit 3.1) Second Amended Restated Bylaws (see Exhibit 3.2) 4.3 -- Rights Agreement dated June 25, 1996 by and among the Company and certain holders of capital stock of the Company named therein 4.4 -- Common Stock Purchase Warrant issued to Holiday Hospitality Corporation 4.5 -- Rights Agreement dated as of September 28, 1998 by and between the Company and American Securities Transfer & Trust, Inc. (incorporated by reference from Exhibit 4 of the Company's Current Report on Form 8-K filed with the Commission on October 9, 1998) 4.6 -- Form of Rights Certificate (incorporated by reference from Exhibit 3 of the Company's Form 8-A filed with Commission on October 9, 1998) *10.1 -- Employment Agreement dated January 1, 2000 between the Company and John F. Davis, III *10.2 -- Employment Agreement dated January 1, 2000 between the Company and Joseph W. Nicholson *10.3 -- Employment Agreement dated January 1, 2000 between the Company and Jerome L. Galant *10.5 -- 1996 Stock Option Plan, as amended
59 60
EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.6 -- 1997 Stock Option Plan, as amended (incorporated by reference from the Company's definitive proxy statement filed with the Commission on March 17, 2000.) 10.7 -- Citibank Global Payments Service Agreement dated July 24, 1998 between The Hotel Clearing Corporation and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Company's 10-Q for the quarter ended October 31, 1998, filed with the Commission on November 16, 1998) 10.8 -- Facilities Management Agreement dated January 1, 1996 between the Company and Anasazi, Inc., currently know as REZsolutions, Inc. 10.9 -- Service Agreement dated December 13, 1996 between the Company and Comdisco, Inc. 10.10 -- Service Agreement dated January 17, 1997 between the Company and Genuity, Inc. *10.11 -- 1997 Employee Stock Purchase Plan, as amended 10.12 -- Office Lease dated October 1, 1995, First Amendment to Office Lease dated February 25, 1998, Second Amendment to Office Lease dated November 2, 1998 and Third Amendment to Office Lease dated November 8, 1999 between the Company and the Utah State Retirement Investment Fund relating to property located at 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219 (incorporated by reference to the Company's Form S-4 filed with the Commission on December 14, 1999) +10.13 -- Office Lease dated, July 26, 1996, First Amendment to Office Lease dated August 22, 1997 and Second Amendment to Office Lease dated October 24, 2000 between the Company and Pivotal Simon Office XVI, L.L.C. relating to property located at 7500 N. Dreamy Draw., Suite 120, Phoenix, Arizona 85020 10.14 -- Credit Agreement dated April 17, 2000, among the Company, Chase Bank of Texas, N.A., Compass Bank and Wells Fargo (incorporated by reference from Exhibit 10.14 of the Company's Form 10-Q filed with the Commission on May 15, 2000) 10.15 -- Form of Security Agreement dated April 17, 2000, among the Company, Chase Bank of Texas, N.A. and certain guarantors (incorporated by reference from Exhibit 10.15 of the Company's Form 10-Q filed with the Commission on May 15, 2000) 10.16 -- Purchase Agreement dated October 31, 2000, among the Company, Global Enterprise Technology Solutions, LLC, Enterprise Hospitality Solutions, Inc., The Rivadalla Family Trust and Christian Rivadalla (incorporated by reference from Exhibit 10.16 of the Company's Form 10-Q filed with Commission on November 14, 2000) 10.17 -- Software Development and License Agreement dated October 31, 2000, among the Company and Global Enterprise Technology Solutions, LLC, including Form of Escrow Agreement (incorporated by reference from Exhibit 10.17 of the Company's Form 10-Q filed with Commission on November 14, 2000) +10.18 -- Office Lease dated January 31, 1997, First Amendment to Office Lease dated August 7, 1997, Second Amendment to Office Lease dated November 1, 1997 and Third Amendment to Office Lease dated November 2, 1999 between the Company and EastGroup Properties relating to property located at 11048 N. 23rd Avenue, Phoenix, Arizona 85029
60 61
EXHIBIT NUMBER DESCRIPTION ------- ----------- +10.19 -- Office Lease dated September 1, 1987 and First Amendment to Office Lease dated October 26, 1989 between the Company and Bridger Properties Limited relating to property located at 2 Kew Bridge Road, Brentford Middlesex +*10.20 -- Employment agreement dated January 1, 2001 between the Company and Ric L. Floyd +*10.21 -- Employment agreement dated January 17, 2001 between the Company and Mark C. Wells +*10.22 -- Supplemental Employee Retirement Plan +21.1 -- Subsidiaries of the Company +23.1 -- Consent of PricewaterhouseCoopers LLP +24.1 -- Power of Attorney (included on signature page)
- --------------- Unless otherwise indicated, exhibits are incorporated by reference to the Company's Registration Statement (File No. 333-28595) on Form S-1 declared effective by the Commission on August 6, 1997. + Filed herewith. * Management contract or compensatory plan or arrangement -- The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon written request to Mr. Ric Floyd, Executive Vice President and General Counsel, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219. (b) Reports on Form 8-K There were no reports on Form 8-K that were filed during the quarter ended December 31, 2000. 61 62 Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on this 22nd day of March, 2001. PEGASUS SOLUTIONS, INC. By: /s/ JOHN F. DAVIS, III ---------------------------------- John F. Davis, III Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints John F. Davis, III, Jerome L. Galant and Ric L. Floyd, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, with all exhibits thereto, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully and to intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ JOHN F. DAVIS, III Chief Executive Officer and March 22, 2001 - ----------------------------------------------------- Chairman (Principal Executive John F. Davis, III Officer) /s/ JEROME L. GALANT Chief Financial Officer (Principal March 22, 2001 - ----------------------------------------------------- Financial and Accounting Jerome L. Galant Officer) /s/ MICHAEL A. BARNETT Director March 22, 2001 - ----------------------------------------------------- Michael A. Barnett /s/ PAUL J. BROWN Director March 22, 2001 - ----------------------------------------------------- Paul J. Brown /s/ ROBERT B. COLLIER Director March 22, 2001 - ----------------------------------------------------- Robert B. Collier /s/ WILLIAM C. HAMMETT, JR. Vice Chairman and Director March 22, 2001 - ----------------------------------------------------- William C. Hammett, Jr.
62 63
SIGNATURES TITLE DATE ---------- ----- ---- /s/ THOMAS F. O'TOOLE Director March 22, 2001 - ----------------------------------------------------- Thomas F. O'Toole /s/ JEFFREY A. RICH Director March 22, 2001 - ----------------------------------------------------- Jeffrey A. Rich /s/ BRUCE W. WOLFF Director March 22, 2001 - ----------------------------------------------------- Bruce W. Wolff
63 64 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Pegasus Solutions, Inc.: Our audits of the consolidated financial statements of Pegasus Solutions, Inc. referred to in our report dated February 6, 2001, except as to Note 19, which is as of March 7, 2001, which report and consolidated financial statements are included in this Annual Report on Form 10-K, also included an audit of the financial statement schedule listed in Item 14(a)(1) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Dallas, Texas February 6, 2001 S-1 65 SCHEDULE II PEGASUS SOLUTIONS, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (IN THOUSANDS)
ADDITIONS ADDITIONS BALANCE AT CHARGED TO FROM BALANCE AT BEGINNING COSTS AND ACQUIRED END OF CLASSIFICATION OF PERIOD EXPENSES COMPANIES DEDUCTIONS PERIOD - -------------- ---------- ---------- --------- ---------- ---------- December 31, 1998 Allowance for doubtful accounts....... $ 78 $ 35 $ 7 $ (21) $ 99 Income tax valuation allowance........ 4,312 270 -- (4,312) 270 ------ ------ ------- ------- ------- Total reserves and allowances......... 4,390 305 7 (4,333) 369 ------ ------ ------- ------- ------- December 31, 1999 Allowance for doubtful accounts....... 99 -- -- (17) 82 Income tax valuation allowance........ 270 -- -- (270) -- ------ ------ ------- ------- ------- Total reserves and allowances......... 369 -- -- (287) 82 ------ ------ ------- ------- ------- December 31, 2000 Allowance for doubtful accounts....... 82 2,874 11,924 (7,721) 7,159 Income tax valuation allowance........ -- -- 50 -- 50 ------ ------ ------- ------- ------- Total reserves and allowances......... $ 82 $2,874 $11,974 $(7,721) $ 7,209 ====== ====== ======= ======= =======
(a) This schedule should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto that appear in Item 8 of this annual report on Form 10-K. S-2 66 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 -- Contribution and Restructuring Agreement dated effective as of July 21, 1995 by and among the Company and all of the stockholders of the Company 2.2 -- Agreement and Plan of Merger dated November 16, 1999, as amended and restated, among the Company, Pegasus Worldwide, Inc., Rez, Inc., Reed Elsevier, Inc. and Utell International Group, LTD. (incorporated by reference from Appendix A of the Company's Registration Statement (File No. 333-92683) on Form S-4 filed on December 14, 1999) 3.1 -- Fourth Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of the Company's Form 10-Q filed with the Commission on May 15, 2000) 3.2 -- Second Amended and Restated Bylaws 3.3 -- Form of Certification of Designation, Preferences and Rights of Series A Preferred Stock of Pegasus Systems, Inc. (incorporated by reference from Exhibit 2 of the Company's Form 8-A filed with the Commission on October 9, 1998) 4.1 -- Specimen of Common Stock certificate 4.2 -- Fourth Amended and Restated Certificate of Incorporation (See Exhibit 3.1) Second Amended Restated Bylaws (see Exhibit 3.2) 4.3 -- Rights Agreement dated June 25, 1996 by and among the Company and certain holders of capital stock of the Company named therein 4.4 -- Common Stock Purchase Warrant issued to Holiday Hospitality Corporation 4.5 -- Rights Agreement dated as of September 28, 1998 by and between the Company and American Securities Transfer & Trust, Inc. (incorporated by reference from Exhibit 4 of the Company's Current Report on Form 8-K filed with the Commission on October 9, 1998) 4.6 -- Form of Rights Certificate (incorporated by reference from Exhibit 3 of the Company's Form 8-A filed with Commission on October 9, 1998) *10.1 -- Employment Agreement dated January 1, 2000 between the Company and John F. Davis, III *10.2 -- Employment Agreement dated January 1, 2000 between the Company and Joseph W. Nicholson *10.3 -- Employment Agreement dated January 1, 2000 between the Company and Jerome L. Galant *10.5 -- 1996 Stock Option Plan, as amended *10.6 -- 1997 Stock Option Plan, as amended (incorporated by reference from the Company's definitive proxy statement filed with the Commission on March 17, 2000.) 10.7 -- Citibank Global Payments Service Agreement dated July 24, 1998 between The Hotel Clearing Corporation and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Company's 10-Q for the quarter ended October 31, 1998, filed with the Commission on November 16, 1998) 10.8 -- Facilities Management Agreement dated January 1, 1996 between the Company and Anasazi, Inc., currently know as REZsolutions, Inc. 10.9 -- Service Agreement dated December 13, 1996 between the Company and Comdisco, Inc.
67
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.10 -- Service Agreement dated January 17, 1997 between the Company and Genuity, Inc. *10.11 -- 1997 Employee Stock Purchase Plan, as amended 10.12 -- Office Lease dated October 1, 1995, First Amendment to Office Lease dated February 25, 1998, Second Amendment to Office Lease dated November 2, 1998 and Third Amendment to Office Lease dated November 8, 1999 between the Company and the Utah State Retirement Investment Fund relating to property located at 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219 (incorporated by reference to the Company's Form S-4 filed with the Commission on December 14, 1999) +10.13 -- Office Lease dated, July 26, 1996, First Amendment to Office Lease dated August 22, 1997 and Second Amendment to Office Lease dated October 24, 2000 between the Company and Pivotal Simon Office XVI, L.L.C. relating to property located at 7500 N. Dreamy Draw., Suite 120, Phoenix, Arizona 85020 10.14 -- Credit Agreement dated April 17, 2000, among the Company, Chase Bank of Texas, N.A., Compass Bank and Wells Fargo (incorporated by reference from Exhibit 10.14 of the Company's Form 10-Q filed with the Commission on May 15, 2000) 10.15 -- Form of Security Agreement dated April 17, 2000, among the Company, Chase Bank of Texas, N.A. and certain guarantors (incorporated by reference from Exhibit 10.15 of the Company's Form 10-Q filed with the Commission on May 15, 2000) 10.16 -- Purchase Agreement dated October 31, 2000, among the Company, Global Enterprise Technology Solutions, LLC, Enterprise Hospitality Solutions, Inc., The Rivadalla Family Trust and Christian Rivadalla (incorporated by reference from Exhibit 10.16 of the Company's Form 10-Q filed with Commission on November 14, 2000) 10.17 -- Software Development and License Agreement dated October 31, 2000, among the Company and Global Enterprise Technology Solutions, LLC, including Form of Escrow Agreement (incorporated by reference from Exhibit 10.17 of the Company's Form 10-Q filed with Commission on November 14, 2000) +10.18 -- Office Lease dated January 31, 1997, First Amendment to Office Lease dated August 7, 1997, Second Amendment to Office Lease dated November 1, 1997 and Third Amendment to Office Lease dated November 2, 1999 between the Company and EastGroup Properties relating to property located at 11048 N. 23rd Avenue, Phoenix, Arizona 85029 +10.19 -- Office Lease dated September 1, 1987 and First Amendment to Office Lease dated October 26, 1989 between the Company and Bridger Properties Limited relating to property located at 2 Kew Bridge Road, Brentford Middlesex +*10.20 -- Employment agreement dated January 1, 2001 between the Company and Ric L. Floyd +*10.21 -- Employment agreement dated January 17, 2001 between the Company and Mark C. Wells +*10.22 -- Supplemental Employee Retirement Plan +21.1 -- Subsidiaries of the Company +23.1 -- Consent of PricewaterhouseCoopers LLP +24.1 -- Power of Attorney (included on signature page)
68 - --------------- Unless otherwise indicated, exhibits are incorporated by reference to the Company's Registration Statement (File No. 333-28595) on Form S-1 declared effective by the Commission on August 6, 1997. + Filed herewith. * Management contract or compensatory plan or arrangement -- The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon written request to Mr. Ric Floyd, Executive Vice President and General Counsel, 3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219. EX-10.13 2 d84582ex10-13.txt OFFICE LEASE DATED JULY 26, 1996 1 EXHIBIT 10.13 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OFFICE LEASE by and between PIVOTAL SIMON OFFICE XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company, "LANDLORD" and ANASAZI INC., a Delaware corporation, "TENANT" JULY 25, 1996 POINTE CORPORATE CENTRE 7500 NORTH DREAMY DRAW DRIVE PHOENIX, ARIZONA 85020 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- 1. BASIC PROVISIONS ....................................................... 1 2. LEASED PREMISES; NO ADJUSTMENTS ........................................ 2 3. LEASE TERM; COMMENCEMENT DATE .......................................... 3 4. SECURITY DEPOSIT ....................................................... 3 5. RENT; RENT TAX; ADDITIONAL RENT ........................................ 4 6. OPERATING COSTS ........................................................ 4 7. CONDITION, REPAIRS AND ALTERATIONS ..................................... 7 8. SERVICES ............................................................... 9 9. LIABILITY AND PROPERTY INSURANCE ....................................... 10 10. RECONSTRUCTION ........................................................ 12 11. WAIVER OF SUBROGATION ................................................. 14 12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS ........................ 14 13. DEFAULT AND REMEDIES .................................................. 15 14. LATE PAYMENTS ......................................................... 17 15. ABANDONMENT AND SURRENDER ............................................. 17 16. INDEMNIFICATION AND EXCULPATION ....................................... 18 17. ENTRY BY LANDLORD ..................................................... 18 18. INTENTIONALLY OMITTED ................................................. 19 19. ASSIGNMENT AND SUBLETTING ............................................. 19 20. USE OF LEASED PREMISES AND RUBBISH REMOVAL ............................ 21 21. SUBORDINATION AND ATTORNMENT .......................................... 22 22. ESTOPPEL CERTIFICATE .................................................. 22 23. SIGNS ................................................................. 22 24. PARKING ............................................................... 22 25. LIENS ................................................................. 23 26. HOLDING OVER .......................................................... 23 27. ATTORNEYS' FEES ....................................................... 23 28. RESERVED RIGHTS OF LANDLORD ........................................... 24 29. EMINENT DOMAIN ........................................................ 25 30. NOTICES ............................................................... 25 31. RULES AND REGULATIONS ................................................. 25 32. ACCORD AND SATISFACTION ............................................... 25 33. BANKRUPTCY OF TENANT .................................................. 26 34. HAZARDOUS MATERIALS ................................................... 28 35. MISCELLANEOUS ......................................................... 29
3 OFFICE LEASE 1. BASIC PROVISIONS 1.1 Date: July 25, 1996 1.2 Landlord: Pivotal Simon Office XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company 1.3 Landlord's Address: c/o Pivotal Group, Inc. 2525 East Camelback Road, Suite 650 Phoenix, Arizona 85016 Attention: Mr. J. Jahm Najafi 1.4 Tenant: Anasazi Inc., a Delaware corporation 1.5 Tenant's Address: 7500 North Dreamy Draw Suite 120 Phoenix, Arizona 85020 1.6 Property: The parcel of real estate located in Phoenix, Maricopa County, Arizona, legally described on Exhibit "B" attached hereto and incorporated herein by this reference, together with the office buildings now or hereafter situated thereon, the landscaping, parking facilities and all other improvements and appurtenances thereto. 1.7 Building: That certain office building known as Pointe Corporate Centre located at 7500 North Dreamy Draw Drive, Phoenix, Maricopa County, Arizona 85020, and situated on the Property. 1.8 Leased Premises: 56,045 rentable square feet of office space located on the first and second floors of the Building and commonly known as Suites 120, 200 (partial), 225 and 240, as outlined on the Floor Plan attached hereto as Exhibit "C".
Suite Rentable Square Feet ----- -------------------- 120 45,118 200 (partial) 5,671 225 1,731 240 3,525
1.9 Permitted Use: Commercial office use 1.10 Lease Term: Seven (7) years 1.11 Commencement Date and Expiration Date: January 1, 1996 until December 31, 2002 1.12 Annual Basic Rent*:
Rental Rate Per Lease Year Annual Basic Rent Monthly Basic Rent Rentable Sq. Ft. - ---------- ----------------- ------------------ ---------------- 1 $ 756,607.50 $63,050.63 $13.50 2 840,675.00 70,056.25 15.00 3 868,697.50 72,391.46 15.50 4 938,753.75 78,229.48 16.75 5 994,798.75 82,899.90 17.75 6 1,008,810.00 84,067.50 18.00 7 1,022,821.20 85,235.10 18.25
4 *Subject to the terms of Article 5.1. 1.13 Security Deposit: Sixty Two Thousand Six Hundred Seventeen and 50/100 Dollars ($62,617.50) 1.14 Base Year Costs: 1996 calendar year actual Operating Costs per rentable square foot, adjusted to 95% occupancy. 1.15 Building Hours: 7:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 12:00 p.m. on Saturday, excluding recognized federal, state or local holidays. Notwithstanding the foregoing, Tenant shall be entitled to access to the Leased Premises twenty-four (24) hours per day, seven (7) days per week, fifty-two (52) weeks per year. 1.16 Parking Spaces: 72 Covered, reserved spaces available at: Years 1-3: No charge Years 4-5: $10.00 per space, per month Years 6-7: $20.00 per space, per month 8 uncovered, reserved parking spaces and 3 uncovered reserved visitor parking spaces shall be available at no charge. 147 additional uncovered unreserved parking spaces shall be, non-exclusively, available on a "first-come," "first-served" basis. 1.17 Parking Charge: See Article 1.16 above. 1.18 Guarantors: Not applicable. 1.19 Broker: Lee & Associates and CB Commercial 1.20 Exhibits: A = Intentionally Omitted B = Legal Description of the Property C = Floor Plan D = Intentionally Omitted E = Reserved Covered Parking License F = Reserved Uncovered Parking License G = Non-Exclusive Unreserved Parking License H = "As Is" Condition/Tenant Allowance I = Building Rules and Regulations J = Tenant Estoppel Certificate 1.21 Riders: 1 = Option to Extend 2 = Right of First Refusal and Right of First Opportunity 2. LEASED PREMISES; NO ADJUSTMENTS 2.1 Leased Premises. (a) Landlord hereby leases to Tenant, and Tenant hereby leases and accepts from Landlord, the Leased Premises, upon the terms and conditions set forth in this Lease and any modifications, supplements or addenda hereto (the "Lease"), including the Basic Provisions of Article 1 which are incorporated herein by this reference, together with the nonexclusive right to use, in common with Landlord and others, the Building Common Areas (defined below). For the purposes of this Lease, the term "Building Common Areas" means common hallways, corridors, walkways and footpaths, foyers and lobbies, bathrooms and janitorial closets, electrical and telephone closets, landscaped areas, and such other areas within or adjacent to the Building which are subject to or are designed or intended solely for the common enjoyment, use and/or benefits of the tenants of the Building. (b) Landlord hereby also grants Tenant the right to occupy Suite 243 of the Building containing 1,896 rentable square feet (1,723 usable square feet) commencing on the date on which Landlord notifies Tenant that Landlord has completed repainting and recarpeting Suite 243 and terminating December 31, 1997. The rental rate for Suite 243 shall be Eighteen and No/100 Dollars ($18.00) per rentable square foot and Tenant shall accept Suite 243 in its "as is" condition 2 5 on the date Landlord tenders possession of Suite 243 to Tenant. Tenant's occupancy of Suite 243 shall otherwise be subject to all of the terms and conditions of this Lease. 2.2 Adjustments. The Annual Basic Rent at the Commencement Date (as hereinafter defined) is based on the Leased Premises containing the rentable square footage set forth in Article 1.8 above, which square footage has been precisely determined by Landlord and approved by Tenant prior to the date of the Lease. No adjustments to Annual Basic Rent or any other charge shall be made if the actual size of the Leased Premises is greater or smaller than that set forth in Article 1.8. For the purpose of this Lease, Landlord and Tenant agree that the useable square footage of the Leased Premises is 50,950. 3. LEASE TERM; COMMENCEMENT DATE 3.1 Lease Term. The Lease Term shall begin on the Commencement Date and shall be for the period set forth in Article 1.10 above, plus any period of less than one (1) month between the Commencement Date and the first day of the next succeeding calendar month, unless sooner terminated in accordance with the further provisions of this Lease. 3.2 Commencement Date. The Commencement Date shall mean the date set forth in Article 1.11 above. 3.3 Intentionally Omitted. 3.4 Quiet Possession. So long as there is not in existence an Event of Default, Tenant may quietly have, hold and enjoy the Leased Premises during the Lease Term, without hindrance or molestation by Landlord, subject, however, to the matters referred to in Article 21. The provisions of this Article 3.4 shall not extend to any disturbance, act or condition brought about by any tenant in the Building. 3.5 Lease Year. Each "Lease Year" shall be a period of twelve (12) consecutive calendar months, the first Lease Year beginning on the Commencement Date or on the first day of the calendar month next succeeding the Commencement Date if the Commencement Date is not on the first day of a calendar month. Each Lease Year after the first Lease Year shall begin on the calendar day next succeeding the expiration of the immediately preceding Lease Year. 4. SECURITY DEPOSIT Tenant shall pay to Landlord, upon the execution of this Lease, the Security Deposit set forth in Article 1.13 above as security for the performance by Tenant of its obligations under this Lease, which amount shall be returned to Tenant within thirty (30) days after the expiration or earlier termination of this Lease, provided that Tenant shall have fully performed all of its obligations contained in this Lease. The Security Deposit, at the election of Landlord, may be retained by Landlord as and for its full damages or may be applied in reduction of any loss and/or damage sustained by Landlord by reason of the occurrence of any breach, nonperformance or default by Tenant under this Lease without the waiver of any other right or remedy available to Landlord at law, in equity or under the terms of this Lease. If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days after written notice from Landlord (which notice shall include an accounting of all applications of all or any part of the Security Deposit), deposit with Landlord immediately available funds in an amount sufficient to restore the Security Deposit to its original amount, and Tenant's failure to do so shall be a breach of this Lease. Tenant acknowledges and agrees that in the event Tenant shall file a voluntary petition pursuant to the Bankruptcy Code or any successor thereto, or if an involuntary petition is filed against Tenant pursuant to the Bankruptcy Code or any successor thereto, then Landlord may apply the Security Deposit towards those obligations of Tenant to Landlord which accrued prior to the filing of such petition. Tenant acknowledges further that the Security Deposit may be commingled with Landlord's other funds and that Landlord shall be entitled to retain any interest earnings thereon. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer the Security Deposit to Landlord's successor in interest, whereupon Landlord shall be released from liability by Tenant for the return of such deposit or the accounting therefore. 3 6 5. RENT; RENT TAX; ADDITIONAL RENT 5.1 Payment of Rent. Tenant shall pay to Landlord the Annual Basic Rent set forth in Article 1.12 above, subject to adjustment as provided herein. Notwithstanding any provision of this Lease to the contrary, Tenant shall pay to Landlord the Annual Basic Rent with respect to 45,118 rentable square feet (Suite 120) from and after the Commencement Date, Annual Basic Rent with respect to 5,671 rentable square feet (part of Suite 200) from and after 5/18/96 and shall pay the Annual Basic Rent with respect to the remaining 5,256 rentable square feet (Suites 225 and 240) from and after the completion of the Tenant Improvements described on Exhibit "H". Landlord and Tenant acknowledge and agree that time is of the essence with respect to their respective obligations as set forth in Exhibit "H" and Tenant shall use its best efforts to cooperate with Landlord with respect to the completion of the Tenant Improvements. The Annual Basic Rent shall be paid in equal monthly installments, on or before the first day of each and every calendar month during the Lease Term, in advance, without notice or demand and without abatement, deduction or set-off. If the Commencement Date is other than the first day of a calendar month, the payment for the partial month following the Commencement Date shall be prorated and shall be payable on the first day of the first full calendar month of the Lease Term. The Annual Basic Rent for the first full month of the Lease Term shall be paid upon the execution of this Lease. All payments requiring proration shall be prorated on the basis of a thirty (30) day month. In addition, all payments to be made under this Lease shall be paid in lawful money of the United States of America to Landlord or its agent at the address set forth in Article 1.3 above, or to such other person or at such other place as Landlord may from time to time designate in writing. 5.2 Rent Tax. In addition to the Annual Basic Rent and Additional Rent, Tenant shall pay to Landlord, together with the monthly installments of Annual Basic Rent and payments of Additional Rent, an amount equal to any governmental taxes, including, without limitation, any sales, rental, occupancy, excise, use or transactional privilege taxes assessed or levied upon Landlord with respect to the amounts paid by Tenant to Landlord hereunder, as well as all taxes assessed or imposed upon Landlord's gross receipts or gross income from leasing the Leased Premises to Tenant, including, without limitation, transaction privilege taxes, education excise taxes, any tax now or hereafter imposed by the City of Phoenix, the State of Arizona, any other governmental body, and any taxes assessed or imposed in lieu of or in substitution of any of the foregoing taxes. Such taxes shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or net income tax assessed against Landlord. 5.3 Additional Rent. In addition to Annual Basic Rent, all other amounts to be paid by Tenant to Landlord pursuant to this Lease (including amounts to be paid by Tenant pursuant to Article 6 below and parking charges to be paid by Tenant pursuant to Exhibits "E", "F" and "G"), if any, shall be deemed to be Additional Rent, whether or not designated as such, and shall be due and payable within five (5) days after receipt by Tenant of Landlord's statement or together with the next succeeding installment of Annual Basic Rent, whichever shall first occur. Landlord shall have the same remedies for the failure to pay Additional Rent as for the nonpayment of Annual Basic Rent. 6. OPERATING COSTS 6.1 Tenant's Obligation. The Annual Basic Rent does not include amounts attributable to any increase in the amount of Taxes (defined below) or amounts attributable to any increase in the cost of the management, repair, service, insurance, operation and maintenance of the Building and the Property. Therefore, in order that the Annual Basic Rent payable throughout the Lease Term shall reflect any such increases, Tenant shall pay to Landlord, in accordance with the further provisions of this Article 6, an amount per rentable square foot of the Leased Premises equal to the difference between the Operating Costs (as hereinafter defined) per rentable square foot and the Base Year Costs. Tenant acknowledges that the Base Year Costs do not constitute a representation by Landlord as to the Operating Costs per rentable square foot that may be incurred during any subsequent calendar year. 6.2 Landlord's Estimate. Landlord shall furnish Tenant an estimate of the Operating Costs per rentable square foot for each calendar year commencing with the 1997 calendar year. In addition, Landlord may, from time to time, furnish Tenant a revised estimate of Operating Costs should Landlord anticipate any increase in Operating Costs from that set forth in a prior estimate. Commencing January 1, 1997, Tenant shall pay, in addition to the monthly installments of Annual Basic Rent, an amount equal to one-twelfth (1/12th) of the product of the rentable square footage of the Leased Premises multiplied by the difference (but not less than zero (0)), if any, between such estimate and the Base Year Costs; provided, however, if less than ninety-five percent (95%) of the 4 7 rentable area of the Building shall be occupied by tenants during the period covered by such estimate, the estimated Operating Costs for such period shall be, for the purposes of this Article 6 increased to an amount reasonably determined by Landlord to be equivalent to the Operating Costs that would be incurred if occupancy would be at least ninety-five percent (95%) during the entire period. Within one hundred twenty (120) days after the expiration of each calendar year or such longer period of time as may be necessary to compile such statement, Landlord shall deliver to Tenant a statement of the actual Operating Costs for such calendar year. If the actual Operating Costs for such calendar year are more or less than the estimated Operating Costs, a proper adjustment shall be made; provided, however, if less than ninety-five percent (95%) of the rentable area of the Building shall have been occupied by tenants at any time during such period, the actual Operating Costs for such period shall be, for the purposes of this Article 6 increased to an amount reasonably determined by Landlord to be equivalent to the Operating Costs that would have been incurred had such occupancy been at least ninety-five (95%) during the entire period. Any excess amounts paid by Tenant shall be refunded to Tenant with such statement or, at Landlord's option, may be applied to any amounts then payable by Tenant to Landlord or to the next maturing monthly installment of Annual Basic Rent or Additional Rent. Any deficiency between the estimated and actual Operating Costs shall be paid by Tenant to Landlord within thirty (30) days after receipt by Tenant of notice of a deficiency. Any amount owing for a fractional calendar year in the first or final Lease Years of the Lease Term shall be prorated. 6.3 Operating Costs - Defined. For the purposes of this Lease, "Operating Costs" shall mean all costs and expenses accrued, paid or incurred by Landlord, or on Landlord's behalf, in respect of the management, repair, service, insurance, operation and maintenance of the Building and the Property, including but not limited to the following: (a) Salaries, wages and benefits of all persons who perform regular duties in connection with landscaping, parking, janitorial and general cleaning services, security services and any and all other employees engaged by or on behalf of Landlord (excluding, however, the salary of employees at the level above Landlord's building supervisor); (b) Payroll taxes, workmen's compensation, uniforms and related expenses for such employees; (c) The cost of all charges for oil, gas, steam, electricity, any alternate source of energy, heat, ventilation, air-conditioning, refrigeration, water, sewer service, trash collection, pest control and all other utilities, together with any taxes on such utilities; (d) The cost of painting the Building Common Areas; (e) The cost of all charges for rent, casualty, liability, fidelity and other insurance maintained by Landlord, including any deductible amounts incurred with respect to an insured loss; (f) The cost of all supplies (including cleaning supplies), tools, materials, equipment and personal property, the rental thereof and sales, transaction privilege, excise and other taxes thereon; (g) Depreciation of hand tools and other moveable equipment; (h) The cost of all charges for window and other cleaning, janitorial, security, refuse, lot sweeping and pest control services; (i) The cost of charges for independent contractors; (j) The cost of repairs and replacements made by Landlord at its expense and the fees and other charges for maintenance and service agreements; (k) The cost of exterior and interior landscaping; (l) Costs relating to the operation and maintenance of all real property and improvements appurtenant to the Property, including, without limitation, all parking areas, service areas, walkways and landscaping; (m) The cost of alterations and improvements made by reason of the laws and requirements of any public authorities or the requirements of any insurance carrier providing 5 8 insurance on the Property imposed after the Commencement Date; provided, however, that any such costs shall be amortized with interest over the useful life of the alteration or improvement in accordance with generally accepted accounting principles, such interest to accrue at a rate equal to the "prime rate" as such rate is publicly announced, quoted or published from time to time by Bank One, Arizona, NA at its Phoenix, Arizona office, plus one (1) percentage point (the "Amortization Rate"); (n) All management fees and other charges for management services and overhead costs (including travel and related expenses), whether provided by an independent management company, Landlord or an affiliate of Landlord, not to exceed the lesser of (i) the then prevailing range of rates charged in comparable office buildings in the Phoenix Arizona metropolitan area, or (ii) five percent (5%) of the aggregate Annual Basic Rent plus Additional Rent (excluding therefrom all property management fees and other charges for management services) payable by tenants of the Building; (o) The cost of any capital improvements or additions which improve the comfort or amenities available to tenants of the Building, provided, however, that (i) any such costs shall be amortized with interest at the Amortization Rate over the useful life of the improvement or addition in accordance with generally accepted accounting principles, and (ii) such improvement or addition shall have been approved by tenants leasing a majority of the rentable square footage of the Building; (p) The cost of any capital improvements or additions which are intended to enhance the safety of the Property or reduce (or avoid increases in) Operating Costs, provided, however, that any such costs shall be amortized with interest at the Amortization Rate over the useful life of the improvement or addition; (q) The cost of licenses and permits, inspection fees and reasonable legal, accounting and other professional fees and expenses; (r) Taxes (as hereinafter defined); (s) Costs relating to the management, repair, service, insurance, operation and maintenance of the Building Common Areas; (t) Costs of monitoring and maintaining good internal air quality in the Building and regularly inspecting, monitoring, maintaining and repairing the Building's air quality systems, hiring outside consultants to investigate and identify the sources of any suspected internal air quality problems that may be identified, remedying any such problems, modifying, renovating or encapsulating any portion of the Building, or systems or components thereof reasonably required in order to continuously and efficiently maintain reasonably acceptable internal air quality in the Building and comply with any and all local, state and federal regulations, or real estate industry standards relating to internal air quality; provided, however, that all such costs shall be amortized with interest at the Amortization Rate over the useful life of the maintenance, repair or other modification of the system in accordance with generally accepted accounting principles; (u) Costs of operating and maintaining an on-site property management office; provided, however, that such on-site property management office shall contain no more than one thousand (1,000) rentable square feet; and (v) All other charges properly allocable to the management, repair, service, insurance, operation and maintenance of the Property in accordance with generally accepted accounting principles. 6.4 Operating Costs - Exclusions. Excluded from Operating Costs shall be the following: (a) depreciation, except to the extent expressly included pursuant to Article 6.3 above; (b) interest on and amortization of debts, except to the extent expressly included pursuant to Article 6.3 above; (c) leasehold improvements, including redecorating made for tenants of the Building; (d) brokerage commissions and advertising expenses for procuring tenants for the Building or the Property; (e) refinancing costs; (f) the cost of any repair, replacement or addition which would be required to be capitalized under general accepted accounting principles, except to the extent expressly included pursuant to Article 6.3 above; (g) the cost of any item included in Operating Costs under Article 63 above to the extent that such cost is reimbursed or paid directly by an insurance company, condemnor, a tenant of the Building or any other party; and (h) Landlord's administrative and 6 9 overhead expenses not incurred directly with respect to the operation and maintenance of the Building. 6.5 Taxes - Defined. For the purposes of this Lease, "Taxes" shall mean and include all real property taxes and personal property taxes, general and special assessments, foreseen as well as unforeseen, which are levied or assessed upon or with respect to the Property, any improvements, fixtures, equipment and other property of Landlord, real or personal, located on the Property and used in connection with the operation of all or any portion of the Property, as well as any tax, surcharge or assessment which shall be levied or assessed in addition to or in lieu of such real or personal property taxes and assessments. Taxes shall also include any expenses incurred by Landlord in contesting the amount or validity of any real or personal property taxes and assessments. Taxes shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or income tax assessed against Landlord. In the event of assessments that may be paid in installments by reason of bonding or otherwise, Landlord shall elect to make payment under the installment plan. In any event, Tenant's obligations under this Article 6.5 shall be as if Landlord made payment over the longest period of time permitted by the assessment, and Tenant shall bear no liability as to installments due following the expiration or earlier termination of this Lease. 6.6 Inspection Rights. Landlord shall, if requested by Tenant, furnish Tenant any and all reasonable backup information and documentation pertaining to any component of the Operating Costs. Tenant or its authorized agent shall have the right, within one (1) year after receipt of Landlord's itemized statement of Operating Costs, upon ten (10) days prior written notice to Landlord, to inspect, at Landlord's main accounting offices, Landlord's books and records regarding Operating Costs. Landlord agrees to maintain its books and records at its main accounting offices for a minimum of one (1) year following the expiration of each accounting year to which such books and records pertain. In the event Tenant's audit shall disclose that Landlord has overstated Tenant's pro rata share of Operating Costs by three percent (3%) or more during any one (1) accounting year, then Landlord shall pay for the reasonable costs of the audit. Any refund due Tenant shall be payable in any event. 6.7 No Waiver. The failure by Landlord to furnish Tenant with a statement of Operating Costs shall not constitute a waiver by Landlord of its right to require Tenant to pay excess Operating Costs per rentable square foot. 7. CONDITION, REPAIRS AND ALTERATIONS 7.1 Condition. The respective obligations of Landlord and Tenant with respect to the condition of the Leased Premises are set forth on Exhibit H to this Lease. 7.2 Alterations and Improvements. Tenant may place partitions and fixtures and may make improvements and other alterations to the interior of the Leased Premises at Tenant's expense, provided, however, that prior to commencing any such work, Tenant shall first obtain the written consent of Landlord to the proposed work, including the plans, specifications, the proposed architect and/or contractor(s) for such alterations and/or improvements and the materials used in connection with such alterations, including, without limitation, paint, carpeting, wall or window coverings and the use of carpet glues and other chemicals for installation of such materials, which consent shall not be unreasonably withheld. At least ten (10) days prior to the commencement of any construction in the Leased Premises, Tenant shall deliver to Landlord copies of the plans and specifications for the contemplated work and shall identify the contractor(s) selected by Tenant to perform such work. Landlord may require that work costing in excess of Fifteen Thousand and No/100 Dollars ($15,000.00) be done by Landlord's own employees, its construction contractors, or under Landlord's direction, but at the expense of Tenant, provided that in such event Landlord shall complete such work at a cost and on a schedule that is competitive with the cost and schedule proposed by contractor(s) selected by Tenant to perform the work and Landlord may, as a condition to consenting to work costing in excess of Fifteen Thousand and No/100 Dollars ($15,000.00), require that Tenant provide security adequate in Landlord's judgment so that the improvements or other alterations to the Leased Premises will be completed in a good, workmanlike and lien free manner. Landlord may also require that any work done to the interior of the Leased Premises be subject to the supervision of a third party under contract to Landlord, and Tenant shall pay to Landlord, upon completion of such work, a supervision fee in an amount equal to the actual cost of such supervision, not to exceed, however, five percent (5%) of the cost of such work. All such improvements or alterations must conform to and be in substantial accordance in quality and appearance with the quality and appearance of the improvements in the remainder of the Building. All such improvements shall be the property of Landlord. In the event Landlord consents to the use by Tenant of its own architect 7 10 and/or contractor for the installation of any such alterations or improvements, prior to the commencement of such work, Tenant shall provide Landlord with evidence that Tenant's contractor has procured worker's compensation, liability and property damage insurance (naming Landlord as an additional insured) in a form and in an amount approved by Landlord, and evidence that Tenant's architect and/or contractor has procured the necessary permits, certificates and approvals from the appropriate governmental authorities. Tenant acknowledges and agrees that any review by Landlord of Tenant's plans and specifications and/or right of approval exercised by Landlord with respect to Tenant's architect and/or contractor is for Landlord's benefit only and Landlord shall not, by virtue of such review or right of approval, be deemed to make any representation, warranty or acknowledgment to Tenant or to any other person or entity as to the adequacy of Tenant's plans and specifications or as to the ability, capability or reputation of Tenant's architect and/or contractor. 7.3 Tenant's Obligations. Tenant shall, at Tenant's sole cost and expense, maintain the Leased Premises in a clean, neat and sanitary condition and shall keep the Leased Premises and every part thereof in good condition and repair except where the same is required to be done by Landlord. Tenant hereby waives all rights to make repairs at the expense of Landlord as provided by any law, statute or ordinance now or hereafter in effect. All of Tenant's alterations and/or improvements are the property of the Landlord, and Tenant shall, upon the expiration or earlier termination of the Lease Term, surrender the Leased Premises, including Tenant's alterations and/or improvements, to Landlord, janitorial clean and in the same condition as when received, ordinary wear and tear excepted. Except as set forth in Article 7.4 below, Landlord has no obligation to construct, remodel, improve, repair, decorate or paint the Leased Premises or any improvement thereon or part thereof. Tenant shall pay for the cost of all repairs to the Leased Premises not required to be made by Landlord and shall be responsible for any redecorating, remodeling, alteration and painting during the Lease Term as Tenant deems necessary. Tenant shall pay for any repairs to the Leased Premises, the Building and the Property made necessary by any negligence or carelessness of Tenant, its employees or invitees. Landlord and Tenant hereby acknowledge and agree that the generator located on the Property and identified as such on the Site Plan (the "Generator") shall be deemed the personal property of Tenant and Tenant shall be obligated, at is sole cost and expense, to repair and maintain the Generator. 7.4 Landlord's Obligations. Landlord shall (a) make all necessary repairs to the exterior walls, exterior doors, roof, windows and corridors of the Building, (b) keep the Building and the Building Common Areas in a clean, neat and attractive condition, and (c) keep the Building equipment such as elevators, plumbing, heating, air conditioning and similar Building equipment in good repair, but Landlord shall not be liable or responsible for breakdowns or interruptions in service when reasonable efforts are made to restore such service unless (i) the cause of the disruption is within Landlord's reasonable control and is due to Landlord's negligence, and (ii) such disruption has a material adverse affect on Tenant's business. 7.5 Removal of Alterations. Upon the expiration or earlier termination of this Lease, Tenant shall remove from the Leased Premises all movable trade fixtures and other movable personal property, and shall promptly repair any damage to the Leased Premises, the Building and/or the Property caused by such removal. All such removal and repair shall be entirely at Tenant's sole cost and expense. At any time within fifteen (15) days prior to the scheduled expiration of the Lease Term or immediately upon any termination of this Lease, Landlord may require that Tenant remove from the Leased Premises any alterations, additions, improvements, trade fixtures, equipment, shelving, cabinet units or movable furniture (and other personal property) designated by Landlord to be removed. In such event, Tenant shall, in accordance with the provisions of Article 7.2 above, complete such removal (including the repair of any damage caused thereby) entirely at its own expense and within fifteen (15) days after notice from Landlord. All repairs required of tenant pursuant to the provisions of this Article 7.5 shall be performed in a manner satisfactory to Landlord, and shall include, but not be limited to, repairing plumbing, electrical wiring and holes in walls, restoring damaged floor and/or ceiling tiles, repairing any other cosmetic damage, and cleaning the Leased Premises. 7.6 No Abatement. Except as provided herein, Landlord shall have no liability to Tenant, nor shall Tenant's covenants and obligations under this Lease, including without limitation, Tenant's obligation to pay Annual Basic Rent and Additional Rent, be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted to make pursuant to the terms of this Lease or by any other tenant's Lease or are required by law to be made in and to any portion of the Leased Premises, the Building or the Property. Landlord shall, nevertheless, use reasonable efforts to minimize any interference with Tenant's business in the Leased Premises. 8 11 8. SERVICES 8.1 Climate Control. Landlord shall provide reasonable climate control to the Leased Premises during the Building Hours as is suitable, in Landlord's judgment, for the comfortable use and occupation of the Leased Premises, excluding, however, air conditioning or heating for electronic data processing or other equipment requiring extraordinary climate control. Landlord shall continue to provide climate control to the Leased Premises during Building Hours to a standard consistent with the climate control that Landlord provides as of the date of this Lease. 8.2 Janitorial Services. Landlord shall provide janitorial and cleaning services to the Leased Premises at least five (5) evenings per week, except recognized federal, state or local holidays. Tenant shall pay to Landlord, within five (5) days after receipt of Landlord's bill, the reasonable costs incurred by Landlord for extra cleaning in the Leased Premises required because of (a) misuse or neglect on the part of Tenant, its employees or invitees, (b) use of portions of the Leased Premises for special purposes requiring greater or more difficult cleaning work than office areas, (c) interior glass partitions or unusual quantities of glass surfaces, (d) non-building standard materials or finishes installed by Tenant or at its request, and (e) removal from the Leased Premises of refuse and rubbish of Tenant in excess of that ordinarily accumulated in general office occupancy or at times other than Landlord's standard cleaning times. 8.3 Electricity. Landlord shall, during Building Hours, furnish reasonable amounts of electric current as required for normal and usual lighting purposes and for office machines and equipment such as persona] computers, typewriters, adding machines, copying machines, calculators and similar machines and equipment normally utilized in general office use. Tenant's use of electric energy in the Leased Premises shall not at any time exceed the capacity of any of the risers, piping, electrical conductors and other equipment in or serving the Leased Premises. In order to insure that such capacity is not exceeded and to avert any possible adverse effect on the Building's electric system, Tenant shall not, without Landlord's prior written consent in each instance, connect appliances, machines using current in excess of 120 volts or heavy-duty equipment other than ordinary office equipment to the Building's electric system or make any alterations or additions to the Building's electric system. Should Landlord grant such consent, all additional risers, piping and electrical conductors and other equipment therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant within ten (10) days after receipt of Landlord's bill. As a condition to granting such consent, Landlord may require Tenant to pay the cost of additional electric energy that is made available to Tenant based upon the estimated additional capacity of such additional risers, piping and electrical conductors or other equipment. 8.4 Water. Landlord shall furnish cold and heated water for drinking and lavatory purposes to the Building Common Areas. 8.5 Light Bulbs. Landlord shall perform such replacement of lamps, fluorescent tubes and lamp ballasts in the Leased Premises and in the Building as may be required from time to time. If the lighting fixtures in the Leased Premises are other than those furnished at the beginning of the Lease Term, Tenant shall pay Landlord's charge for replacing the lamps, lamp ballasts and fluorescent tubes in such lighting fixtures within ten (10) days after receipt of Landlord's bill. 8.6 Heat Generating Equipment. Whenever heat generating machines or equipment used in the Leased Premises affect the temperature otherwise maintained by the climate control system, Landlord shall have the right to install supplementary air-conditioning units in the Leased Premises and the cost thereof, including the cost of installation, operation and maintenance shall be paid by Tenant to Landlord within five (5) days after receipt by Tenant of Landlord's statement. 8.7 Separate Meters. Landlord may install separate meters for the Leased Premises to register the usage of all or any one of the utilities serving the Leased Premises and in such event, Tenant shall pay for the cost of utility usage as metered (a) during other than Building Hours, or (b) which is in excess of that usage by Tenant as of date of this Lease. 8.8 Additional Services. Tenant shall pay to Landlord, monthly as billed, as Additional Rent, Landlord's charge for services furnished by Landlord to Tenant in excess of that agreed to be furnished by Landlord pursuant to this Article 8, for (a) any utility services utilized by Tenant during other than Building Hours, and (b) climate control provided at times other than Building Hours or in excess of that used by Tenant as of the date of this Lease. Landlord shall bill Tenant for the actual cost of such services, which as of the date of this Lease is Five and No/100 Dollars ($5.00) per 9 12 hour, per zone of the Leased Premises. Landlord hereby acknowledges and agrees that, as of the date of this Lease, Tenant's use of all utilities during Building Hours is normal and usual. 8.9 Interruptions in Service. Landlord does not warrant that any of the foregoing services or any other services which Landlord may supply will be free from interruption. Tenant acknowledges that any one or more of such services may be suspended by reason of accident, repairs, inspections, alterations or improvements necessary to be made, or by strikes or lockouts, or by reason of operation of law, or by causes beyond the reasonable control of Landlord. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of Annual Basic Rent or Additional Rent by reason of any disruption of the services to be provided by Landlord pursuant to this Lease by reason of accident, repairs, inspections, alterations or improvements necessary to be made, or by strikes or lockouts, or by reason of operation of law, or by causes beyond the reasonable control of Landlord; provided, however, that Landlord shall use commercially diligent efforts to minimize the disruption to Tenant's business and to reinstate service and shall diligently pursue in good faith a reinstatement of services until the same has been accomplished. 9. LIABILITY AND PROPERTY INSURANCE 9.1 Liability Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of commercial general liability insurance for personal injury (including wrongful death) and damage to property covering (a) any occurrence in the Leased Premises, (b) any act or omission by Tenant, by any subtenant of Tenant, or by any of their respective invitees, agents, servants or employees anywhere in the Leased Premises and the Property, (c) the business operated by Tenant and by any subtenant of Tenant in the Leased Premises, and (d) the contractual liability of Tenant to Landlord pursuant to the indemnification provisions of Article 16.1 below, which coverage shall not be less than One Million and No/100 Dollars ($1,000,000.00) per occurrence and Two Million and No/100 Dollars ($2,000,000.00) combined single limit. If Landlord shall so request, Tenant shall increase the amount of such liability insurance to the amount then customary for premises and uses similar to the Leased Premises and Tenant's use thereof. The liability policy or policies shall contain an endorsement naming Landlord, its partners, members or shareholders (as applicable), Landlord's lender and management agent and any persons, firms or corporations specifically designated by Landlord in a written notice to Tenant as additional insureds, and shall provide that the insurance carrier shall have the duty to defend and/or settle any legal proceeding filed against Landlord seeking damages based upon bodily injury or property damage liability even if any of the allegations of such legal proceedings are groundless, false or fraudulent. 9.2 Property Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of insurance with "Special Form Coverage," including coverage for vandalism or malicious mischief, insuring the Tenant Improvements as defined on Exhibit H hereto and Tenant's alterations and/or improvements made pursuant to Article 7.2 above and Tenant's stock in trade, furniture, personal property, fixtures, equipment and other items in the Leased Premises, with coverage in an amount equal to the full replacement cost thereof. 9.3 Worker's Compensation Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of worker's compensation insurance with an insurance carrier and in amounts approved by the Industrial Commission of the State of Arizona. 9.4 Business Interruption Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of business interruption insurance in an amount equal to twelve (12) monthly installments of Annual Basic Rent and Additional Rent payable to Landlord, together with the taxes thereon, insuring Tenant against losses sustained by Tenant as a result of any cessation or interruption of Tenant's business in the Leased Premises for any reason. 9.5 Insurance Requirements. Each insurance policy and certificate thereof obtained by Tenant pursuant to this Lease shall contain a clause that the insurer will provide Landlord, its partners and any persons, firms or corporations designated by Landlord with at least thirty (30) days prior written notice of any material change, non-renewal or cancellation of the policy. Each such insurance policy shall be with an insurance company authorized to do business in the State of Arizona and reasonably acceptable to Landlord. Certified copies of all insurance policies evidencing the coverage under each such policy, as well as a certified copy of the required additional insured endorsement(s) shall be delivered to Landlord prior to commencement of the Lease Term. Each such policy shall provide that any loss payable thereunder shall be payable notwithstanding (a) any act, omission or neglect by Tenant or by any subtenant of Tenant, or (b) any occupation or use of the Leased Premises or any portion thereof by Tenant or by any subtenant of Tenant for purposes 10 13 more hazardous than permitted by the terms of such policy or policies, or (c) any foreclosure or other action or proceeding taken by any mortgagee or trustee pursuant to any provision of any mortgage or deed of trust covering the Leased Premises, the Building or the Property, or (d) any change in title or ownership of the Property. All insurance policies required pursuant to this Article 9 shall be written as primary policies, not contributing with or in excess of any coverage which Landlord may carry. Tenant shall procure and maintain all policies required under this Article 9 entirely at its own expense and shall, at least twenty (20) days prior to the expiration of such policies, furnish Landlord with certified copies of replacement policies or renewal certificates for existing policies in conformance with Accord Form No. 27 (March 1993). Tenant shall not do or permit to be done anything which shall invalidate the insurance policies maintained by Landlord or the insurance policies required pursuant to this Article 9 or the coverage thereunder. If Tenant or any subtenant of Tenant does or permits to be done anything which shall increase the cost of any insurance policies maintained by Landlord, then Tenant shall reimburse Landlord for any additional premiums attributable to any act or omission or operation of Tenant or any subtenant of Tenant causing such increase in the cost of insurance. Any such amount shall be payable as Additional Rent within five (5) days after receipt by Tenant of a bill from Landlord. All policies of insurance shall name both Landlord and Tenant (and/or such other party or parties as Landlord may require) as insureds and shall be endorsed to indicate that the coverage provided shall not be invalid due to any act or omission on the part of Landlord. 9.6 Co-Insurance. If on account of the failure of Tenant to comply with the provisions of this Article 9 Landlord is deemed a co-insurer by its insurance carrier, then any loss or damage which Landlord shall sustain by reason thereof shall be borne by Tenant, and shall be paid by Tenant within five (5) days after receipt of a bill therefor. 9.7 Adequacy of Insurance. Landlord makes no representation or warranty to Tenant that the amount of insurance to be carried by Tenant under the terms of this Lease is adequate to fully protect Tenant's interests. If Tenant believes that the amount of any such insurance is insufficient, Tenant is encouraged to obtain, at its sole cost and expense, such additional insurance as Tenant may deem desirable or adequate. Tenant acknowledges that Landlord shall not, by the fact of approving, disapproving, waiving, accepting, or obtaining any insurance, incur any liability for or with respect to the amount of insurance carried, the form or legal sufficiency of such insurance, the solvency of any insurance companies or the payment or defense of any lawsuit in connection with such insurance coverage, and Tenant hereby expressly assumes full responsibility therefor and all liability, if any, with respect thereto. 9.8 Self-Insurance. Tenant shall have the right to self-insure for the liability insurance, the property insurance and the business interruption insurance required by Articles 9.1, 9.2 and 9.4, respectively, subject to the requirements of this Article 9.8: (a) For purposes of this Article 9.8, "self-insurance" shall mean that Tenant is itself acting as though it were the insurance company providing the insurance required under the provisions of this Article 9 and Tenant shall pay any amounts due in lieu of insurance proceeds as required under the provisions of this Lease, which amounts shall be treated as insurance proceeds for all purposes under this Lease. (b) All amounts which Tenant pays or is required to pay and all losses or damages resulting from risks for which Tenant has elected to self-insure shall be subject to the waiver of subrogation provisions in Article 11 below and shall not limit Tenant's indemnification obligations set forth in Article 16.1 below. (c) Tenant's right to self-insure and to continue to self-insure is conditioned upon and subject to: (i) The Tenant having a net worth, calculated in accordance with generally accepted accounting principles, consistently applied, of at least One Hundred Million Dollars ($100,000,000.00). (ii) The Tenant providing an audited financial statement, prepared in accordance with generally accepted accounting principles, consistently applied, to Landlord on or before the date which is thirty (30) days prior to the upcoming annual anniversary of the Commencement Date which establishes and confirms that Tenant has the required net worth, unless events occur that make it apparent that such net worth has diminished below 11 14 the required level (such as the bankruptcy of Tenant), in which event Tenant shall not be permitted to continue to self-insure; and (iii) The Tenant maintaining appropriate loss reserves which are actuarially derived in accordance with accepted standards of the insurance industry and accrued (i.e., charged against earnings) or otherwise funded. (d) In the event that Tenant elects to self-insure and an event or claim occurs for which a defense and/or coverage would have been available from the insurance company Tenant shall: (i) undertake the defense of any such claim, including a defense of Landlord, at Tenant's sole cost and expense, and (ii) use its own funds to pay any claim or replace any property or otherwise provide the funding which would have been available from insurance proceeds but for such election by Tenant to self-insure. (e) In the event Tenant has the right and elects that it will not operate its business in the Leased Premises after the Leased Premises are damaged or destroyed, Landlord shall have the right to determine that the self-insurance proceeds either be paid to Landlord: (i) for restoration of the Leased Premises in accordance with Article 10 below and Tenant's liability and obligations under this Lease shall continue in full force and effect, or (ii) to terminate this Lease in accordance with the provisions of Article 10 below. (f) Tenant shall provide Landlord and Superior Mortgagee (defined below) or Superior Lessor (defined below) with certificates of self-insurance specifying the extent of self-insurance coverage hereunder and containing a waiver of subrogation provision reasonably satisfactory to Landlord. Any insurance coverage provided by Tenant shall be for the benefit of Landlord, the Superior Mortgagee and the Superior Lessor as their respective interests may appear. 10. RECONSTRUCTION 10.1 Damage. (a) (i) Within sixty (60) days after a partial destruction of either the Leased Premises, the Building, or the Property (as defined in Article 10.1(f)), subject to Force Majeure and provided there is not then in existence an Event of Default, Landlord shall notify Tenant in writing of the date by which Landlord estimates in good faith that reconstruction of the Premises shall be complete (the "Completion Date"). If the Completion Date is more than one hundred fifty (150) days after the end of the sixty (60) day period, Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by delivering to Landlord, within thirty (30) days after receipt by Tenant of Landlord's notice, written notice of termination, which termination shall be effective thirty (30) days after the end of the sixty (60) day period. Failure by Tenant to terminate this Lease within such thirty (30) day period shall be deemed a waiver by Tenant of such termination right. (ii) In the event that Tenant shall not have provided Landlord with notice of termination within the thirty (30) day period, Landlord shall thereafter promptly commence the repair, reconstruction and restoration of the Leased Premises, the Building or the Property, as applicable, and shall diligently prosecute the same until completion. If Landlord shall not have completed reconstruction of the Leased Premises, Building or Property, as applicable, on or before the Completion Date, Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by delivering to Landlord, within thirty (30) days after the Completion Date, written notice of termination, which termination shall be effective thirty (30) days after receipt by Landlord of Tenant's notice of termination unless Landlord shall have completed such repairs and restoration prior to the expiration of such thirty (30) day period. In the event that Tenant shall have given Landlord notice of termination and Landlord shall not have completed reconstruction of the Leased Premises, Building or Property prior to the expiration of the thirty (30) day period, Tenant shall have the right to continue to occupy the Leased Premises (but only to the extent of such occupancy as of the date Tenant delivers to Landlord such notice of termination) for a period of ninety (90) days after the end of such thirty (30) day period at the Annual Basic Rent then in effect under Article 1.12 and such 12 15 occupancy shall not be deemed a holdover. The failure of Tenant to terminate this Lease pursuant to this Article 1O.1(a)(ii) shall be deemed a waiver by Tenant of its right to terminate this Lease on account of the failure of Landlord to complete the reconstruction by the Completion Date. (b) (i) Within sixty (60) days after destruction of more than thirty-three and one-third percent (33.33%) of the then full replacement cost of the Leased Premises, the Building, or the Property as of the date of destruction, subject to Force Majeure and provided there is not then in existence an Event of Default, Landlord shall notify Tenant in writing of the date by which Landlord estimates in good faith that reconstruction of the Premises shall be complete (the "Completion Date"). If the Completion Date is more than three hundred and thirty-five (335) days after the end of the sixty (60) day period. Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by delivering to Landlord, within thirty (30) days after receipt by Tenant of Landlord's notice, written notice of termination, which termination shall be effective thirty (30) days after the end of the sixty (60) day period. Failure by Tenant to terminate this Lease within such thirty (30) day period shall be deemed a waiver by Tenant of such termination right. (ii) In the event that Tenant shall not have provided Landlord with notice of termination within the thirty (30) day period, Landlord shall thereafter promptly commence the repair, reconstruction and restoration of the Leased Premises, the Building or the Property, as applicable, and shall diligently prosecute the same until completion. If Landlord shall not have completed reconstruction of the Leased Premises, Building or Property, as applicable, on or before the Completion Date, Tenant shall have the right, as its sole and exclusive remedy, to terminate this Lease by delivering to Landlord, within thirty (30) days after the Completion Date, written notice of termination, which termination shall be effective thirty (30) days after receipt by Landlord of Tenant's notice of termination unless Landlord shall have completed such repairs and restoration prior to the expiration of such thirty (30) day period. In the event that Tenant shall have given Landlord notice of termination and Landlord shall not have completed reconstruction of the Leased Premises, Building or Property prior to the expiration of the thirty (30) day period, Tenant shall have the right to continue to occupy the Leased Premises (but only to the extent of such occupancy as of the date Tenant delivers to Landlord such notice of termination) for a period of ninety (90) days after the end of such thirty (30) day period at the Annual Basic Rent then in effect under Article 1.12 and such occupancy shall not be deemed a holdover. The failure of Tenant to terminate this Lease pursuant to the previous sentence shall be deemed a waiver by Tenant of its right to terminate this Lease on account of the failure of Landlord to complete the reconstruction by the Completion Date. (c) In the event of destruction of more than thirty-three and one-third percent (33.33%) of the then full replacement cost of the Leased Premises the Building, or the Property as of the date of destruction during the last two (2) years of the Lease Term, Landlord and Tenant shall each have the option to terminate this Lease upon giving written notice to the other party within sixty (60) days after such destruction, which termination shall be effective thirty (30) days after receipt of notice by the non-terminating party. (d) In the event of a partial destruction of either the Leased Premises, the Building, or the Property during the last one (1) year of the Lease Term, Landlord and Tenant shall each have the option to terminate this Lease upon giving written notice to the other party within sixty (60) days after such destruction, which termination shall be effective thirty (30) days after receipt of notice by the non-terminating party. (e) In the event that Landlord shall exercise its right of termination as set forth in Article 10.1(c) and 10.1(d) above, Tenant shall have the right to nullify such election by Landlord by notifying Landlord within thirty (30) days after receipt by Tenant of Landlord's notice of termination that Tenant has exercised the right to extend this Lease as described in Rider 1 hereto; Tenant shall have the right to nullify Landlord's termination in such circumstances at any time during the Lease Term. (f) For purposes of this Article 10, "partial destruction" shall be deemed destruction to an extent of thirty-three and one-third percent (33.33%) or less of the then full replacement cost of the Leased Premises, the Building, or the Property as of the date of destruction. 10.2 Intentionally Omitted. 10.3 Reconstruction. In the event of any reconstruction of the Leased Premises, the Building or the Property pursuant to this Article 10, such reconstruction shall be in conformity with all city, county, state and federal ordinances, rules and regulations then in existence, as the same may 13 16 be interpreted and enforced. Notwithstanding that all reconstruction work shall be performed by Landlord's contractor unless Landlord shall otherwise agree in writing, Landlord's obligation to reconstruct the Leased Premises shall be only to the comparable condition of the Leased Premises immediately prior to the Commencement Date. Landlord's obligation to repair and reconstruct the Leased Premises shall be limited to the amount of net proceeds of insurance received by Landlord. Any extra expenses incurred by Landlord in the reconstruction of the Leased Premises, the Building or any other portion of the Property as a result of the violation by Tenant of the terms and conditions set forth in Article 34 below shall be borne by Tenant. Tenant, at Tenant's sole cost and expense, shall be responsible for the repair and restoration of all items of the Tenant improvements or Tenant's improvements and/or alterations installed pursuant to Article 7.2 and the replacement of Tenant's stock in trade, trade fixtures, furniture, furnishings and equipment. Tenant shall commence the installation of fixtures, equipment and merchandise promptly upon delivery to Tenant of possession of the Leased Premises and shall diligently prosecute such installation to completion. 10.4 Termination. Upon any termination of this Lease under any of the provisions of this Article 10, Landlord and Tenant each shall be released without further obligations to the other coincident with the surrender of possession of the Leased Premises to Landlord, except for items which have previously accrued and remain unpaid and provided that Landlord shall return to Tenant the Security Deposit in accordance with the provisions of Article 4 and any advance rent paid by Tenant to Landlord. In the event of termination, all proceeds from Tenant's property insurance coverage and covering the Tenant Improvements or Tenant's improvements and/or alterations installed pursuant to Article 7.2. but excluding proceeds for trade fixtures, merchandise, signs and other removable personal property, shall be disbursed and paid to Landlord. 10.5 Abatement. In the event of repair, reconstruction and restoration of the Leased Premises, the Minimum Annual Rental and Additional Rent shall be abated proportionately with the degree to which Tenant's use of the Leased Premises is impaired commencing from the date of destruction and continuing during the period of such repair, reconstruction or restoration, Tenant shall continue the operation of Tenant's business at the Leased Premises during any such period to the extent reasonably practicable from the standpoint of prudent business management Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Leased Premises, or the building of which the Leased Premises are a part, Tenant's personal property or for any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. 10.6 Waiver. Tenant hereby waives any statutory and common law rights of termination which may arise by reason of any partial or total destruction of the Leased Premises which Landlord is obligated to restore or may restore under any of the provisions of this Lease, including the provisions of A.R.S. Section 33-343. 11. WAIVER OF SUBROGATION Tenant hereby waives its rights and the subrogation rights of its insurer against Landlord and any other tenants of space in the Building or the Property, as well as their respective members, officers, employees, agents, authorized representatives and invitees, with respect to any claims including, but not limited to, claims for injury to any persons, and/or damage to the Leased Premises and/or any fixtures, equipment, personal property, furniture, improvements and/or alterations in or to the Leased Premises, which are caused by or result from (a) risks or damages required to be insured against wider this Lease, or (b) risks and damages which are insured against by insurance policies maintained by Tenant from time to time. Tenant shall obtain for Landlord from its insurers under each policy required by this Lease a waiver of all rights of subrogation which such insurers of Tenant might otherwise have against Landlord. 12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of Annual Basic Rent or Additional Rent. If Tenant shall fail to pay any sum of money, other than Annual Basic Rent, required to be paid by it hereunder, or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for five (5) days after written notice thereof by Landlord (or such shorter period of time as may be reasonable under the circumstances in the event of an emergency following oral notice to Tenant's senior management personnel in the Leased Premises), Landlord may (but shall not be obligated to do so) without waiving or releasing 14 17 Tenant from any of Tenant's obligations, make any such payment or perform any such other act on behalf of Tenant; provided, however, that Landlord shall not perform any obligation of Tenant if Tenant shall have commenced curing such failure and is diligently and in good faith prosecuting the same. All sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the greater of (a) eighteen percent (18%) per annum or (b) the rate of interest per annum publicly announced, quoted or published, from time to time, by Bank One, Arizona, NA. at its Phoenix, Arizona office as its reference rate" plus four (4) percentage points, from the date of such payment by Landlord until reimbursement in full by Tenant (the "Default Rate"), shall be payable to Landlord as Additional Rent with the next monthly installment of Annual Basic Rent; provided, however, in no event shall the Default Rate exceed the maximum rate (if any) permitted by applicable law. 13. DEFAULT AND REMEDIES 13.1 Event of Default. The occurrence of any one or more of the following events will constitute an "Event of Default" on the part of Tenant: (a) Failure to pay any installment of Annual Basic Rent, any Additional Rent or any other sum required to be paid by Tenant under this Lease when due, and such failure shall continue for five (5) days after written notice thereof by Landlord to Tenant; (b) Failure to perform any of the other covenants or conditions which Tenant is required to observe and perform (except failure in the payment of Annual Basic Rent, Additional Rent or any other monetary obligation contained in this Lease) and such failure shall continue for fifteen (15) days (or such shorter period of time as may be specified by Landlord in the event of an emergency, i.e., immediate danger to persons or property) after written notice thereof by Landlord to Tenant, provided that if such default is other than the payment of money and cannot be cured within such fifteen (15) day period, then an Event of Default shall not have occurred if Tenant, within such fifteen (15) day period, commences curing of such failure and diligently in good faith prosecutes the same to completion and furnishes evidence thereof to Landlord within thirty (30) days thereafter; (c) If any warranty, representation or statement made by Tenant to Landlord in connection with the financial statements of Tenant delivered to Landlord prior to the execution of this Lease is or was materially false or misleading when made or furnished; (d) Intentionally omitted; (e) Failure to conduct substantially all business operations within the Leased Premises for ten (10) consecutive days except for temporary closures for reconstruction, remodeling, relocation of a subsidiary or division, an assignment or subletting in accordance with the terms of Article 19 provided; however, that in no event shall any such temporary closure exceed ninety (90) days; (f) If Tenant makes a bulk sale of its goods or moves or commences, attempts to move its goods, equipment and personal property out of the Leased Premises; (g) The levy of a writ of attachment or execution or other judicial seizure of substantially all of Tenant's assets or its interest in this Lease, such attachment, execution or other seizure remaining undismissed or discharged for a period of sixty (60) days after the levy thereof; (h) The filing of any petition by or against Tenant or any Guarantor to declare Tenant or any Guarantor a bankrupt or to delay, reduce or modify Tenant's or any Guarantor's debts or obligations, which petition is not discharged within sixty (60) days after the date of filing; (i) The filing of any petition or other action taken to reorganize or modify Tenant's or any Guarantor's capital structure, which petition is not discharged within sixty (60) days after the date of filing (j) If Tenant or any Guarantor shell be declared insolvent according to law; (k) A general assignment by Tenant Or any Guarantor for the benefit of creditors; 15 18 (l) The appointment of a receiver or trustee for Tenant or any Guarantor or all or any of their respective property, which appointment is not discharged within sixty (60) days after the date of filing; (m) The filing by Tenant or any Guarantor of a voluntary petition pursuant to the Bankruptcy Code or any successor thereto or the filing of an involuntary petition against Tenant or any Guarantor pursuant to the Bankruptcy Code or any successor legislation, which petition is not discharged within sixty (60) days after the date of filing; or (n) The occurrence of an Event of Default under Articles 31 or 34.11. 13.2 Remedies. Upon the occurrence of an Event of Default, Landlord may, without prejudice to any other rights and remedies available to a landlord at law, in equity or by statute, Landlord may exercise one or more of the following remedies, all of which shall be construed and held to be cumulative and non-exclusive: (a) Terminate this Lease and re-enter and take possession of the Leased Premises, in which event, Landlord is authorized to make such repairs, redecorating, refurbishments or improvements to the Leased Premises as may be necessary in the reasonable opinion of Landlord acting in good faith for the purposes of reletting the Leased Premises and the costs and expenses incurred in respect of such repairs, redecorating and refurbishments and the expenses of such reletting (including brokerage commissions) shall be paid by Tenant to Landlord within five (5) days after receipt of Landlord's statement; or (b) Without terminating this Lease, re-enter and take possession of the Leased Premises; or (c) Without such re-entry, recover possession of the Leased Premises in the manner prescribed by any statute relating to summary process; or (d) Without terminating this Lease, Landlord may relet the Leased Premises as Landlord may see fit without thereby avoiding or terminating this Lease, and for the purposes of such reletting, Landlord is authorized to make such repairs, redecorating, refurbishments or improvements to the Leased Premises as may be necessary in the reasonable opinion of Landlord acting in good faith for the purpose of such reletting, and if a sufficient sum is not realized from such reletting (after payment of all costs and expenses of such repairs, redecorating and refurbishments and expenses of such reletting (including brokerage commissions) and the collection of rent accruing therefrom) each month to equal the Annual Basic Rent and Additional Rent payable hereunder, then Tenant shall pay such deficiency each month within five (5) days after receipt of Landlord's statement; or (e) Landlord may declare immediately due and payable all the present value of the remaining installments of Annual Basic Rent and Additional Rent (utilizing the discount rate of the Federal Reserve Bank situated nearest to the location of the Building at the time of Landlord's declaration plus one (1) percentage point), and such amount, less the present value of the fair rental value of the Leased Premises for the remainder of the Lease Term (utilizing the discount rate of the Federal Reserve Bank situated nearest to the location of the Building at the time of Landlord's declaration plus one (1) percentage point) shall be paid by Tenant within five (5) days after receipt of Landlord's statement. Landlord shall not by re-entry or any other act, be deemed to have terminated this Lease, or the liability of Tenant for the total Annual Basic Rent and Additional Rent reserved hereunder or for any installment thereof then due or thereafter accruing, or for damages, unless Landlord notifies Tenant in writing that Landlord has so elected to terminate this Lease. After the occurrence of an Event of Default, the acceptance of Annual Basic Rent or Additional Rent, or the failure to re-enter by Landlord shall not be deemed to be a waiver of Landlord's right to thereafter terminate this Lease and exercise any other rights and remedies available to it, and Landlord may re-enter and take possession of the Leased Premises as if no Annual Basic Rent or Additional Rent had been accepted after the occurrence of an Event of Default. Upon an Event of Default, Tenant shall also pay to Landlord all costs and expenses incurred by Landlord, including court costs and attorneys' fees, in retaking or otherwise obtaining possession of the Leased Premises, removing and storing all equipment, fixtures and personal property on the Leased Premises and otherwise enforcing any of Landlord's rights, remedies or recourses arising as a result of an Event of Default. 13.3 Additional Remedies. All of the remedies given to Landlord in this Lease in the event Tenant commits an Event of Default are in addition to all other rights or remedies available to a landlord at law, in equity or by statute, including, without limitation, the right to seize and sell all goods, equipment and personal property of Tenant located in the Leased Premises and apply the proceeds thereof to all due and unpaid Annual Basic Rent, Additional Rent and other amounts owing under the Lease. All rights, options and remedies available to Landlord shall be construed and held to be cumulative, and no one of them shall be exclusive of the other. Upon the occurrence of an Event of Default, all rights, privileges and contingencies which may be exercised by Tenant under the Lease, including, without limitation, options to renew, extend and expand, as well as relocation rights, contraction rights and any other rights which may be exercised by Tenant during the Lease Term, shall be void and of no further force and effect. 16 19 13.4 Interest on Past Due Amounts. In addition to the late charge described in Article 14 below, if any installment of Annual Basic Rent or Additional Rent is not paid within five (5) business days after the date when due, it shall bear interest at the Default Rate; provided, however, this provision shall not relieve Tenant from any default in the making of any payment at the time and in the manner required by this Lease; and provided, further, in no event shall the Default Rate exceed the maximum rate (if any) permitted by applicable law. 13.5 Landlord Default. In the event Landlord should neglect or fail to perform or observe any of the covenants, provisions or conditions contained in this Lease on its part to be performed or observed, and such failure continues for thirty (30) days after written notice of default (or if more than thirty (30) days shall be required because of the nature of the default, if Landlord shall fail to commence the curing of such default within such thirty (30) day period and proceed diligently thereafter), then Landlord shall be responsible to Tenant for any actual damages sustained by Tenant as a result of Landlord's breach, but not special or consequential damages; provided, however, that in the event of an interruption of HVAC or electricity services, Landlord shall promptly take commercially reasonable efforts to cure such interruption and shall diligently pursue such cure until reinstatement of service. Should Tenant give written notice to Landlord to correct any default, Tenant shall give similar concurrent notice to the holder of any mortgages or deeds of trust against the Building or the lessor of any ground lease (provided that the names and addresses of such holders have been provided to Tenant), and prior to any cancellation of this Lease, the holder of such mortgage or deed of trust and/or the lessor under such ground lease shall be given a reasonable period of time to correct or remedy such default. If and when such holder of such mortgage or deed of trust and/or the lessor under any such ground lease has made performance on behalf of Landlord, the default of Landlord shall be deemed cured. 14. LATE PAYMENTS Tenant hereby acknowledges that the late payment by Tenant to Landlord of any monthly installment of Annual Basic Rent, any Additional Rent or any other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Such costs include but are not limited to processing, administrative and accounting costs. Accordingly, if any monthly installment of Annual Basic Rent, any Additional Rent or any other sum due from Tenant shall not be received by Landlord within five (5) business days after the date when due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount or Two Hundred and No/100 Dollars ($200.00), whichever is greater. With respect to any late payment by Tenant that is subject to a late charge, the acceptance of payment in full of all amounts past due and the applicable late charge by Landlord shall constitute a waiver of Tenant's default with respect to such overdue amount, and shall prevent Landlord from exercising any of the other rights and remedies available to Landlord with respect to that particular default by Tenant. Nothing contained in this Article 14 shall be deemed to authorize or grant to Tenant an option for the late payment of Annual Basic Rent, Additional Rent or any other sum due hereunder. 15. ABANDONMENT AND SURRENDER 15.1 Abandonment. Tenant shall not abandon the Leased Premises at any time during the Lease Term. No act or thing done by Landlord or by any agent or employee of Landlord during the Lease Term shall be deemed an acceptance of a surrender of the Leased Premises unless such acceptance is expressed in writing and duly executed by Landlord. Unless Landlord so agrees in writing, the delivery of the key to the Leased Premises to any employee or agent of Landlord shall not operate as a termination of this Lease or as a surrender of the Leased Premises, 15.2 Surrender. Tenant shall, upon the expiration or earlier termination of this Lease, peaceably surrender the Leased Premises, including Tenant Improvements and Tenant's improvements and/or alterations installed pursuant to Article 7.2, in a janitorial clean condition and otherwise in as good condition as when Tenant, took possession, except for (i) reasonable wear and tear subsequent to the last repair replacement, restoration, alteration or renewal; (ii) loss by fire or other casualty, and (iii) loss by condemnation. If Tenant shall abandon or surrender the Leased Premises, or be dispossessed by process of law or otherwise, any personal property and fixtures belonging to Tenant and left in the Leased Premises shall be deemed abandoned and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. Landlord may, however, if it so elects, remove all or any part of such personal property from the Leased Premises and the costs incurred by Landlord in connection with such removal, including storage costs and the cost of 17 20 repairing any damage to the Leased Premises, the Building and/or the Property caused by such removal shall be paid by Tenant within five (5) days after receipt of Landlord's statement. Upon the expiration or earlier termination of this Lease, Tenant shall surrender to Landlord all keys to the Leased Premises and shall inform Landlord of the combination of any vaults, locks and safes left on the Leased Premises. The obligations of Tenant under this Article 15.2 shall survive the expiration or earlier termination of this Lease. Tenant shall indemnify Landlord against any loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding Tenant founded on such delay Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises for the express purpose of arranging a meeting with Landlord for a joint inspection of the Leased Premises. In the event of Tenant's failure to give such notice or to participate in such joint inspection, Landlord's inspection at or after Tenant's vacation of the Leased Premises shall be conclusively deemed correct for purposes of determining Tenant's liability for repairs and restoration hereunder. 16. INDEMNIFICATION AND EXCULPATION 16.1 Indemnification. Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, all claims, damages, losses, costs, liens, encumbrances, liabilities and expenses, including reasonable attorneys', accountants' and investigators' fees and court costs (collectively, the "Claims"), however caused, arising in whole or in part from Tenant's use of all or any part of the Leased Premises or the Generator or the conduct of Tenant's business or from any activity, work or thing done or permitted by Tenant or by any invitee, servant, agent, employee or subtenant of Tenant in the Leased Premises or with respect to the Generator, and shall further indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, all Claims arising in whole or in part from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease or arising in whole or in part from any negligence or willful misconduct of Tenant or by any invitee, servant, agent, employee or subtenant of Tenant anywhere in the Leased Premises, the Building and/or the Property or with respect to the Generator. The preceding sentence shall not apply to any Claim arising from any negligence or wilful misconduct by Landlord or any of its invitees, servants, agents or employees. In case any action or proceeding is brought against Landlord to which this indemnification shall be applicable, Tenant shall pay all Claims resulting therefrom and shall defend such action or proceeding, if Landlord shall so request, at Tenant's sole cost and expense, by counsel reasonably satisfactory to Landlord. The obligations of Tenant under this Article 16.1 shall survive the expiration or earlier termination of this Lease. 16.2 Exculpation. Neither Landlord nor its agents or employees shall be liable for (i) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, sewage, odor, noise, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein, or from the roof of any structure on the Property, or from any streets or subsurfaces on or adjacent to the Building or the Property, or from any other place or resulting from dampness, (ii) any defects in the Leased Premises, (iii) negligence or misconduct, including, but not limited to, criminal acts, by maintenance or other personnel or contractors serving the Leased Premises, the Building and/or the Property, other tenants or third parties unless arising from the negligence or wilful misconduct of Landlord, its agents or employees. All property of Tenant kept or stored on the Property shall be so kept or stored at the risk of Tenant only, and Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any Claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers, unless such damage shall be caused by the willful act or negligence of Landlord and through no fault of Tenant. Tenant shall give prompt notice to Landlord with respect to any defects, fires or accidents which Tenant observes in the Leased Premises, the Building and/or the Property. 17. ENTRY BY LANDLORD Landlord reserves and shall at any and all reasonable times during business hours and upon prior notice (except in cases of emergency) have the right to enter the Leased Premises, to inspect the same to submit the Leased Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Leased Premises and any portion of the Building of which the Leased Premises are a part, without abatement of Annual Basic Rent or Additional Rent, and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that access into the Leased Premises shall not be blocked thereby, and further providing that the business of Tenant shall not 18 21 be interfered with unreasonably. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Leased Premises or any loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon or about the Leased Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open such doors in an emergency in order to obtain entry to the Leased Premises, and any entry to the Leased Premises obtained by Landlord by any such means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer off, the Leased Premises or an eviction of Tenant from all or any portion of the Leased Premises. Nothing in this Article 17 shall be construed as obligating Landlord to perform any repairs, alterations or maintenance except as otherwise expressly required elsewhere in this Lease. 18. INTENTIONALLY OMITTED 19. ASSIGNMENT AND SUBLETTING 19.1 Consent of Landlord Required. Tenant shall not transfer or assign this Lease or any right or interest hereunder, or sublet the Leased Premises or any part thereof, without first obtaining Landlord's prior written consent, which consent shall not be unreasonably withheld. No transfer or assignment (whether voluntary or involuntary, by operation of law or otherwise) or subletting shall be valid or effective without such prior written consent. Should Tenant attempt to make or allow to be made any such transfer, assignment or subletting, except as aforesaid, or should any of Tenant's tights under this Lease be sold or otherwise transferred by or under court order or legal process or otherwise, then, and in any of the foregoing events Landlord may, at its option, treat such act as an Event of Default by Tenant. Should Landlord consent to a transfer, assignment or subletting, such consent shall not constitute a waiver of any of the restrictions or prohibitions of this Article 19 and such restrictions or prohibitions shall apply to each successive transfer, assignment or subletting hereunder, if any. 19.2 Deemed Transfers. For the purposes of this Article 19 an assignment shall be deemed to include the following: (a) if Tenant is a partnership, a withdrawal or change (voluntary, involuntary, by operation of law or otherwise) of any of the partners thereof, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) by any partner thereof of such partner's interest in Tenant, or the dissolution of the partnership; (b) if Tenant consists of more than one person, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) from one person unto the other or others; (c) if Tenant (or a constituent partner of Tenant) is a corporation, any dissolution, merger, consolidation or reorganization of Tenant (or such constituent partner), or any change in the ownership (voluntary, involuntary, by operation of law, creation of new stock or otherwise) of more than fifty percent (50%) or more of its capital stock from the ownership existing on the date set forth in Article 1.1 above; (d) if Tenant is an unincorporated association, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) of any interest in such unincorporated association; or (e) if Tenant is a limited liability company, a withdrawal or change of any of the members thereof, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) by any member of such member's interest in Tenant, or the dissolution of the limited liability company; or (f) the sale of fifty percent (50%) or more in value of the assets of Tenant Notwithstanding the foregoing, Landlord hereby acknowledges and consents to Tenant's right, without further approval from Landlord, but only after written notice to Landlord, to assign this Lease or sublet the Premises in the event that Tenant or the surviving entity into which Tenant may be merged has an initial public offering of its shares pursuant to the Securities Act of 1933 or any other comparable federal or state securities acts (a "Permitted Transfer"). A Permitted Transfer shall not relieve Tenant of its liability under this Lease and Tenant shall remain liable to Landlord for the payment of all Annual Basic Rent, and Additional Rent and in the performance of all covenants and conditions of this Lease applicable to Tenant. Any such assignee or sublessee of a Permitted Transfer shall be subject to all of the terms, covenants and conditions of this Lease and such assignee or sublessee shall expressly assume for the benefit of Landlord the obligations of Tenant under this Lease. 19.3 Delivery of Information. If Tenant wishes at any time to assign this Lease or sublet the Leased Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (a) the name of the proposed subtenant or assignee; (b) the 19 22 nature of the proposed subtenant's or assignee's business to be carried on in the Leased Premises; (c) the terms and the provisions of the proposed sublease or assignment; and (d) such financial information as Landlord may reasonably request concerning the proposed subtenant or assignee. Tenant's failure to comply with the provisions of this Article 19.3 shall entitle Landlord to withhold its consent to the proposed assignment or subletting. 19.4 Recapture. If Tenant proposes to assign its interest in this Lease, Landlord may, at its option, upon written notice to Tenant within thirty (30) days after Landlord's receipt of the information specified in Article 19.3 above, elect to recapture all or any portion of the Leased Premises, and within sixty (60) days after notice of such election has been given to Tenant, this Lease shall terminate as to the portion of the Leased Premises recaptured. if all or a portion of the Leased Premises is recaptured by Landlord pursuant to this Article 19.4. Tenant shall promptly execute and deliver to Landlord a termination agreement setting forth the termination date with respect to the Leased Premises or the recaptured portion thereof, and prorating the Annual Basic Rent, Additional Rent and other charges payable hereunder to such date, If Landlord does not elect to recapture as set forth above, Tenant may thereafter enter into a valid assignment with respect to the Leased Premises, provided that Landlord consents thereto pursuant to this Article 19 and provided further, that (a) such assignment is executed within ninety (90) days alter Landlord has given its consent, (B) Tenant pays all amounts then owed to Landlord under this Lease, (c) there is not in existence an Event of Default as of the effective date of the assignment, (d) there have been no material changes with respect to the financial condition of the proposed subtenant or assignee or the business such party intends to conduct in the Leased Premises, and (e) a fully executed original of such assignment providing for an express assumption by the assignee of all of the terms, covenants and conditions of this Lease is promptly delivered to Landlord. 19.5 Adjustment to Rental. In the event Tenant assigns its interest in this Lease or sublets the Leased Premises, the Annual Basic Rent set forth in Article 1.12 above, as adjusted, shall be increased effective as of the date of such assignment or subletting by an amount equal to one-half (1/2) of the difference, if any, between the Annual Basic Rent payable pursuant to this Lease, as adjusted, and the rent and other consideration payable by any such assignee or sublessee pursuant to such assignment or sublease. Notwithstanding the foregoing, in no event shall the Annual Basic Rent after any such assignment or subletting be less than the Annual Basic Rent specified in Article 1.12 above, as adjusted. 19.6 No Release from Liability. Landlord may collect Annual Basic Rent and Additional Rent from the assignee, subtenant, occupant or other transferee, and apply the amount so collected, first to the monthly installments of Annual Basic Rent, then to any Additional Rent and other sums due and payable to Landlord, and the balance, if any, to Landlord, but no such assignment, subletting, occupancy, transfer or collection shall be deemed a waiver of Landlord's rights under this Article 19 or the acceptance of the proposed assignee, subtenant, occupant or transferee. Notwithstanding any assignment, sublease or other transfer (with or without the consent of Landlord), Tenant shall remain primarily liable under this Lease and shall not be released from performance of any of the terms, covenants and conditions of this Lease. 19.7 Landlord's Expenses. If Landlord consents to an assignment, sublease or other transfer by Tenant of all or any portion of Tenant's interest under this Lease, Tenant shall pay Or cause to be paid to Landlord, a transfer fee to reimburse Landlord for reasonable administrative expenses and for legal, accounting and other out of pocket expenses incurred by Landlord. 19.8 Assumption Agreement. If Landlord consents to an assignment, sublease or other transfer by Tenant of all or any portion of Tenant's interest under this Lease, Tenant shall execute and deliver to Landlord, and cause the transferee to execute and deliver to Landlord, an instrument in the form and substance acceptable to Landlord in which (a) the transferee adopts this Lease and assumes and agrees to perform, jointly and severally with Tenant, all of the obligations of Tenant hereunder, (b) Tenant acknowledges that it remains primarily liable for the payment of Annual Basic Rent, Additional Rent and other obligations under this Lease, (c) Tenant subordinates to Landlord's statutory lien, contract lien and security interest, any liens, security interests or other rights which Tenant may claim with respect to any property of transferee and (d) the transferee agrees to use and occupy the Leased Premises solely for the purpose specified in Article 20 and otherwise in strict accordance with this Lease. 19.9 Withholding Consent. Without limiting the grounds for withholding consent which may be reasonable, it shall be reasonable for Landlord to withhold consent if the proposed assignee or subtenant is a tenant in default of such tenant's lease (or the termination by such assignee or 20 23 subtenant of such lease to sublease from Tenant will be a default under same) in a building in the Phoenix metropolitan area owned by Landlord or by an affiliate of Landlord or any of Landlord's constituent partners or principals; or if the proposed assignee or subtenant is a governmental or quasi-governmental entity, agency, department or any subdivision thereof; or if the use by the proposed assignee or subtenant would violate the terms of this Lease, or any restrictive use covenant or exclusive rights granted by Landlord; or if the nature of the proposed assignee or subtenant or its business would not be consistent with the operation of a first class, institutional grade office building; or if the proposed assignee or subtenant does not intend to occupy the Premises for its own use, or if the proposed assignee or subtenant is an existing tenant of the Project or the adjoining Pointe Corridor Centre located at 7600 North 16th Street and 7600 North 15th Street, Phoenix Arizona, or is a prospective tenant of the Project on the adjoining project with whom Landlord or its broker have discussed leasing space. 20. USE OF LEASED PREMISES AND RUBBISH REMOVAL 20.1 Use. The Leased Premises are leased to Tenant solely for the Permitted Use set forth in Article 1.9 above and for no other purpose whatsoever. Tenant shall not use or occupy or permit the Leased Premises to be used or occupied, nor shall Tenant do or permit anything to be done in or about the Leased Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any casualty or other insurance on the Building or the Property, or any of their respective contents) or make void or voidable or cause a cancellation of any insurance policy covering the Building or the Property, or any part thereof or any of their respective contents. Tenant shall not do or permit anything to be done in or about the Leased Premises, the Building and/or the Property which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or the Property or injure or annoy them. Tenant shall not use or allow the Leased Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Leased Premises, the Building and/or the Property. In addition, Tenant shall not commit or suffer to be committed any waste in or upon the Leased Premises, the Building and/or the Property. Tenant shall not use the Leased Premises, the Building and/or the Property or permit anything to be done in or about the Leased Premises, the Building and/or the Property which will in any way conflict with any matters of record, or any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, and shall, at its sole cost and expense, promptly comply with all matters of record and all laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force and with the requirements of any Board of Fire Underwriters or other similar body now or hereafter constituted, foreseen or unforeseen, ordinary as well as extraordinary, relating to or affecting the condition, use or occupancy of the Property, excluding structural changes not relating to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission by Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any matters of record, or any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact between Landlord and Tenant. In addition, Tenant shall not place a load upon any floor of the Leased Premises which exceeds the load per square foot which the floor was designed to carry, nor shall Tenant install business machines or other mechanical equipment in the Leased Premises which cause noise or vibration that may be transmitted to the structure of the Building. 20.2 Rubbish Removal. Tenant shall keep the Leased Premises clean, both inside and outside, subject, however, to Landlord's obligation as set forth in Article 8.2 above. Tenant shall not burn any materials or rubbish of any description upon the Leased Premises. Tenant shall keep all accumulated rubbish in covered containers. In the event Tenant fails to keep the Leased Premises in the proper condition, Landlord may cause the same to be done for Tenant and Tenant shall pay the expenses incurred by Landlord on demand, together with interest at the Default Rate, as Additional Rent, Tenant shall, at its sole cost and expense, comply with all present and future laws, orders and regulations of all state, county, federal, municipal governments, departments, commissions and boards regarding the collection, sorting, separation, and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably approved by Landlord. Such separate receptacles may, at Landlord's option, be removed from the Leased Premises in accordance with a collection schedule prescribed by law. Landlord reserves the right to refuse to collect or accept from Tenant any waste products, garbage, refuse or trash that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant's sole cost and expense using a contractor satisfactory to Landlord. Tenant shall pay all costs, expenses, fines, penalties or damages that may be imposed on Landlord or Tenant by reason of Tenant's failure to 21 24 comply with the provisions of this Article 20.2, and, at Tenant's sole cost and expense, Tenant shall indemnify, defend and hold Landlord and Landlord's agents and employees harmless (including legal fees and expenses) from and against, and shall be responsible for, all actions, claims, liabilities and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Landlord. 21. SUBORDINATION AND ATTORNMENT 21.1 Subordination. This Lease and all rights of Tenant hereunder shall be, at the option of Landlord, subordinate to (a) all matters of record, (b) all ground leases, overriding leases and underlying leases (collectively referred to as the "leases") of the Building or the Property now or hereafter existing, (c) all mortgages and deeds of trust (collectively referred to as the "mortgages") which may now or hereafter encumber or affect the Building or the Property, and (d) all renewals, modifications, amendments, replacements and extensions of leases and mortgages and to spreaders and consolidations of the mortgages, whether or not leases or mortgages shall also cover other lands, buildings or leases. The provisions of this Article 21.1 shall be self-operative and no further instruments of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any lease or the holder of any mortgage or any of their respective assigns or successors in interest may reasonably request to evidence such subordination. Any lease to which this Lease is subject and subordinate is called a "Superior Lease" and the lessor under a Superior Lease or its assigns or successors in interest is called a "Superior Lessor". Any mortgage to which this Lease is subject and subordinate is called a "Superior Mortgage" and the holder of a Superior Mortgage is called a "Superior Mortgagee". If Landlord, a Superior Lessor or a Superior Mortgagee requires that such instruments be executed by Tenant, Tenant shall execute and deliver such instruments within ten (10) days after request therefor. Tenant waives any right to terminate this Lease because of any foreclosure proceedings. Tenant hereby irrevocably constitutes and appoints Landlord (and any successor Landlord) as Tenant's attorney-in-fact, with full power of substitution coupled with an interest, to execute and deliver to any Superior Lessor or Superior Mortgagee any documents required to be executed by Tenant for and on behalf of Tenant if Tenant shall have failed to do so within ten (10) days after request therefore. 21.2 Attornment. If any Superior Lessor or Superior Mortgagee (or any purchaser at a foreclosure sale) succeeds to the rights of Landlord under this Lease, whether through possession or foreclosure action, or the delivery of a new lease or deed (a "Successor Landlord"), Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment, provided that the successor Landlord shall honor this Lease and assume liability for the Security Deposit. 22. ESTOPPEL CERTIFICATE Tenant shall, whenever requested by Landlord, within twenty (20) days after written request by Landlord, execute, acknowledge and deliver to Landlord, without charge, a statement in writing substantially in the form attached hereto as Exhibit "J". 23. SIGNS Landlord shall retain absolute control over the exterior appearance of the Building and the exterior appearance of the Leased Premises as viewed from the public halls. Tenant shall not install, or permit to be installed, any drapes, shutters, signs, lettering, advertising, or any items that will in any way, in the sole opinion of Landlord, adversely alter the exterior appearance of the Building or the exterior appearance of the Leased Premises as viewed from the public halls or the exterior of the Building. Notwithstanding the foregoing, Landlord shall install, at Tenant's sole cost and expense, letters or numerals at or near the entryway to the Leased Premises provided Tenant obtains Landlord's prior written consent as to size, color, design and location. All such letters or numerals shall be in accordance with the criteria established by Landlord for the Building. In addition, Tenant's name and suite number shall be identified on the Building directory. 24. PARKING 24.1 Parking Facility. Landlord shall provide, operate and maintain a parking accommodations (the "Parking Accommodations"), together with necessary access, having a capacity adequate in Landlord's opinion to accommodate the requirements of the Building and the Property. 22 25 No storage of vehicles or parking for more than twenty-four (24) hours shall be allowed without Landlord's prior written consent; provided, however, that Landlord's prior consent shall not be required with respect to occasional overnight parking by Tenant's employees or invitees in connection with out-of-state travel. Tenant acknowledges and agrees that Landlord shall not be liable for damage, loss or theft of property or injury to persons in, upon or about the Parking Accommodations unless caused by Landlord's negligence or willful misconduct. Landlord shall have the right to establish, and from time to time change, alter and amend, and to enforce against all users of the Parking Accommodations, such reasonable requirements and restrictions as Landlord deems necessary and advisable for the proper operation and maintenance of the Parking Accommodations, including, without limitation, designation of particular areas for reserved, visitor and/or employee parking, and establishment of a reasonable rental charge for the use of the Parking Accommodations by tenants of the Building and/or the general public, as a part of the Rules and Regulations of the Building referenced in Article 31 hereof. 24.2 Parking Passes. Tenant is hereby allocated the number of reserved covered, reserved uncovered and unreserved parking passes designated in Article 1.16 hereof, entitling holders to park in either reserved covered, reserved uncovered or unreserved parking spaces, as the case may be, located in the Parking Accommodations as designated by Landlord from time to time for use by Tenant, its employees and licensees, and for which Tenant shall pay the monthly charges set forth in Article 1.17 hereof Landlord and Tenant shall execute, prior to the Commencement Date a Reserved Covered Parking License in the form attached hereto as Exhibit "E", a Reserved Uncovered Parking License in the form attached as Exhibit "F", and a Non-Exclusive Unreserved Parking License in the form attached as Exhibit "G", as applicable. The unreserved parking spaces shall be available to Tenant, its employees and licensees on a "first come, first serve" basis. Holders of parking passes shall not be entitled to park in visitor parking spaces so designated by Landlord, or in any other parking spaces other than those designated by Landlord for use by holders of parking passes. 25. LIENS Tenant shall keep the Leased Premises free and clear of all mechanic's and materialmen's liens. If, because of any act or omission (or alleged act or omission) of Tenant, any mechanics', materialmen's or other lien, charge or order for the payment of money shall be filed or recorded against the Leased Premises, the Property or the Building, or against any other property of Landlord (whether or not such lien, charge or order is valid or enforceable as such), Tenant shall, at its own expense, cause the same to be canceled or discharged of record within thirty (30) days after Tenant shall have received written notice of the filing thereof, or Tenant may, within such thirty (30) day period, furnish to Landlord, a bond pursuant to A.R.S. Section 33-1004 (or any successor statute) and satisfactory to Landlord and ALL Superior Lessors and Superior Mortgagees against the lien, charge or order, in which case Tenant shall have the right to contest, in good faith, the validity or amount thereof. 26. HOLDING OVER It is agreed that the date of termination of this Lease and the right of Landlord to recover immediate possession of the Leased Premises thereupon is an important and material matter affecting the parties hereto and the rights of third parties, all of which have been specifically considered by Landlord and Tenant. In the event of any continued occupancy or holding over of the Leased Premises without the express written consent of Landlord beyond the expiration or earlier termination of this Lease or of Tenants right to occupy the Leased Premises, whether in whole or in part, or by leaving property on the Leased Premises or otherwise, this Lease shall be deemed a monthly tenancy and Tenant shall pay two (2) times the Annual Basic Rent then in effect, in advance at the beginning of the hold-over month(s), plus any Additional Rent or other charges or payments contemplated in this Lease, and any other costs, expenses, damages, liabilities and attorneys' fees incurred by Landlord on account of Tenant's holding over. 27. ATTORNEYS' FEES Tenant shall pay to Landlord all amounts for costs (including reasonable attorneys' fees) incurred by Landlord in connection with any breach or default by Tenant under this Lease or incurred in order to enforce or interpret the terms or provisions of this Lease. Such amounts shall be payable within five (5) days after receipt by Tenant of Landlord's statement. In addition, if any action shall be instituted by either of the parties hereto for the enforcement or interpretation of any of their respective rights or remedies in or under this Lease, the prevailing party shall be entitled to 23 26 recover from the losing party all costs incurred by the prevailing party in such action and any appeal therefrom, including reasonable attorneys' fees to be fixed by the court. Further, should Landlord be made a patty to any litigation between Tenant and any third patty, then Tenant shall pay all costs and attorneys' fees incurred by or imposed upon Landlord in connection with such litigation. 28. RESERVED RIGHTS OF LANDLORD Landlord reserves the following rights, exercisable without liability to Tenant for damage or injury to property, persons or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession or giving rise to any claim: (a) To name the Building and the Property and to change the name or street address of the Building or the Property after ninety (90) days prior written notice to Tenant; (b) To install and maintain all signs on the exterior and interior of the Building and the Property; (c) To designate all sources furnishing sign painting and lettering; (d) During the last ninety (90) days of the Lease Term, if Tenant has vacated the Leased Premises, to decorate, remodel, repair, alter or otherwise prepare the Leased Premises for reoccupancy, without affecting Tenant's obligation to pay Annual Basic Rent; (e) To have pass keys to the Leased Premises and all doors therein, excluding Tenant's vaults and safes; (f) On reasonable prior notice to Tenant, to exhibit the Leased Premises to any prospective purchaser, mortgagee, or assignee of any mortgage on the Building or the Property and to others having interest therein at any time during the Lease Term, and to prospective Tenants during the last six (6) months of the Lease Term; (g) To take any and all measures, including entering the Leased Premises for the purposes of making inspections, repairs, alterations, additions and improvements to the Leased Premises or to the Building (including, for the purposes of checking, calibrating, adjusting and balancing controls and other parts of the Building systems) as may be necessary or desirable for the operation, improvement, safety, protection or preservation of the Leased Premises or the Building, or in order to comply with all laws, orders and requirements of governmental or other authorities, or as may otherwise be permitted or required by this Lease; provided, however, that Landlord shall endeavor (except in an emergency) to minimize interference with Tenant's business in the Leased Premises; (h) To relocate various facilities within the Building and on the Property if Landlord shall determine such relocation to be in the best interest of the development of the Building and the Property, provided, that such relocation shall not materially restrict access to the Leased Premises; (i) To change the nature, extent, arrangement, use and location of the Building Common Areas; provided, however, that no such change shall have a material and adverse effect on Tenant's access to the Leased Premises; (j) To make alterations or additions to and to build additional stories on the Building and to build additional buildings or improvements on the Property; and (k) To install vending machines of all kinds in the Leased Premises and the Building, and to receive all of the revenue derived therefrom (excluding those machines installed in the Leased Premises prior to the Commencement Date), provided, however, that no vending machines shall be installed by Landlord in the Leased Premises unless Tenant so requests. Landlord further reserves the exclusive right to the roof of the Building. No easement for light, air, or view is included in the leasing of the Leased Premises to Tenant Accordingly, any diminution or shutting off of light, air or view by any structure which may be erected on the Property or other properties in the vicinity of the Building shall in no way affect this Lease or impose any liability upon Landlord. 24 27 29. EMINENT DOMAIN 29.1 Taking. If the whole of the Building is lawfully and permanently taken by condemnation or any other manner for any public or quasi-public purpose, or by deed in lieu thereof, this Lease shall terminate as of the date of vesting of title in such condemning authority and the Annual Basic Rent and Additional Rent shall be pro rated to such date. If any part of the Building or Property is so taken, or if the whole of the Building is taken, but not permanently, then this Lease shall be unaffected thereby, except that (a) Landlord may terminate this Lease by notice to Tenant within ninety (90) days after the date of vesting of title in the condemning authority, and (b) if twenty percent (20%) or more of the Leased Premises shall be permanently taken and the remaining portion of the Leased Premises shall not be reasonably sufficient for Tenant to continue operation of its business, Tenant may terminate this Lease by notice to Landlord within ninety (90) days after the date of vesting of title in such condemning authority. This Lease shall terminate on the thirtieth (30th) day after receipt by Landlord of such notice, by which date Tenant shall vacate and surrender the Leased Premises to Landlord. The Annual Basic Rent and Additional Rent shall be pro rated to the earlier of the termination of this Lease or such date as Tenant is required to vacate the Leased Premises by reason of the taking. If this Lease is not terminated as a result of a partial taking of the Leased Premises, the Annual Basic Rent and Additional Rent shall be equitably adjusted according to the rentable area of the Leased Premises and Building remaining. 29.2 Award. In the event of a taking of all or any part of the Building or the Property, all of the proceeds or the award, judgment, settlement or damages payable by the condemning authority shall be and remain the sole and exclusive property of Landlord, and Tenant hereby assigns all of its right, title and interest in and to any such award, judgment, settlement or damages to Landlord. Tenant shall, however, have the right, to the extent that the same shall not reduce or prejudice amounts available to Landlord, to claim from the condemning authority, but not from Landlord, such compensation as may be recoverable by Tenant in its own right for relocation benefits, moving expenses, and damage to Tenant's personal property and trade fixtures. 30. NOTICES Any notice or communication given under the terms of this Lease shall be in writing and shall be delivered in person, sent by any public or private express delivery service or deposited with the United States Postal Service or a successor agency, certified or registered mail, return receipt requested, postage pre-paid, addressed as set forth in the Basic Provisions, or at such other address as a party may from time to time designate by notice hereunder. Notice shall be effective upon delivery. The inability to deliver a notice because of a changed address of which no notice was given or a rejection or other refusal to accept any notice shall be deemed to be the receipt of the notice as of the date of such inability to deliver or rejection or refusal to accept. Any notice to be given by Landlord may be given by the legal counsel and/or the authorized agent of Landlord. 31. RULES AND REGULATIONS Tenant shall abide by all rules and regulations (the "Rules and Regulations") of the Building and the Property imposed by Landlord, as attached hereto as Exhibit "T" or as may hereafter be issued by Landlord. Such Rules and Regulations are imposed to enhance the cleanliness, appearance, maintenance, order and use of the Leased Premises, the Building and the Property, and the proper enjoyment of the Building and the Property by all tenants and their clients, customers and employees. The Rules and Regulations may be changed from time to time upon ten (10) days notice to Tenant. Breach of the Rules and Regulations, by Tenant shall constitute an Event of Default if such breach is not fully cured within ten (10) days after written notice to Tenant by Landlord. Landlord shall not be responsible to Tenant for nonperformance by any other tenant, occupant or invitee of the Building or the Property of any Rules or Regulations. 32. ACCORD AND SATISFACTION No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Annual Base Rent and Additional Rent (jointly called "Rent" in this Article 32), shall be deemed to be other than on account of the earliest stipulated Rent due and not yet paid, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue any other remedy in this Lease. No receipt of money by Landlord from Tenant after the termination of this Lease, after 25 28 the service of any notice relating to the termination of this Lease, after the commencement of any suit, or after final judgment for possession of the Leased Premises, shall reinstate, continue or extend the Lease Term or affect any such notice, demand, suit or judgment. 33. BANKRUPTCY OF TENANT 33.1 Charter 7. If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, the election or assignment, or both, may be made only if all of the terms and conditions of Articles 33.2 and 33.4 below are satisfied. If the trustee fails to elect to assume this Lease for the purpose of assigning it within sixty (60) days after appointment, this Lease will be deemed to have been rejected. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the conditions hereinafter stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee, and this Lease will be terminated. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive. 33.2 Chapters 11 and 13. If Tenant files a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code or a proceeding that is filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13 proceeding and Tenant's trustee or Tenant as a debtor-in-possession fails to assume this Lease within sixty (60) days from the date of the filing of the petition or the conversion, the trustee or the debtor-in-possession will be deemed to have rejected this Lease. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: (a) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance, as defined in this Article 33.2 that; (1) The trustee will cure all monetary defaults under this Lease within ten (10) days from the date of the assumption; and (2) The trustee will cure all non-monetary defaults under this Lease within thirty (30) days from the date of the assumption. (b) The trustee or the debtor-in-possession has compensated Landlord, or has provided to Landlord adequate assurance, as defined in this Article 33.2, that within ten (10) days from the date of the assumption Landlord will be compensated for any pecuniary loss it incurred arising from the default of Tenant, the trustee, or the debtor-in-possession as recited in Landlord's written statement of pecuniary loss sent to the trustee or the debtor-in-possession. For purposes of this Lease, pecuniary loss shall include all attorneys' fees and court costs incurred by Landlord in connection with any bankruptcy proceeding filed by or against Tenant. (c) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under the Lease; provided, however, that: (1) The trustee or debtor-in-possession will also deposit with Landlord as security for the timely payment of Annual Basic Rent and Additional Rent, an amount equal to three months Annual Basic Rent and Additional Rent accruing under this Lease. (2) If not otherwise required by the terms of this Lease, the trustee or the debtor-in-possession will also pay in advance, on each day that the Annual Basic Rent is payable, one-twelfth of Tenant's estimated annual obligations under the Lease for the Additional Rent. (3) From and after the date of the assumption of this Lease, the trustee or the debtor-in-possession will pay the Annual Basic Rent and Additional Rent as provided in Article 5 above. (4) The obligations imposed upon the trustee or the debtor-in-possession will continue for Tenant after the completion of bankruptcy proceedings. (d) Landlord has determined that the assumption of the Lease will not: 26 29 (1) Breach any provisions in any other lease, mortgage, financing agreement, or other agreement by which Landlord is bound relating to the Property; or (2) Disrupt, in Landlord's judgment, the tenant mix of the Building or any other attempt by Landlord to provide a specific variety of Tenants in the Building that, in Landlord's judgment, would be most beneficial to all of the tenants of the Building and would enhance the image, reputation, and profitability of the Building. (e) For purposes of this Article 33.2 "adequate assurance" means that: (1) Landlord will determine that the trustee or the debtor-in-possession has, and will continue to have, sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that the trustee or the debtor-in-possession will have sufficient funds to fulfill Tenant's obligations under this Lease and to keep the Leased Premises properly staffed with sufficient employees to conduct a fully operational, actively promoted business on the Leased Premises; and (2) An order will have been entered segregating sufficient cash payable to Landlord and/or a valid and perfected first lien and security interest will have been granted in property of Tenant, trustee, or debtor-in-possession that is acceptable for value and kind to Landlord, to secure to Landlord the obligation of the trustee or debtor-in-possession to cure the monetary or non-monetary defaults under this Lease within the time periods set forth above. 33.3 Landlord's Right to Terminate. In the event that this Lease is assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession under the provisions of Article 33.2 above and, thereafter, Tenant is either adjudicated a bankrupt or files a subsequent petition for arrangement under chapter 11 of the Bankruptcy Code, then Landlord may terminate, at its option, this Lease and all Tenant's rights under it, by giving written notice of Landlord's election to terminate, 33.4 Assignment by Trustee. If the trustee or the debtor-in-possession has assumed the Lease, under the terms of Article 33.1 or 33.2 above, and elects to assign Tenant's interest under this Lease or the estate created by that interest to any other person, that interest or estate may be assigned only if Landlord acknowledges in writing that the intended assignee has provided adequate assurance, as defined in this Article 33.4 of future performance of all of the terms, covenants, and conditions of this Lease to be performed by Tenant. 33.5 Adequate Assurance. For the purposes of this Article 33 "adequate assurance of future performance" means that Landlord has ascertained that each of the following conditions has been satisfied: (1) The assignee has submitted a current financial statement, audited by a certified public accountant, that shows a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by the assignee of Tenant's obligations under this Lease; (2) If requested by Landlord, the assignee will obtain guarantees, in form and substance satisfactory to Landlord from one or more persons who satisfy Landlord's standards of creditworthiness; (3) Landlord has obtained all consents or waivers from any third party required under any lease, mortgage, financing arrangement or other agreement by which Landlord is bound, to enable Landlord to permit the assignment; (4) When, pursuant to the Bankruptcy Code, the trustee or the debtor-in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Leased Premises, the charges will not be less than the Annual Basic Rent and Additional Rent. 33.6 Consent of Landlord. Neither Tenant's interest in the Lease nor any estate of Tenant created in the Lease will pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, or otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant unless Landlord consents in writing to the transfer. Landlord's acceptance of Annual Basic Rent or Additional Rent or any other payments from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, the 27 30 need to obtain Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's interest under this Lease without that consent. 34. HAZARDOUS MATERIALS 34.1 Hazardous Materials Laws. "Hazardous Materials Laws" means any and all federal, state or local laws, ordinances, rules, decrees, orders, regulations or court decisions (including the so-called "common-law") relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, environmental conditions on, under or about the Premises, or soil and ground water conditions, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, 42 U.S.C. Section 9601, et seq., the Resource Conversation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., any amendments to the foregoing, and any similar federal, state or local laws, ordinances, rules, decrees, orders or regulations. 34.2 Hazardous Materials. "Hazardous Materials" means any chemical, compound, material, substance or other matter that: (i) is a flammable explosive, asbestos, radioactive material, nuclear medicine material, drug, vaccine, bacteria, virus, hazardous waste, toxic substance, petroleum product, or related injurious or potentially injurious material, whether injurious or potentially injurious by itself or in combination with other materials; (ii) is controlled, designated in or governed by any Hazardous Materials Law; (iii) gives rise to any reporting, notice or publication requirements under any Hazardous Materials Law; or (iv) gives rise to any liability, responsibility or duty on the part of Tenant or Landlord with respect to any third person under any Hazardous Materials Law. 34.3 Use. Tenant shall not allow any Hazardous Material to be used, generated, released, stored or disposed of on, under or about, or transported from, the Leased Premises, the Building or the Property, unless: (i) such use is specifically disclosed to and approved by Landlord in writing prior to such use; and (ii) such use is conducted in compliance with the provisions of this Article 34. Landlord may approve such use subject to reasonable conditions to protect the Leased Premises, the Building or the Property, and Landlord's interests. Landlord may withhold approval if Landlord determines that such proposed use involves a material risk of a release or discharge of Hazardous Materials or a violation of any Hazardous Materials Laws or that Tenant has not provided reasonable assurances of its ability to remedy such a violation and fulfill its obligations under this Article 34. Notwithstanding any provision of this Lease to the contrary, Tenant shall be permitted to use Hazardous Substances normally associated with office activities, provided that such Hazardous Substances are used in compliance with all applicable Hazardous Materials Laws. 34.4 Compliance With Laws. Tenant shall strictly comply with, and shall maintain the Leased Premises in compliance with, all Hazardous Materials Laws. Tenant shall obtain and maintain in full force and effect all permits, licenses and other governmental approvals required for Tenant's operations on the Leased Premises under any Hazardous Materials Laws and shall comply with all terms and conditions thereof. At Landlord's request, Tenant shall deliver copies of, or allow Landlord to inspect, all such permits, licenses and approvals. Tenant shall perform any monitoring, investigation, clean-up, removal and other remedial work (collectively, "Remedial Work") required as a result of any release or discharge of Hazardous Materials affecting the Leased Premises, the Building or the Property, or any violation of Hazardous Materials Laws by Tenant or any assignee or sublessee of Tenant or their respective agents, contractors, employees, licensees, or invitees. Landlord shall have the right to intervene in any governmental action or proceeding involving any Remedial Work, and to approve performance of the work, in order to protect Landlord's interests. 34.5 Compliance With Insurance Requirements. Tenant shall comply with the requirements of Landlord's and Tenant's respective insurers regarding Hazardous Materials and with such insurers' recommendations based upon prudent industry practices regarding management of Hazardous Materials. 34.6 Notice; Reporting. Tenant shall notify Landlord, in writing, within two (2) days after any of the following: (a) a release or discharge of any Hazardous Material, whether or not the release or discharge is in quantities that would otherwise be reportable to a public agency; (b) Tenant's receipt of any order of a governmental agency requiring any Remedial Work pursuant to any Hazardous Materials Laws; (c) Tenant's receipt of any warning, notice of inspection, notice of violation or alleged violation, or Tenant's receipt of notice or knowledge of any proceeding, investigation of enforcement action, pursuant to any Hazardous Materials Laws; or (d) Tenant's receipt of notice or knowledge of any claims made or threatened by any third party against Tenant or the Leased Premises, the Building or the Property, relating to any loss or injury resulting from 28 31 Hazardous Materials. Tenant shall deliver to Landlord copies of all test results, reports and business or management plans required to be filed with any governmental agency pursuant to any Hazardous Materials Laws. 34.7 Termination Expiration. Upon the termination or expiration of this Lease. Tenant shall remove any equipment, improvements or storage facilities utilized in connection with an Hazardous Materials and shall, clean up, detoxify repair and otherwise restore the Leased Premises to a condition free of Hazardous Materials. 34.8 Indemnity. Tenant shall protect, indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any and all claims, costs, expenses, suits, judgments, actions, investigations, proceedings and liabilities arising out of or in connection with an breach of any provisions of this Article 34 or directly or indirectly arising out of the use, generation, storage, release, disposal or transportation of Hazardous Materials by Tenant or any sublessee or assignee of Tenant, or their respective agents, contractors, employees, licensees, or invitees, on, under or about the Leased Premises, the Building or the Property during the Lease Term or Tenant's occupancy of the Leased Premises, including, but not limited to, all foreseeable and unforeseeable consequential damages and the cost of any Remedial Work. Neither the consent by Landlord to the use, generation, storage, release, disposal or transportation of Hazardous Materials nor the strict compliance with all Hazardous Material Laws shall excuse Tenant from Tenant's indemnification obligations pursuant to this Article 34. The foregoing indemnity shall be in addition to and not a limitation of the indemnification provisions of Article 16 of this Lease. Tenant's obligations pursuant to this Article 34 shall survive the termination or expiration of this Lease. 34.9 Assignment; Subletting. If Landlord's consent is required for an assignment of this Lease or a subletting of the Leased Premises, Landlord shall have the right to refuse such consent if the possibility of a release of Hazardous Materials is materially increased as a result of the assignment or sublease or if Landlord does not receive reasonable assurances that the new tenant has the experience and the financial ability to remedy a violation of the Hazardous Materials Laws and fulfill its obligations under this Article 34. 34.10 Entry and Inspection; Cure. Landlord and its agents, employees and contractors, shall have the right, but not the obligation, to enter the Leased Premises at all reasonable times to inspect the Leased Premises and Tenant's compliance with the terms and conditions of this Article 34, or to conduct investigations and tests. No prior notice to Tenant shall be required in the event of an emergency, or if Landlord has reasonable cause to believe that violations of this Article 34 have occurred, or if Tenant consents at the time of entry. In all other cases, Landlord shall give at least twenty-four (24) hours prior notice to Tenant. Landlord shall have the right, but not the obligation, to remedy any violation by Tenant of the provisions of this Article 34 or to perform any Remedial Work which is necessary or appropriate as a result of any governmental order, investigation or proceeding. Tenant shall pay, upon demand, as Additional Rent, all costs incurred by Landlord in remedying such violations or performing all Remedial Work, plus interest thereon at the Default Rate from the date of demand until the date received by Landlord. 34.11 Event of Default. The release or discharge of any Hazardous Material or the violation of any Hazardous Materials Law shall constitute an Event of Default by Tenant under this Lease. In addition to and not in lieu of the remedies available under this Lease as a result of such Event of Default, Landlord shall have the right, without terminating this Lease, to require Tenant to suspend its operations and activities on the Leased Premises until Landlord is satisfied that appropriate Remedial Work has been or is being adequately performed and Landlord's election of this remedy shall not constitute a waiver of Landlord's right thereafter to pursue the other remedies set forth in this Lease. 35. MISCELLANEOUS 35.1 Entire Agreement, Amendments. This Lease and any Exhibits and Riders attached hereto and forming a part hereof, set forth all of the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Leased Premises and there are no covenants, promises, agreements, representations, warranties, conditions or understandings either oral or written between them other than as contained in this Lease. Except as otherwise provided in this Lease, no subsequent alteration, amendment, change or addition to this Lease shall be binding unless it is in writing and signed by both Landlord and Tenant. 29 32 35.2 Time of the Essence. Time is of the essence of each and every term, covenant and condition of this Lease. 35.3 Binding Effect. The covenants and conditions of this Lease shall, subject to the restrictions on assignment and subletting, apply to and bind the heirs, executors, administrators, personal representatives, successors and assigns of the parties hereto. 35.4 Recordation. Neither this Lease nor any memorandum hereof shall be recorded by Tenant. At the sole option of Landlord, Tenant and Landlord shall execute, and Landlord may record, a short form memorandum of this Lease in form and substance satisfactory to Landlord. 35.5 Governing Law, This Lease and all the terms and conditions thereof shall be governed by and construed in accordance with the laws of the State of Arizona. 35.6 Defined Terms and Paragraph Headings. The words "Landlord" and "Tenant" as used in this Lease shall include the plural as well as the singular. Words used in masculine gender include the feminine and neuter. If there is more than one Tenant, the obligations in this Lease imposed upon Tenant shall be joint and several. The paragraph headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 35.7 Representations and Warranties of Tenant. Tenant represents and warrants to Landlord as follows: (a) Tenant has been duly organized, is validly existing, and is in good standing under the laws of its state of incorporation and is qualified to transact business in Arizona. All necessary action on the part of Tenant has been taken to authorize the execution, delivery and performance of this Lease and of the other documents, instruments and agreements, if any, provided for herein. The persons who have executed this Lease on behalf of Tenant are duly authorized to do so; (b) This Lease constitutes the legal, valid and binding obligation of Tenant, enforceable against Tenant in accordance with its terms, subject, however, to bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, general principles of equity, whether enforceability is considered in a proceeding in equity or at law, and to the qualification that certain waivers, procedures, remedies and other provisions of this Lease may be unenforceable under or limited by applicable law, however, none of the foregoing shall prevent the practical realization to Landlord of the benefits intended by this Lease; (c) To the best of its knowledge, there are no suits, actions, proceedings or investigations pending, or to the best of its knowledge, threatened against or involving Tenant before any court, arbitrator or administrative or governmental body which might reasonably result in any material adverse change in the contemplated business, condition or operations of Tenant; (d) To the best of its knowledge, Tenant is not, and the execution, delivery and performance of this Lease and the documents, instruments and agreements, if any, provided for herein will not result in any breach of or default under any other document, instrument or agreement to which Tenant is a party or by which Tenant is subject or bound; (e) To the best of its knowledge, Tenant has obtained all required licenses and permits, both governmental and private, to use and operate the Leased Premises in the manner intended by this Lease. 35.8 No Waiver. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or 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. 35.9 Severability. If any clause or provision of this Lease is or becomes illegal or unenforceable because of any present or future law or regulation of any governmental body or entity 30 33 effective during the Lease Term, the intention of the parties is that the remaining provisions of this Lease shall not be affected thereby. 35.10 Exhibits. If any provision contained in an Exhibit, Rider or Addenda to this Lease is inconsistent with any other provision of this Lease, the provision contained in this Lease shall supersede the provisions contained in such Exhibit, Rider or Addenda, unless otherwise provided. 35.11 Fair Meaning. The language of this Lease shall be construed to its normal and usual meaning and not strictly for or against either Landlord or Tenant. Landlord and Tenant acknowledge and agree that each party has reviewed and revised this Lease and each party has been represented by legal counsel and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply to the interpretation of this Lease, or any Exhibits, Riders or amendments hereto. 35.12 No Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation of this Lease shall not work as a merger and shall, at Landlord's option, either terminate any or all existing subleases or subtenancies, or operate as an assignment to Landlord of any or all of such subleases or subtenancies. 35.13 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials for reasonable substitutes therefor, governmental restrictions, regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty and other causes beyond the reasonable control of Landlord shall excuse the Landlord's performance hereunder for the period of any such prevention, delay, or stoppage. 35.14 Government Energy or Utility Controls. In the event of the imposition of federal, state or local governmental controls, rules, regulations or restrictions on the use or consumption of energy or other utilities during the Lease Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation of any governmental control, rule, regulation or restriction between Landlord and Tenant, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance, including the right of entry into the Leased Premises to effect compliance. 35.15 Shoring. If any excavation or construction is made adjacent to, upon or within the Building, or any part thereof, Tenant shall afford to any and all persons causing or authorized to cause such excavation or construction license to enter onto the Leased Premises for the purpose of doing such work as such persons shall deem necessary to preserve the Building or any portion thereof from injury or damage and to support the same by proper foundations, braces and supports without any claim for damages, indemnity or abatement of Annual Basic Rent or Additional Rent or for a constructive or actual eviction of Tenant. 35.16 Transfer of Landlord's Interest. The term "Landlord" as used in this Lease, insofar as the covenants or agreements on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners of Landlord's interest in this Lease at the time in question. Upon any transfer or transfers of such interest, the Landlord herein named (and in the case of any subsequent transfer, the then transferor) shall thereafter be relieved of all liability for the performance of any covenants or agreements on the part of the Landlord contained in this Lease. 35.17 Limitation on Landlord's Liability. If Landlord becomes obligated to pay Tenant any judgment arising out of any failure by the Landlord to perform or observe any of the terms, covenants conditions or provisions to be performed or observed by Landlord under this Lease, Tenant shall be limited in the satisfaction of such judgment solely to Landlord's interest in the Building and the Property or any proceeds arising from the sale thereof and no other property or assets of Landlord or the individual partners, directors, officers or shareholders of Landlord or its constituent partners shall be subject to levy, execution or other enforcement procedure whatsoever for the satisfaction of any such money judgment. In the event Tenant obtains a money judgment against Landlord and Landlord does not pay or bond over such money judgment within thirty (30) days after entry thereof, Tenant may offset the amount of such judgment, with interest at the Default Rate, against the Annual Basic Rent and Additional Rent payable under this Lease until, by virtue of such offset, Tenant shall have recovered the full amount of its judgment. Exercise by Tenant of the foregoing right of offset shall not be deemed an election of remedies and Tenant shall have the right, either concurrently or consecutively, to pursue all other remedies available to Tenant at law or in equity, subject to the limitation on remedies set forth in this Lease. 31 34 35.18 Brokerage Fees. Tenant warrants and represents that it has not dealt with any realtor, broker or agent in connection with this Lease except the Broker identified in Article 1.19 above. Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any cost, expense or liability (including the cost of suit and reasonable attorneys' fees) for any compensation, commission or charges claimed by any other realtor, broker or agent in connection with this Lease or by reason of any act of Tenant. 35.19 Intentionally Omitted. 35.20 Continuing Obligations. All obligations of Lessee hereunder not fully performed as of the expiration or earlier termination of this Lease shall survive the expiration or earlier termination of this Lease, including, without limitation, all payment obligations with respect to Annual Basic Rent, Additional Rent and all obligations concerning the condition of the Premises. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date and year first above written. LANDLORD: Pivotal Simon Office XVI L.L.C., formerly known as Pivotal Simon Point, L.L.C., an Arizona limited liability company By: Pivotal Group II, L.L.C., an Arizona limited liability company, its Administrative Member By: /s/ J. JAHM NAJAFI ---------------------------------- Name: J. Jahm Najafi Its: Administrative Member TENANT: Anasazi Inc., a Delaware corporation By: /s/ VERN L. SNIDER -------------------------------------- Name: Vern L. Snider ------------------------------------ Its: Executive Vice President & C.F.O ------------------------------------- By: /s/ [ILLEGIBLE] -------------------------------------- Name: [ILLEGIBLE] ------------------------------------ Its: Secretary ------------------------------------- If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. The Lease must be executed by the president or vice-president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease. 32 35 RIDER "1" Rider 1 to Lease dated July 25, 1996 between Pivotal Simon Office XVI, L.L.C., an Arizona limited liability company ("Landlord"), and Anasazi Inc., a Delaware corporation ("Tenant"). 1. Option to Extend. Provided that Tenant is not in breach or default of any of the terms, conditions, covenants, obligations or provisions of the Lease to which this Rider is attached, and that no event shall have occurred or state of facts exists which if continued uncured will, with the lapse of time or the delivery of notice, or both, constitute an Event of Default, then Tenant shall have, and is hereby granted, the option to extend the Initial Term for one (1) additional period of five (5) years. Except as set forth in Section 2 of this Rider, Tenant's occupancy of the Leased Premises during the Renewal Term shall be governed by all of the terms, conditions, covenants and provisions of the Lease to which this Rider is attached except that Tenant shall have no further option to extend the Initial Term after the expiration of the Renewal Term. If Tenant desires to exercise its option to extend the initial Term, it must give Landlord notice in writing ("Option Notice") of its intent to do so at least ten (10) months, but not more than twenty-four (24) months prior to the expiration of the Initial Term. For the purposes of the Lease to which this Rider is attached, the phrase "Lease Term" shall be deemed to refer to the Initial Term and the Renewal Term to the extent applicable. 2. Amendment to Basic Provisions. (a) Lease Term. Article 1.10 of the lease entitled "Lease Term" is hereby deleted and replaced with the following: 1.11 Lease Term. (a) Initial Term: seven (7) years; (b) Renewal Term: five (5) years. (b) Annual Basic Rent. Article 1.12 of the Lease entitled "Annual Basic Rent" is hereby deleted and replaced with the following: 1.12 Annual Basic Rent. (a) Initial Term:
Rental Rate Per Lease Year Annual Basic Rent Monthly Basic Rent Rentable Sq. Ft. ---------- ----------------- ------------------ ---------------- 1 $ 756,607.50 $63,050.63 $13.50 2 840,675.00 70,056.25 15.00 3 868,697.50 72,391.46 15.50 4 938,753.75 78,229.48 16.75 5 994,798.75 82,899.90 17.75 6 1,008,810.00 84,067.50 18.00 7 1,022,821.20 85,235.10 18.25
*Subject to the terms of Article 5.1. (b) Renewal Term: (i) Landlord and Tenant shall have sixty (60) days after Landlord receives the Option Notice within which to agree on the Annual Basic Rental and Parking Charge for the Renewal Term based upon ninety-five percent (95%) of the "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" as defined below. If the parties agree on the Annual Basic Rental and Parking Charge for the Renewal Term within sixty (60) days, they shall amend this Lease by stating the Annual Basic Rental and Parking Charge for the Renewal Term. Rider 1 - 1 36 (ii) If they are unable to agree on the Annual Basic Rental and Parking Charge for the Renewal Term within the sixty (60) day period, then the Annual Basic Rental and Parking Charge shall be ninety-five percent (95%) of the "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" as determined in accordance with this Rider. (iii) The "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" means what a landlord under no compulsion to lease the Premises and a tenant under no compulsion to lease the Premises, would determine as rent for the Renewal Term, as of the commencement of the Renewal Term, taking into consideration the use permitted under the Lease and the quality, size, shape, design and location of the Premises within the Building. The then fair market rental value of the Premises for the first year of the Renewal Term will not be less than the Annual Basic Rental and Parking Charge payable during the last year of the Initial Term. (iv) Within seven (7) days after the expiration of the sixty (60) day period set forth in Subsection 1.12 above, Landlord and Tenant shall each appoint an independent real estate broker with at least five (5) full years full-time commercial brokerage experience in the area in which the Premises are located to determine the then fair market rental value of the Premises. If either the Landlord or the Tenant does not appoint a broker within ten (10) days after the other has given notice of the name of its broker, the single broker appointed shall be the sole broker and shall set the then fair market rental value of the Premises. If two (2) brokers are appointed pursuant to this paragraph, they shall meet promptly and attempt to set the then fair market rental value of the Premises. If they are unable to agree within the thirty (30) days after the second broker has been appointed, they shall attempt to elect a third broker meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) brokers are given to set the then fair market rental value of the Premises. If they are unable to agree on the third broker either the Landlord or Tenant may petition the presiding civil court judge of the Maricopa County Superior Court for the selection of a third broker who meets the qualifications stated in this paragraph. Tenant and Landlord shall each bear one-half (1/2) of the cost of appointing the brokers and of paying the broker's fees. Within thirty (30) days after the selection of the third broker, a majority of the brokers shall set the then fair market rental value of the Premises. If a majority of the brokers are unable to set the then fair market rental value of the Premises within thirty (30) days after selection of the third broker, the three (3) opinions shall be averaged and the average shall be the then fair market rental value of the Premises. The broker(s) determination of the fair market rental value of the Leased Premises shall contemplate an Annual Basic Rent that increases over the Renewal Term. Within five (5) days after the final determination by the broker(s) of the fair market rental value of the Premises, both Landlord and Tenant shall have the right to reject or withdraw the exercise of the Option, as applicable, by delivering notice to the other party. Notwithstanding the provisions of Paragraph 2(b)(iv) to the contrary, the rejecting or withdrawing party, as applicable, shall bear the entire cost of appointing the broker(s) and paying the brokers' fee. 3. Definitions. Capitalized terms used in this Rider without definition shall have the definition assigned to such terms in the Lease to which this Rider is attached, unless the context requires otherwise. 4. Full Force and Effect. Except as specifically modified by this Rider, the tease to which this Rider is attached remains in full force and effect. [ILLEGIBLE] [ILLEGIBLE] - ---------------------------------- ------------------------------------ Landlord's Initials Tenant's Initials Rider 1 - 2 37 RIDER "2" Rider 2 to Lease dated July 25, 1996 between Pivotal Simon Office XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company ("Landlord"), and Anasazi Inc., a Delaware corporation ("Tenant"). 1. Right of First Refusal to Lease. Provided that Tenant is not in breach or default of any of the terms, conditions, covenants, obligations or provisions of the Lease to which this Rider is attached and provided that the originally named Tenant shall be in occupancy of the Leased Premises and subject to any rights of first refusal existing prior to the date of this Lease, then at such time as Landlord receives a lease proposal (the "PROPOSAL") from a specific bona fide prospective tenant to lease all or any portion of the office space on the second floor of the Building that is vacant as of the date of this Lease (the "REFUSAL SPACE") which Proposal Landlord is willing to accept, Landlord shall notify Tenant of the Proposal (the "PROPOSAL NOTICE") and Tenant shall have an option (the "OPTION") exercisable by written notice to Landlord within two (2) days after receipt of the Proposal Notice to lease all of the Refusal Space upon the same terms and conditions as are contained in the Proposal. Promptly after Tenant exercises the Option, Landlord and Tenant shall execute a supplemental agreement to this Lease, in a form satisfactory to Landlord and Tenant, incorporating the Refusal Space as part of the Leased Premises. If Tenant does not timely exercise the Option, or if Landlord and Tenant do not execute a supplemental agreement to this Lease within thirty (30) days after notice by Tenant to Landlord of its election to exercise the Option, the Option shall be deemed waived and Landlord may enter into an agreement with the specific bona fide prospective tenant who submitted the Proposal without liability to Tenant, provided that such lease is on terms not materially more favorable to such party than those contained in the Proposal and provided that such lease is consummated within one hundred eighty (180) days after the waiver of the Option. 2. Right of First Opportunity to Lease. Provided that Tenant is not in breach or default of any of the terms, conditions, covenants, obligations or provisions of this Lease to which this Rider is attached and provided that the originally named Tenant or Permitted Transferee (as defined in Article 19.2 of the Lease) shall be in occupancy of the Lease Premises, and in the event First Data Corporation does not renew its lease for that portion of the space in Suite 200 that is not subject to this Lease (the "Additional Space") prior to Landlord offering the Additional Space for lease, Landlord shall deliver to Tenant written notice (the "Proposal Notice") which Proposal Notice shall set forth the Annual Basic Rent, Additional Rent and tenant improvements at which Landlord intends to market the Additional Space. Tenant shall have an option (the "Option") exercisable by written notice to Landlord within ten (10) days after receipt of the Proposal Notice to lease all of the Additional Space upon the terms and conditions contained in the Proposal Notice. Promptly after Tenant exercises the Option, Landlord and Tenant shall exercise supplement agreement to this Lease, in a form satisfactory to Landlord and Tenant, incorporating the Additional Space as part of the Lease Premises, If Tenant does not timely exercise the Option, or if Landlord and Tenant do not execute a supplemental agreement to this Lease within thirty (30) days after notice by Tenant to Landlord of its election to exercise the Option, the Option shall be deemed waived and Landlord may lease the Additional Space to third parties provided that the Annual Basic Rent, Additional Rent and tenant improvements is at least ninety-five percent (95%) of the Rent, Additional Rent and tenant improvements set forth in the Proposal Notice. 3. Definitions. Capitalized terms used in this Rider without definition shall have the definition assigned to such terms in the Lease to which this Rider is attached, unless the Context requires otherwise. 4. Full Force and Effect. Except as specifically modified by this Rider, the Lease to which this Rider is attached remains in full force and effect. [ILLEGIBLE] [ILLEGIBLE] - ---------------------------------- ------------------------------------ Landlord's Initials Tenant's Initials Rider 2 - 1 38 EXHIBIT "A" INTENTIONALLY OMITTED A-1 39 EXHIBIT "B" LEGAL DESCRIPTION OF THE PROPERTY That portion of the South half of the South half of the Northwest quarter of Section 3, Township 2 North, Range 3 East of the Gila and Salt River Base and Meridian, Maricopa County, Arizona more particularly described as follows: COMMENCING at the Northeast corner of the South half of the Southwest quarter of the Northwest quarter of Section 3, which is also the TRUE POINT OF BEGINNING; thence South 87 degrees 32 minutes 45 seconds East 342.67 feet (recorded South 87 degrees 39 minutes 30 seconds East, 343.03 feet) to the Westerly right-of-way of Dreamy Draw Drive; thence South 16 degrees 47 minutes 13 seconds West along the Westerly right-of-way of Dreamy Draw Drive, 607.07 feet; thence South 60 degrees 04 minutes 30 seconds West, 20.48 feet (recorded South 60 degrees 04 minutes 37 seconds West 20.38 feet) to a point on the Northerly right-of-way line of Morten Avenue; thence North 76 degrees 38 minutes 44 seconds West along the said Northerly right-of-way line of Morten Avenue 142.17 feet (recorded North 76 degrees 38 minutes 00 seconds West, 142.28 feet); thence continuing along the said Northerly right-of-way a distance of 490.32 feet (recorded 489.11 feet) along the arc of a corner whose central angle is 36 degrees 43 minutes 24 seconds (recorded 36 degrees 37 minutes 58 seconds) and whose radius point bears North 13 degrees 21 minutes 16 seconds East (recorded North 13 degrees 22 minutes 00 seconds East) a distance of 765.00 feet; thence North 39 degrees 55 minutes 20 seconds West, 141.94 feet (recorded North 40 degrees 00 minutes 02 seconds West) 143.10 feet); thence a distance of 48.44 feet (recorded 48.46 feet) along the arc of a curve whose central angle is 3 degrees 19 minutes 25 seconds (recorded 3 degrees 19 minutes 31 seconds) and whose radius point bears South 50 degrees 04 minutes 40 seconds West (recorded South 49 degrees 59 minutes 58 seconds West) a distance of 835.00 feet; thence North 47 degrees 17 minutes 08 seconds East, 275.65 feet (recorded North 47 degrees 13 minutes 09 seconds East, 275.71 feet to the North line of the South half of the Southwest quarter of the Northwest quarter of Section 3; thence South 87 degrees 48 minutes 07 seconds East (recorded South 87 degrees 38 minutes 52 seconds East) along the said North line of the South half of the Southwest quarter of the Northwest quarter of said Section, 320.04 feet (recorded 319.94 feet) to the TRUE POINT OF BEGINNING. B-1 40 EXHIBIT "C" FLOOR PLAN [FLOOR PLAN] FIRST FLOOR N.T.S. 7/10/95 [FLOOR PLAN] SECOND FLOOR N.T.S. 7/10/95 56,045 TOTAL R.S.F EXHIBIT C-1 41 EXHIBIT "D" INTENTIONALLY OMITTED D-1 42 EXHIBIT "E" RESERVED COVERED PARKING LICENSE THIS RESERVED COVERED PARKING LICENSE (this "License") is made as of the 25th day of July 1996, between Pivotal Simon Office XVI, L.L.C., formerly known as Pivotal Simon Pointe L.L.C., an Arizona limited liability company ("Licensor"), and Anasazi Inc., a Delaware corporation ("Licensee"). 1. LICENSE. Licensor hereby grants Licensee a license to use 72 reserved covered parking spaces (the "Spaces") in the parking accommodations (the "Parking Accommodations") of the property (the "Property") located at 7500 North Dreamy Draw Drive, Phoenix, Arizona 85020, as cross-hatched on the site plan attached hereto as Annex "A", for a term the same as the term of the Lease referred to in Paragraph 2 hereof Each Space shall be used solely for the parking of one vehicle (which shall mean an automobile, motorcycle or light "sport-utility" truck, but shall expressly exclude heavy "delivery" or other trucks) therein by Licensee in accordance with the terms of this License. 2. THE LEASE. Anything herein to the contrary notwithstanding, this License shall terminate no later than the date of termination of the Lease (the "Lease") between Licensor, as Landlord, and Licensee, as Tenant, for space in the Property of even date herewith, whether such termination occurs at the end of the scheduled Lease term or prior thereto. A breach of this License by Tenant shall be deemed a breach of the Lease by Tenant and after notice given in accordance with the terms of the tease and the failure of Tenant to cure within fifteen (15) days of such notice, Landlord shall have all remedies available herein, under the Lease, and at law or in equity. In the event the term of the Lease is extended, the term of this License shall also be extended to correspond with the Lease Term. 3. MONTHLY FEE. Licensee agrees to pay as a monthly fee for this License Licensor's current fee for each Space licensed, payable on or before the first day of each month in advance. The monthly fee which Licensee shall pay is as follows:
Lease Years Monthly Fee per Space ----- --------------------- 1-3 $0 4-5 $10.00 6-7 $20.00
4. DESIGNATION OF SPACES. This License is for 72 reserved covered parking Spaces in the area of the Parking Accommodations cross-hatched on Annex "B" attached hereto, which area may be redesignated from time to time by Licensor. Landlord may, at any time during the Lease Term, by delivering written notice to Tenant, elect to redesignate Tenant's reserved covered parking Spaces, so long as the substitute Spaces are located in substantially the same area of the Parking Accommodations. The initial Spaces designated for Licensee are cross-hatched on Exhibit "B" attached hereto. 5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to Licensor may be parked in the Spaces, provided, however, that Licensee may change its automobile designations at any time upon written notice to Licensor or for temporary use upon notification given to the garage attendant, if any. No more than one (1) automobile per Space licensed hereunder shall be parked under Licensee's rights hereunder at any one time. 6. NO ADDITIONAL SERVICES. This license is for self-service parking only and does not include the rights to any additional services, which services may be made available by Licensor from time to time at an additional charge. 7. INDEMNITY. Licensor and its agents and employees shall not be liable for loss or damage to any vehicle parked by Licensee or under Licensee's rights herein and/or to the contents thereof caused by fire, theft, vandalism, collision, explosion, freezing, earthquake, storms, natural disasters, strikes, riots or by any other causes, unless caused by the negligence or willful misconduct of Licensor, and Licensee (1) waives and agrees to hold Licensor harmless from any claim against Licensor, its agents and employees for and in respect thereto, and (2) hereby agrees to indemnify and E-1 43 ANNEX A TO EXHIBIT "E" [PARKING LOT] THE POINTE RESORT AT SQUAW PEAK RESTAURANTS, CONVENTION CENTRE AND RECREATION ADJACENT 44 ANNEX B TO EXHIBIT "E" [PARKING LOT] THE POINTE RESORT AT SQUAW PEAK RESTAURANTS, CONVENTION CENTRE, AND RECREATION ADJACENT 45 EXHIBIT "F" RESERVED UNCOVERED PARKING LICENSE THIS RESERVED UNCOVERED PARKING LICENSE (this "License") is made as of the 25th day of July, 1996, between Pivotal Simon Pointe, L.L.C., an Arizona limited liability company ("Licensor"), and Anasazi Inc., a Delaware corporation, an ("Licensee"). 1. LICENSE. Licensor hereby grants Licensee a license to use 8 reserved uncovered parking spaces and 3 reserved uncovered visitor parking spaces (the "Spaces") in the parking accommodations (the "Parking Accommodations") of the property (the "Property") located at 7500 North Dreamy Draw Drive, Phoenix, Arizona 85020, as cross-hatched on the site plan attached hereto as Annex "A", for a term the same as the term of the Lease referred to in Paragraph 2 hereof. Each Space shall be used solely for the parking of one automobile therein by Licensee in accordance with the terms of this License. 2. THE LEASE. Anything herein to the contrary notwithstanding, this License shall terminate no later than the date of termination of the Lease (the "Lease") between Licensor, as Landlord, and Licensee, as Tenant, for space in the Property of even date herewith, whether such termination occurs at the end of the scheduled Lease term or prior thereto. A breach of this License by Tenant shall be deemed a breach of the Lease by Tenant and after notice given in accordance with the terms of the Lease and the failure of Tenant to cure within fifteen (15) days of such notice, Landlord shall have all remedies available herein, under the Lease, and at law or in equity. In the event the term of the Lease is extended, the term of this License shall also be extended to correspond with the Lease Term. 3. MONTHLY FEE. No monthly fee is payable pursuant to this License. 4. DESIGNATION OF SPACES. This license is for 8 reserved uncovered parking spaces and 3 reserved uncovered visitor parking spaces in the area of the Parking Accommodations cross-hatched on Annex "B" attached hereto. Licensee may redesignate the location of the 5 uncovered reserved parking spaces along Morten Avenue, from time to time by Licensor but shall not redesignate the location of the 3 visitor parking spaces and the 3 uncovered reserved spaces located adjacent to the 3 visitor parking spaces, unless required by governmental regulation. 5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to Licensor may be parked or stored in the Spaces, provided, however, that Licensee may change its automobile designations at any time upon written notice to Licensor or for temporary use upon notification given to the garage attendant, if any. No more than one (1) automobile per Space licensed hereunder shall be parked or stored under Licensee's rights hereunder at any one time. 6. NO ADDITIONAL SERVICES. This License is for self-service storage or parking only and does not include the rights to any additional services, which services may be made available by Licensor from time to time at an additional charge. 7. INDEMNITY. Licensor and its agents and employees shall not be liable for loss or damage to any vehicle parked or stored by Licensee or under Licensee's rights herein and/or to the contents thereof caused by fire, theft, vandalism, collision, explosion, freezing, earthquake, storms, natural disasters, strikes, riots or by any other causes, unless caused by the gross negligence or willful misconduct of Licensor, and Licensee (1) waives and agrees to hold Licensor harmless from any claim against Licensor, its agents and employees for and in respect thereto, and (2) hereby agrees to indemnify and defend Licensor, its agents and employees against all claims for any loss or damage to any such vehicle or its contents from any cause whatsoever, unless caused by the gross negligence or willful misconduct of Licensor. 8. RELATIONSHIP OF PARTIES. The relationship between Licensor and Licensee constitutes a license to use the Parking Accommodations subject to the terms and conditions of this License only and neither such relationship nor the storage or parking of any automobile thereunder shall constitute a bailment nor create the relationship of bailor and bailee. 9. NOTICES. All notices hereunder shall be given in accordance with the terms of the Lease. F-1 46 10. SUBORDINATION AND ATTORNMENT. This License shall be subject and subordinate to any mortgage, deed of trust or ground lease now or hereafter placed on the Property, or any portion thereof, and to replacements, renewals and extensions thereof, and Licensee, upon request by Licensor, shall execute instruments (in form satisfactory to Licensor) acknowledging such subordination. 11. NO WASTE. Licensee covenants not to cause any waste or damage or disfigurement or injury to the Property. 12. CLOSURE OF FACILITY. Licensor shall have the right to close any portion of the Parking Accommodations and deny access thereto in connection with any repairs or in an emergency, as it may require, without liability, cost or abatement of fee. 13. RULES. Licensee shall perform, observe and comply with such rules of the Property as may be reasonably adopted by Licensor in respect of the use and operation of said Parking Accommodations. 14. REGULATIONS. Licensee shall, when using the Parking Accommodations, observe and obey all signs regarding fire lanes and no parking zones, and when parking always park between designated lines. Licensor reserves the right to tow away, or otherwise impound, at the expense of the owner or operator, any vehicle which is improperly parked or parked in a no parking zone. No overnight parking shall be allowed in the Parking Accommodations. IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first above written. LICENSOR: LICENSEE: Pivotal Simon Office XVI, L.L.C., Anasazi Inc., a formerly known as Pivotal Simon Delaware corporation Pointe L.L.C., an Arizona limited liability company By: Pivotal Group II, L.L.C., an Arizona limited liability company, its Administrative Member By: /s/ [ILLEGIBLE] -------------------------------- By: /s/ [ILLEGIBLE] Its: E.V.P. & C.F.O. --------------------------- ------------------------------- Its: Administrative Member -------------------------- F-2 47 ANNEX A TO EXHIBIT "F" [GRAPHIC] THE POINTE RESORT AT SQUAW PEAK RESTAURANTS, CONVENTION CENTRE AND RECREATION ADJACENT 48 ANNEX B TO EXHIBIT "F" [GRAPHIC] THE POINTE RESORT AT SQUAW PEAK RESTAURANTS, CONVENTION CENTRE AND RECREATION ADJACENT 49 EXHIBIT "G" NON-EXCLUSIVE UNRESERVED PARKING LICENSE THIS UNRESERVED PARKING LICENSE (this "License") is made as of the 25th day of July, 1996 between Pivotal Simon Office XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company ("Licensor"), and Anasazi Inc., a Delaware corporation, ("Licensee"). 1. LICENSE. Licensor hereby grants licensee a license to use 147 reserved uncovered parking spaces (the "Spaces") in the parking accommodations (the "Parking Accommodations") of the property (the "Property") located at 7500 North Dreamy Draw Drive, Phoenix, Arizona 85020, as cross-hatched on the site plan attached hereto as Annex "A" for a term the same as the term of the Lease referred to in Paragraph 2 hereof. Each Space shall be used solely for the parking of one vehicle (which shall mean an automobile, motorcycle or light "sport-utility" truck, but shall expressly exclude a heavy "delivery" or other trucks) therein by Licensee in accordance with the terms of this License. 2. THE LEASE. Anything herein to the contrary notwithstanding, this License shall terminate no later than the date of termination of the Lease (the "Lease") between Licensor, as Landlord, and Licensee, as Tenant, for space in the Property of even date herewith, whether such termination occurs at the end of the scheduled Lease term or prior thereto. A breach of this License by Tenant shall be deemed a breach of the Lease by Tenant and after notice given in accordance with the terms of the Lease and the failure of Tenant to cure within fifteen (15) days of such notice, Landlord shall have all remedies available herein, under the Lease, and at law or in equity. In the event the term of the Lease is extended, the term of this License shall also be extended to correspond with the Lease Term. 3. MONTHLY FEE. There shall be no charge for this License. 4. DESIGNATION OF SPACES. This License is for 147 unreserved uncovered parking spaces in the area of the Parking Accommodations cross-hatched on Annex "B" attached hereto, which area may be redesignated from time to time by Licensor; provided, however, Licensor may designate specific Spaces or otherwise require Licensee to park in another specific location. 5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to Licensor may be parked in the Spaces, provided, however, that Licensee may change its automobile designations at any time upon written notice to Licensor or for temporary use upon notification given to the garage attendant, if any. No more than one (1) automobile per Space licensed hereunder shall be parked under Licensee's rights hereunder at any one time. 6. NO ADDITIONAL SERVICES. This License is for self-service storage or parking only and does not include the rights to any additional services, which services may be made available by Licensor from time to time at an additional charge. 7. INDEMNITY. Licensor and its agents and employees shall not be liable for loss or damage to any vehicle parked by Licensee or under Licensee's rights herein and/or to the contents thereof caused by fire, theft, vandalism, collision, explosion, freezing, earthquake, storms, natural disasters, strikes, riots or by any other causes, unless caused by the negligence or willful misconduct of Licensor, and Licensee (1) waives and agrees to hold Licensor harmless from any claim against Licensor, its agents and employees for and in respect thereto, and (2) hereby agrees to indemnify and defend Licensor, its agents and employees against all claims for any loss or damage to any such vehicle or its contents from any cause whatsoever, if caused by the negligence or willful misconduct of Licensee. 8. RELATIONSHIP OF PARTIES. The relationship between Licensor and Licensee constitutes a license to use the Parking Accommodations subject to the terms and conditions of this License only and neither such relationship nor the storage or parking of any automobile thereunder shall constitute a bailment nor create the relationship of bailor and bailee. 9. Notices. All notices hereunder shall be given in accordance with the terms of the Lease. G-1 50 10. SUBORDINATION AND ATTORNMENT. This License shall be subject and subordinate to any mortgage, deed of trust or ground lease now or hereafter placed on the Property, or any portion thereof, and to replacements, renewals and extensions thereof, and Licensee, upon request by Licensor, shall execute instruments (in form satisfactory to Licensor) acknowledging such subordination. 11. NO WASTE. Licensee covenants not to cause any waste or damage or disfigurement or injury to the Property. 12. CLOSURE OF FACILITY. Licensor shall have the right to close temporarily any portion of the Parking Accommodations and deny access thereto in connection with any repairs or in an emergency, as it may require, without liability, cost or abatement of fee. 13. RULES. Licensee shall perform, observe and comply with such rules of the Property as may be reasonably adopted by Licensor in respect of the use and operation of said Parking Accommodations. 14. REGULATIONS. Licensee shall, when using the Parking Accommodations, observe and obey all signs regarding fire lanes and no parking zones, and when parking always park between designated lines. Licensor reserves the right to tow away, or otherwise impound, at the expense of the owner or operator, any vehicle which is improperly parked or parked in a no parking zone. No storage or overnight parking shall be allowed in the Parking Accommodations without Landlord's prior written consent; provided, however, that Landlord's prior consent shall not be required with respect to occasional overnight parking by Tenant's employees or invitees in connection with out-of-state travel. IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first above written. LICENSOR: LICENSEE: Pivotal Simon Office XVI, L.L.C., Anasazi Inc., a formerly known as Pivotal Simon Delaware corporation Pointe, L.L.C., an Arizona limited liability company By: Pivotal Group II, L.L.C., an Arizona limited liability company, its Administrative Member By: /s/ [ILLEGIBLE] ------------------------------------ Its: E.V.P. & C.F.O. ----------------------------------- By: /s/ [ILLEGIBLE] ------------------------------------ Its: Administrative Member ----------------------------------- G-2 51 ANNEX A TO EXHIBIT "G" [PARKING LOT] THE POINTE RESORT AT SQUAW PEAK RESTAURANTS, CONVENTION CENTRE AND RECREATION ADJACENT 52 ANNEX B TO EXHIBIT "G" [PARKING LOT] THE POINTE RESORT AT SQUAW PEAK RESTAURANTS, CONVENTION CENTRE AND RECREATION ADJACENT 53 EXHIBIT "H" "AS IS" CONDITION/TENANT ALLOWANCE 1. Landlord shall provide the Leased Premises to Tenant, and Tenant accepts a portion of Suite 200, which comprises a portion of the Leased Premises, in its present "as is" condition. Tenant represents and warrants that it has inspected this portion of the Leased Premises prior to execution of this Lease, and that it is relying on its own inspection in executing this Lease and not on any statement, representation or warranty of Landlord, its agents or employees. 2. COMPLETION SCHEDULE. Attached to this Work Letter is a schedule (the "Work Schedule") setting forth the time table for the planning and completion of the installation of the tenant improvements to be constructed in the Leased Premises (the "Tenant Improvements"). The Work Schedule sets forth each of the various items of work to be done in connection with the completion of the Tenant Improvements and shall become the basis for completing the Tenant Improvements. Landlord and Tenant acknowledge and agree that time is of the essence with respect to their respective obligations as set forth in this Work Letter. 3. TENANT IMPROVEMENTS. The Tenant Improvements shall include the work described on Annex I to this Exhibit "H", which work shall be done in the Leased Premises pursuant to the Tenant Improvements Plans described in Paragraph 4 below. 4. TENANT IMPROVEMENT PLANS. Tenant shall meet with Landlord's architect and/or space planner for the purposes of preparing a space plan for the layout of Suites 120, 220 and 245 of the Leased Premises. Based upon such space plan, Landlord's architect shall prepare final working drawings and specifications for the Tenant Improvements. Such final working drawings and specifications are referred to in this Work Letter as the "Tenant Improvement Plans." 5. PREPARATION OF TENANT IMPROVEMENT PLANS AND FINAL PRICING. After the preparation of the space plan and after Tenant's approval thereof in accordance with the Work Schedule, Landlord shall cause its architect to prepare and submit to Tenant the Tenant Improvement Plans. Promptly after the approval of the Tenant Improvement Plans by Landlord and Tenant in accordance with the Work Schedule, the Tenant Improvement Plans shall be submitted to the appropriate governmental body for plan checking and building permits. Landlord, with Tenant's cooperation, shall cause to be made such changes in the Tenant Improvement Plans necessary to obtain required permits. Tenant acknowledges that after final approval of the Tenant Improvement Plans, no further changes to the Tenant Improvement Plans may be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld but may be conditioned on the agreement by Tenant to pay all additional costs and expenses resulting from such requested changes that exceed the Allowance (defined below). 6. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement Plans have been prepared and approved, and building permits for the Tenant Improvements have been issued, Landlord shall enter into a construction contract with a licensed and bonded contractor for the installation of the Tenant Improvements in accordance with the Tenant Improvement Plans. The Tenant Improvements shall be constructed in a good, workmanlike and lien free manner, and in conformance with applicable building codes. Landlord shall supervise the completion of the Tenant Improvements and shall endeavor in good faith to secure the completion of the Tenant Improvements in accordance with the Work Schedule. The cost of the Tenant Improvements shall be paid as provided in Paragraph 7 below. Tenant shall accept the Tenant Improvements upon substantial completion thereof, as reasonably determined by Landlord's architect, which determination shall be set forth in a certificate of Landlord's architect certified to Landlord and Tenant. 7. PAYMENT OF THE COST OF THE TENANT IMPROVEMENTS. a. TENANT IMPROVEMENT ALLOWANCE. Landlord hereby grants to Tenant a Tenant Improvement allowance (the "Allowance") based upon a calculation of Six and No/100 Dollars ($6.00) per useable square foot of the Leased Premises (other than Suite 200). Landlord and Tenant agree that the useable square footage of the Leased Premises (other than Suite 200) is 45,795 useable square feet. The Allowance shall be used only for: H-1 54 (i) Payment of the cost preparing the space plan and the final working drawings and specifications, including mechanical, electrical and structural drawings and of all other aspects of the Tenant Improvement Plans, including the charges of Landlord's space planner and Landlord's architect. (ii) The payment of permit and license fees relating to construction of the Tenant Improvements; and (iii) Construction of the Tenant Improvements, including without limitation the following (1) Installation within the Leased Premises of all partitioning, doors, floor coverings, finishes, ceilings, wall coverings and paintings, millwork and similar items; (2) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work to be installed within the Leased Premises; (3) The furnishing and installation of all duct work terminal boxes, defusers and accessories required for the completion of the heating, ventilation and air conditioning systems within the Leased Premises. (4) Any additional Tenant requirements including, but not limited to odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems; (5) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories installed within the Leased Premises; and (6) All plumbing, fixtures, pipes and accessories to be installed within the Leased Premises; (7) All monument and directory signage; and (8) Up to One and No/100 Dollars ($1.00) per useable square foot may be applied to cabling. b. ADDITIONAL COSTS. The cost of each of the items Set forth in Paragraph 7(a) above shall be charged against the Allowance. In the event the anticipated cost of installing the Tenant Improvements, as established by Landlord's final pricing schedule, shall exceed the Allowance, or in the event any of the Tenant Improvements are not to be paid for from the Allowance, the excess shall be paid by Tenant to Landlord prior to the commencement of construction of the Tenant Improvements. c. CHANGES TO TENANT IMPROVEMENT PLANS. In the event that Tenant shall request any changes or substitutions to the Tenant Improvement Plans, after the Tenant Improvement Plans have been prepared and the final pricing established by Landlord, any additional costs attributable thereto shall be paid by Tenant to Landlord prior to the commencement of the work represented by such changes, unless covered under the Allowance. d. UNUSED ALLOWANCE. Any unused part of the Allowance shall be credited toward the fist payments due from Tenant for the Annual Basic Rent and Additional Rent. 8. EARLY ENTRY. Landlord shall permit Tenant and Tenant's agents to enter the Leased Premises prior to the Commencement Date in order that Tenant may do such work as may be required by Tenant to make the Leased Premises ready for Tenant's use and occupancy. If Landlord permits such entry prior to the Commencement Date, such permission is conditioned upon Tenant and its agents, contractors, employees and invitees working in harmony and not interfering with Landlord and its agents, contractors and employees in the installation of the Tenant Improvements or in the performance of work for other tenants and occupants of the Building. If at any time such entry shall cause or threaten to cause disharmony or interference, Landlord shall have the right to withdraw such permission upon twenty-four (24) hours notice to Tenant. Any entry into the Leased Premises by Tenant prior to the Commencement Date shall be subject to all of the terms, covenants, H-2 55 conditions and provisions of the Lease, other than with respect to Tenant's obligation to pay Annual Basic Rent. Tenant acknowledges and agrees that Landlord shall not be liable in any way for any injury, loss or damage which may occur to Tenant, its agents, contractors and employees or to Tenant's work and installations made in the Leased Premises or to property placed therein prior to the Commencement Date, all of the same being at Tenant's sole risk, provided, however, that Landlord shall be liable to Tenant for the gross negligence of Landlord, its agents, contractors and employees. 9. PUNCH LIST PROCEDURE. Within fifteen (15) days after the Landlord's notice of substantial completion, Tenant shall prepare A list (the "Punch List") of any deficiencies or incompleted work regarding any Tenant Improvements. Provided that such items are Landlord's responsibility pursuant to the Tenant Improvement Plans, Landlord shall correct such deficiencies or incompleted work within a reasonable period of time, but in no event later than sixty (60) days after receipt of the Punch List, after which Landlord shall have no further obligation to alter change, decorate or improve the Leased Premises, whether to adapt the same for the use for which it is leased or for any other purpose. The existence of such deficiencies or incompleted work shall not effect Tenant's obligation to accept the Leased Premises as otherwise required hereunder. 10. ASSIGNMENT OF WARRANTIES. Landlord shall assign to Tenant the non-exclusive right to enforce any and all warranties which Landlord may receive from any contractor, supplier or other person or entity involved with construction of the Tenant Improvements, which assignment shall continue until the expiration or sooner termination of the Lease or the expiration of the warranty, whichever occurs first. H-3 56 EXHIBIT "I" RULES AND REGULATIONS 1. Unless otherwise specifically defined herein, all capitalized terms in these Rules and Regulations shall have the meaning set forth in the Lease to which these Rules and Regulations are attached. 2. The sidewalks, driveways, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls of the Building and the Property shall not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the premises demised to any tenant or occupant. 3. No awnings or other projection shall be attached to the outside walls or windows of the Building. No curtains, blinds, shades, or screens shall be attached to or hung in, or used in connection with, any window or door of the premises demised to any tenant or occupant, without the prior written consent of Landlord. All electrical fixtures hung in any premises demised to any tenant or occupant must be of a type, quality, design, color, size and general appearance approved by Landlord. 4. No tenant shall place objects against glass partitions, doors or windows which would be in sight from the Building corridors or from the exterior of the Building and such tenant will promptly remove any such objects when requested to do so by Landlord. 5. The windows and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed, nor shall any bottles, parcels, or other articles be placed on any window sills. 6. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building or the other buildings in the Property, nor placed in the halls, corridors, walkways, landscaped areas, vestibules or other public parts of the Building or the Property. 7. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown therein. No tenant shall bring or keep, or permit to be brought or kept, any inflammable, combustible, explosive or hazardous fluid, material, chemical or substance in or about the premises demised to such tenant or the Property. 8. No tenant or occupant shall mark, paint, drill into, or in any way deface any part of the Property, the Building or the premises demised to such tenant or occupant. No boring, cutting or strings of wires shall be permitted, except with the prior consent of Landlord, and as Landlord may direct. No tenant or occupant shall install any resilient tile or similar floor covering in the premises demised to such tenant or occupant except in a manner approved by Landlord. 9. Any carpeting cemented down by a tenant shall be installed with a releaseable adhesive. In the event of a violation of the foregoing by a tenant, Landlord may charge the expense incurred in such removal to such tenant. 10. No bicycles, vehicles or animals of any kind (except seeing eye dogs) shall be brought into or kept in or about the premises demised to any tenant. No cooking shall be done or permitted in the Building by any tenant without the written approval of Landlord. Use by Tenant and its employees of the lunchroom (including microwave ovens therein) existing in the Leased Premises as of the Commencement Date shall not violate this Paragraph 10. No tenant shall cause or permit any unusual or objectionable odors to emanate from the premises demised to such tenant. 11. No space in the Building or the Property shall be used for manufacturing, for the storage of merchandise, or for the sale of merchandise, goods or property of any kind at auction. 12. No tenant shall make, or permit to be made, any unseemly or disturbing noises or vibrations or disturb or interfere with other tenants or occupants of the Building, the Property or neighboring buildings or premises whether by the use of any musical instrument, radio, television set broadcasting equipment or other audio device, unmusical noise, whistling, singing, or in any other way. Nothing shall be thrown out of any doors. I-1 57 13. No additional locks or bolts of any kind shall be placed upon any of the doors, nor shall any changes be made in locks or the mechanism thereof, excluding, however, current locks and security devices installed by Tenant in the Leased Premises prior to the Commencement Date, which may be modified following notice to Landlord. Each tenant must, upon the termination of its tenancy, return to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant 14. All removals from the Building, or the carrying in or out of the Building or from the premises demised to any tenant, of any safes, freight, furniture or bulky matter of any description must take place at such time and in such manner as Landlord or its agents may determine, from time to time. Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of the Rules and Regulations or the provisions of such tenant's lease. 15. No tenant or occupant shall engage or pay any employees in the Building or the Property, except those actually working for or under contract with such tenant or occupant in the Building or the Property, nor advertise for day laborers giving an address at the Building or the Property. 16. No tenant or occupant shall purchase lighting maintenance, cleaning towels or other like service, from any company or person not approved in writing by Landlord. 17. Landlord shall have the right to prohibit any advertising by any tenant or occupant which, in Landlord's opinion, tends to impair the reputation of the Building or the Property or its desirability as a building for offices, and upon notice from Landlord, such tenant or occupant shall refrain from or discontinue such advertising. 18. Each tenant, before closing and leaving the premises demised to such tenant at any time, shall see that all entrance doors are locked and all electrical equipment and lighting fixtures are turned off. Corridor doors, when not in use, shall be kept closed. 19. Each tenant shall, at its expense, provide artificial light in the premises demised to such tenant for Landlord's agents, contractors and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises. 20. No premises shall be used, or permitted to be used for lodging or sleeping, or for any immoral or illegal purposes. 21. The requirements of tenants will be attended to only upon application at the management office of Landlord. Building employees shall not be required to perform, and shall not be requested by any tenant or occupant to perform, and work outside of their regular duties, unless under specific instructions from the office of Landlord. 22. Canvassing, soliciting and peddling in the Building or the Property are prohibited and each tenant and occupant shall cooperate in seeking their prevention. 23. There shall not be used in the Building, either by any tenant or occupant or by their agents or contractors, in the delivery or receipt of merchandise, freight or other matter, any hand trucks or other means of conveyance except those equipped with rubber tires, rubber side guards and such other safeguards as Landlord may require. 24. Intentionally Omitted. 25. No premises shall be used, or permitted to be used, at any time, as a store for the sale or display of goods, wares or merchandise of any kind, or as a restaurant, shop, booth, bootblack or other stand, or for the conduct of any business or occupation which predominantly involves direct patronage of the general public in the premises demised to such tenant, or for manufacturing or for other similar purposes. 26. No tenant shall clean any window of the Building from the outside. 27. No tenant shall move, or permit to be moved, into or out of the Building or the premises demised to such tenant, any heavy or bulky matter, without the specific approval of Landlord. If any such matter requires special handling, only a qualified person shall be employed to I-2 58 perform such special handling. No tenant shall place or permit to be placed, on any part of the floor or floors of the premises demised to such tenant, a load exceeding the floor load per square foot which such floor was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of safes and other heavy objects, which must be placed so as to distribute the weight. 28. Intentionally Omitted. 29. Landlord shall not be responsible for lost or stolen personal property, equipment, money, or jewelry from the premises of tenants or public rooms whether or not such loss occurs when the Building or the premises are locked against entry. 30. Landlord may permit entrance to the premises of tenants by use of pass keys controlled by Landlord employees, contractors, or service personnel directly supervised by Landlord and employees of the United States Postal Service. 31. Each tenant and all of tenant's representatives, shall observe and comply with the directional and parking signs on the property surrounding the Building, and Landlord shall not be responsible for any damage to any vehicle towed because of non-compliance with parking regulations. 32. No tenant shall install any radio, telephone, television, microwave or satellite antenna, loudspeaker, music system or other device on the roof or exterior walls of the Building or on common walls with adjacent tenants or in the Common Areas. 33. Each tenant shall store all trash and garbage within its premises. No material shall be placed in the trash boxes or receptacles in the Building or the Property unless such material may be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage and will not result in a violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate. 34. No tenant shall employ any persons other than the janitor of Landlord for the purpose of cleaning its premises without the prior written consent of Landlord. 35. Each tenant shall give prompt notice to landlord of any accidents to or defects in plumbing, electrical or heating apparatus so that same may be attended to properly. 36. No tenant shall bring onto the Property or into the Building any pollutants, contaminants, inflammable, gasolines, kerosene or hazardous substances (as now or later defined under State or Federal law). 37. Intentionally Omitted. 38. All tenant and Tenants; servants, employees, agents, visitors, invitees and licensees shall observe faithfully and comply strictly with the foregoing Rules and Regulations and such other and further appropriate Rules and Regulations as Landlord or Landlord's agent from time to time adopt. 39. Landlord shall furnish each tenant, at Landlord's expense, with two (2) keys to unlock the entry level doors and two (2) keys to unlock each corridor door entry to each tenant's premises and, at such tenant's expense, with such additional keys as such tenant may request. No tenant shall install or permit to be installed any additional lock on any door into or inside of the premises demised to that tenant or make or permit to be made any duplicate of keys to the entry level doors or the doors to such premises, excluding, however, security devices and locks installed by Tenant prior to the Commencement Date, which may be modified following notice to Landlord. Landlord shall be entitled at all times to possession of a duplicate of all keys to all doors into or inside of the premises demised to tenants of the Building. All keys shall remain the property of Landlord. Upon the expiration of the Lease Term, each tenant shall surrender all such keys to Landlord and shall deliver to Landlord the combination to all locks on all safes, cabinets and vaults which will remain in the premises demised to that tenant. Landlord shall be entitled to install, operate and maintain security systems in or about the Property which monitor, by computer, close circuit television or otherwise, persons entering or leaving the Property, the Building and/or the premises demised to any tenant. For the purposes of this rule the term "keys" shall mean traditional metallic keys, plastic or other key cards and other lock opening devices. 1-3 59 40. Each person using the Parking Accommodations or other areas designated by Landlord where parking will be permitted shall comply with all Rules and Regulations adopted by Landlord with respect to the Parking Accommodations or other areas, including any employee or visitor parking restrictions, and any sticker or other identification system established by Landlord. Landlord may refuse to permit any person who violates any parking rule or regulation to park in the Parking Accommodations or other areas, and may remove any vehicle which is parked in the Parking Accommodations or other areas in violation of the parking Rules and Regulations. The Rules and Regulations applicable to the Parking Accommodations and the outside parking areas are as follows: (a) The maximum speed limit within the Parking Accommodations shall be 5 miles per hour, the maximum speed limit in other parking areas shall be 15 miles per hour. (b) All directional signs and arrows must be strictly observed. (c) All vehicles must be parked entirely within painted stall lines. (d) No intermediate or full-size car may be parked in any parking space reserved for a compact car; no bicycle, motorcycle or other two or three wheeled vehicle, and no truck, van or other oversized vehicle, may be parked in any area not specifically designated for use thereby. (e) No vehicle may be parked (i) in an area not striped for parking, (ii) in a space which has been reserved for visitors or for another person or firm, (iii) in an aisle or on a ramp, (iv) where a "no parking" sign is posted or which has otherwise designated as a no parking area, (v) in a cross hatched area, (vi) in an area bearing a "handicapped parking only" or similar designation unless the vehicle bears an appropriate handicapped designation, (vii) in an area bearing a "loading zone" or similar designation unless the vehicle is then engaged in a loading or unloading function and (viii) in an area with a posted height limitation if the vehicle exceeds the limitation. (f) Parking passes, stickers or other identification devices that may be supplied by Landlord shall remain the property of Landlord and shall not be transferable. A replacement charge determined by Landlord will be payable by each tenant for loss of any magnetic parking card or parking pass or sticker. (g) Garage managers or attendants shall not be authorized to make or allow any exceptions to these Rules and Regulations. (h) Each operator shall be required to park and lock his or her own vehicle, shall use the Parking Facilities at his or her own risk and shall bear full responsibility for all damage to or loss of his or her vehicle, and for all injury to persons and damage to property caused by his or her operation of the vehicle. (i) Landlord reserves the right to tow away, at the expense of the owner, any vehicle which is inappropriately parked or parked in violation of these Rules and Regulations. 41. Landlord reserves the right at any time and from time to time to rescind, alter or waive, in whole or in part, any of the Building Rules and Regulations when it is deemed necessary, desirable or proper, in Landlord's judgment for its best interest or of the best of the tenants of the Property. 42. Landlord has designated the Building a "non-smoking" building in accordance with the Smoking Pollution Control Ordinance adopted by the City of Phoenix, Arizona as set forth in Sections 23-101, et seq. of the City of Phoenix Municipal Code. Accordingly, smoking of tobacco or any other weed plant is prohibited in the Building Common Areas, including the Building Lobby, public corridors, lavatories, elevators and other public areas, except in the immediate vicinity of ashtrays located within the Building Common Areas by Landlord, which ashtrays shall not be removed by Landlord. Further, smoking of tobacco or any other weed plant is prohibited within the Leased I-4 60 Premises, except in a designated smoking break room, the configuration and location of which has been approved by Landlord. Tenant hereby acknowledges receipt of the Building Rules and Regulations. TENANT: Anasazi Inc., a Delaware corporation By: [ILLEGIBLE] --------------------------------------- ITS: E.V.P. & C.F.O -------------------------------------- Date: 7/25/96 -------------------------------------- I-5 61 EXHIBIT "J" TENANTS CERTIFICATE The undersigned, ________________________________ a ___________________ is the tenant ("Tenant") under a Lease ("Lease") dated ______________________ between Tenant and _________________, a ___________________ as landlord ("Landlord") with respect to the premises ("Leased Premises") as described in Exhibit "A" attached hereto. With the understanding that ______________________ ("Lender") will rely upon the representations made herein in making a loan ("Loan") to Landlord and accepting an assignment of Landlord's interest in the Lease pursuant to an Assignment of Leases and Rents to be entered into between Lender, as assignee, and Landlord, as assignor ("Assignment of Leases"), Tenant hereby represents and certifies as follows: 1. The Lease is in full force and effect and has not been modified, supplemented, cancelled or amended in any respect, except as follows: 2. The Lease, as affected by those changes in Paragraph 1 above, represents the entire agreement of the parties with respect to the Leased Premises. 3. Tenant has accepted the Leased Premises and is the actual occupant in possession and both the Landlord and the Tenant have completed and complied with all required conditions precedent to such acceptance and possession. Tenant has no claims, defenses or rights of offset against any rents payable thereunder. All improvements to be constructed on the Leased Premises have been completed and accepted by Tenant and any Tenant construction allowances have been made. 4. The term of the Lease commenced on ________________ and, including any presently exercised option or renewal term, will expire on ("Initial Term"), with the right to extend the Lease for ______ additional period(s) of _______ years each, and on or before the first said date the Tenant became obligated to pay fixed minimum rent in monthly installments each in an amount not less than $__________________, which rent obligation is continuing and is not past due or delinquent in any respect. No installment of rent has been or will be prepaid more than one (1) month in advance. 5. To the best of Tenant's knowledge, as of the date of this Certificate, there exists no breach or default, nor state of facts which, with notice, the passage of time, or both, would result in a breach or default on the part of either Tenant or landlord. To the best of Tenant's knowledge, no claim, controversy, dispute, quarrel or disagreement exists between Tenant and Landlord. 6. Tenant has no option or preferential right to purchase all or any part of the Leased Premises (or the real property of which the Leased Premises is a part) nor any right or interest with respect to the Leased Premises other than as Tenant under the Lease. 7. Tenant has no option, right of first offer or right of first refusal to lease or occupy any other space within the property of which the Leased Premises are a part, except as follows: 8. Tenant has no right to renew or extend the terms of the Lease except as follows: 9. Tenant has no preferential right to parking spaces or storage area except as follows: 10. Lender and Landlord have represented in writing to Tenant, and Tenant therefore acknowledges, that pursuant to the Assignment of Leases, Lender is presently entitled to collect and receive all rents to be paid under the Lease directly from Tenant. Based upon such written representations, Tenant agrees to pay all rents and installments of rent as they become due directly to Lender at such address as Lender may hereafter direct by written notice to Tenant. Until such notice is given by Lender to Tenant, Tenant shall pay all rent and installments of rent to lessor in accordance with the provisions of the Lease. J-1 62 11. All information, notices or requests provided for or permitted to be given or made pursuant to this Certificate shall be deemed to have been properly made or given by depositing the same in the United States Mail, postage prepaid and registered or certified return receipt requested and addressed to the addresses set forth below, or to such other addresses as may from time to time be specified in writing by Tenant or Lender to the other: If to Lender: ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- If to Tenant: ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- All requests or notices shall be effective upon being deposited in the United States Mail, however the time period in which any response to any notice or request must be made shall commence from the date of receipt of the request or notice by the addressee. 12. There shall be no merger of the Lease or the leasehold estate created thereby with any other estate in the Leased Premises, including without limitation, the fee estate, by reason of the same person or entity acquiring or holding, directly or indirectly, the Lease and said leasehold estate and any such other estate. 13. The Lease and this Certificate have been duly authorized, executed and delivered by the Tenant and constitute legal, valid and binding instruments enforceable against Tenant in accordance with their respective terms, except as such terms may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally. 14. The provisions of the Lease, including the rents payable thereunder, were negotiated at arms length and no consent, authorization or approval of any governmental authority is necessary in connection with Tenant's execution, delivery or performance of this Certificate. 15. This Certificate and the representations made herein shall be governed by the laws of Arizona and are binding upon and inure to the benefit of Lender and Tenant and their respective successors and assigns and to no other persons or entities, and the representations made herein shall survive the closing of the Loan and the delivery of this Certificate. IN WITNESS WHEREOF, this Certificate has been duly executed and delivered by the undersigned as of____________________________________, 199___. ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- J-2 63 the service of any notice relating to the termination of this Lease, after the commencement of any suit, or after final judgment for possession of the Leased Premises, shall reinstate, continue or extend the Lease Term or affect any such notice, demand, suit or judgment. 33. BANKRUPTCY OF TENANT 33.1 Chapter 7. If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, the election or assignment, or both, may be made only if all of the terms and conditions of Articles 33.2 and 33.4 below are satisfied. If the trustee fails to elect to assume this Lease for the purpose of assigning it within sixty (60) days after appointment, this Lease will be deemed to have been rejected. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the conditions hereinafter stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee, and this Lease will be terminated. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive. 33.2 Chapters 11 and 13. If Tenant flies a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code or a proceeding that is filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13 proceeding and Tenant's trustee or Tenant as a debtor-in-possession fails to assume this Lease within sixty (60) days from the date of the filing of the petition or the conversion, the trustee or the debtor-in-possession will be deemed to have rejected this Lease. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: (a) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance, as defined in this Article 33.2, that; (1) The trustee will cure all monetary defaults under this Lease within ten (10) days from the date of the assumption; and (2) The trustee will cure all non-monetary defaults under this Lease within thirty (30) days from the date of the assumption. (b) The trustee or the debtor-in-possession has compensated Landlord, or has provided to Landlord adequate assurance, as defined in this Article 33.2, that within ten (10) days from the date of the assumption Landlord will be compensated for any pecuniary loss it incurred arising from the default of Tenant, the trustee, or the debtor-in-possession as recited in Landlord's written statement of pecuniary loss sent to the trustee or the debtor-in-possession. For purposes of this Lease, pecuniary loss shall include all attorneys' fees and court costs incurred by Landlord in connection with any bankruptcy proceeding filed by or against Tenant. (c) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under the Lease; provided, however, that: (1) The trustee or debtor-in-possession will also deposit with Landlord as security for the timely payment of Annual Basic Rent and Additional Rent, an amount equal to three mouths Annual Basic Rent and Additional Rent accruing under this Lease. (2) If not otherwise required by the terms of this Lease, the trustee or the debtor-in-possession will also pay in advance, on each day that the Annual Basic Rent is payable, one-twelfth of Tenant's estimated annual obligations under the Lease for the Additional Rent. (3) From and after the date of the assumption of this Lease, the trustee or the debtor-in-possession will pay the Annual Basic Rent and Additional Rent as provided in Article 5 above. (4) The obligations imposed upon the trustee or the debtor-in-possession will continue for Tenant after the completion of bankruptcy proceedings. (d) Landlord has determined that the assumption of the Lease will not: 64 FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "AMENDMENT") is entered into this 22nd day of August, 1997 by and between PIVOTAL SIMON OFFICE XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company ("LANDLORD"), and ANASAZI INC., a Delaware corporation ("TENANT"). RECITALS A. Landlord and Tenant previously entered into that certain Office Lease dated July 25, 1996 (the "LEASE") with respect to premises (the "LEASED PREMISES") consisting of 56,045 rentable square feet located at 7500 North Dreamy Draw Drive, Phoenix, Arizona 85020. B. Tenant desires to lease additional square footage from Landlord and Landlord is willing to lease to Tenant additional square footage. C. The parties desire to amend the Lease subject to and in accordance with the further terms, covenants and conditions of this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the Lease, the foregoing Recitals, the mutual agreements, covenants and promises set forth in this Amendment and other good and valuable consideration, the receipt, sufficiency and validity of which is hereby acknowledged, the parties hereby agree as follows: 1. Except as otherwise defined in this Amendment, all capitalized terms shall have the meanings given to them in the Lease. 2. Effective as of the earlier to occur of (i) October 22, 1997, or (ii) Tenant receives a Certificate of Occupancy from the City of Phoenix with respect to the additional space known as Suite 212 (the "SUITE 212 EFFECTIVE DATE"), the Leased Premises shall increase by 7,275 rentable (6,614 usable) square feet by adding thereto Suite 212. Effective thirty (30) days after the date Tenant receives written notice of the date Suite 200 is vacated by the current tenant of Suite 200 (the "SUITE 200 EFFECTIVE DATE"), but in no event earlier than January 1, 1998, the Leased Premises shall increase by 7,533 rentable (6,848 usable) square feet by adding thereto the additional space known as Suite 200. Suite 212 and Suite 200 are individually and together sometimes hereinafter be referred to as the "ADDITIONAL LEASED SPACE". Upon the date Tenant commences occupancy of Suite 200, Tenant shall surrender to Landlord a portion of Suite 240 (which is within the Leased Premises) which portion shall contain 419 rentable square feet as shown on the Site Plan attached hereto (the "SUITE 240 REDUCTION"). Accordingly, and subject to the further provisions of this Amendment, as of the later to occur of the Suite 212 Effective 65 Date or the Suite 200 Effective Date, Article 1.8 of the Lease is hereby modified by replacing "56,045 rentable square feet" with "70,434 rentable square feet". From and after the later of the Suite 212 Effective Date or the Suite 200 Effective Date, all references in the Lease to the "Leased Premises" shall be deemed references to the Leased Premises as modified by this Amendment. 3. Landlord and Tenant acknowledge that Suite 200 is currently occupied pursuant to a Lease that expires on November 30, 1997. Landlord shall use commercially reasonable efforts to ensure that Suite 200 is vacated as of November 30, 1997. 4. Landlord grants Tenant the right to occupy Suite 212 and Suite 200 commencing on the applicable Effective Date and terminating on the Expiration Date (as defined in the Lease), as the same may be extended. Landlord shall provide the Additional Leased Space to Tenant and Tenant accepts the Additional Leased Space in its present "as is" condition. 5. The Annual Basic Rent for Suite 212 shall be $140,043.75 ($11,670.31 per month) based on a rental rate of $19.25 per rentable square foot. The Annual Basic Rent for Suite 200 shall be $145,010.25 ($12,084.19 per month) based on a rental rate of $19.25 per rentable square foot. Such Annual Basic Rent shall be payable with respect to Suite 212 and Suite 200 as of the applicable Effective Date. Accordingly, from and after the later of the Suite 212 Effective Date or the Suite 200 Effective Date Article 1.13 of the Lease is hereby deleted in its entirety and replaced with the following:
LEASE YEAR/ PARTIAL LEASE YEAR ANNUAL BASIC RENT MONTHLY RENT ------------------ ----------------- ------------ 1 [completed] $ -- $ -- 1/1/97-10/21/97 -- 70,056.25 10/22/97-12/31/97 -- 81,726.56 3 1,147,257.00 95,604.75 4 1,216,789.50 101,399.13 5 1,272,415.40 106,034.63 6 1,286,322.00 107,193.50 7 1,300,228.45 108,352.37
The rental amounts are calculated based on the assumption that the Suite 240 Reduction shall occur on January 1, 1998. In the event that the Suite 240 Reduction occurs prior to January 1, 1998, the monthly rental shall be reduced by $523.75 for each month in the second Lease Year that Tenant pays the rental set forth above through December 31, 1997. 6. The Base Year Costs for Suite 212 shall be 1997 calendar year actual Operating Costs per rentable square foot, adjusted to 95% occupancy. The Base Year Costs for Suite 200 2 66 shall be 1998 calendar year actual Operating Costs per rentable square foot, adjusted to 95% occupancy. 7. With respect to Suite 212, Tenant shall have the right to lease seven (7) covered reserved parking spaces throughout the Lease Term at the rate of $15.00 per space, per month. With respect to Suite 200, Tenant shall have the right to lease eight (8) covered reserved parking spaces throughout the Lease Term at the rate of $15.00 per space, per month. Additional uncovered unreserved parking spaces shall be available on a non-exclusive, "first-come, first served" basis. 8. Except as set forth in this Amendment, Tenant's occupancy of the Additional Leased Space and Landlord's obligations with respect to Tenant's Occupancy of the Additional Leased Space shall otherwise be subject to all of the terms and conditions of the Lease. 9. Landlord shall provide to Tenant a Tenant Improvement Allowance with respect to the Additional Leased Space of $165,350.00 (the "AMENDMENT ALLOWANCE") based on a rate of Twenty-Five and No/100 Dollars ($25.00) per usable square foot of Suite 212. Tenant's use of the Amendment Allowance is subject to the terms and conditions of Exhibit "H" to the Lease. For a period commencing on the date of this Amendment and expiring twelve (12) months thereafter, Tenant shall have the right to use the Amendment Allowance for Tenant Improvements in the Additional Leased space and/or any other portion of the Leased Premises. Notwithstanding anything contained in Exhibit H to the contrary, no portion of any unused Amendment Allowance may be credited toward payments due from Tenant for the Annual Basic Rent and Additional Rent due and payable under the Lease. Further notwithstanding any provision of Exhibit "H" to the contrary, Tenant shall have the right to select, contract with and supervise the contractor that shall perform the Tenant Improvements, subject to Landlord's approval, which approval shall not be unreasonably withheld. 10. EXHIBIT "C" of the Lease is hereby deleted in its entirety and replaced with EXHIBIT "C" attached hereto. 11. Tenant hereby affirms by execution of this Amendment that the Lease is in full force and effect and Tenant does not have any presently existing claims against Landlord or any offsets against rent due under the Lease. There are no defaults of Landlord under the Lease and there are no existing circumstances which with the passage, notice, or both, would give rise to a default under the Lease. Landlord hereby affirms by execution of this Amendment that the Lease is in full force and effect and Landlord does not have any presently existing claims against Tenant under the Lease. There are no defaults of Tenant under the Lease and there are no existing circumstances which with the passage, notice, or both, would give rise to a default under the Lease. 3 67 12. Except as set forth in this Amendment, the Lease remains in full force and effect. All references in the Lease to "this Lease" shall be deemed references to the Lease as modified by this Amendment. 13. This Amendment is contingent upon and shall not be effective until receipt of written approval from Bank One, Arizona, N.A., Landlord's lender ("LENDER"). Landlord shall use commercially reasonable efforts following the execution of this Amendment by Landlord and Tenant to obtain Lender's approval on or before August 31, 1997, and upon receipt thereof will promptly provide a copy of such approval to Tenant. In the event that Landlord is unable to obtain such approval on or before August 31, 1997, Tenant shall have the right, as its sole and exclusive remedy to terminate this Amendment upon written notice to Landlord on or before September 10, 1997, which termination shall be effective immediately upon receipt thereof by Landlord, and, upon such termination Landlord shall reimburse Tenant for Tenant's actual, out-of-pocket costs related to this Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first hereinabove set forth. LANDLORD: PIVOTAL SIMON OFFICE XVI, L.L.C., an Arizona limited liability company, formerly known as PIVOTAL SIMON POINTE, L.L.C. By: Pivotal Group II, L.L.C., an Arizona limited liability company Its: Administrative Member By: Jahm Najafi, Trustee of the Jahm Najafi Trust dated July 30, 1996 Its: Administrative Member By: /s/ JAHM NAJAFI ------------------------- Name: Jahm Najafi Its: Trustee 4 68 TENANT: ANASAZI INC., A Delaware corporation By: /s/ J. ATTERIDGE ---------------------------------- Name: J. Atteridge -------------------------------- Its: President & COO --------------------------------- APPROVED BY LENDER: Bank One, Arizona, N.A., hereby approves and consents to the First Amendment to Lease Agreement set forth above. BANK ONE, ARIZONA, N.A., a national banking association By: /s/ [ILLEGIBLE] ---------------------------------- Name: [ILLEGIBLE] -------------------------------- Its: Vice President --------------------------------- 5 69 EXHIBIT C [FLOORPLAN] 70 CONSENT TO ASSIGNMENT RECITALS A. PIVOTAL SIMON OFFICE XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company ("LANDLORD"), and ANASAZI INC., a Delaware corporation ("TENANT"), previously entered into that certain Office Lease dated July 25, 1996, as amended by that certain First Amendment to Lease Agreement dated August 2, 1997 (together, the "LEASE") with respect to Leased Premises consisting of 70,434 rentable square feet located at 7500 North Dreamy Draw Drive, Phoenix, Arizona 85020. B. Tenant has advised Landlord that a subsidiary of Resolutions, a Delaware corporation, will merge with end into Tenant and Tenant shall be the surviving entity. Such merger constitutes an assignment under ARTICLE 19.2(c) of the Lease and Tenant requests the Landlord's consent to this assignment ("ASSIGNMENT"). CONSENT IN CONSIDERATION of the Lease and other good and valuable consideration, the receipt and sufficiency thereof being hereby acknowledged, Landlord hereby grants consent to the Assignment upon the following terms and conditions. 1. The Assignment is subject to the Lease and to all of the terms, covenants, conditions, provisions and agreements of the Lease. 2. Following the Assignment, Tenant shall faithfully perform and be bound by all of the terms, conditions, provisions and agreements of the Lease for the period covered by the Lease. 3. Neither the Assignment nor this Consent thereto shall: a. release or discharge Tenant from any liability, whether past, present or future, under the Lease: b. operate as a consent or approval by Landlord to or of any of the terms, covenants, conditions, provisions or agreements of the Assignment and Landlord shall not be bound thereby; c. be construed to modify, waive or affect any of the terms, covenants, conditions, provisions or agreements of the Lease, or to waive any breach 71 thereof, or any of the rights of Landlord thereunder, or to enlarge or increase Landlord's obligations as Landlord thereunder; or d. be construed as a consent by Landlord to any further assignment or subletting by Tenant, it being clearly understood that this consent shall not in any way be construed to relieve Tenant of the obligation to obtain Landlord's express prior written consent to any further subletting or assignment 4. Landlord and Tenant agree that this Consent shall not be assigned. 5. Tenant covenants and agrees that under no circumstances shall Landlord be liable for any brokerage commission or other charge or expense in connection with the Assignment and Tenant agrees to indemnify Landlord against same and against any cost or expense (including but not limited to attorney's fees) incurred by Landlord in resisting any claim for any such brokerage commission. 6. Landlord shall use commercially reasonable efforts following the execution of this Consent by Landlord and Tenant to obtain signatures from Bank One, Arizona, N.A., Landlord's lender, and upon receipt thereof will promptly provide a fully executed Consent to Tenant. LANDLORD: PIVOTAL SIMON OFFICE XVI, L.L.C., an Arizona limited liability company, formerly known as PIVOTAL SIMON POINTE, L.L.C. By: Pivotal Group II, L.L.C., an Arizona limited liability company Its: Administrative Member By: Jahm Najafi, Trustee of the Jahm Najafi Trust dated July 30, 1996 Its: Administrative Member By: /s/ JAHM NAJAFI ----------------------- Name: Jahm Najafi Its: Trustee 2 72 TENANT: ANASAZI INC., a Delaware corporation By: KEVIN HANSON -------------------------------------- Name: Kevin Hanson ------------------------------------ Its: V/P Finance & CFO ------------------------------------- APPROVED BY LENDER: Bank One, Arizona, N.A., hereby approves and consents to the Consent set forth above. BANK ONE, ARIZONA, N.A., a national banking association By: MATTHEW C. BERK -------------------------------------- Name: Matthew C. Berk ------------------------------------ Its: Vice President ------------------------------------- 3 73 SECOND AMENDMENT TO OFFICE LEASE THIS SECOND AMENDMENT TO OFFICE LEASE ("Second Amendment") is entered into this 24th day of October, 2000 (the "Effective Date"), by and between WXIII/PCC REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership, as successor to Pivotal Simon Office XVI, L.L.C., an Arizona limited liability company ("Landlord"), and PEGASUS SOLUTIONS COMPANIES, a Delaware corporation, formerly known as Rezsolutions, Inc. d/b/a (PHX) Inc., a Delaware corporation, formerly known as Anasazi Inc., a Delaware corporation ("Tenant"). Except as otherwise defined in this Amendment, all capitalized terms shall have the meanings given to them in the Lease. RECITALS A. Landlord and Tenant previously entered into that certain Office Lease dated July 25, 1996, as amended by that certain First Amendment to Lease Agreement dated August 22, 1997 (collectively, the "Lease"), with respect to premises (the "Leased Premises") consisting of 70,434 rentable square feet located at 7500 North Dreamy Draw Drive, Phoenix, Arizona 85020 (the "Building"). B. Tenant wishes to lease additional space from Landlord in the Building, and Landlord is willing to lease to Tenant additional space in the Building provided that the contingencies delineated below are satisfied. C. This Second Amendment of this Lease is subject to the execution of a First Amendment to Office Lease (the "Boral Amendment") of a date even herewith, by and between Landlord and Boral Material Technologies, Inc., a Delaware corporation, as successor by merger to Western Ash Company, a Nevada corporation ("Boral"), decreasing Boral's commitment under its Office Lease with Landlord dated March 7, 1997, with respect to Boral's Leased Premises in the Building. D. The parties wish to amend the Lease subject to and in accordance with the further terms, covenants and conditions of this Amendment. AGREEMENT NOW, THEREFORE, in consideration of the Lease, the foregoing Recitals, the mutual agreements, covenants and promises set forth in this Amendment and other good and valuable consideration, the receipt, sufficiency and validity of which is hereby acknowledged, the parties hereby agree as follows: 1. As of the Effective Date, Tenant shall have the right to occupy 1,268 rentable 74 square feet of the 7,289 rentable square feet of Suite 234 as outlined in the Floor Plan attached hereto as Exhibit "A" (the "Additional Space") through the period expiring December 31, 2002 ("Termination Date"). The Additional Space is hereinafter referred to as "Suite 235". Upon the Termination Date, Tenant's right to occupy Suite 235 shall terminate and Tenant shall have vacated Suite 235. 2. Landlord shall provide Suite 235 to Tenant in an "as is" condition. Notwithstanding the foregoing, Landlord makes no representations or warranties concerning the condition of Suite 235, including, without limitation, those relating to the structure of Suite 235, systems and components thereof, and the internal air quality within Suite 235, and has no obligation to construct, remodel, improve, repair, decorate or paint Suite 235 or any improvements thereon or any part thereof except as specifically provided otherwise in the Lease. Tenant represents and warrants that it has inspected Suite 235, including all base building systems serving Suite 235 prior to the execution of this Second Amendment and that it is accepting Suite 235 in its current "as is" condition, subject to Landlord's obligations described herein, and that it is relying upon its own inspection in executing this Second Amendment and not on any statement, representation or warranty of Landlord, is agents or employees. 3. The Annual Basic Rent for Suite 235 for the term beginning November 1, 2000 and ending December 31, 2001 shall be ($27,896) payable in regular monthly installments of Two Thousand Three Hundred Twenty-Four and 67/100 Dollars ($2,324.67) per month, based on a rental rate of Twenty-Two and 00/100 Dollars ($22.00) per rentable square foot. The Annual Basic Rent for Suite 235 for the term beginning January 1, 2001 and ending December 31, 2002 shall be ($29,164) payable in regular monthly installments of Two Thousand Four Hundred Thirty and 33/100 ($2,430.33) per month, based on a rental rate of Twenty-Three and 00/100 Dollars ($23.00) per rentable square foot. In addition to the Annual Basic Rent set forth above, Tenant shall also be liable for all Operating Costs and other amounts pursuant to the terms of the Lease. Such rent shall be in addition to any other amounts owed under the terms of the Lease. The Base Year for the Suite 235 shall be 2000 calendar year actual Operating Costs per rentable square foot, adjusted to ninety-five percent (95%) occupancy. 4. No additional covered, reserved parking spaces shall be available for Tenant's use with respect to Suite 235. 5. Except as set forth in this Second Amendment, Tenant's occupancy of Suite 235 shall otherwise be subject to all of the terms and conditions of the Lease. 6. Tenant hereby affirms by execution of this Second Amendment that the Lease is in full force and effect and Tenant does not have any presently existing claims against Landlord or any offsets against rent due under the Lease, and that there are no defaults of Landlord under the Lease and there are no existing circumstances which with the passage, notice, or both, would give rise to a default under the Lease. 7. Except as set forth in this Second Amendment, the Lease remains in full force -2- 75 and effect. All references in the Lease to "Lease" shall be deemed references to the Lease as modified by this Second Amendment. IN WITNESS WHEREOF, the parties have executed this Second Amendment as of the Effective Date. LANDLORD: WXIII/PCC REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: WXIII/PCC Gen-Par, L.L.C., a Delaware limited liability company, General Partner By: ---------------------------------- Its: ------------------------------ TENANT: PEGASUS SOLUTIONS COMPANIES, a Delaware corporation By: /s/ [ILLEGIBLE] -------------------------------------- Its: Vice President ---------------------------------- -3- EX-10.18 3 d84582ex10-18.txt OFFICE LEASE DATED JANUARY 31, 1997 1 EXHIBIT 10.18 STANDARD FORM MULTI-TENANCY INDUSTRIAL LEASE (TRIPLE NET) Landlord Eastgroup Properties, a Maryland Real Estate Investment Trust, c/o Hewson Properties, Inc., Tenant Anasazi, Inc., a Delaware Corporation Dated as of January 31, 1997 TABLE OF CONTENTS 1. Defined Terms .................................................................... 1 2. Leased Premises .................................................................. 2 (a) Property to be Leased ...................................................... 2 (b) Common Areas ............................................................... 2 (c) Reserved Rights of Landlord ................................................ 2 3. Completion of Premises ........................................................... 3 (a) Plans ...................................................................... 3 (b) Scheduled Commencement Date ................................................ 3 (c) Remedy ..................................................................... 3 (d) Changes .................................................................... 3 (e) Ready for Occupancy ........................................................ 3 (f) Construction Representative ................................................ 4 (g) Early Entry ................................................................ 4 (h) Quality of Construction .................................................... 4 4. Term ............................................................................. 4 5. Rent ............................................................................. 4 (a) Fixed Rent ................................................................. 4 (c) Pro Rata Rent .............................................................. 5 (d) Net Lease .................................................................. 5 (e) Reimbursable Expenses ...................................................... 5 6. Security ......................................................................... 6 (a) Security Deposit ........................................................... 6 7. Use .............................................................................. 7 (a) General .................................................................... 7 (b) Compliance with Law ........................................................ 7 (c) Existing Title and Condition of Premises ................................... 7 (d) Signs ...................................................................... 7 (e) Governmental Regulation .................................................... 8 (f) Security Devices ........................................................... 8 8. Maintenance and Repairs .......................................................... 8 (a) Operating Expenses ......................................................... 8 (b) Tenant's Maintenance ....................................................... 9 (c) Landlord's Obligations to Repair ........................................... 9 (d) Surrender .................................................................. 9 9. Utilities ........................................................................ 9 10. Alterations and Additions ....................................................... 10 (a) Limitation ................................................................. 10 (b) Liens ...................................................................... 10 (c) Removal .................................................................... 10
Please Initial: /s/ Illegible /s/ Illegible -i- 2 11. Insurance ....................................................................... 10 (a) General Liability .......................................................... 10 (b) Extended Coverage .......................................................... 10 (c) Policies ................................................................... 11 (d) Waiver of Subrogation ...................................................... 11 (e) Tenant's Contents .......................................................... 11 (f) Workmen's Compensation ..................................................... 12 12. Indemnity; Exemption of Landlord from Liability ................................. 12 (a) General .................................................................... 12 (b) Tenant's Business .......................................................... 12 13. Damage or Destruction; Obligation to Rebuild .................................... 12 (a) Landlord's Obligation to Rebuild ........................................... 12 (b) Abatement of Rent .......................................................... 12 (c) Option to Terminate ........................................................ 12 (d) Uninsured Casualties ....................................................... 13 (e) Tenant's Waiver ............................................................ 13 14. Taxes ........................................................................... 13 (a) Tenant's Share of Property Taxes ........................................... 13 (b) Tenant's Personal Property ................................................. 13 (c) Rent Tax ................................................................... 14 15. Condemnation .................................................................... 14 (a) Rent Reduction or Lease Termination ........................................ 14 (b) Award ...................................................................... 14 16. Assignment and Subletting ....................................................... 15 (a) Consent .................................................................... 15 (b) Tenant's Continuing Liability .............................................. 15 (c) Information ................................................................ 15 (d) Excess Sublease Rental ..................................................... 15 (e) Release .................................................................... 15 (f) Controlled Entity .......................................................... 16 (g) Attorneys' Fees ............................................................ 16 17. Defaults; Remedies .............................................................. 16 (a) Defaults ................................................................... 16 (b) Remedies ................................................................... 17 (c) Late Charges ............................................................... 19 (d) Payment or Performance by Landlord ......................................... 19 18. Miscellaneous ................................................................... 19 (a) Estoppel Certificate ....................................................... 19 (b) Landlord's Liability ....................................................... 20 (c) Construction ............................................................... 20 (d) Interest on Past-Due Obligations ........................................... 20 (e) Time of Essence ............................................................ 20 (f) Counterparts ............................................................... 20 (g) Incorporation of Prior Agreements; Amendments .............................. 20 (h) Notices .................................................................... 20 (i) Waivers .................................................................... 20 (j) Recording .................................................................. 21 (k) Holding Over ............................................................... 21 (l) Covenants and Conditions ................................................... 21 (m) Binding Effect ............................................................. 21 (n) Subordination .............................................................. 21 (o) Attorneys' Fee ............................................................. 21 (p) Landlord's Access .......................................................... 21 (q) Auctions ................................................................... 21 (r) Merger ..................................................................... 22 (s) Joint and Several Liability ................................................ 22 (t) Individual Liability ....................................................... 22 (u) Attornment ................................................................. 22
Please Initial: /s/ Illegible /s/ Illegible -ii- 3 (v) Lenders Right to Cure ...................................................... 22 (w) Revisions to Lease ......................................................... 22 (x) Administrative Charge ...................................................... 22 19. Toxic Materials ................................................................. 23 (a) Definitions ................................................................ 23 (b) Prohibition on Hazardous Materials ......................................... 23 (c) Exception to Prohibition ................................................... 24 (d) Compliance with Environmental Laws ......................................... 24 (e) Environmental Notices ...................................................... 24 (f) Environmental Indemnity .................................................... 24 (g) Remedial Work .............................................................. 25 (h) Landlord's Option .......................................................... 25 (i) Injunctive Relief .......................................................... 25 (j) Self-Help .................................................................. 25 (k) Other Tenants .............................................................. 25 (l) Environmental Inspection ................................................... 25 (m) Surrender of Premises-Environmental Considerations ......................... 26
Exhibit A The Premises Exhibit B Preliminary Plans Exhibit D Hazardous Materials Exhibit E Option to Extend Lease Term Exhibit F First Right of Refusal Exhibit G First Right of Refusal Floor Plan Exhibit H Project Please Initial: /s/ Illegible /s/ Illegible -iii- 4 1. DEFINED TERMS. Each reference in this Lease to any of the following terms shall incorporate the data stated for that term. Other terms are as defined in the Lease. (a) LANDLORD AND LANDLORD'S EastGroup Properties ADDRESS (SUBPARAGRAPH c/o Hewson Properties, Inc. 18(h)): 4636 East University Drive Suite 265 Phoenix, Arizona 85034 (b) TENANT AND TENANT'S ANASAZI, Inc., ATTN: STEVE GREENSPAN ADDRESS FOR NOTICES 7500 N. Dreamy Draw Drive, Suite 120 (SUBPARAGRAPH 18(H)): Phoenix, Arizona 85020-4668 cc: Mr. Chuck Nixon CB Commercial (c) STREET ADDRESS OF PREMISES 2346 North Central, #100 (PARAGRAPH 2): Phoenix, Arizona 85004 See Page 1(a) -------------------------------------- (d) APPROXIMATE SQUARE Approximately A-104 - 13,200 SF FOOTAGE OF PREMISES " A-103 - 5,881 SF (PARAGRAPH 2) " A-102 - 8,600 SF (e) PROJECT IN WHICH PREMISES Metro Business Park Phase I ARE LOCATED which consists of three (3) buildings (PARAGRAPH 2) on Exhibit A (f) LANDLORD'S CONSTRUCTION Cathleen R. Yeager REPRESENTATIVE (SUBPARAGRAPH 3(f)): -------------------------------------- -------------------------------------- (g) TENANT'S CONSTRUCTION Steve Greenspan REPRESENTATIVE (SUBPARAGRAPH 3(f)) -------------------------------------- -------------------------------------- (h) TERM (PARAGRAPH 4): A104 - 2/15-97 - 3/31/00 A102 - 4/01/97 - 3/31/00 A103 - 4/01/97 - 11/30/01 (i) SCHEDULE COMMENCEMENT 12:01 a.m. on DATE (PARAGRAPH 4): A104 - February 15, 1997 A102 & A103 - April 1, 1997 (j) FIXED RENT (SUBPARAGRAPH 5(a)): 2/15/97 - 3/31/97 @ $ 5,105.99/NNN/ (A104) 4/01/00 - 3/31/00 @ $18,000.00/NNN/ Month (All) 4/01/00 - 11/30/01 @ $ 3,234.55/NNN/ Month (A103) -------------------------------------- -------------------------------------- -------------------------------------- per month ------------------------------------ (k) RENTAL PERIOD February 15, 1997 - November 30, 2001 SUBPARAGRAPH 5(a)): -------------------------------------- (l) SECURITY DEPOSIT $27,000.00 PARAGRAPH 6(a)): -------------------------------------- --------------------------------------
Please Initial: /s/ A /s/ CM 5 1.(c) STREET ADDRESS OF PREMISES. 11048 N. 23rd Avenue Suites A102-A104 Phoenix, AZ 85029 Please Initial: /s/ A /s/ CM 1(a) 6 (m) PERMITTED USES (PARA- Data Center, Call Center and GRAPH 7): ----------------------------------- general office use. ------------------------------------ (n) CLEANING DEPOSIT (SUB- Waived PARAGRAPH 8(e)): ------------------------------------ ------------------------------------ (o) TENANT'S SHARE OF 78.64%; provided, however, if any OPERATING EXPENSES such Expenses or Taxes are not (PARAGRAPH 8), IN- specifically identifiable as SURANCE EXPENSES (PARA- attributable solely to the Building GRAPH 11) AND PROPERTY and the real property immediately TAXES (PARAGRAPH 14): adjacent to the Building but are attributable to the Project, Tenant's Share of such Expenses and Taxes shall be 27.57% (p) LIABILITY INSURANCE $2,000,000.00 (SUBPARAGRAPH 11(a)): ------------------------------------ ------------------------------------ 2. LEASED PREMISES. (a) PROPERTY TO BE LEASED. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, subject to the terms and conditions contained herein certain floor space (the "Premises") located in the building (the "Building") located (or to be constructed) on that certain real property located at the street address set forth in paragraph 1 hereof (the "Property"). The Building is located in Landlord's Project set forth in paragraph 1 above. The Premises, which are more particularly described on Exhibit A attached hereto and incorporated herein by this reference, shall be deemed to extend from the top surface of subfloor to the bottom surface of roof above but shall not include the common stairways, stairwells, hallways, accessways, and pipes, ducts, conduits, wires and appurtenant fixtures serving exclusively or in common other parts of the Building, and (if the Premises include less than the entire rentable area of any floor) shall not include the remainder of the Floor Common Area (as defined below). The Approximate Square Footage of the Premises is set forth in paragraph 1 above. (b) COMMON AREAS. Tenant shall have, as appurtenant to the Premises, rights to use in common, subject to reasonable rules from time to time made by Landlord of which Tenant is given notice: (i) The common stairways and accessways, loading docks and platforms and any passageways thereto, and the common pipes, ducts, conduits, wires appurtenant equipment serving the Premises; (ii) If the Premises include less than the entire rentable area of any floor, the common lobbies, hallways, toilets and other common facilities (the "Floor Common Area"); and (iii) Common walkways, sidewalks, and driveways necessary for access to the Building; greenbelt areas; and except for parking spaces which may be reserved for persons other than Tenant, parking spaces or area from time to time maintained on the Project for use by tenants in and visitors to the Building and, to the extent from time to time arranged by Landlord, maintained on adjacent real property for such use. (c) RESERVED RIGHTS OF LANDLORD. Notwithstanding the foregoing, Landlord reserves the right from time to time, without unreasonable interference with Tenant's use: (i) To install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment for service to other parts of the Building above the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas, and to replace any pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises which are so located or located elsewhere outside the Premises; Please Initial: /s/ A /s/ CM 2 7 (ii) To alter or relocate any other common facility; provided, however, that substitutions are substantially equivalent or better in quality; and (iii) To alter the boundaries of the Property, grant easements on the Property and dedicate for public use portions thereof without Tenant's consent, provided that no such grant or dedication shall unreasonably interfere with Tenant's use of the Premises or otherwise cause Tenant to incur cost or expense. 3. COMPLETION OF PREMISES. (a) PLANS. Landlord and Tenant have approved the preliminary plans and outline specifications (the "Preliminary Plans") identified in Exhibit B for the construction of improvements in and to the Premises. If necessary, Tenant shall cause to be prepared final plans and specifications (the "Final Plans") substantially in conformity with the Preliminary Plans, which need not include working detail drawings. The term "Plans" shall hereinafter mean the Preliminary Plans and, if and when prepared, the Final Plans. The Final Plans, if necessary, shall be delivered to Tenant as soon as reasonably possible from the date hereof, subject to any period of delay encountered by Tenant in such preparation as a result of requests by Landlord for changes in the Final Plans subsequent to the date hereof. Within ten (10) days after delivery of the Final Plans, Tenant shall set forth in writing, with particularity and precision, any corrections or changes necessary to bring the Final Plans into substantial conformity with the Preliminary Plans, except that Tenant may not object to any logical development or refinement of the Preliminary Plans. Failure to deliver to Landlord written notice of any such corrections or changes within said ten (10) day period shall constitute approval of the Final Plans by Tenant. Following such approval of the Final Plans, both parties shall endorse approval for filing purposes thereon, in duplicate, and thereafter changes may be made only in accordance with subparagraph (d) below. (b) SCHEDULED COMMENCEMENT DATE. Tenant, at its sole expense, shall proceed diligently with construction and completion of the Premises substantially in accordance with the Plans. Tenant shall complete the Premises and they shall be Ready for Occupancy (as defined below) by Tenant on approximately the Scheduled Commencement Date set forth in paragraph 1 above; provided, however, that such Scheduled Commencement Date shall be extended for a period of time equal to the period of any delay or delays encountered by Landlord affecting construction because of fire, earthquake, inclement weather, or other acts of God, acts of the public enemy, riot, insurrection, governmental regulations of the sales of materials or supplies or the transportation thereof, strikes or boycotts, shortages of material or labor, Tenant's early entry under the provisions of subparagraph (g) below, changes in the Plans pursuant to subparagraph (d) below, or any other cause beyond the control of Landlord. (d) CHANGES. Tenant shall have the right to request changes in the Plans, which request shall not be unreasonably denied, provided, however, that: (i) such right shall not be exercised unreasonably, (ii) no such request shall affect any structural change in the Premises. (e) READY FOR OCCUPANCY. The Premises shall be deemed to be ready for occupancy ("Ready for Occupancy") when the architect or engineer in charge of the work of construction certifies: (i) that the work of construction has been substantially completed in accordance with the Plans; and (ii) the date of such completion. Tenant shall diligently complete, as soon as Please Initial: /s/ A /s/ CM 3 8 reasonably possible, any items work and adjustment not completed when the Premises are Ready for Occupancy. (f) CONSTRUCTION REPRESENTATIVE. In connection with the original construction of the Premises each party shall be bound by its Construction Representative set forth in paragraph 1 above. A party may designate a substitute Construction Representative by giving written notice to the other party. (g) EARLY ENTRY. With the prior written consent of Landlord, Tenant may, at any time prior to the commencement of the Term, at its sole risk, enter upon and install such trade fixtures and equipment in the Premises as it may elect; provided, however, that (ii) Tenant shall execute an indemnity agreement in favor of Landlord in form and substance satisfactory to Landlord; (iii) Tenant shall pay for and provide evidence of insurance satisfactory to Landlord; and (iv) Tenant shall pay utility charges reasonably allocated to Tenant by Landlord. Tenant shall not use the Premises for the storage of inventory or otherwise commence the operation of business prior to the commencement of the operation of business prior to the commencement of the Term without the express prior written consent of Landlord. (h) QUALITY OF CONSTRUCTION. All work shall be done in a good and workmanlike manner and in compliance with all applicable laws and lawful ordinances, bylaws, regulations and orders of governmental authority and of the insurers of the Improvements. Landlord assumes no liability for special, consequential or incidental damages of any kind. There are no representations, warranties or guaranties, express or implied, including warranties of merchantability or use of the Premises, except as are expressly set forth herein. Tenant hereby waives the benefit of any rule that disclaimers of warranty shall be construed against Landlord. 4. TERM. The Term of this Lease, which shall be for the period set forth in paragraph 1 above, shall commence on the first to occur of the following dates (the "Commencement Date") (it being agreed that if the Term of this Lease shall not commence within one (1) year of the Scheduled Commencement Date this Lease shall terminate and be of no further force and effect): (a) The date on which Suite A102 or A103 is ready for occupancy, or (b) The date on which Tenant actually commences to do business in Suites A102 or A103. 5. RENT. (a) FIXED RENT. Tenant shall pay Landlord as fixed rent for the Premises a sum equal to the Fixed Rent set forth in paragraph 1 on or before the first day of each and every calendar month during the Term of this Lease, except that Fixed Rent for the first full calendar month of the Term shall be payable simultaneously with the execution of this Lease by Tenant. Please Initial: /s/ A /s/ CM 9 4. Term. (d) The commencement date on Suite A104 will be no later than February 15, 1997. (e) The commencement date on Suites A103 and A102 will be no later than twelve (12) weeks after both parties have executed the lease unless as extended pursuant to paragraph 3(b). Please Initial: /s/ A /s/ CM 4(a) 10 (c) PRO RATA RENT. Rent for any period during the Term which is for less than one month shall be a pro rata portion of the Rental Period installment. Rent shall be payable, without deduction or offset, in lawful money of the United States to Landlord at the address stated herein or to such other persons or at such other places as Landlord may designate in writing. (d) NET LEASE. This Lease is what is commonly called a "net lease", it being understood that Landlord shall receive the Rent set forth in this paragraph free and clear of any and all impositions, taxes, except income taxes, liens, charges or expenses of any nature whatsoever in connection with its ownership and leasing of the Premises. In addition to the Rent provided in this paragraph, Tenant shall pay all impositions, taxes, insurance premiums, operating charges, costs and expenses which arise or may be contemplated under any provisions of this Lease during the Term. All of such charges, costs and expenses shall constitute additional rent, and upon the failure of Tenant to pay any of such costs, charges or expenses, Landlord shall have the same rights and remedies as otherwise provided in this Lease for the failure of Tenant to pay Rent. It is the intention of the parties hereto that Tenant shall in no event be entitled to any abatement of or reduction in Rent or additional rent payable hereunder, except as expressly provided herein. (e) REIMBURSABLE EXPENSES. The sums payable by Tenant for Operating Expenses, Insurance Expenses and Property, Taxes (hereinafter sometimes cumulatively referred to as the "Reimbursable Expenses") under subparagraphs 8(a), 11(b) and 14(a) of this Lease shall be paid in accordance with the following procedures: (i) Landlord shall prepare an annual statement (the "Annual Statement") setting forth the sum of the Reimbursable Expenses for the calendar year ending on the prior December 31 and Tenant's Share thereof and setting forth the estimated Reimbursable Expenses that will be incurred by Landlord during the current calendar year ending on the next following December 31 and Tenant's Share thereof. (ii) Landlord shall endeavor to give to Tenant such Annual Statement on or before March 1 of each calendar year throughout the Term of the Lease, but Landlord's failure to provide Tenant with an Annual Statement by said date shall not constitute a Please Initial: /s/ A /s/ CM 5 11 2.(b) (iv) Landlord shall provide, throughout the initial term and any renewal option periods, employee and visitor parking in the building area for one hundred (100) cars. All one hundred (100) stalls shall be reserved and free for the initial term and any renewal option periods. Parking will be uncovered and the number of stalls will be reduced in proportion with their leased square footage. Please Initial: /s/ A /s/ CM 5(a) 12 waiver by Landlord of its right to require payment by Tenant of Tenant's Share of estimated Reimbursable Expenses or actual Reimbursable Expenses. (iii) Tenant's Share of estimated Reimbursable Expenses for the calendar year in which the Annual Statement is received shall be divided by twelve (12) and one such installment shall be paid concurrently with each rental payment thereafter until receipt by Tenant of the next Annual Statement. In addition, Tenant shall pay in full concurrently with the first monthly rent payment due following receipt of the Annual Statement an amount equal to the excess of the monthly installment required to be paid under the most current Annual Statement over the monthly installment made under the preceding Annual Statement (or the amount specified in subparagraph (v) below, as applicable) multiplied by the number of months from January through the month in which the Annual Statement is received by Tenant. (iv) If Tenant's Share of actual Reimbursable Expenses for the past calendar year as shown on the Annual Statement is greater than the payments made by Tenant for that calendar year, then concurrently with the first monthly rent payment due following receipt by Tenant of the Annual Statement, Tenant shall pay in full an amount equal to such excess. If Tenant's Share of actual Reimbursable Expenses for the past calendar year as shown on the Annual Statement is less than the payments made by Tenant for that calendar year, the amount of such overpayment shall be credited against the next monthly rent payment(s) falling due. (vi) Even though the Term has expired and the Tenant has vacated the Premises when the final determination is made of Tenant's Share for the calendar year in which the Lease expires, Tenant shall immediately pay the excess of Tenant's Share for the portion of such year in which Tenant was in occupancy over the estimated payments made by Tenant for that calendar year and, conversely, any overpayment made shall be immediately rebated by Landlord to Tenant. (vii) An administrative charge equal to five percent (5%) of the Reimbursable Expenses shall be added to each installment payment due under this subparagraph (e) (including the estimated payments and any reconciliation payment), which administrative charge shall be reflected in the Annual Statement, shall be payable in addition to the Reimbursable Expenses and shall be intended to compensate Landlord for supervision, administrative and clerical costs. (viii) Each Annual Statement shall be prepared in accordance with GAAP and each determination and Annual Statement, certified by Landlord, shall be final and conclusive on both parties, including any determination made by Landlord of the appropriate estimated payment during the period prior to issuance of the first Annual Statement to Tenant. 6. SECURITY. (a) SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution hereof the Security Deposit set forth in paragraph 1 above as security for Tenant's faithful performance of Tenant's obligations hereunder. If Tenant fails to pay Rent or any other charges payable by Tenant hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may at its option use, apply or retain all or any portion of the Security Deposit (i) to remedy Tenant's defaults in the payment of Rent or any other sums payable by Tenant pursuant to the terms hereof, (ii) to repair any damage to the Premises, (iii) to clean and otherwise maintain the Premises, or (iv) to compensate Landlord for any other loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Please Initial: /s/ A /s/ CM 6 13 5.e(ix) Tenant may audit the Landlord records pertaining to Tenant only. The audit will take place at the Hewson Properties, Inc., headquarters with time given to the Landlord to pull records out of storage. Tenant may have up to nine months after receipt of actual expense reconciliation for the prior year to audit Landlord's records. If audit reveals ten percent (10%) or over miscalculation, then Landlord will pay for the audit. Please Initial: /s/ A /s/ SG Please Initial: /s/ A /s/ CM 6(a) 14 Security Deposit, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full amount hereinabove stated and Tenant's failure to do so shall be a breach of and a default under this Lease. Landlord shall not be required to keep the Security Deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, the Security Deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration of the Term hereof, after Tenant has vacated the Premises. 7. USE. (a) GENERAL. The Premises shall be used and occupied only for the Permitted Uses set forth in paragraph 1 above and for no other purpose. (b) COMPLIANCE WITH LAW. Tenant shall, at Tenant's sole cost and expense, comply with all present and future laws, ordinances, orders, declarations of covenants and restrictions, rules, regulations and requirements of all federal, stare and municipal governments, courts, departments, or any other body exercising functions similar to those of any of the foregoing, foreseen or unforeseen, ordinary as well as extraordinary; which may be applicable to the Premises, the Building, and the Property or to the use or manner of use of the Premises. Tenant shall obtain any required certificate of occupancy with respect to its use of the Premises, the Building and the Property within thirty (30) days from the Commencement Date and shall deliver a copy thereof to Landlord within such thirty (30) day period; provided, however, Landlord shall obtain any certificate of occupancy required for the shell of the Building and any improvements to the Premises to be made by Landlord pursuant to paragraph 3 above. Tenant shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance. (c) EXISTING TITLE AND CONDITION OF PREMISES. Tenant hereby accepts the Premises in their condition existing as of the Commencement Date and also accepts the Premises and this Lease subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, subject to all covenants, conditions and restrictions affecting the Property, Project or Premises and subject to all liens, claims and encumbrances currently existing against the Premises or any part thereof, including all matters disclosed by any of the foregoing or by any exhibits attached hereto. Landlord, in accordance with (and except as otherwise provided in) subparagraph 8(c) below, shall be responsible for causing the roof and bearing walls of the Premises to be in good condition and repair at the Commencement Date and shall also cause the heating, ventilating and air conditioning system, the plumbing system and the electrical system to be in good operating condition as of the Commencement Date. All such systems shall be deemed in the condition required at the Commencement Date unless Tenant gives Landlord written notice of any defects in such systems on or before thirty (30) days after the Commencement Date. Except for any representation or warranty which may be specifically set forth in this Lease, Tenant acknowledges that neither Landlord nor Landlord's agents have made any representations or warranties as to the Premises, including without limitation, any representation or warranty as to condition or fitness of the Building or the suitability of the Building for the conduct of Tenant's business. (d) SIGNS. Tenant shall not erect or install on any exterior or interior window, any door, or any exterior wall any signs, advertising media, placards, trademarks, drapes, screens, tinting materials, shades, blinds or similar items, without first securing Landlord's written permission. Landlord's permission will not be unreasonably withheld. All signs shall comply with all applicable governmental requirements, shall conform Please Initial: /s/ A /s/ CM 7 15 to the design, motif and decor of the Property and shall be in good taste, as determined in Landlord's reasonable discretion. Landlord may also establish such sign criteria as Landlord deems appropriate for the Property and Tenant shall cause all signs which are located on the Premises and are visible from outside the Premises to conform to such sign criteria. Tenant shall properly maintain all approved signs. Upon expiration of the Lease, Tenant promptly shall remove all signs placed in and around the Premises by Tenant and shall repair any damage to the Premises, Building or other portions of the Project caused by the removal of such signs. (e) GOVERNMENTAL REGULATION. In addition to the general obligation of Tenant to comply with laws and without limitation thereof, Landlord shall not be liable to Tenant nor shall this Lease be affected if any parking privileges appurtenant to the Premises, the Building and the Property are impaired by reason of any moratorium, initiative, referendum, statute, regulation, or other governmental decree or action which could in any manner prevent or limit the parking rights of Tenant hereunder. See Page 8A. Any governmental charges or surcharges or other monetary obligations imposed relative to parking rights with respect to the Premises, the Building and the Property shall be considered as Property Taxes and shall be payable by Tenant under the provisions of paragraph 14 hereof. (f) SECURITY DEVICES. Tenant may not install any alarm boxes, foil protection tape or other security equipment on the Premises without Landlord's prior written consent. Landlord's permission will not be unreasonably withheld. 8. MAINTENANCE AND REPAIRS. (a) OPERATING EXPENSES. As additional rent during the Term, Tenant shall pay to Landlord an amount equal to the product obtained by multiplying (i) Tenant's Share of Operating Expenses (as set forth in paragraph 1 above) by (ii) the amount which Landlord expends for Operating Expenses for the Term hereof. "Operating Expenses" shall include all reasonable and necessary expenses actually incurred by Landlord for the operation, cleaning, maintenance (including but not limited to preventive maintenance), repair and property management of the Building and the Property and, if applicable, the Project, including, without limitation, the roof and walls (other than for the structural repair of such roof and walls), utility systems and related equipment serving all of the Building or the Project and all walks, driveways, parking areas, loading areas, lawns and landscaping. Among the items included in Operating Expenses under the foregoing definition are expenses for utilities furnished to the common areas of the Building and Property and fees and charges paid to the property manager for the Building; provided, however, the amount of the property manager's fee included in Operating Expenses of the Building for any calendar year shall not exceed an amount equal to five percent (5%) of the gross receipts received by Landlord from the Building for such calendar year. If Landlord determines that a utility system and related equipment or portion thereof serves one or more tenant suites in addition to the Premises but less than all of the tenant suites in the Building or the Project, the system and equipment or portion thereof, as applicable, which serves the Premises and such additional suites, to the extent the operation, cleaning, maintenance, repair and/or replacement thereof is not the responsibility of the applicable utility company, shall be deemed a part of the Building and the Project for the purposes of this subparagraph 8(a), except that the amount of the reimbursement by Tenant to Landlord for such items shall be separately stated and shall be determined by multiplying the reasonable and necessary expenses incurred by Landlord for such items by the percentage which the Premises is of the total space leased or available for lease which is served by such systems and equipment or portion thereof instead of by the Tenant's Share of Operating Expenses as set forth in paragraph 1. Sums payable by Tenant pursuant to this subparagraph shall be paid in accordance with the provisions of subparagraph 5(e) above. Landlord may enter upon the Premises to the extent necessary or appropriate to do any work described in this subparagraph 8(a), Landlord shall not be liable for any inconvenience, annoyance, disturbance, loss of business or other damage of Tenant by reason of performing any such work or on account of bringing materials, tools, supplies or equipment into or through the Premises during the course thereof, and the obligations of Tenant under this Lease shall nor be affected thereby. Capital Expenditures will be amortized over the life of the item. ADA costs will not be included in Operating Expenses. Please Initial: /s/ A /s/ CM 8 16 8. operating expenses will not exceed more than a five percent (5%) increase on controllable expenses. (Excluding property taxes and insurance) per year. The first year's expenses will be the actual expenses incurred in 1997. Please Initial: /s/ A /s/ SG Please Initial: /s/ A /s/ CM 8(a) 17 (b) TENANT'S MAINTENANCE. Tenant shall, at Tenant's sole cost and expense, keep and maintain the Premises, subfloors and floor coverings in good repair and in a clean and safe condition, casualties covered by insurance coverage excepted to the extent of proceeds received by Landlord. Tenant's obligations shall include the cleaning, operation, maintenance, repair and replacement of all utility systems and related equipment and portions thereof located within the Premises except to the extent Landlord performs such cleaning, operation, maintenance, repair and/or replacement under subparagraph 8(a) above because all or portions of the system and equipment serve more than one tenant suite. Tenant shall, at Tenant's own expense, immediately replace all interior, exterior or other glass in or about the Premises that may be broken during the Term with glass at least equal to the specification and quality of the glass so replaced. If Tenant fails to perform Tenant's obligations under this subparagraph, Landlord may at its option enter upon the Premises after ten (10) days prior written notice to Tenant and put the same in good order, condition and repair, and the cost thereof together with interest thereon at the rate of eighteen percent (18%) per annum shall become due and payable as additional rental to Landlord together with Tenant's next monthly Rent payment. Nothing herein shall imply any duty upon the part of Landlord to do any such work and the performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Landlord may, during the progress of any such work in or on the Premises, keep and store therein all necessary materials, tools, supplies and equipment. Landlord shall not be liable for the inconvenience, annoyance, disturbance, loss of business or other damage of Tenant by reason of making such repairs or the performance of any such work, or on account of bringing materials, tools, supplies or equipment into or through the Premises during the course thereof, and the obligations of Tenant under this Lease shall not be affected thereby. (c) LANDLORD'S OBLIGATIONS TO REPAIR. Landlord shall, at its expense, after written notice from Tenant, repair in a prompt and diligent manner any damage to structural portions of the roof and bearing walls of the Premises; provided, however, that if such damage is caused by an act or omission of Tenant or Tenant's agents, invitees, employees or contractors, then such repairs shall be at Tenant's expense, payable to Landlord pursuant to this paragraph. There shall be no abatement of Rent during the performance of such work. Landlord shall not be liable to Tenant for injury or damage that may result from any defect in the construction or conditions of the Premises and Tenant shall seek recovery for such injury or damage solely from Tenant's insurance and/or any other persons or entities which may be liable to Tenant. Tenant waives any right to make repairs at the expense of Landlord under any law, statute or ordinance now or hereafter in effect unless Tenant has given Landlord written notice of the need for such repairs, such repairs are the obligation of Landlord under this Lease and Landlord has failed to make the needed repairs or started the process of repairing within ten (10) business days from the receipt of such notice. (d) SURRENDER. On the last day of the Term, or on any sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in the same condition as when received, broom clean, ordinary wear and tear alone excepted. Tenant shall repair any damage to the Premises, the Building and the Project occasioned by the removal of Tenant's alterations and improvements (including, without limitation, its trade fixtures, furnishings and equipment), which repair shall include, without limitation, the patching and filling of holes and repair of structural damage. 9. UTILITIES. Tenant shall pay for water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion to be determined by Landlord of all charges jointly metered with other premises, and Landlord's determination thereof, in good faith, shall be conclusive. Landlord reserves the right to grant easements on the Premises, and to dedicate for public use portions thereof, without Tenant's Please Initial: /s/ A /s/ CM 9 18 8.(b) TENANT'S MAINTENANCE. The cost of new HVAC units will be paid for by the Landlord and passed through to the Tenant over the life of the item as part of operating expenses. Please Initial: /s/ S /s/ CW 9(a) 19 consent provided that no such grant or dedication shall interfere with Tenant's use of the Premises or otherwise cause Tenant to incur cost or expense. From time to time upon Landlord's demand, Tenant shall execute, acknowledge and deliver to Landlord, in accordance with Landlord's instructions, any and all documents or instruments necessary to effect Tenant's covenants herein. 10. ALTERATIONS AND ADDITIONS. (a) LIMITATION. Tenant shall not, without Landlord's prior written consent, which permission shall not be unreasonably withheld, make any alterations, improvements, additions, or utility installations (which term "utility installations" shall include ducting, power panels, fluorescent fixtures, space heaters, conduits and wiring) in, on or about the Premises, except for interior nonstructural alterations to the Premises costing less than Ten Thousand Dollars ($10,000) in the aggregate over any one (1) year period. As a condition to giving such consent, Landlord may require that Tenant agree to (i) remove any such alterations, improvements, additions or utility installations at the expiration of the Term and restore the Premises to their prior condition or, in the alternative, (ii) require that such alterations, improvements, additions or utility installations shall become the property of Landlord and shall be left by Tenant upon the expiration of the Term. As a further condition to giving such consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, lien and completion bonds in an amount equal to one hundred five percent (105%) of the estimated cost of such improvements to insure Landlord against any liability for mechanics' and materialmen's liens and to insure completion of the work. (b) LIENS. Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use on or in connection with the Premises, which claims are or may be secured by any mechanics' or materialmens' lien against the Premises or any interest therein. Tenant shall give Landlord not less than ten (10) days notice prior to the commencement of any work on the Premises, and Landlord shall have the right to post notices of non-responsibility in or on the Premises as provided by law. (c) REMOVAL. Unless Landlord requires their removal as set forth in subparagraph (a) above or otherwise consents to such removal, all alterations, improvements, additions and utility installations which may be made on or to the Premises shall become the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the Term. Notwithstanding the provisions of this subparagraph (c), Tenant's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Tenant and may be removed by Tenant subject to provisions of paragraph 8(d) above. 11. INSURANCE. (a) GENERAL LIABILITY. Tenant at its sole cost and expense shall maintain commercial general liability insurance ("Liability Insurance") on an "occurrence basis" against claims for "personal injury," including without limitation, bodily injury, death or property damage, occurring upon, in or about the Premises, the Building and the Property, such insurance to afford immediate minimum protection, at the time of the inception of this Lease, and at all times during the Term, to a limit of not less than Two Million Dollars ($2,000,000) with respect to personal injury or death to any one or more persons or to damage to property. Such insurance shall designate, and be for the benefit of, Tenant as the named insured and Landlord as an additional named insured. Such insurance shall also include coverage against liability for bodily injury or property damage arising out of the use, by or on behalf of Tenant, or any other person or organization, of an owned, non-owned, leased or hired automotive equipment in the conduct of any and all operations called for under this Lease. The limits of said insurance shall not, however, limit the liability of Tenant hereunder. (b) EXTENDED COVERAGE. During the Term, Landlord shall procure and maintain in full force and effect with respect to the Building, a policy or policies of fire insurance with extended coverage endorsement attached, including vandalism and malicious mischief coverage, and any other endorsements (such as earthquake coverage) which Landlord may elect to obtain or which may be required by the holder of any fee or leasehold mortgage, which insurance coverage may be in an amount up to one hundred percent (100%) of the full insurance replacement value (replacement cost new, including debris removal and demolition thereof. 10 Please Initial: /s/ A /s/ CM Please Initial: /s/ A /s/ AG 20 10. ALTERATIONS AND ADDITIONS. A response from the Landlord will be given to Tenant within ten (10) business days from Tenant's written request. Landlord will let the Tenant know at the time of approval if the alteration or addition needs to be removed or restored at the time of such approval. If not stated at that time then the Tenant will be under no obligation to remove or restore the alteration or addition. 10.(a) Please Initial: /s/ A /s/ CM 21 Landlord shall further obtain rental abatement insurance against abatement or loss of Rent in case of fire or other casualty, in an amount at lease equal to the amount of the Rent payable by Tenant during one (1) year next ensuing as reasonably determined by Landlord. Tenant shall pay to Landlord, in accordance with provisions of subparagraph 5(e) above, an amount equal to Tenant's Share of Insurance Expenses multiplied by the premium or premiums on insurance maintained by Landlord pursuant to this subparagraph ("Insurance Expenses"), with appropriate proration at the beginning and end of the Term. (c) POLICIES. Insurance required hereunder shall be by companies rated A/X or better in "Best's Insurance Guide" licensed to do business in the state in which the Premises are located and acceptable to Landlord and the holder of any mortgage or deed of trust on the Premises or any part or portion thereof. Tenant shall deliver to Landlord copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Landlord. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days written notice to Landlord. Tenant shall, within ten (10) days of the expiration of such policies, furnished Landlord with renewals or "binders" thereof, or Landlord may order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant upon demand. Each such policy or certificate therefor issued by the insurer shall to the extent obtainable contain (i) a provision that no act or omission of Tenant which would otherwise result in forfeiture or reduction of the insurance therein provided shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained and (ii) an agreement by the insurer that such policy shall not be cancelled without at least thirty (30) days prior written notice by registered mail to Landlord. Tenant shall not do or permit to be done anything which shall invalidate the insurance policies referred to herein. If Tenant shall fail to produce and maintain any insurance required to be maintained by it by virtue of any provision of this paragraph, Landlord may, but shall not be required to, procure and maintain the same, but at the expense of Tenant. (d) WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the partners, officers, employees, agents and representatives of the other, for loss of or damage to such waiving party or its property or the property of the other under its control to the extent that such loss or damage is insured against under any insurance policy in force at the time of such loss or damage. Tenant shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in the Lease. (e) TENANT'S CONTENTS. Tenant shall assume the risk of damage to any fixtures, goods, inventory, merchandise, equipment, furniture and leasehold improvements which remain the property of Tenant or as to which Tenant retains the right of removal from the Premises, and Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom relative to such damage. Tenant shall maintain the following insurance coverage with respect to such items during the Term: (i) Against fire, extended coverage, and vandalism and malicious mischief perils in an amount not less than ninety percent (90%) of the full replacement cost thereof; (ii) Broad form boiler and machinery insurance on a blanket repair and replacement basis with limits per accident not less than the replacement cost of all leasehold improvements and of all boilers, pressure vessels, air conditioning equipment, miscellaneous electrical apparatus and all other insurable objects owned or operated by the Tenant or by others (other than Landlord) on behalf of Tenant in the Premises, or relating to or serving the Premises; and; (iii) Business interruption insurance in such an amount as will reimburse Tenant for direct or indirect loss of earnings attributable to all such perils insured against in subparagraphs 11(e)(i) and (ii) hereinabove. 11 22 (f) WORKMEN'S COMPENSATION. Tenant shall, at its own cost and expense, keep and maintain in full force and effect during the Term, a policy or policies of workmen's compensation insurance covering all Tenant's employees working in the Premises, and shall furnish Landlord with certificates thereof. 12. INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY. (a) GENERAL. In addition to any other obligations of Tenant hereunder, including the obligations of Tenant, to provide insurance, Tenant shall indemnify and hold Landlord harmless for, from and against any and all claims arising from Tenant's use of the Premises, or from the conduct of Tenant's business or from any activity, work or things done, permitted or suffered by Tenant in or about the Premises or elsewhere and shall further indemnify and hold Landlord harmless for, from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any negligence of Tenant, or any of Tenant's agents, contractors, or employees, and for, from and against all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel satisfactory to Landlord; provided, however, the foregoing indemnity shall not apply to claims made as a result of the gross negligence or intentional misconduct of Landlord. Tenant, as a material part of the consideration to Landlord for Landlord's execution of this Lease, also hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises arising from any cause whatsoever; hereby waives all claims in respect thereof against Landlord unless caused by Landlord's gross negligence and agrees that all claims with respect thereto shall be made solely against any insurance carried by Tenant and/or against any other persons or entities which may be liable for such claims, unless caused by Landlords gross Please Initial /s/ A /s/ CM (b) TENANT'S BUSINESS. In addition to any other obligation of Tenant hereunder, including any obligation of Tenant to provide insurance, Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, or any other person in or about the Premises, nor shall Landlord be liable for injury to the person of Tenant or Tenant's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause whatsoever, resulting from conditions arising upon the Premises, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing, the same is inaccessible to Tenant unless caused by Landlord's gross negligence. Instead, Tenant shall seek recovery for any such injury, loss or damage solely from any insurance carried by Tenant and/or from any other persons or entities which may be liable to Tenant for such injury, loss or damage. Please Initial /s/ A /s/ CM 13. DAMAGE OR DESTRUCTION; OBLIGATION TO REBUILD. (a) LANDLORD'S OBLIGATION TO REBUILD. If the Premises are damaged or destroyed during the Term, Landlord shall, except as hereinafter provided, diligently repair or rebuild them to substantially the condition in which they existed immediately prior to such damage or destruction; provided that any damage which is estimated in good faith by Landlord to be under Two Thousand Five Hundred Dollars ($2,500.00) shall be repaired by Tenant, and Landlord shall reimburse Tenant upon demand for expenses incurred in such repair work to the extent of any proceeds received by Landlord from extended coverage insurance maintained pursuant to paragraph 11 above. (b) ABATEMENT OF RENT. Rent due and payable hereunder shall be abated, but only to the extent of any proceeds received by Landlord from rental abatement insurance maintained pursuant to paragraph 11 above, during the period commencing with such damage or destruction and ending with a substantial completion by Landlord of the work of repair or reconstruction which Landlord is obligated or undertakes to do. (c) OPTION TO TERMINATE. If the Building or the Premises are damaged or destroyed to the extent that Landlord determines that the same cannot, with reasonable diligence, be fully repaired or restored by Landlord within one hundred eighty (180) days after the date of the Please Initial /s/ A /s/ CM 12 23 12. INDEMNITY: EXEMPTION OF TENANT FROM LIABILITY. (a) GENERAL. In addition to any other obligations of Landlord hereunder, Landlord shall indemnify and hold Tenant harmless for, from and against any and all claims arising from Landlord's use of the Premises, or from the conduct of Landlord's business or from any activity, work or things done, permitted or suffered by Landlord in or about the Premises and all claims arising from any breach or default in the performance of any obligation on Landlord's part to be performed under the terms of this Lease, unless caused by Tenant's gross negligence. Please Initial: [ILLEGIBLE] ---------------------- [ILLEGIBLE] ---------------------- 24 damage or destruction, the sole right of both Landlord and Tenant shall be the option to terminate this Lease as hereinafter provided; provided, however, Tenant shall not have the right to terminate this Lease unless Landlord reasonably determines that the Premises cannot be so repaired or restored within such one hundred eighty (180) day period of time. Landlord shall determine whether the Building and, if applicable, the Premises can be fully repaired or restored within the one hundred eighty (180) day period, and Landlord's determination shall be conclusive on Tenant. Landlord shall notify Tenant of its determination, in writing, within thirty (30) days after the date of the damage or destruction. If Landlord determines that the Building, including the Premises, can be fully repaired or restored within the one hundred eighty (180) day period, or if it is determined that such repair or restoration cannot be made within said period but no party having the right to do so elects to terminate within thirty (30) days from the date of said determination, this Lease shall remain in full force and effect and Landlord shall diligently repair and restore the damage as soon as reasonably possible. (d) UNINSURED CASUALTIES. Notwithstanding anything contained herein to the contrary, in the event of damage to or destruction of all or any portion of the Building which is not fully covered (except for deductible amounts) by the insurance proceeds received by Landlord under the insurance policies required to be maintained pursuant to paragraph eleven (11) above or in the event that any portion of such insurance proceeds must be paid over to or are retained by the holder of any mortgage or deed of trust on the Property or Premises, Landlord may terminate this Lease by written notice to Tenant, given within thirty (30) days after the date of notice to Landlord that said damage or destruction is not so covered or that the proceeds are not available for repair of the damage or destruction. If Landlord does not elect to terminate this Lease, the Lease shall remain in full force and effect and the Building shall be repaired and rebuilt in accordance with the provisions for repair set forth in paragraph 8 above. (e) TENANT'S WAIVER. With respect to any destruction which Landlord is obligated to repair or may elect to repair under the terms of this paragraph, Tenant hereby waives all right to terminate this Lease pursuant to rights otherwise presently or hereafter accorded by the provisions of Arizona Revised Statutes Section 33-343 or other applicable laws to tenants, except as expressly otherwise provided herein. 14. TAXES. (a) TENANT'S SHARE OF PROPERTY TAXES. Tenant shall pay to Landlord Tenant's Share of Property Taxes (as set forth in paragraph 1 hereof) multiplied by the sum of the following: all real estate taxes and all other taxes relating to the Premises, the Building and the Property, all other taxes which may be levied in lieu of real estate taxes, assessments, and other governmental charges, or levies, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature for public improvements, services or benefits (collectively, "Property Taxes"), which are assessed, levied, confirmed, imposed or become a lien upon the Premises, the Building or the Property, or become payable during the Term; provided, however that: (i) any Property Taxes shall be prorated between Landlord and Tenant so that Tenant shall pay only that proportion thereof which the part of such period within the Term bears to the entire period; and (ii) any such sum payable by Tenant, which would not otherwise be due until after the date of the termination of this Lease, shall be paid by Tenant to Landlord upon such termination. Any sum payable by Tenant pursuant to this subparagraph for any period during the Term shall be paid by Tenant in accordance with the provisions of subparagraph 5(e) above. (b) TENANT'S PERSONAL PROPERTY. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained on the Premises or elsewhere. Tenant shall cause such trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the Premises, the Building and the Property. Please Initial: /s/ A /s/ CM 13 25 (c) RENT TAX. Tenant shall pay to Landlord a sum equal to the amount which Landlord is required to pay or collect by reason of any privilege tax, sales tax, gross proceeds tax, rent tax, or like tax levied, assessed or imposed by any governmental authority or subdivision thereof, upon or measured by any Rent, Reimbursable Expense, or other charges or sums required to be paid or improvements to be made by Tenant under this Lease. Such sum shall be paid simultaneously with the payment by Tenant to Landlord of the Fixed Rent or other charge to which such tax is attributable or, in the case of a tax not attributable to Fixed Rent or other charges, at such time as Landlord shall demand payment thereof. Nothing contained in this Lease shall require Tenant to pay any franchise, corporate, estate, inheritance, succession, or transfer tax of Landlord or any tax upon the net income of Landlord. 15. CONDEMNATION. (a) RENT REDUCTION OR LEASE TERMINATION. If the Premises or any portion thereof is taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs (the "Condemnation Date") and the Rent shall be reduced (as of the Condemnation Date) as provided below. If (i) more than ten percent (10%) of the Premises is taken by condemnation and (ii) if the balance of the Premises remaining after such condemnation is not reasonably suitable for the use to which the Premises were being put immediately prior to the condemnation, Landlord or Tenant may, at either's option, to be exercised in writing only within thirty (30) days after Landlord shall have given Tenant written) notice of such taking (or in the absence of such notice, within thirty (30) days of the Condemnation Date) terminate this Lease as of the Condemnation Date. If neither Landlord nor Tenant terminates this Lease in accordance with the foregoing, or in the event that that portion of the Premises taken by condemnation is not sufficiently large so as to give rise to the right to terminate this Lease as above provided, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Fixed Rent shall be reduced (as of the Condemnation Date) in the proportion that the area taken by condemnation bears to the total area of the Premises. (b) AWARD. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any award specifically attributed by the condemning authority to loss or damage to Tenant's trade fixtures and removable personal property or to Tenant's relocation costs. In the event that this Lease is not terminated by reason of such condemnation, Landlord shall, to the extent of severance damages received by Landlord in connection with such condemnation and not paid to or retained by the holder of any mortgage or deed of trust on the Property or the Premises, repair any damage to the Premises caused by such condemnation except to the extent that Tenant has been reimbursed therefor by the condemning authority (in which event such reimbursement to Tenant shall also be applied to such repair). Please Initial: /s/ A /s/ CM 14 26 16. ASSIGNMENT AND SUBLETTING. (a) CONSENT. Tenant shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises without Landlord's prior written consent, which consent Landlord shall not unreasonably withhold. Landlord may, however, withhold its consent to such assignment, transfer, mortgage, subletting or other transfer or encumbrance pursuant to the preceding sentence for substantive reasons including, without limitation, the financial condition of the proposed assignee or transferee. Any attempted assignment, transfer, mortgage, subletting or encumbrance without such consent shall be void and shall constitute a breach of this Lease. The consent of Landlord to any one assignment, transfer, mortgage, subletting, or encumbrance shall not be deemed to be a consent to any subsequent assignment, transfer, mortgage, subletting, or encumbrance. Tenant to provide 30 day notice prior to transfer of more than 50% of the stock or ownership in tenant, or merger or consolidation along with adequate financial information to inform Landlord. (b) TENANTS CONTINUING LIABILITY. Regardless of Landlord's consent, no subletting or assignment shall alter the primary liability of Tenant to pay the Rent or release Tenant of Tenant's obligation to perform all other obligations to be performed by Tenant hereunder unless Landlord's written consent shall so specifically provide, and Landlord under no circumstances shall be obligated to release Tenant from any such liability. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. (c) INFORMATION. In connection with any proposed assignment or sublease, Tenant shall submit to Landlord in writing: (i) The name of the proposed assignee or sublessee; (ii) Such information as to the financial responsibility and standing of said assignee or sublessee as Landlord may reasonably require; and (iii) All of the terms and conditions upon which the proposed assignment or subletting is to be made. (d) EXCESS SUBLEASE RENTAL. If for any sublease or assignment, Tenant receives rent or other consideration, either directly or indirectly (by performance of Tenant's obligations or otherwise) and either initially or over the Term of the sublease or assignment, in excess of the Fixed Rent, Adjustments and additional rent called for hereunder, or in the case of the sublease or assignment of a portion of the Premises, in excess of such Fixed Rent, Adjustments and additional rent fairly allocable to such portion, after appropriate adjustments to assure that all other payments called for hereunder are appropriately taken into account, Tenant shall pay to Landlord, at the same time as Fixed Rent is due hereunder, one-half (1/2) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. (e) RELEASE. Whenever Landlord conveys its interest in the Premises, Landlord shall be automatically released from the further performance of covenants on the part of Landlord herein contained, and from any and all further liability, obligations, costs and expenses, demands, causes of action, claims or judgments arising from or growing out of, or connected with this Lease after the effective date of said release. The effective date of said release shall be the date the assignee executes an assumption of such an assignment whereby the assignee expressly agrees to assume all of Landlord's obligations, duties, responsibilities and liabilities with respect to this Lease. If requested, Tenant shall execute a form of release and such other documentation as may be required to effect the provisions of this paragraph. Please Initial: /s/ A /s/ CM 15 27 If Tenant subleases, assigns or conveys their interest in the Lease, and the new entity gives the Landlord a security deposit, then Landlord will return the security deposit to Tenant minus monies owed or damages to the suite. If building changes ownership and current Landlord shall either refund the Tenant's security deposit to Tenant or transfer security deposit to new owner as part of escrow. 16. ASSIGNMENT AND SUBLETTING. (a) CONSENT. A response from Landlord will be within fifteen (15) days from Tenant's written request. Please Initial: /s/ A /s/ CM 15(a) 28 (f) CONTROLLED ENTITY. Notwithstanding the provisions of this paragraph 16, Tenant may assign or sublet the Premises, or any portion thereof, without Landlord's consent, after written notice to Landlord, to any entity which controls, is controlled by, or is under common ownership with Tenant, or to any entity resulting from the merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant as a going concern of the business that is being conducted on the Premises, provided that said assignee assumes, in full, the obligations of Tenant under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Tenant under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Tenant, the consent of whom shall not be necessary for such change or alteration. (g) ATTORNEYS' FEES. In the event that Landlord shall consent to a sublease or assignment under subparagraph (a) above, Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with the giving of such consent and review of the information submitted by Tenant. 17. DEFAULTS; REMEDIES. (a) DEFAULTS. The occurrence of any one or more of the following events shall constitute a material default and material breach of this Lease by Tenant: (ii) The failure by Tenant to make any payment of Rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of ten (10) days after written notice thereof from Landlord to Tenant; (iii) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, other than those described in subparagraph (ii) above, where such failure shall continue for a period of ten (10) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that it is capable of being cured but more than ten (10) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within such ten (10) day period and thereafter diligently prosecutes such cure to completion; or (iv) The making by Tenant of any general assignment for the benefit of creditors, the filing by or against Tenant of a petition for order of relief in bankruptcy for the purpose of bankruptcy liquidation or reorganization under any law relating to bankruptcy whether now existing or hereafter enacted (including, without limitation, any petition filed by or against Tenant under any one or more of the following Chapters of the Bankruptcy Reform Act of 1978, 11 U.S.C. Sections 101-1330 ("Bankruptcy Code") as amended: Chapter 7 or Chapter 9 or Chapter 11 or Chapter 12 or Chapter 13) except that, in the case of a filing against Tenant of such a petition, such filing shall not be a default if the petition is dismissed or discharged on or before sixty (60) days after the filing thereof; the appointment of a trustee or receiver to take possession of all or substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days; or the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within sixty (60) days. Unless Landlord's express written consent thereto is first obtained, in no event shall this Lease, or any interest herein or hereunder or any estate created hereby, be assigned or assignable by operation of law or by, in or under voluntary or involuntary bankruptcy liquidation or reorganization proceedings or otherwise and in no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy liquidation or reorganization proceedings. Any purported assignment or transfer in violation of the provisions of this subparagraph (iv) shall constitute a material default and breach of this Lease by Tenant and in connection with any such default and breach Landlord shall have the rights and remedies described in subparagraph (b) below, including, without limitation, the election to terminate this Please Initial: /s/ A /s/ CM 16 29 Lease. As used in this subparagraph (iv) the words "bankruptcy liquidation or reorganization proceedings" shall include any proceedings under any law relating to bankruptcy whether now existing or hereafter enacted (including, without limitation, proceedings under any one or more of the Bankruptcy Code as amended: Chapter 7 or Chapter 9 or Chapter 11 or Chapter 12 or Chapter 13). (b) REMEDIES. (i) In the event of any default and breach by Tenant of any of its obligations under this Lease then this Lease shall continue in effect so long as Landlord does not expressly terminate Tenant's right to possession in any of the manners specified in this paragraph and Landlord may, at Landlord's option and without limiting Landlord in the exercise of any other rights or remedies which it may have by reason of such default and breach, exercise all of its rights and remedies hereunder, including, without limitation: (A) The right to declare the Term ended and to reenter the Premises and take possession thereof and remove all persons therefrom, and Tenant shall have no further claim in or to the Premises or under this Lease; or (B) The right without declaring this Lease ended to reenter the Premises, take possession thereof, remove all persons therefrom and occupy or lease the whole or any part thereof for and on account of Tenant and upon such terms and conditions and for such rent as Landlord may deem proper and to collect such rent or any other rent that may hereafter become payable and apply the same as provided in subparagraph (ii) below; or (C) The right, even though Landlord may have relet the Premises or brought an action to collect Rent and other charges without terminating this Lease, to thereafter elect to terminate this Lease and all of the rights of Tenant in or to the Premises; or (D) The right, without terminating this Lease, to bring an action or actions to collect Rent and other charges hereunder which are from time to time past due and unpaid or to enforce any other provisions of this Lease imposing obligations on Tenant, it being understood that the bringing of any such action or actions shall not terminate this Lease unless written notice of termination is given. (ii) Should Landlord relet the Premises under the provisions of subparagraph (b)(i)(B) above, Landlord may execute any lease either in its own name or in the name of Tenant, but Tenant hereunder shall have no right or authority whatever to collect any rent from the new tenant. The proceeds of any such reletting shall first be applied to the payment of the costs and expenses of reletting the Premises, including without limitation, reasonable brokerage commissions and alterations and repairs which Landlord, in its sole discretion, deems reasonably necessary and advisable and to the payment of reasonable attorneys' fees incurred by Landlord in connection with the Tenant's default, the retaking of the Premises and such reletting and, second, to the payment of any indebtedness, other than Rent, due hereunder, including, without limitation, storage charges owing from Tenant to Landlord. When such costs and expenses of reletting have been paid, and if there is no such indebtedness or such indebtedness has been paid, Tenant shall be entitled to a credit for the net amount of rental received from such reletting each month during the unexpired balance of the Term, and Tenant shall pay Landlord monthly on the first day of each month as specified herein such sums as may be required to make up the rentals provided for in this Lease. Nothing contained herein shall be construed as obligating Landlord to relet the whole or any part of the Premises. (iii) Should Landlord elect to terminate this Lease under the provisions of subparagraphs (b)(i)(A) or (C) above, Landlord shall be entitled to recover immediately 17 30 17.(b)(ii) If Landlord extends the lease term of the new Tenant past the current Tenant's expiration, then the re-lease costs will be prorated according to the existing and new lease terms. l7(a) 31 from Tenant (in addition to any other amounts recoverable by Landlord as provided by law), the following amounts: (A) The worth at the time of award of the unpaid rent which had been earned at the time of termination; (B) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (C) The worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of fair rental value that Tenant proves could be reasonably avoided; and (D) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom. For purposes of computing "the worth at the time of the award" of the amount specified in subparagraph (b)(iii)(C) above, such amount shall be discounted at the discount rate of the Federal Reserve Bank of San Francisco at the time of award. For purposes of computing "the worth at the time of the award" under subparagraphs (b)(iii)(A) and (b)(iii)(B) above, an interest rate of ten percent (10%) per annum shall be utilized. (iv) If Landlord shall elect to reenter the Premises as provided above, Landlord shall not be liable for damages by reason of any reentry, unless caused by Landlord's gross negligence Tenant hereby waives all claims and demands against Landlord for damages or loss arising out of or in connection with any reentering and taking possession of the Premises and waives all claims for damages or loss arising out of or in connection with any destruction of or damage to the Premises, or for any loss of property belonging to Tenant or to any other person, firm or corporation which may be in or upon the Premises at the time of such reentry. (v) Landlord shall not be deemed to have terminated this Lease, Tenant's right to possession of the Premises or the liability of Tenant to pay Rent thereafter to accrue or its liability for damages under any of the provisions hereof by any reentry hereunder or by any action in unlawful detainer or otherwise to obtain possession of the Premises, unless Landlord shall notify Tenant in writing that Landlord has so elected to terminate this Lease. Tenant agrees that the service by Landlord of any notice pursuant to the unlawful detainer statutes or comparable statutes of the state or locality in which the Premises are located and the surrender of possession pursuant to such notice shall not (unless Landlord elects to the contrary at the time of or at any time subsequent to the service of such notice and such election shall be evidenced by a written notice to Tenant) be deemed to be a termination of this Lease or of Tenant's obligations hereunder. No reentry or reletting under this paragraph shall be deemed to constitute a surrender or termination of this Lease, or of any of the rights, options, elections, powers and remedies reserved by Landlord hereunder, or a release of Tenant from any of its obligations hereunder, unless Landlord shall specifically notify Tenant, in writing, to that effect. No such reletting shall preclude Landlord from thereafter at any time terminating this Lease as herein provided. (vi) All fixtures, furnishings, goods, equipment, chattels or other personal property of Tenant remaining on the Premises at the time that Landlord takes possession thereof may at Landlord's election be stored at Tenant's expense or sold or otherwise disposed of by Landlord in any manner permitted by applicable law, up to the amount owed to Landlord by Tenant. (vii) All rights, options, elections, powers and remedies of Landlord under the provisions of this Lease are cumulative of each other and of every other right, option, 18 32 election, power or remedy which Landlord may otherwise have at law or in equity and all or any of which Landlord is hereby authorized to exercise. The exercise of one or more rights, options, elections, powers or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies Landlord may have upon a breach and default under this Lease and shall not be deemed to be a waiver of Landlord's rights or remedies thereupon or to be a release of Tenant from Tenant's obligations thereon unless such waiver or release is expressed in writing and signed by Landlord. (c) LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant to Landlord of Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after such amount shall be due, Tenant shall pay to Landlord a late charge equal to ten percent (10%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. (d) PAYMENT OR PERFORMANCE BY LANDLORD. Landlord may, at Landlord's option and without any obligation to do so, pay any sum or do any act which Tenant has failed to pay or do at the time Tenant was obligated to make such payment or perform such act and Landlord shall be entitled to recover from Tenant, upon demand, all sums expended by Landlord in making such payment or performing such act, together with interest thereon at the rate provided in subparagraph 18(d) from the date of expenditure until repaid by Tenant. Such sum and interest shall be deemed additional rent under this Lease. 18. MISCELLANEOUS. (a) ESTOPPEL CERTIFICATE. (i) Tenant shall at any time upon not less than ten (10) business days prior written notice from Landlord execute, acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the Rent and other charges are paid in advance, if any, and acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any person to whom it shall be delivered by Landlord including any prospective purchaser or encumbrancer of the Premises, the Building, the Property, or any part thereof. (ii) Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured defaults in Landlord's performance; and that not more than one month's Rent has been paid in advance. (iii) If Landlord desires to finance or refinance the Premises, the Building, the Property, or any part thereof, Tenant hereby agrees to deliver to any lender designated by Landlord such financial statements of Tenant as may be reasonably required by such lender. Such statements shall include the past one or more years financial statements of Tenant. 19 33 All such financial statements shall be received by Landlord in confidence and shall be used only for the purposes herein set forth. (b) LANDLORD'S LIABILITY. The term "Landlord" as used. herein shall mean only the owner or owners at the time in question of the fee title (or the lessee's interest in any ground or master lease) to the Premises and in the event of any transfer of such title, Landlord herein named (and in case of any subsequent transfers, the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed, provided that any funds in the hands of Landlord or the then grantor at the time of such transfer in which Tenant has an interest shall be delivered to the grantee, The obligations contained in this Lease to be performed by Landlord shall, subject as aforesaid, be binding on Landlord's successors and assigns only during their respective periods of ownership. (c) CONSTRUCTION. Paragraph captions are solely for the convenience of the parties and shall not be deemed to or be used to define, construe, or limit the terms hereof. As used in this Lease, the masculine, feminine and neuter genders shall be deemed to include the others, and the singular number shall be deemed to include the plural, whenever the context so requires. The invalidity of any provisions of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. This Lease shall be governed by the laws of the state in which the Premises are located. (d) INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Landlord not paid when due shall bear interest at the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum rate permitted by law, from the date due until the date such amount is paid. Payment of such interest shall be made when such amount is paid. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. (e) TIME OF ESSENCE. Time is of the essence of this Lease and all of the covenants and obligations hereof. (f) COUNTERPARTS. This Lease may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same Lease. (g) INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, which writing shall be signed by the parties in interest at the time of the modification. (h) NOTICES. Any notices, approvals, agreements, certificates, other documents or communications between the parties hereto required or permitted under this Lease shall be in writing. Any such communications shall be deemed to have been duly given or served if delivered in hand or forty-eight (48) hours after deposit in the United States mail, certified or registered, postage and fees prepaid, return receipt requested, addressed to the parties at the addresses set forth in paragraph 1 of this Lease. The address to which any such communications shall be sent may be changed by either party hereto from time to time by a notice mailed as aforesaid. (i) WAIVERS. No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of Rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. 20 34 (j) RECORDING. Tenant shall not record this Lease without Landlord's prior written consent and such recordation shall, at the option of Landlord, constitute a noncurable default of Tenant hereunder. Landlord and Tenant shall, upon the request of either party, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. (k) HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the Term or sooner termination of this Lease with the express written consent of Landlord and without executing a new lease, such occupancy shall be construed as a tenancy from month-to-month at a rental equal to one hundred twenty-five percent (125%) of the last monthly Rent plus all other charges payable hereunder, and upon all the terms hereof insofar as the same are applicable to a month-to-month tenancy. Nothing contained in this subparagraph shall be construed to grant Tenant the right to holdover without the express written consent of Landlord. (l) COVENANTS AND CONDITIONS. Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition. (m) BINDING EFFECT. Subject to any provisions hereof restricting assignment or subletting by Tenant and subject to the provision of subparagraph (b) above, this Lease shall bind the parties and their personal representatives, successors and assigns. (n) SUBORDINATION. (i) This Lease, at Landlord's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation for security now or hereafter placed upon the Premises, the Building or the Property, or any part or parts thereof, and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. If any present or future mortgagee, trustee or ground lessor shall at any time elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and written notice of such election shall be given to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (ii) Tenant agrees to execute any documents required to effectuate such subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be, and failing to do so within ten (10) business days after written demand, does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney in fact and in Tenant's name, place and stead, to do so. (o) ATTORNEYS' FEE. If either party brings an action to enforce the terms hereof or declare rights under this Lease, the prevailing party in the final adjudication of any such action, on trial or appeal, shall be entitled to its costs and expenses of suit, including, without limitation, its actual attorneys' fees, to be paid by the losing party as fixed by the court. (p) LANDLORD'S ACCESS. Landlord and Landlord's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers or lenders, and making such alterations, repairs, improvements or additions to the Premises or the improvements as Landlord may deem necessary or desirable. Landlord may at any time place on or about the Premises any ordinary "For Sale" signs and Landlord may at any time during the last one hundred twenty (120) days of the Term place on or about the Premises any ordinary "For Lease" signs, all without rebate of rent or liability to Tenant. (q) AUCTIONS. Tenant shall not conduct any auction on the Premises without Landlord's prior written consent. 21 35 (r) MERGER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. During any period while Tenant is in default under this Lease, Landlord, in addition to any other rights and remedies it may have under this Lease, shall have the right to collect directly from any subtenant all rentals owing to Tenant under any subtenancy and to apply such rentals to any amounts owing to Landlord by Tenant and the payment of such amounts by the subtenant directly to Landlord shall not be a default under the subtenancy. (s) JOINT AND SEVERAL LIABILITY. Each party signing this Lease as Tenant shall be jointly and severally liable for the failure on the part of Tenant to pay any sums due under the terms of this Lease or for the breach by Tenant or any of the covenants or obligations of Tenant contained herein. (t) INDIVIDUAL LIABILITY. The obligations of Landlord or Tenant under this Lease do not constitute personal obligations of the individual partners, directors, officers, or shareholders of Landlord or Tenant and Landlord or Tenant shall look solely to the real estate that is the subject of this Lease and to no other assets of Landlord or Tenant for satisfaction of any liability in respect of this Lease and will not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for such satisfaction. (u) ATTORNMENT. Tenant shall, in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under any mortgage or deed of trust made by the Landlord, its successors or assigns, encumbering the Premises, or any part thereof, or in the event of termination of the ground lease, if any, and if so requested, attorn to the purchaser upon such foreclosure or sale or upon any grant of a deed in lieu of foreclosure and shall recognize such purchaser as the Landlord under this Lease. If such purchaser honors lease and assumes liability for the security deposit. (v) LENDERS RIGHT TO CURE. Tenant agrees to give the holder of any mortgage or trust deed encumbering the Premises, by registered mail, a copy of any notice of default or nonperformance served upon Landlord, provided that prior to such notice, Tenant has been notified in writing (by way of Assignment of Rents and Leases or otherwise) of the address of such mortgagee or trust deed holder. Tenant further agrees that Landlord shall not be in default under this Lease unless (i) Tenant has given a written notice to Landlord stating that Landlord has failed to perform Landlord's obligations under this Lease and (ii) specifying with particularity the obligations which Landlord has failed to perform, and Landlord thereafter fails to perform any of its obligations so specified within a reasonable time after Landlord's receipt of such notice. If Landlord shall fail to cure such nonperformance in a timely manner, then such mortgagee or trust deed holder shall have an additional thirty (30) days within which to cure the default, or, if such default cannot be cured within that time, then such additional time as may be necessary if within such thirty (30) days such mortgagee or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated by Tenant while such remedies arc being so diligently pursued. (w) REVISIONS TO LEASE. Tenant hereby agrees to make any reasonable revisions to this Lease which may be required in good faith by a bona fide construction, interim or permanent lender in connection with the financing of the Premises. Tenant agrees as long as the changes do not change the terms and conditions of the Lease. (x) ADMINISTRATIVE CHARGE. In addition to Fixed Rent, Adjustments and other charges hereunder, Tenant shall pay to Landlord an overall administrative charge of five percent (5%) of any charge which is Tenant's responsibility to pay, which Landlord pays on behalf of Tenant and for which Landlord subsequently bills Tenant. 22 36 19. TOXIC MATERIALS. (a) DEFINITIONS. (i) As used in this Lease, the term "Hazardous Material[s]" means any oil, flammable items, explosives, radioactive materials, hazardous or toxic substances, material or waste or related materials including, without limitation, any substances that pose a hazard to the Premises or to persons on or about the Premises and any substances defined as or included in the definition of "hazardous substance," "hazardous waste," "hazardous material," "toxic substance," "extremely hazardous waste," "restricted hazardous waste" or words of similar import, now or subsequently regulated in any way under applicable federal, state or local laws or regulations, including without limitation, petroleum-based products, paints, solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonia compounds and other chemical products, asbestos, PCBs, urea formaldehyde foam insulation, transformers or other equipment containing dielectric fluid, levels of polychlorinated biphenyls, or radon gas, and similar compounds, and including any different products and materials which are subsequently found to have adverse effects on the environment or the health and safety of persons. (ii) As used herein, the term "Environmental Law[s]" means any one or all of the following: the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. Sections 9601 et seq.); the Resource Conservation and Recovery Act as amended (42 U.S.C. Sections 6901 et seq.); the Safe Drinking Water Act as amended (42 U.S.C. Sections 300f et seq.); the Clean Water Act as amended (33 U.S.C. Sections 1251 et seq.); the Clean Air Act as amended (42 U.S.C. Sections 7401 et seq.); the Toxic Substances Control Act as amended (15 U.S.C. Sections 136 et seq.); the Solid Waste Disposal Act as amended (42 U.S.C. Sections 3251 et seq.); the Hazardous Materials Transportation Act (49 U.S.C. Sections 1801 et seq.); the regulations promulgated under any of the foregoing; and all other laws, regulations, ordinances, standards, policies, and guidelines now in effect or hereinafter enacted by any governmental entity (whether local, state or federal) having jurisdiction or regulatory authority over the Premises or the Project or over activities conducted therein and which deal with the regulation or protection of human health, industrial hygiene or the environment, including the soil, subsurface soil, ambient air, groundwater, surface water, and land use. (iii) As used herein, the term "Environmental Activity{ies]" means any generation, manufacture, production, pumping, bringing upon, use, storage, treatment, release, discharge, escaping, emitting, leaching, disposal or transportation of Hazardous Materials. (b) PROHIBITION ON HAZARDOUS MATERIALS. Except as specifically provided in subparagraph (c) below, Tenant shall not cause or permit any Environmental Activities in, on or about the Premises by Tenant or Tenant's agents, employees, contractors, assignees, sublessees or invitees (hereinafter cumulatively referred to as "Tenant's Agents") without the prior written consent of Landlord. Landlord shall be entitled to take into account such factors or facts as Landlord may reasonably determine to be relevant in determining whether to consent Please Initial: 23 /s/ A /s/ CM 37 to Tenant's proposed Environmental Activity and Landlord may attach conditions to any such consent if such conditions are reasonably necessary to protect Landlord's interests in avoiding potential liability upon Landlord or damage to Landlord's property arising from any Environmental Activity by Tenant or Tenant's Agents. In no event shall Landlord be required to consent to the installation or use of any storage tanks on the Property. (c) EXCEPTION TO PROHIBITION. Notwithstanding the prohibition set forth in subparagraph (b) above, but subject to Tenant's covenant to comply with all Environmental Laws and with the other provisions of this paragraph 19, Tenant may bring upon, keep and use in the Premises (but not outside the Premises) (i) general office supplies typically used in an office or warehouse in the ordinary course of business, such as copier toner, liquid paper, glue, ink and janitorial supplies, so long as such supplies are used in the manner for which they were designed and in such amounts as may be normal for the business operations conducted by Tenant in the Premises, and (ii) those Hazardous Materials, if any, described on Exhibit D attached hereto and by this reference made a part hereof so long as Tenant has delivered to Landlord a description of the handling, storage, use and disposal procedures to be utilized by Tenant with respect thereto. (d) COMPLIANCE WITH ENVIRONMENTAL LAWS. Tenant shall keep and maintain the Premises in compliance with, and shall not cause or permit the Premises to be in violation of, any Environmental Laws. All Tenant's activities at the Premises shall be in accordance with all Environmental Laws. Additionally, Tenant shall obtain any and all necessary permits for Tenant's activities at the Premises. Tenant's obligations and liabilities under this paragraph 19 shall continue so long as Landlord bears any liability or responsibility under the Environmental Laws for any action that occurs on the Premises during the term of this Lease. (e) ENVIRONMENTAL NOTICES. Tenant shall immediately notify Landlord of, and upon Landlord's request shall provide Landlord with copies of, the following: (i) Any correspondence, communication or notice, oral or written, to or from any governmental entity regarding the application of Environmental Laws to the Premises or Tenant's operations on the Premises including, without limitation, notices of violation, notices to comply and citations; (ii) Any reports filed pursuant to any Environmental Law or self-reporting requirements; (iii) Any permits and permit applications; and (iv) Any change in Tenant's operations on the Premises that will change or has the potential to change Tenant's or Landlord's obligations or liabilities under Environmental Laws. Tenant shall also notify the Landlord of the release of any Hazardous Material in, on, under, about or above the Premises, the Building, the Property or the Project. (f) ENVIRONMENTAL INDEMNITY. Tenant shall protect, indemnify, defend (with counsel satisfactory to Landlord) and hold harmless Landlord and its directors, officers, partners, employees, agents, lenders, and ground lessees, if any, and their respective successors and assigns for, from and against any and all losses, damages, claims, costs, expenses, penalties, fines and liabilities of any kind (including, without limitation, the cost of any investigation, remediation and cleanup, and attorneys' fees) which, in Landlord's reasonable opinion after reviewing an environment report are attributable to (i) any Environmental Activity on the Property or Project or in the Building or Premises undertaken or committed by Tenant or Tenant's Agents or caused by the negligence of such persons during the Term of this Lease, (ii) any remedial or clean-up work undertaken by or for Tenant in connection with Tenant's Environmental Activities or Tenant's compliance with Environmental Laws, or (iii) the breach by Tenant of any of its obligations and covenants set forth in this paragraph 19. Landlord shall have the right but not the obligation to join and participate in, and control, if it so elects, any legal proceedings initiated in connection with the 24 38 Environmental Activities of Tenant or Tenant's Agents. Landlord may also negotiate, defend, approve and appeal any action taken or issued by any applicable governmental authority with regard to contamination of the Premises or any portion of the Property or Project by a Hazardous Material. Any costs or expenses incurred by Landlord for which Tenant is responsible under this paragraph 19 or for which Tenant has indemnified Landlord shall be reimbursed by Tenant on demand, as additional rent and with interest thereon, as provided by subparagraph 17(d) of this Lease. This indemnity shall survive the termination of this Lease. (g) REMEDIAL WORK. If (i) any Environmental Activity undertaken by Tenant or Tenant's Agents results in contamination of the Premises, Building, Property or Project or any portion thereof, or the soil or groundwater thereunder, or (ii) any investigation, site monitoring, containment, cleanup, removal, restoration or other remedial work of any kind or nature ("Remedial Work") is necessary or appropriate due to or in connection with Tenant's use or occupancy of the Premises, then, subject to Landlord's prior written approval and any conditions imposed by Landlord, Tenant shall promptly perform all Remedial Work, at Tenant's sole expense and without abatement of rent, as is necessary to return the affected portion of the Premises, Building, Property and/or Project and the soil and groundwater to the condition existing prior to the introduction of the contaminating Hazardous Material and to otherwise comply with all applicable Environmental Laws. Landlord's approval of such Remedial Work shall not be unreasonably withheld so long as such actions will not cause a material adverse effect on the Premises, Building, Property or Project after expiration of the Lease Term or any material adverse effect on the Premises, Building, Property or Project. Landlord shall also have the right to approve any and all contractors hired by Tenant to perform such Remedial Work. All such Remedial Work shall be performed in compliance with all applicable laws, ordinances and regulations and in such a manner as to minimize any interference with the use and enjoyment of the Premises, Building, Property and Project. All costs and expenses of such Remedial Work shall be paid by Tenant including, without limitation, the charges of such contractor(s), and the reasonable fees and costs of the attorneys and consultants for Landlord incurred in connection with monitoring or review of such Remedial Work. (h) LANDLORD'S OPTION. Landlord may elect, at Landlord's sole discretion, to perform any Remedial Work. Landlord and Landlord's agents shall have the right to enter the Premises at all reasonable times to inspect, monitor and/or perform Remedial Work. All expenses incurred by Landlord in connection with performing Remedial Work are payable by Tenant, upon Landlord's demand, with interest thereon, as provided by subparagraph 17(d). (i) INJUNCTIVE RELIEF. Tenant's failure to abide by the terms of this paragraph 19 shall be restrainable by injunction. (j) SELF-HELP. Landlord and/or Tenant shall have the right of "self-help" or similar remedy in order to minimize any damages, expenses, penalties and related fees or costs arising from or related to a violation of any Environmental Law with respect to the Premises or the Project. (k) OTHER TENANTS. Other tenants of the Project may be using, handling or storing certain Hazardous Materials in connection with such tenants' use of their premises. The failure of another tenant to comply with applicable laws and procedures could result in a release of Hazardous Materials and contamination to improvements within the Project or the soil and groundwater thereunder. In the event of such a release, the tenant responsible for the release, and not Landlord, shall be responsible for any claim, damage or expense incurred by Tenant by reason of such contamination and Tenant shall exhaust all its remedies against such other tenant without any right to seek any recovery against Landlord. Unless caused by Landlord's gross negligence. (l) ENVIRONMENTAL INSPECTION. Tenant shall, if reasonably required by Landlord on account of the activities or suspected activities of Tenant or Tenant's Agents, retain a recognized environmental consultant (the "Consultant") acceptable to Landlord to conduct an investigation of the Premises and of other portions of the Project deemed appropriate by Landlord ("Environmental Assessment") (i) for Hazardous Materials contamination in, about or beneath the Premises, the Building or the Project as a result of such activities and (ii) to assess all Environmental Activities of Tenant and Tenant's Agents on the Premises or the Project for 25 39 compliance with all applicable laws, ordinances and regulations and for the use of procedures intended to reasonably reduce the risk of a release of Hazardous Materials. The Environmental Assessment shall be performed in a manner reasonably calculated to discover the presence of Hazardous Materials contamination and shall be of a scope and intensity reflective of the general standards of professional environmental consultants who regularly provide environmental assessment services in connection with the transfer or leasing of real property. Additionally, the Environmental Assessment shall take into full consideration the past and present uses of the Property and Project and other factors unique to the Property and Project. If Landlord obtains the Environmental Assessment because of the activities of Tenant or Tenant's Agents, Tenant shall pay Landlord on demand the cost of the Environmental Assessment, with interest thereon, as additional rent and in accordance with subparagraph 17(d). If Landlord so requires, Tenant shall comply, at its sole cost and expense, with all recommendations contained in the Environmental Assessment, including any recommendation with respect to the precautions which should be taken with respect to Environmental Activities on the Premises or the Project or any recommendations for additional testing and studies to detect the presence of Hazardous Materials. Tenant covenants to reasonably cooperate with the Consultant and to allow entry and reasonable access to all portions of the Premises for the purpose of Consultant's investigation. (m) SURRENDER OF PREMISES - ENVIRONMENTAL CONSIDERATIONS. Prior to or after the expiration or termination of the Lease Term, Landlord may have an Environmental Assessment of the Property performed in accordance with subparagraph (l) above. Tenant shall perform, at its sole cost and expense, any Remedial Work recommended by the Consultant which is necessary to remove, mitigate or remediate any Hazardous Materials contamination of the Premises, Building, Property or Project in connection with any Environmental Activities of Tenant or Tenant's Agents. Prior to surrendering possession of the Premises, Tenant shall also, unless otherwise directed by Landlord, remove any personal property, equipment, fixture (except for any fixture installed by Landlord) and/or storage device or vessel on or about the Premises, Building, Property and/or Project which is contaminated by or contains Hazardous Materials as a result of the activities of Tenant or Tenant's Agents and repair all damage to the Premises, the Building and the Project caused by such removal. Please Initial /s/ A 26 /s/ CM 40 In addition to the above terms and conditions, the following also applies: 20. The only Broker recognized by all parties to this lease agreement is CB Commercial. 21. The Landlord will not lease to another Call Center in Metro Business Park Phase I as long as the Tenant is not in default of their lease agreement. 22. QUIET ENJOYMENT. Landlord covenants that on or before the commencement date it will have good title to the Premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this tease, zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record. Landlord represents that it has the authority to enter into this Lease and that so long as Tenant pays all amounts due hereunder and performs all other covenants and agreements herein set forth, Tenant shall peaceably and quietly have, hold and enjoy the Premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and Provisions of this Lease. Please Initial /s/ A /s/ CM 26(a) 41 IN WITNESS WHEREOF, the undersigned have executed this Lease as of the date and year first above written. "LANDLORD" "TENANT" EastGroup Properties, ANASAZI, Inc., A Maryland Real Estate Investment Trust A Delaware Corporation BY: /s/ MARSHALL [ILLEGIBLE] BY: /s/ [ILLEGIBLE] ---------------------------- ------------------------ IT'S: Vice President IT'S: President & Coo -------------------------- ---------------------- Please Initial /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] 27 42 TENANT ACKNOWLEDGMENTS: CORPORATE STATE OF Arizona ) ) ss. County of [ILLEGIBLE] ) On this the 11th day of February 1997, before me, the undersigned Notary Public, personally appeared [ILLEGIBLE], who acknowledged himself to be the President of Anasazi Inc., a corporation, and that he, as such officer, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation, by himself as such officer. IN WITNESS WHEREOF, I and hereunto set my hand and official seal. /s/ [ILLEGIBLE] ------------------------- Notary Public My Commission Expires: 6-24-97 ---------------------- Please Initial /s/ A /s/ CM 27 (a) 43 EXHIBIT A THE PREMISES The Premises is approximately 27,681 square feet of building A of Metro Business Park Phase I Located at 11048 N. 23rd.., Phoenix AZ 85029. PREMISES [HEWSON LOGO] [FLOOR PLAN] [METRO BUSINESS PARK] [PHASE I] Please Initial: /s/ ILLEGIBLE 44 EXHIBIT B PRELIMINARY PLANS Tenant is to Lease suites A-104 (13,200 square feet), Suite A-103 (5,881 square feet) and Suite A-102 (8,600 square feet) in "AS IS" condition. Tenant will build out the suite to Hewson Properties, Inc. building standards and as per Exhibit B(a) which is attached. PREMISES Metro Business Park Phase I 11048 N. 23rd avenue - Suite A-104 - Phoenix 13,000 Rentable sq. ft. - Offices. 2,696 sq. ft. = 21%-SCALE-1/16"=1'-0" [FLOOR PLAN] Please Initial: /s/ A /s/ CM 45 EXHIBIT B(a) [FLOOR PLAN] ANASAZI METRO BUSINESS PARK 11048 NORTH 23rd AVE PHOENIX, ARIZONA Please Initial: /s/ A /s/ CM 46 EXHIBIT D HAZARDOUS MATERIAL "NONE" 32 47 EXHIBIT E OPTION TO EXTEND LEASE TERM Provided that at the time of exercise Tenant is not and had not been in default under any term or provision of this Lease, then, upon the expiration of the original term hereof, Tenant shall have the option to extend the term of this Lease for an additional period of [See Below] years, ("the Extended Term") upon the same terms and conditions set forth herein, so far as applicable, except that Tenant shall have no further allowance for Tenant Improvements, no additional option to extend the term hereof, and that rent for the option period shall be ninety-five percent (95%) of market rent for a similar lease transaction, adjusted, if appropriate, over the duration of the option term, that would be charged for a comparable property in the general geographical area in which the leased premises are located. In the event the Tenant wishes to exercise this option to extend the term of the Lease, Tenant shall give Landlord written notice of such election between 270 and 180 days prior to expiration of the original term. Upon receipt of that notice, Landlord and Tenant shall attempt to determine the rental rate for the Extended Term. In determining the rental rate for the Extended Term at the time of exercise of the option, Landlord within five (5) business days of the notice of exercise, shall present Tenant in writing with its lease terms for the Extended Term, including the proposed rental rate. Within ten (10) business days thereafter, Tenant shall either accept the rental rate proposed by the Landlord, or shall present Landlord in writing with its proposed rental rate. Within five (5) business days thereafter, Landlord shall either accept that rate, or notify Tenant that the proposed rate is unacceptable. In the latter case, Landlord and Tenant shall present the issue of rental rate to an appraiser or other third party chosen by the Landlord and agreeable to the Tenant ("the Appraiser") for determination. In making the determination of rental rate, the Appraiser shall consider all relevant terms of the Lease proposed for the Extended Term, and shall make a determination of the rental rate for comparable space in the general geographic area of the Project for the proposed lease transaction. The determination of the Appraiser of the rental rate shall be binding on both parties for the lease for the Extended Term. The determination of the Appraiser shall be made within thirty (30) days of the date of submission of the issue to him. At such time as Landlord and Tenant have agreed upon the terms of the Lease for the Extended Term, including the rental rate, whether with or without the services of the Appraiser, then the Landlord will prepare a Lease Amendment extending the term of this Lease consistent with this provision, which both parties shall execute. If Tenant shall fail to deliver to Landlord written notice of its election to exercise this option between 270 and 180 days prior to expiration of the original term, then this option shall expire and be of no further force or effect. 9/29/93 Tenant shall have three (3) one (1) year options to renew the lease. Those options will be as follows: A104 & A102 Three One year options: From 04/01/00 - 03/31/01 04/01/01 - 11/30/01 12/01/01 - 12/31/02 A101 & A103 One One (1) year option: From 12/01/01 - 12/31/02 Please Initial: /s/ A /s/ CM 33 48 EXHIBIT F RIGHT OF FIRST REFUSAL Provided that at the time of exercise Tenant is not and had not been in default under any term or provision of this Lease, then, during the original term of this Lease, Tenant shall have the right of first refusal to lease that certain additional space in the Project consisting of approximately 7,519 square feet and described as Suite A-100, as outlined on the floor plan attached hereto as "Exhibit" ("the Additional Space"). In the event that Landlord shall receive a bona fide offer, as hereinafter defined, from a third party or entity to lease all or a portion of the Additional Space at any time during the original term of the Lease, which offer Landlord desires to accept, Landlord shall promptly give Tenant written notice of such offer, which notice shall describe all of the provisions thereof. Within (5) five business days of the date of mailing of that notice, Tenant shall give Landlord written notice of its election to lease that portion of the Additional Space referred to in the offer, at the rental rate and upon all other terms and conditions described in the offer, and subject to all other terms and conditions of this Lease, as applicable. If the offer is for space in the Project greater than the Additional Space, but encompassing the Additional Space, then, in exercising this right, Tenant must lease the entire space subject to the offer, not only the Additional Space. If Landlord fails to receive written notice of Tenant's election to lease the space as set forth in the offer within such 5-business day period, then Landlord may proceed to lease to the third party the Additional Space as set forth in the offer, and Tenant's rights as set forth in this Section shall expire and be of no force and effect through the Lease term. It Landlord receives written notice of Tenant's agreement to lease the space referred to in the offer within that period, then Landlord and Tenant shall enter into a Lease Amendment evidencing the lease of that space to Tenant upon the terms and conditions of the offer, and subject to all other provisions of the Lease, as applicable, and that space referred to in the offer shall be included in the leased premises and leased to Tenant. For purposes of this Section, the term "bona fide offer" shall mean an offer in writing from a third person or entity, executed by such third person or a representative of the entity, setting forth the basic provisions of the offered Lease. 9/29/93 34 49 EXHIBIT F. RIGHT OF FIRST REFUSAL. This Right of First Refusal will continue through the term of this Lease and any renewal option periods. Notice may also be given by fax but only if it is followed by a confirmation of receipt phone call. If Landlord does not lease it's space to the third (3rd) party related to this Right of First Refusal, then the Tenant's Right of First Refusal will be restored, only through March 31, 2000. The term of the Right of First Refusal space shall be coterminius with the rest of the Tenant's lease. Please Initial: /s/ A /s/ CM 34(a) 50 EXHIBIT G Tenant has the Right Of First Refusal for the indicated 7,519 square feet [FLOOR PLAN] Please Initial: /s/ A /s/ CM 35 51 FIRST AMENDMENT TO LEASE That certain lease dated January 31, 1997 by and between EastGroup Properties, Landlord, and Anasazi, Inc., Tenant, for the premises located at 11048 N 23rd Avenue, Building C, Suite 102, 103, 104, is amended this 7th day of August, 1997 solely as hereinafter described. Effective the 15th day of August, 1997, the clauses below are substituted for like numbered clauses in the Lease agreement. 1(b) Street Address of Premises: 11048 N. 23rd Avenue, Suites A102--A104 Phoenix, AZ 85029 11226 N. 23rd Avenue, Suite B101 Phoenix, AZ 85029 1(d) Approximate Square Footage of Premises: A104 -- 13,200 sf A103 -- 5,881 sf A102 -- 8,600 sf B101 -- 13,063 sf 1(h) Term: A104 2/15/97 -- 3/31/00 A102 4/01/97 -- 3/31/00 A103 4/01/97 -- 11/30/01 B101 10/15/97 -- 12/31/02 1(i) Scheduled Commencement Date: A104 2/15/97 A102 4/01/97 A103 4/01/97 B101 10/15/97 or the date premises is ready for occupancy. 1(j) Fixed Rent: 2/15/97 -- 3/31/97 $10,031.98/NNN/Month (A104) 10/15/97 -- 3/31/00 $18,000.00/NNN/Month (A104, A103, A102) 10/15/97 -- 3/31/00 $12,390.67/NNN/Month (B101) 4/01/00 -- 4/30/00 $ 3,234.55/NNN/Month (A103) 4/01/00 -- 4/30/00 $12,390.67/NNN/Month (B101) 5/01/00 -- 11/30/01 $ 3,234.55/NNN/Month (A103) 5/01/00 -- 11/30/01 $14,219.49/NNN/Month (B101) 12/01/01 -- 12/31/02 $14,219.49/NNN/Month (B101) 1(1) Security Deposit: 2/15/97 -- 10/14/97 $ 27,000.00 Cash (paid 2/97) 10/15/97 -- 10/31/98 $100,000.00 Letter of Credit (due at the signing of Amendment) and $ 27,000.00 Cash (paid 2/97) 11/01/98 -- 12/31/02 $ 47,000.00* Cash ($27,000 paid 2/97) * Landlord will review the Tenant's most recent financial statements and in Landlord's sole discretion will make the decision regarding the adequacy of such information on or before 11/01/98 with the Landlord to determine whether or not to waive the additional $20,000 Security Deposit due 11/1/98. 1(0) Tenant's share of Operating Expenses, Insurance Expenses and Property Taxes: Project: 40.61% Building B: 37.11% Building A: 78.64% Exhibit A The Premises are approximately 40,744 square feet and are located at 11048 and 11226 North 23rd Avenue. Please Initial: /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] 52 Exhibit B Suite A104, A103 and A102 were taken in "As Is" condition. Landlord will provide an allowance not to exceed $250,000 for Tenant Improvements for suite B101 including, architectural, engineering, and city permits, cabling, and wiring. Excess Tenant Improvement monies will be put in reserve for future use. All Tenant Improvements dollars will be paid upon receipt of a certificate of completion from the Architect along with all lien waivers from the contractor and subcontractors. Exhibit E Along with existing options to extend Leases Tenant also has the option to renew all suites for a three year term at market rate after the current Options to Extend. Subject to the same notice provisions as Exhibit E of the lease dated January 31, 1997. Exhibit H: Landlord gives Tenant, the Right to Cancel the lease for Suite B101 only on 3/31/00 with one hundred and eighty (180) days written notice to Landlord and a buy-out amount of $230,l5l.06 to be paid in full on 3/31/00. EXHIBIT I: Landlord will provide fifty (50) reserved parking spaces in accordance with Exhibit I, in addition to the one hundred (100) spaces provided in the lease dated January 31, 1997. All other terms and conditions of said Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first written above. "Landlord" "Tenant" EastGroup Properties ANASAZI, INC. a Maryland Real Estate a Delaware corporation Investment Trust BY: /s/ [ILLEGIBLE] BY: /s/ MARSHALL LOEB --------------------------- -------------------------- Marshall Loeb IT'S: President & COO IT'S: Vice President ------------------------- Please Initial: /s/ A /s/ CM 53 Exhibit I Parking Schedule [GRAPHIC] Please Initial: /s/ A /s/ CM 54 RIGHT OF FIRST REFUSAL Provided that at the time of exercise Tenant is not and had not been in default under any term or provision of this Lease, then, during the original term of this Lease, Tenant shall have the right of first refusal to lease that certain additional space as soon as it is vacated by AT&T in the Project consisting of approximately 8,860 square feet and described as Suite B102, as outlined on the floor plan attached hereto as "Exhibit I" ("the Additional Space"). In the event that Landlord shall receive a bona fide offer, as hereinafter defined, from a third party or entity to lease all or a portion of the Additional Space at any time during the original term of the Lease, which offer Landlord desires to accept, Landlord shall promptly give Tenant written notice of such offer, which notice shall describe all of the provisions thereof. Within (5) five business days of the date of mailing of that notice, Tenant shall give Landlord written notice of its election to lease that portion of the Additional Space referred to in the offer, at the rental rate and upon all other terms and conditions described in the offer, and subject to all other terms and conditions of this Lease, as applicable. If the offer is for space in the Project greater than the Additional Space, but encompassing the Additional Space, then, in exercising this right, Tenant must lease the entire space subject, to the offer, not only the Additional Space. If Landlord fails to receive written notice of Tenant's election to lease the space as set forth in the offer within such 5-business day period, then Landlord may proceed to lease to the third party the Additional Space as set forth in the offer, and Tenant's rights as set forth in this Section shall expire and be of no force and effect through the Lease term. If Landlord receives written notice of Tenant's agreement to lease the space referred to in the offer within that period, then Landlord and Tenant shall enter into a Lease Amendment evidencing the lease of that space to Tenant upon the terms and conditions of the offer, and subject to all other provisions [ILLEGIBLE] applicable, and that [ILLEGIBLE] 55 Exhibit "J" Right of First Refusal The premises is are located at 11226 N. 23rd Avenue, Suite B-102, Phoenix, Arizona 85029. [FLOOR PLAN] Please Initial: /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] 56 SECOND AMENDMENT TO LEASE That certain lease dated January 31, 1997 by and between EastGroup Properties, Landlord, and Anasazi, Inc., Tenant, for the premises located at 11048 & 11226 N. 23rd Avenue Building A & B, Suite A104, A103, A102, B101, is amended this 1st day of November, 1997 solely as hereinafter described. Effective the 1st day of November, 1997, the clauses below are substituted for like numbered clauses in the Lease agreement. 1(h) Term: A104 02/15/97 - 03/31/00 A102 04/01/97 - 03/31/00 A103 04/01/97 - 11/30/01 B101 11/10/97 - 12/31/02 1(i) Scheduled Commencement Date: A104 02/15/97 A102 04/01/97 A103 04/01/97 B101 11/10/97 1(j) Fixed Rent 02/15/97 - 03/31/97 @ $10,031.98/NNN/Month* (A104) 04/01/97 - 03/31/00 @ $18,000.00/NNN/Month* (A104, A103, A102) 11/10/97 - 03/31/00 @ $12,390.67/NNN/Month* (B101) 04/01/00 - 04/30/00 @ $ 3,234.55/NNN/Month* (A103) 04/01/00 - 04/30/00 @ $12,390.67/NNN/Month (B101) 05/01/00 - 11/30/01 @ $ 3,234.55/NNN/Month* (A103) 05/01/00 - 11/30/01 @ $14,219.49/NNN/Month* (B101) 12/01/01 - 12/31/02 @ $14,219.49/NNN/Month* (B101) *Plus applicable rental taxes. All other terms and conditions of said Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first written above. "LANDLORD" "TENANT" EastGroup Properties Anasazi, Inc. a Maryland Real Estate Investment Trust a Delaware corporation BY: /s/ MARSHALL LOEB By: /s/ [ILLEGIBLE] ------------------ ----------------- Its: Vice President Its: [ILLEGIBLE] ---------------- 57 [PEGASUS SOLUTIONS LETTERHEAD] September 27, 2000 CERTIFIED MAIL Mr. William D. Petsas Senior Vice President EastGroup Properties 1553 West Todd Drive, Suite 203 Tempe, AZ 85283 RE: NOTICE TO EXERCISE OPTION TO RENEW SUITES A-102 AND A-104 SECOND NOTICE Dear Mr. Petsas: On September 6, 2000, our agent, Chuck Nixon of CB Richard Ellis, sent to Ms. Cathleen Yeager, via certified mail, Notice To Exercise Option to Renew for the period 4/1/01-11/30/01, pursuant to Exhibit "E" of the Lease dated January 31, 1997 between Pegasus Solutions Companies, formerly REZsolutions, Inc., formerly Anasazi Inc. ("Tenant") and EastGroup Properties ("Landlord") and amended by the First Amendment To Lease dated August 7, 1997 and further amended by the Second Amendment dated November 1, 1997, and Third Amendment dated November 2, 1999. This Notice, a copy of which is attached, was received at your offices at 1533 West Todd, Suite 203, Tempe, Arizona 85283 on September 8, 2000, and was signed for by one of your employees. In addition, you have had conversations concerning this renewal with our agent, Chuck Nixon, both prior to and subsequent to receipt of the Notice to Exercise. Per Exhibit E of the Lease, "Landlord, within five (5) business days of the notice of exercise, shall present Tenant in writing with its lease terms for the Extended Term, including the proposed rental rate". As of the date of this letter, approximately thirteen (13) business days have expired, and EastGroup has failed to provide Tenant or its agent with Landlord's terms, as required by the lease. Please be aware that Tenant fully intends to exercise its renewal option for the period 4/1/01-11/30/01, and that Tenant hereby certifies that it has not waived any of its rights as a result of Landlord's failure to comply with the terms of Exhibit "E" of the Lease. Sincerely, /s/ STEVE GREENSPAN Steve Greenspan Director of Facilities 58 [PEGASUS SOLUTIONS LETTERHEAD] Cc: Chuck Nixon -- CB Richard Ellis Cathleen Yeager -- EastGroup Properties (certified mail) 59 [PEGASUS SOLUTIONS LETTERHEAD] September 6,2000 CERTIFIED MAIL Ms. Cathleen Yeager Property Manager EastGroup Properties 1553 West Todd, Suite 203 Tempe, Arizona 85283 RE: NOTICE TO EXERCISE OPTION TO RENEW SUITES A-102 AND A-104 Dear Cathleen: This letter serves as official notice for Pegasus Solutions Companies, formerly Rezsolutions, Inc., formerly Anasazi Inc., to exercise its option to renew the Lease for Suites A-102 and A-104, located at 11048 North 23rd Avenue, Phoenix, Arizona 85029. This notice is provided pursuant to the agreed-upon terms, as outlined in Exhibit "E" of the Lease dated January 31, 1997, between Anasazi Inc. ("Tenant") and EastGroup Properties ("Landlord") and amended by the First Amendment To Lease dated August 7, 1997 and further amended by the Second Amendment dated November 1, 1997, and Third Amendment dated November 2, 1999. Pursuant to Exhibit "E", Landlord has five (5) business days from receipt of this notice to provide Tenant with its offer for the Extended Term. Pursuant to Exhibit "E", the Extended Term shall be for a period of eight (8) months, starting April 1, 2001 and ending November 30, 2001. Landlord's offer should include a three percent (3%) commission paid by Landlord to Tenant's broker, CB Richard Ellis. Sincerely, /s/ CHUCK NIXON Chuck Nixon First Vice President Corporate Services 602-735-5653 CN/pe cc: Steve Greenspan -- Pegasus Solutions 60 THIRD AMENDMENT TO LEASE That certain lease dated the 31st day of January 1997, by and between EASTGROUP PROPERTIES, L.P., A DELAWARE LIMITED PARTNERSHIP, Landlord, and ANASAZI, INC., A DELAWARE CORPORATION, NOW KNOWN AS REZSOLUTIONS, INC., Tenant, for the premises located at 11048 N. 23rd AVENUE, SUITES A102 AND A104, PHOENIX, ARIZONA, is amended this 2ND DAY OF NOVEMBER 1999 as hereinafter described. Effective the 2ND DAY OF NOVEMBER 1999, the Clauses below are substituted for like numbered clauses in the Lease Agreement. 1.(d) APPROXIMATE SQUARE FOOTAGE OF PREMISES (PARAGRAPH 2): For Suites A102 and A104 consisting of approximately 21,800 square feet. 1.(h) TERM (PARAGRAPH 4): For Suites A102 and A104, April 1, 2000 through March 31, 2001. 1.(i) SCHEDULED COMMENCEMENT DATE FOR A102 AND A104: April 1, 2000. 1.(j) FIXED RENT (SUBPARAGRAPH 5(a)): For Suites A102 and A104, the rental rate will be $15,696.00 per month plus applicable rental taxes, exclusive of all operating expenses including, but not limited to, all common area charges, property taxes and insurance. All other terms and conditions of said Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first written above. LANDLORD: EastGroup Properties, L.P., TENANT: REZsolutions, Inc., formerly a Delaware limited partnership Anasazi, Inc., a Delaware Corporation X /s/ MARSHALL LOEB X /s/ MAC HIGHET --------------------------------------- ----------------------------------- By: Marshall Loeb By: Mac Highet Its: Senior Vice President Its: President & CEO Date: 11-18-99 Date: 11/10/99 EX-10.19 4 d84582ex10-19.txt OFFICE LEASE DATED SEPTEMBER 1, 1987 1 EXHIBIT 10.19 DATED 1st September 1987 BRIDGER PROPERTIES LIMITED (1) and NEWS INTERNATIONAL PLC (2) LEASE -- of - 2 Kew Bridge Road Brentford Middlesex TERM COMMENCES : 24th June 1987 LENGTH : 25 years EXPIRES : 23rd June 2012 RENT : L320,000.00 per annum (subject to review at the fifth tenth fifteenth and twentieth anniversaries of the commencement date) Jonas & Parker 45 Castle Street Salisbury Wiltshire 2 THIS LEASE made the 1st [STAMP] September One thousand nine hundred and eighty-seven BETWEEN:- (1) BRIDGER PROPERTIES LIMITED whose registered office is situate at 36 Milford Street Salisbury Wiltshire (hereinafter called "the Landlord" which expression shall where the context so admits include the reversioner for the time being expectant on the determination of the term hereby granted) (2) NEWS INTERNATIONAL Plc whose registered office is situate at P.O. Box 495 1 Virginia Street London E1 9XY (hereinafter called "the Tenant" which expression shall whether the Tenant or any of its successors in title be one person or more than one person or a firm or company or any combination thereof and where the context so admits include his its or their respective successors in title) WITNESSETH as follows:- 1. IN this Lease:- (1) The following expressions have unless the context otherwise requires the following meanings:- (a) "the Demised Premises" means the premises described in Part I of the First Schedule and all additions and alterations thereto and all Landlord's fixtures from time to time annexed thereto (b) "the Yearly Rent" means a rent of Three hundred and twenty thousand pounds (L320,000.O0) per annum or such other rent as may from time to time be substituted therefor pursuant to the provisions of the Second Schedule 1 3 (c) "the Insurance Rent" means the amount of gross premiums and other costs and expenses from time to time required to effect or procure the insurance of the Demised Premises (including loss of rent insurance) in accordance with the Landlord's covenant in that behalf hereinafter contained (d) "the Management Charge" means such costs and expenses as may be reasonably incurred by the Landlord in retaining the services of agents for the purpose of acting as agent of the Landlord in connection with the performance and observance of all rights obligations covenants agreements and undertakings of the parties hereunder other than for the purpose of collecting the Yearly Rent and Insurance Rent PROVIDED THAT in no event shall such charge exceed three per centum of the aggregate of the annual Yearly Rent and Insurance Rent payable hereunder (e) "Conducting Media" means sewers drains pipes wires cables ventilation ducts heating ducts and other conducting media and includes any apparatus (not being tenant's or trade fixtures) connected to any Conducting Media for enabling use to be made of the Conducting Media or of any water gas electricity heating ventilation air conditioning or other effluvia passing through Conducting Media (f) "Legislation" means all Acts of Parliament and all orders regulations and bye-laws made pursuant to any 2 4 Act of Parliament or otherwise having the force of law (g) "the Planning Acts" means the legislation from time to time in force relating to Town and Country Planning (h) "Rent Restriction Legislation" means any legislation which renders unlawful or otherwise precludes (a) any demand for or payment of or acceptance of the whole or any part of the Yearly Rent which would otherwise be for the time being payable hereunder or (b) the requiring or carrying out of any review of the Yearly Rent at the times and in the manner herein provided (i) "the Review Dates" means the fifth tenth fifteenth and twentieth anniversaries of the term hereby granted (j) "Insured Risks" means the risk of damage or destruction by fire (other than fire risks from time to time excluded from the fire policy issued by the Landlord's insurers) storm earthquake riot damage by malicious persons damage impact and aircraft flooding and damage by bursting water pipes or any such other risks as the Landlord at his own discretion may from time to time insure pursuant to the Landlord's covenant in that behalf hereinafter contained (k) "the Prescribed Rate" means interest of a rate 3 per cent above the base rate from time to time of Lloyds Bank Plc (l) "Sub-lettable Unit" shall mean any of the areas on the ground first and second floors of the Demised 3 5 premises shown for the purposes of identification only edged blue on the plans B, C and D annexed hereto (2) Where two or more persons constitute a party to this Lease covenants by that party herein contained or implied shall be deemed to be made by those persons jointly and severally (3) References to "the tenancy" hereinafter contained shall be deemed to be references both to the term of years hereby demised and to any extension or continuation thereof whether pursuant to the provisions of the Landlord and Tenant Act 1954 or any similar legislation from time to time in force or otherwise which tenancy shall be deemed to have commenced on the date of commencement of the said term hereinafter stipulated (4) The expression "termination" in relation to the tenancy means termination in any manner whether by effluxion of time notice forfeiture surrender or otherwise and the expression "terminating" bears a corresponding meaning (5) Words importing the masculine gender only shall also import the feminine gender or the feminine gender shall (in relation to a corporation aggregate) also import the appropriate words of the neuter gender and words importing the singular number only shall also import the plural number and respectively vice versa (6) Any reference to any Act of Parliament shall include any modification extension or re-enactment thereof for the time being in force and shall include any instrument 4 6 regulation scheme order plan permission direction or condition for the time being issued or made or given thereunder or deriving validity therefrom 2. THE Landlord hereby demises unto the Tenant ALL THOSE the Demised Premises TO HOLD the same unto the Tenant for the term of Twenty-five years commencing on the 24th day of June One thousand nine hundred and eighty-seven YIELDING AND PAYING therefor throughout the term the Yearly Rent and the Insurance Rent the Yearly Rent being payable by equal quarterly installments in advance on the usual quarter days by standing order to the Landlord's bank account the Insurance Rent and the Management Charge being payable forthwith on demand from time to time and to be recoverable as rent by the Landlord and subject to all the Landlord's remedies under this Lease in respect of rent in arrear and SUBJECT TO the matters referred to in Part II of the First Schedule so far as the same affect the Demised Premises and are still subsisting and capable of taking effect 3. THE Tenant hereby covenants with the Landlord: (1) To pay the Yearly Rent and the Insurance Rent hereby reserved at the times and in the manner aforesaid and any Value Added Tax payable thereon respectively and without any deduction (2) To pay all rates taxes assessments impositions and outgoings whether of an existing or novel kind now or at any time hereafter during the said term levied imposed or charged exclusively in respect of the Demised Premises or any part thereof whether payable by the Landlord or the Tenant and a fair and due proportion (as determined by the 5 7 Landlord's Surveyor whose decision shall be final) of any such rates taxes assessments impositions and outgoings levied imposed or charged on the Demised Premises in common with any other premises of the Landlord (3) To repair and keep in good and substantial repair and to renew and rebuild whenever necessary and keep clean and properly decorated all to the reasonable satisfaction of the Landlord's Surveyor the whole of the Demised Premises damage by the Insured Risks excepted provided that the policy or policies or insurance effected by the Landlord shall not have been vitiated or payment of the policy monies refused in whole or in part as a consequence of some acts neglect or omission of or permitted by the Tenant or any sub-tenant or their respective servants agents licencees or invitees (4) (a) In every third year of the tenancy and also in the last three months of the tenancy howsoever terminating in a workmanlike manner to prepare and paint with at least three coats of good quality paint of a colour approved by the Landlord all parts of the exterior of the Demised Premises previously or usually painted and clean and where appropriate repoint and treat with the like protective and decorative finishes as shall have previously been applied or otherwise with such protective and decorative finishes approved by the Landlord as are necessary for their proper maintenance all other parts of the exterior of the Demised Premises 6 8 (b) In every fifth year of the tenancy and also in the last three months of the tenancy howsoever terminating in a workmanlike manner to prepare and paint with at least two coats of good quality paint all parts of the interior of the Demised Premises previously or usually painted and clean and where appropriate treat with the like protective and decorative finishes as shall previously have been applied or otherwise with such protective and decorative finishes as are necessary for their proper maintenance all other parts of the interior of the Demised Premises Provided that the painting and treatment to be carried out in the last three months of the tenancy shall be in colours and with finishes previously approved by the Landlord (5) To keep the Demised Premises in a clean and tidy condition and regularly to remove therefrom all waste or offensive materials and articles and without prejudice to the generality of the foregoing to maintain the flower beds forming part of the Demised Premises in a neat and tidy condition and properly planted and to replace all shrubs as and when necessary and not to cut down any trees, shrubs or bushes therein without the consent of the Landlord which shall not be unreasonably withheld (6) To comply in all respects with all requirements (whether placed on the Landlord or the Tenant) of all present and future legislation and of all competent authorities as to the condition of the Demised Premises and 7 9 the user thereof and the activities carried on thereat and any works or alterations executed or required to be executed thereon or in respect thereof or in any other way affecting the Demised Premises and to keep the Landlord indemnified against all actions proceedings claims or demands which may be brought or made by reason of any such requirements not having been duly complied with and if as a result of any such requirements the Landlord shall carry out any works or alterations to the Demised Premises the Tenant shall repay to the Landlord on demand the expenses thereby incurred by the Landlord or a fair proportion thereof as determined by the Landlord's Surveyor whose decision shall be final save in the case of manifest error (7) At the termination of the tenancy to yield up the Demised Premises and all fixtures therein in such repair and condition as is required by the covenants on the part of the Tenant herein contained PROVIDED THAT:- (a) the Tenant may before such termination remove all tenant's or trade fixtures but shall make good any damage thereby caused to the Demised Premises to the Landlord's reasonable satisfaction (b) if after the termination of the tenancy there shall be left on the Demised Premises any tenant's or trade fixtures or any chattels or refuse the Landlord may treat the same as having been abandoned by the Tenant and may arrange for the removal and destruction or disposal thereof as the Landlord thinks fit and the 8 10 Tenant shall pay to the Landlord on demand the cost of such removal and destruction or disposal and shall indemnify the Landlord against any liability resulting therefrom and (c) if the Tenant shall fail to yield up the Demised Premises in such repair and condition as aforesaid the Landlord may if it thinks fit effect any repairs decorations and other works which ought to have been carried out by the Tenant pursuant to the covenants on the part of the Tenant herein contained and the Tenant shall pay to the Landlord on demand the cost of such repairs decorations and other works effected by the Landlord together with mesne profits at a rate equal to the rack rental value of the Demised Premises at the date of such termination for the period reasonably required for the carrying out of such work and the Landlord's Surveyor's certificate as to the amount of such cost and mesne profits shall be conclusive and binding on the parties (8) To permit the Landlord and those authorised by it at all reasonable times during normal business hours (except in case of emergency) on giving reasonable notice to the Tenant (except in case of emergency) to enter upon the Demised Premises or any part thereof for any of the following purposes:- (a) inspecting the Demised Premises and taking schedules of the condition thereof and of the Landlords fixtures therein 9 11 (b) repairing altering adding to rebuilding or replacing any adjacent premises or any Conducting Media comprised in the Demised Premises but which serve or are capable of serving other premises and (c) doing anything which the Landlord considers necessary for the performance by the Landlord of the covenants on its part hereinafter contained PROVIDED THAT the person so entering shall cause as little inconvenience as reasonably possible to the Tenant or other occupiers of the Demised Premises and shall make good any damage to the Demised Premises or the property or fixtures and fittings of the Tenant or other occupiers of the Demised Premises which that person causes (9) (a) To permit the Landlord and those authorised by it at all reasonable times during normal business hours (except in case of emergency) on giving reasonable notice to the Tenant (except in case of emergency) to enter upon the Demised Premises in order to carry out any works to which this sub-clause applies and which the Tenant has failed to carry out within two months after service upon the Tenant of a notice requiring the same to be carried out (b) The works (hereinafter referred to as "the Prescribed Works") to which this sub-clause applies are:- (i) the carrying out and completion in the manner required by this Lease of any repairs or other 10 12 works which the Tenant is obliged to carry out by the terms of this Lease (ii) the removal of any alterations additions or other works carried out or commenced on the Demised Premises without all necessary licences consents permissions and approvals of the Landlord the Local Planning Authority and any other authority or person having been obtained and (iii) the removal or (at the Landlord's option) the completion in a good and workmanlike manner in accordance with the terms of this Lease and of such licences consents permissions and approvals of any alterations additions or other works which have not been so completed Provided that the carrying out of such works shall cause as little inconvenience as reasonably possible to the Tenant or other occupiers of the Demised Premises or the property or fixtures and fittings of the Tenant or other occupiers of the Demised Premises and the Landlord shall make good any damage caused to the Demised Premises or the property (10) To pay to the Landlord on demand all expenses (including Solicitors' Surveyors' and other professional fees) reasonably and properly incurred by the Landlord in or in connection With:- (a) carrying out any of the Prescribed Works (b) the preparation and service of any notice under Section 146 or Section 147 of the Law of Property Act 11 13 1925 notwithstanding that forfeiture is avoided otherwise than by relief granted by the Court or (c) the preparation and service at any time during or after the termination of the tenancy of any notice or schedule of dilapidations (11) Not to make any alteration or addition to or in any way injure the Demised Premises or any part thereof or the internal arrangement thereof or the Conducting Media comprised in or serving the Demised Premises other than alterations to the internal arrangement of the Demised Premises through the erection or demounting of non-structural demountable partitioning which does not affect the structure thereof full written details including plans and specifications of such erection or demounting to be given to the Landlord immediately on completion thereof PROVIDED that with the prior written consent of the Landlord such consent not to be unreasonably withheld the Tenant may make internal alterations to the Demised Premises and connections to the Conducting Media therein which do not affect the structure thereof full written details including plans and specifications of such alterations and connections to be given to the Landlord immediately upon completion thereof (12) Not to interfere with or obstruct any Conducting Media and without prejudice to the generality of the foregoing not to throw or permit to be thrown any dirt rubbish rags or other refuse into the sinks lavatories cisterns or waste or soil pipes in the Demised Premises 12 14 (13) Not without the consent of the Landlord to display upon the exterior of the Demised Premises or upon the interior thereof so as to be visible outside the Demised Premises any lettering advertisement sign notice placard flag or similar device provided that such consent shall not be unreasonably withheld or delayed to a sign displaying the name and business of the Tenant or of any permitted sub-tenant and the name of the Building (14) Not to use or permit to be used the Demised Premises or any part thereof for any illegal or immoral purpose or for the sale of any beer wine spirit or liquor or for any sale by auction and not to permit any person to reside at the Demised Premises and not to bring upon the Demised Premises anything of an explosive or inflammable nature or which may overload any part of the Demised Premises (15) Not to use the Demised Premises or any part thereof for any purpose other than as offices as the same were previously defined in Class II of the Town and Country Planning (Use Classes) Order 1972 (16) In relation to the Planning Acts:- (a) not to make any application under the Planning Acts for permission to carry out any development (as defined by the Planning Acts) or for the approval of anything in connection therewith unless the Tenant shall previously have obtained all consents licences and approvals of the Landlord required under this Lease for the carrying out of such development 13 15 (b) Not to make any such application except in such form and for such duration whether limited or unlimited as the Landlord may approve which approval shall not be unreasonably withheld (c) Not to implement any planning permission or approval unless the same has been submitted to and approved in writing by the Landlord whose approval shall not be unreasonably withheld (d) In the event of the Tenant carrying out any works in implementation of any planning permission or approval so approved to carry out and complete all works required to implement the same in a good and workmanlike manner in accordance with the terms of such permission or approval (e) To make or secure to the satisfaction of the Secretary of State or other authority appointed for the purpose any payment that may be required for any planning permission or approval which may be granted and so to do for the full term of the permission or approval and similarly to make or secure any payment that may be required in respect of any development or the continuance or retention of any development being a permission or approval implemented or development carried out or continued or retained at any time during the currency of the tenancy (f) Unless the Landlord otherwise directs to carry out before the termination of the tenancy or such earlier 14 16 date as may be nominated by the Landlord any works required to be carried out to the Demised Premises by a date subsequent to the termination of the tenancy by any limitation or condition to which any planning permission or approval implemented by or under or for the benefit of the Tenant is subject (g) To produce to the Landlord or the Landlord's agents when required all such drawings documents and other evidence that the provisions of this sub-clause (16) have been complied with as it or they may reasonably require (h) For the avoidance of doubt the Landlord's approval of any application permission or approval under this sub-clause may be refused on the grounds (inter alia) that the period thereof or anything contained therein or omitted therefrom or the implementation thereof would in the reasonable opinion of the Landlord's Surveyor be likely to be prejudicial to the interests of the Landlord whether in relation to the Demised Premises or any neighbouring premises or otherwise and whether during the currency of the tenancy or thereafter or might in the Landlord's opinion give rise to a taxation or potential taxation liability on the Landlord (17) Within seven days of the receipt of the same by the Tenant to give full particulars to the Landlord or the Landlord's Surveyor of any notice or order or proposal for a notice or order given issued or made to or on the Tenant by 15 17 any competent authority pursuant to Legislation and if so required by the Landlord or the Landlord's Surveyor to produce such notice order or proposal to them and without delay to take all necessary steps to comply with any such notice order or proposal and at the request of the Landlord or the Landlord's Surveyor but at the cost of the Tenant to make or join with the Landlord in making such objections or representations against or in respect of any such notice order or proposal as they or any of them shall deem expedient (18) Not knowingly to permit any person to encroach upon or to acquire any right of light air way water or drainage or other easement over the Demised Premises but forthwith to inform the Landlord of any such encroachment or of any act or thing which might result in the acquisition of any right or easement over the Demised Premises and to do all acts and things which may be necessary or expedient to prevent such encroachment or the acquisition of any such right or easement Provided that if the Tenant shall fail to do such acts and things as aforesaid the Landlord shall have power to enter upon the Demised Premises for the purpose of doing the same and any expenses which the Landlord thereby incurs shall be paid by the Tenant to the Landlord on demand (19) Not to do or omit or cause any act or thing which might invalidate or prejudicially affect any insurance of the Demised Premises or any adjoining premises or render to be insurance monies in whole or in part irrecoverable and at 16 18 the Tenant's expense to comply with any requirements of the insurers for the time being thereof (20) In the event of the premiums payable for the insurance of the Demised Premises or any neighbouring premises being increased by reason of any act or default of the Tenant to pay on demand to the Landlord or to whomsoever the Landlord shall direct the amount of such increase (21) Not to mortgage charge part with the possession of or permit any other person to occupy the whole or any part of the Demised Premises save that the Tenant may with the written consent of the Landlord (which consent shall not be unreasonably withheld or delayed):- (a) assign the whole of the Demised Premises to a person (in this paragraph called "the proposed Assignee") not intending to use the Demised Premises or any part thereof for any purpose other than in accordance with Clause 3 (15) hereof who has previously entered into a covenant with the Landlord in such form as the Landlord shall reasonably require to pay the rent hereby reserved and to observe and perform the Tenant's covenants and the conditions herein contained and who (if a private limited company) has also procured that two persons acceptable to the Landlord have each entered into a covenant with the Landlord in such form as the Landlord shall reasonably require that the proposed Assignee will as from the date of the assignment of the Demised Premises to the proposed Assignee pay such rent and observe and perform such covenants and conditions or 17 19 (b) underlet the whole of the Demised Premises to a person not intending to use the Demised Premises or any part thereof for any purpose other than in accordance with Clause 3(15) hereof who has previously entered into a covenant with the Landlord in the same terms as this paragraph at the best rent reasonably obtainable without taking a fine or premium by means of an underlease which contains like covenants on the part of the underlessee to the Tenant's covenants and like conditions to the conditions herein contained and the like provisions for review at each of the Review Dates of the rent thereby reserved to those contained in the Second Schedule hereto (c) underlet part of the Demised Premises on the same terms as are contained in clause 3(21)(b) hereof PROVIDED that: (i) save as provided in paragraph (d) below the maximum number of underlettings permitted by this sub-clause shall be two and (ii) underletting of part of any sub-lettable unit is hereby expressly prohibited (d) for the purposes of paragraph (c) of this sub-clause an underletting of two or more sub-lettable units to the same tenant shall be treated as a single underletting and notwithstanding the first proviso to the said sub-clause more than two underlettings shall 18 20 be permitted pursuant thereto provided that the security of tenure provisions of Part II of The Landlord and Tenant Act 1954 shall have been excluded by Order of the Court from any such additional underletting and PROVIDED FURTHER that so long as this Lease shall be vested in NEWS INTERNATIONAL PLC such company may without the necessity of obtaining any such consent part with possession or occupation of the Demised Premises as a whole or in part with or to a holding or subsidiary company (within the meaning of Section 736 of the Companies Act 1985) for the same purposes as are permitted by this Lease provided no tenancy is thereby created (22) Not to allow any underlessee or other person deriving title to the Demised Premises from the Tenant to assign mortgage charge underlet part with the possession of or permit any other person to occupy the Demised Premises or any part thereof save that with the written consent of the Landlord which consent shall not be unreasonably withheld and upon terms (mutatis mutandis) of paragraph (22)(a) & (b) of this Clause the Tenant may permit such underlessee or other person to assign or underlet the whole of the Demised Premises (23) (a) To procure that every assignee underlessee licensee or other person in whose favour any disposition (whether affecting the Demised Premises or any derivative interest therein) is effected or upon whom the Demised Premises or any such derivative 19 21 interest shall devolve by operation of law shall (without any demand in that behalf) within twenty-one days after such disposition or devolution occurs leave a certified copy of the instrument effecting the disposition or notice of the devolution together with any instrument evidencing the same with the Landlord for registration (b) To procure that upon every registration of each instrument or notice under the foregoing provisions the person leaving the same pays to the Landlord its registration fee of fifteen pounds together with any Value Added Tax payable thereon (24) To permit the Landlord at any time (in the case of a proposed sale mortgage or charge of the Landlord's interest) or during the last six months of the term hereby granted and the remainder of the tenancy thereafter (in the case of a proposed letting) to display upon some part of the exterior of the Demised Premises in such a position as not to interfere with the light or air enjoyed by the Demised Premises or the Tenant's user thereof a notice advertising that the same are for sale or to let and to permit prospective purchasers mortgagees chargees or lessees to inspect the Demised Premises at reasonable times by prior appointment during normal business hours (25) To pay on a full indemnity solicitor and own client basis the reasonable and properly incurred costs and disbursements (including stamp duties) of the Landlord's 20 22 Solicitors and the reasonably and properly incurred costs and disbursements of the Landlord's Surveyors Architects and other professional advisers and the Landlords reasonable administration fee in connection with any Deed or other thing hereby required to be executed or done at the Tenant's expense or any licence consent or approval applied for by the Tenant relating to the Demised Premises or the provisions of this Lease whether or not the same shall be executed done or given together with any Value Added Tax payable thereon (26) Not to store stack place lay out or leave outside the Demised Premises any rubbish or refuse or other material (except in refuse bins designed for the purpose in the bin area) and not to obstruct or cause or suffer to be obstructed the accessways serving or adjoining the Demised Premises or any adjoining premises or any part or parts thereof (27) To ensure that nothing of an explosive or highly inflammable nature and no engine or machinery shall be brought into or stored in the Demised Premises nor any safe or other heavy article which in the opinion of the Landlord is likely to affect the stability of the structure of the Demised Premises (28) If so required by the Landlord to pay forthwith on demand interest at the Prescribed Rate both before and after judgement upon:- (a) any instalment of the Yearly Rent or any sum due as or as part of or on account of the Insurance Rent 21 23 which shall not have been paid to the Landlord within seven days after the same became due for the period from the date on which the same became due to the date on which the same was paid and (b) any other expenditure by the Landlord for which the Tenant is obliged to reimburse the Landlord for the period from the date of such expenditure to the date on which such reimbursement was made (29) To indemnify the Landlord from and against all claims costs damages and expenses made against or incurred by the Landlord as a result of the Tenants occupation of the Demised Premises or on account of the rights herein reserved or granted by the Landlord (30) If and for so long as the Tenant is ordinarily resident outside England and Wales or is a company or corporate body with a registered office outside England and Wales the Tenant hereby covenants and declares that the Tenant will from time to time serve notice in writing on the Landlord specifying for the purposes of this Clause 3 (30) the name and address of a person within England and in any action in respect of this Lease being begun by writ by the Landlord against the Tenant such writ may (in addition to or substitution for any method specified by this Lease or by the Rules of the Supreme Court) be served upon the Tenant by posting such writ in an ordinary pre-paid envelope addressed to the person so specified from time to time and unless and until the Landlord shall be notified by the Tenant that the 22 24 Tenant has specified some other person within England service upon such specified person shall be deemed to be good service of such writ upon the Tenant 4. THE Landlord hereby covenants with the Tenant as follows: (1) that subject to the Tenant paying the Insurance Rent the Landlord will insure and keep insured the Demised Premises (unless such insurance shall be vitiated by any act or default of the Tenant or any person claiming through the Tenant or his or their servants agents licensees or visitors) with an insurance company of repute as the Landlord shall determine against damage or destruction by the Insured Risks in an amount equal to the full reinstatement value of the Demised Premises (as determined by the landlord's Surveyors) plus the estimated cost of clearing debris and of Architects' Surveyors' and other professional fees in connection with reinstatement plus (if required by the Landlord) provision for increased costs plus loss of three years' rent of the Demised Premises (but in respect of any years or part thereof from a Review Date and any years or part thereof following the expiration of the term hereby granted at such rent as shall reasonably be required by the Landlord) and will in the event of the Demised Premises being destroyed or damaged by any of the Insured Risks with all practicable speed and subject to all necessary licences consents permissions and approvals being obtainable lay out the money received in respect of such insurance (other than in respect of loss of rent) in reinstating the damage in respect of which the same shall have been paid 23 25 (2) To permit the Tenant to notify the Landlord's insurers of the Tenant's interest in the Demised Premises (3) To provide the Tenant not more than once every twelve months on request with details of the said policy (4) That the Tenant paying the rents hereby reserved and observing and performing the covenants on its part and the conditions herein contained shall peaceably hold and enjoy the Demised Premises throughout the said term without any lawful interruption by the Landlord or any person lawfully claiming under through or in trust for the Landlord 5. PROVIDED ALWAYS AND IT IS EXPRESSLY AGREED as follows:- (1) If the rents hereby reserved or any part thereof shall be unpaid for twenty one days after becoming payable (whether formally demanded or not) or if any covenant on the Tenant's part or conditions herein contained shall not be performed or observed or if the Tenant being an individual shall become bankrupt or enter into any composition with the Tenant's creditors or being a company shall enter into liquidation (other than a voluntary members liquidation for the purpose of reconstruction or amalgamation forthwith carried into effect and not involving any reduction of capital) or have a receiver appointed of its undertaking or assets or any part thereof or if any distress or execution shall be levied upon the Tenant's goods then and in any of the said cases it shall be lawful for the Landlord at any 24 26 time thereafter to re-enter upon the Demised Premises or any part thereof in the name of the whole and thereupon this demise shall absolutely determine but without prejudice to the right of action of the Landlord in respect of any breach of the Tenant's covenants herein contained (2) That if the Demised Premises or any part thereof shall be so destroyed or damaged by any of the Insured Risks as to be unfit for occupation and use by the Tenant then (unless any of the insurance money in respect of loss of rent shall have been rendered irrecoverable by the act or default of the Tenant or any other person deriving title from the Tenant or any licensee or invitee of the Tenant or any such other person) the rent hereby reserved or a fair proportion thereof according to the extent of the damage shall be suspended and cease to be payable until the Demised Premises shall be reinstated and fit for occupation and use or until the expiration of three years from the date of such destruction or damage whichever shall be the earlier provided that any dispute as to the amount or length of such suspension shall be determined by an independent Surveyor (acting as expert) appointed by the President of the Royal Institution of Chartered Surveyors on the application of either party (3) The Landlord may retain for its own benefit any commissions or discounts received or obtained by it on or based on the gross premiums and other costs which would otherwise be paid incurred or suffered by the Landlord in insuring or procuring the insurance of the Demised Premises in accordance with the Landlord's covenant in that behalf herein contained. 25 27 (4) Subject to the provisions of sub-section (2) of Section 38 of the Landlord and Tenant Act 1954 neither the Tenant nor any person deriving title from the Tenant to the whole or any part of the Demised Premises shall be entitled on quitting the Demised Premises or any part thereof to any compensation under Section 37 of the said Act (5) Any consent permission licence or approval purporting to be given by the Landlord to the Tenant in relation to this Lease or the Demised Premises whether or not the same be required to be obtained by the Tenant by any of the covenants or conditions herein contained shall be ineffective unless the same be given either:- (a) by Deed or (b) by writing under the hand of the Landlord or some duly authorised officer or agent of the Landlord expressly stating that the Landlord does not require the same to be by Deed (6) That no demand for or acceptance or receipt of any part of the Yearly Rent or any payment on account thereof shall operate as a waiver by the Landlord of any right which the Landlord may have to forfeit this Lease by reason of the breach of covenant or condition by the Tenant notwithstanding that the Landlord may know or be deemed to know of such breach at the date of such demand acceptance or receipt 26 28 [MAP] 29 [FLOOR PLAN] 30 [FLOOR PLAN] 31 [FLOOR PLAN] 32 (7) Nothing herein contained shall operate to grant by implication or otherwise any estate right or easement not hereby expressly granted by the Landlord (8) The provisions of Section 196 of the Law of Property Act 1925 as amended by the Recorded Delivery Service Act 1962 shall apply to any notices served pursuant to or in connection with this Lease as if such notices were notices required or authorised under the said Acts (9) All references in this Lease to amounts (including rent) payable by the Tenant to the Landlord shall be construed as references to such amounts exclusive of Value Added Tax and the Tenant shall pay to the Landlord in addition to any such amount any Value Added Tax payable on that amount (10) This Lease shall be governed by and subject to the laws of England and Wales and the parties hereby submit to the jurisdiction of the Courts thereof IN WITNESS whereof the parties hereto have executed this Lease the day and year above written THE FIRST SCHEDULE PART I Description of the Demised Premises The entire building and premises including all walls foundations roofs boilers plant machinery and lifts therein with the car parking spaces and flower beds and walls thereof known as 2 Kew Bridge Road Brentford as the same are shown for identification purposes only edged red on the plan A annexed hereto TOGETHER 27 33 with the benefit of the covenants on the part of the Grantee contained or referred to in a Deed dated the Twenty-first day of November One thousand nine hundred and sixty and made between Alan Russell Smith Edward Hamilton Fleetwood Fuller and Philip Stirling Eliot (1) and Rodwell Estates Limited (2) PART II Matters to which Lease is subject All matters contained or referred to in the Charges Register of the Landlord's freehold title no NGL 518559 THE SECOND SCHEDULE Provisions as to Rent Review 1. (a) The Landlord may require a review of the Yearly Rent at each of the Review Dates by notice (hereinafter called "a Review Notice") specifying the relevant Review Date given to the Tenant at any time before the relevant Review Date in which event the Yearly Rent payable as from the relevant Review Date shall be the higher of (i) the Yearly Rent payable immediately before such Review Date and (ii) the rack rental value of the Demised Premises at the relevant Review Date (b) If no Review Notice specifying a particular Review Date shall have been given to the Tenant before such Review Date then at any time thereafter the Landlord may give a Review Notice to the Tenant specifying such Review Date but save as provided in paragraph 2 of this Schedule such notice shall otherwise take effect as if the Review Notice had been given before the relevant Review Date and this Schedule shall be construed accordingly 28 34 2. If during any period whilst Rent Restriction Legislation is in force the Landlord shall be precluded by such Legislation from requiring the Tenant to pay the full amount of the Yearly Rent payable immediately before the commencement of such period or of the Yearly Rent payable as from any Review Date occurring during that period or if no review of rent shall for any reason whatsoever be carried out in respect of a Review Date falling within that period the Landlord may on each occasion during such period when such Legislation makes it lawful for the Landlord to require the Tenant to pay an increased amount of rent and also on the occasion when such period comes to an end require a supplementary review of the Yearly Rent by a Review Notice given to the Tenant before or not later than six months after the relevant occasion in which event the Yearly Rent payable as from the relevant occasion shall be the highest of (i) the Yearly Rent payable immediately before such occasion (ii) the rack rental value of the Demised Premises at such occasion and (iii) the greatest amount of yearly rent it would have been lawful to charge for the Demised Premises pursuant to the terms of such Legislation and for the purposes of the remaining provisions of this Schedule each such occasion shall be deemed a Review Date 3. Rack rental value of the Demised Premises means such rent as may be agreed or determined as hereinafter provided to be the yearly rent at which the Demised Premises could reasonably be expected to be let in the open market by a willing landlord to a willing tenant for a term equal to the term then unexpired not 29 35 being less than Fifteen years by means of a lease containing the same provisions (other than as to the amount of the yearly rent but including the same provisions for rent review) as are herein contained on the following assumptions:- (1) that the Demised Premises are in such condition as they would have been in had the Tenant's covenants herein contained been fully complied with at that date (2) that if the Demised Premises have been destroyed or damaged (whether by any of the Insured Risks or otherwise) they have been completely reinstated (3) that the Demised Premises are vacant and fit in all respects for occupation and use by the Tenant and (4) that there is disregarded any effect on rent or:- (a) the Tenant or an underlessee or their respective predecessors in title having been in occupation of the Demised Premises (b) goodwill attaching to the Demised Premises solely by virtue of any business carried on thereat by the Tenant or an underlessee or their respective predecessors in title or their respective businesses (c) any improvement lawfully carried out to the Demised Premises by the Tenant or an underlessee or their respective predecessors in title or their respective businesses at its own expense not being an improvement carried out in pursuance of an obligation to the Landlord or (d) Rent Restriction Legislation 30 36 4. (1) If the Landlord and the Tenant fail to agree upon the rack rental value of the Demised Premises within two months of receipt by the Tenant of the Review Notice the same shall be determined by an independent surveyor experienced in the letting and/or valuation of premises of a similar nature to and situate in the same region as the Demised Premises and put to a use the same as or similar to that of the Tenant (hereinafter called "the surveyor") agreed upon by the Landlord and the Tenant or failing agreement appointed on the application of either of them by the President for the time being of the Royal Institution of Chartered Surveyors and no delay however long in making such application shall prejudice the right of the Landlord or the Tenant to require the rack rental value to be determined as aforesaid (2) The Surveyor shall notify the Landlord and the Tenant in writing of his appointment and invite the parties to submit written representations and/or valuations to him within such reasonable period (being not longer than twenty-eight days) as he may specify (3) The Surveyor shall act as an expert in reaching his decision and he shall be obliged to consider any representations and/or valuations submitted to him and his decision shall be final and binding on the parties (4) The fees of the Surveyor shall be paid as directed by the Surveyor (5) If the Surveyor shall fail to reach a decision and give notice thereof to the Landlord and the Tenant within three 31 37 months after his appointment or such longer period as the Landlord and the Tenant may from time to time agree or if he shall relinquish his appointment or die or if it shall become apparent that for any reason he will be unable to complete his duties hereunder the Landlord and the Tenant may apply to the said President for a substitute to be appointed in his place which procedure may be repeated as many times as necessary (6) If the said president shall for any reason not be available or be unable or unwilling to make any appointment applied for pursuant to this paragraph at the time of application therefor the appointment may be made by the Vice-President or next senior officer of the said Institution then available and able and willing to make such appointment or if no such officer of the said Institution shall be available and able and willing by such officer of such other professional body of surveyors as the Landlord shall nominate and any reference herein contained to the said President shall be deemed to include a reference to such Vice-President or other officer 5. If the rent payable as from any Review Date shall not have been agreed or determined by that Review Date the Tenant shall continue to pay rent at the rate payable immediately before that Review Date but immediately upon the rent payable as from that Review Date being agreed or determined shall pay to the Landlord on demand the balance (if any) due from the Tenant in respect of the period from that Review Date to the Quarter Day next after the rent payable as from that Review Date shall have been agreed 32 38 or determined together with interest on such balance at the Prescribed Rate calculated on a day-to-day basis for the period from that Review Date to the date of payment of such balance 6. A Memorandum in such form as the Landlord's Solicitors shall reasonably require recording the amount of the Yearly Rent payable from the review date shall be endorsed on the Lease and on the Counterpart Lease and each party shall bear its own costs in connection therewith THE COMMON SEAL of BRIDGER PROPERTIES LIMITED was hereunto affixed in the presence of: [SEAL] /s/ [ILLEGIBLE] Director /s/ [ILLEGIBLE] Secretary THE COMMON SEAL of NEWS INTERNATIONAL PLC was hereunto affixed in the presence of: Director Secretary 33 39 DATED 1997 ------------------------------------------ BARELLA ESTABLISHMENT To REED TELEPUBLISHING LIMITED [COUNTERPART] LICENCE To make alterations at 2 Kew Bridge Road Brentford Middlesex PRITCHARD ENGLEFIELD 14 New Street London EC2M 4TR Tel: 0171 072 9720 Fax:0171 972 9721 Ref: DRL/mt/Barella.Lic 40 THIS DEED is made the day of One thousand nine hundred and ninety seven BETWEEN BARELLA ESTABLISHMENT OF VADUZ whose address for service in the United Kingdom is at 14 New Street London EC2M 4TR (hereinafter called the Landlord") of the one part and REED TELEPUBLISHING LIMITED registered number 181427 whose registered office is at Church Street Dunstable Bedfordshire LU5 4HB (hereinafter called the Tenant) of the other part /s/ [ILLEGIBLE] WHEREAS: (1) By a Lease (hereinafter called "the Lease") short particulars whereof appear in the First Schedule ALL THAT the premises described in the Second Schedule (hereafter called "the demised premises") TOGETHER WITH the rights set out in the Lease were demised for the term and at the yearly rent as in the Lease set out and subject to the tenant's covenants and conditions and to the exceptions and reservations therein contained (2) The Lease contained a covenant on the part of the Tenant inter alia not without the prior written consent of the landlord to make any alterations or additions to the plan or elevation of the demised premises (3) The Tenant is desirous of carrying out certain works and alterations to the demised premises in accordance with the attached drawing prepared by Weatherglaze and numbered 2KBR/I 2KBR/2(a) 2KBR/3 2KBR/4 and 2KBR/7 (hereinafter called "the drawings") full particulars whereof appear in the Third Schedule all such work and alterations being hereinafter referred to as "the works" and has requested the Landlord to grant a licence to execute the works which the Landlord has agreed to do in consideration of the Tenant entering into the covenants and subject to the terms hereinafter contained (4) This Deed is supplemental to the Lease 41 NOW THIS DEED WITNESSES as follows:- 1. IN pursuance of the said agreement and in consideration of the covenants on the part of the Tenant hereinafter contained the Landlord at the request of the Tenant hereby gives licence and authority to the execution of the works at the demised premises 2. IN consideration of the licence hereinbefore contained the Tenant for Itself and its successors in title HEREBY COVENANTS with the Landlord as follows:- 2.1 To carry out the works with due diligence and speed within three months from the date hereof strictly in accordance with the drawing and the particulars set out in the Third Schedule and in accordance with the provisions of Planning Consent dated 20th February 1997 issued by the London Borough of Hounslow and with good quality materials and in a good and workmanlike manner and with due regard to modern standards of building and workmanship to the reasonable satisfaction of the surveyor to the Landlord whose proper fees together with V.A.T. thereon shall be borne by the Tenant and to make good to the like satisfaction all damage caused directly or indirectly by the carrying out of the works It is AGREED AND DECLARED that by expressing such satisfaction the 2 42 obligations of the Tenant hereunder shall not be affected or lessened in any way 2.2 To do all things necessary and make all payments required for obtaining all necessary consents for the works including the consents of the local and/or any other authority (including any Utility) and also the Insurance Company with which the demised premises are insured against fire and to produce all necessary consents to the Landlord before commencing any part of the works 2.3 To observe and perform all statutory requirements and any conditions imposed by any of the consents referred to in sub--clause 2.2 hereof and any conditions and requirements of the insurers of the demised premises as a result of the carrying out of the works and to pay to the landlord any increased insurance premium payable in respect of the demised premises and/or the building (without prejudice to any other obligation imposed by the Lease) occasioned by the works 2.4 Without prejudice to any other provision hereof 2.4.1 to obtain the consent of the Fire Officer to the works and the mode of execution thereof 2.4.2 to observe and perform any requirements of the Fire Officer and the Fire Authority in relation to the works and in particular but without prejudice to the generality of the foregoing not to impede the fire escape routes from the demised premises 2.4.3 not to do anything which may infringe the Fire Certificate for the demised premises 3 43 2.4.4 to comply with any applIcable code of building practice 2.4.5 to carry out the works in a manner which causes the least possible inconvenience or annoyance to the owners or occupiers of any neighbouring premises 2.5 During the execution of the works 2.5.1 to keep all materials and equipment stored inside the demised premises 2.5.2 not to cause or permit 2.5.2.1 any damage disturbance annoyance nuisance or inconvenience whether by noise dust vibration the emission of smoke fumes or effluvia or otherwise to the Landlord or to the owners or occupiers of any adjoining or neighbouring property 2.5.2.2 any damage or disturbance to or weakness or render unsafe the structure of the demised premises or any adjoining or neighbouring property or any plant or machinery at the demised premises 2.5.2.3 the infringement interruption or destruction of any right easement or privilege 2.5.2.4 the interruption of any service to or from adjoining or neighbouring property 2.6 The Tenant hereby admits that this Licence and the Lease constitute a valuable consideration for the covenants on the part of the Tenant herein contained to execute and complete the works and that the Tenant shall 4 44 not be entitled to compensation in respect thereof upon quitting the demised premises or at any other time 2.7 To indemnify and keep fully and effectively indemnified the Landlord and the occupiers of any adjoining or neighbouring premises and all persons who are at any time present thereon or have any interest therein from and against damage or injury thereto and to themselves and to their respective property and from and against all costs claims demands proceedings and liability whatsoever incurred by or made against any of them directly or indirectly resulting from or arising out of the works or any breach or non-observance or non-performance of the covenants on the Tenant's part herein contained and any injury or damage (including death) whether to person or property real or personal arising out of or in any way connected with the granting of this Licence or the construction or use of the works 2.8 If required by the Landlord on the happening of any of the following events the Tenant will at its own cost reinstate the demised premises to their former condition and carry out such works of reinstatement to the satisfaction and under the supervision of the surveyor to the landlord Whose proper fees in connection with the supervision of such work shall be borne by the Tenant The said events are:- 2.8.1 the expiration or sooner determination of the Lease 2.8.2 when this Licence becomes void or voidable 5 45 3. PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED THAT:- 3.1 Nothing in this Deed shall authorise the carrying out of any works other than the works herein provided and if the works shall not be completed to the satisfaction of the surveyor to the Landlord within three months from the date hereof then the Licence and authority given by this Deed to carry out the works shall at the option of the Landlord exercisable in writing be voidable and 3.2 When the carrying out of the works has been completed the restrictions and other covenants on the part of the Tenant and the provisions contained in the Lease shall be applicable to the demised premises in their then altered state in the same manner and as fully and extensively as if the demised premises had contInued in the same state as the same are at present 3.3 During the following the execution of the works all covenants on the part of the Tenant contained herein shall be deemed to be incorporated into the Lease and the rights of re-entry contained in the Lease shall be construed and have effect accordingly 3.4 The works are not improvements for the purposes of the Landlord and Tenant Act 1927 Part I and are carried out by the Tenant to suit its own personal requirements and neither the Tenant nor any other persons shall be entitled to compensation in respect of them at the expiry or sooner determination of the term of the Lease or at any other time 3.5 The works shall be disregarded on any review of the rent under the Lease. 6 46 4. THE proper costs of the preparation and completion of this Deed in duplicate and all disbursements including stamp duty and surveyor's fees and all Value Added Tax shall be borne by the Tenant 6. REFERENCES to "the Landlord" and "the Tenant" shall include their respective successors in title 6. ON completion of this Deed the Tenant shall cause a memorandum to be indorsed on the Lease in the following form: MEMORANDUM by a Deed dated 1997 the Landlord consented to certain alterations to the demised premises and the Tenant covenanted to reinstated as mentioned in the Deed" IN WITNESS whereof the parties hereto have executed these presents as a Deed and delivered them the day and year first before written THE FIRST SCHEDULE HEREINBEFORE REFERRED TO Date of Lease: 1st September 1987 Landlord: Bridger Properties Limited Tenant: News International plc Term: 25 years from 24th June 1987 Rent: Initial Rent L.320,000 per annum 7 47 THE SECOND SCHEDULE HEREINBEFORE REFERRED TO (being the demised premises) ALL THAT building and premises known as Number 2 Kew Bridge Road Brentford Middlesex THE THIRD SCHEDULE HEREINBEFORE REFERRED TO (being the works) Erection of a conservatory to the rear of the existing building SIGNED on behalf of BARELLA ) ESTABLISHMENT by [ ) ] ) duly authorised in that behalf ) THE COMMON SEAL of REED ) TELEPUBLISHING LIMITED ) Was hereunto affixed as a Deed ) In the presence of: ) Director [ILLEGIBLE] [SEAL] Director [ILLEGIBLE] 8 48 RENT REVIEW MEMORANDUM Date of Lease : 1 September 1987 Demised Premised : Utell House, 2 Kew Bridge Road, Brentford, Middlesex Landlord : Bridger Properties Limited Present Landlord : Barella Establishment Tenant : News International plc Present Tenant : REZsolutions Limited The Landlord and the Tenant hereby declare that the rent reserved by the above mentioned Lease has been reviewed in accordance with its provisions and will remain at (pound)340,000 per annum as from 24 June 1997 until the next review date thereunder. Signed /s/ [ILLEGIBLE] --------------------------------- On behalf of Barella Establishment Signed /s/ [ILLEGIBLE] --------------------------------- On behalf of REZsolutions Limited Dated this 18th day of June l998 49 DATED 26th OCTOBER 1989 BARELLA ESTABLISHMENT - to - NEWS INTERNATIONAL PLC - and - REED INTERNATIONAL PLC ------------------- LICENCE TO ASSIGN premises at 2 Kew Bridge Road Brentford Middlesex ------------------- Pritchard Englefield & Tobin 23 Great Castle Street London W1N 8NQ Ref: CLO/12332/1 CLO/5119Q(v2) 17071989 50 THIS DEED made the 26th day of October One thousand nine hundred and eighty-nine BETWEEN BARELLA ESTABLISHMENT of PO Box 136 Sarnia House Le Truchot St Peter Port Guernsey Channel Islands (hereinafter called "the Landlord") of the first part NEWS INTERNATIONAL PLC whose registered office is situate at PO Box 495 1 Virginia Street London E1 9XY (hereinafter called "the Tenant") of the second part and REED INTERNATIONAL PLC whose registered office is at Reed House 6 Chesterfield Gardens London W1A 1EJ (hereinafter called "the Assignee") of the third part WHEREAS:- (1) By a Lease (hereinafter called "the Lease") short particulars whereof appear in the First Schedule hereto ALL THAT the premises described in the Second Schedule hereto (hereinafter called "the demised premises") TOGETHER WITH the rights set out in the Lease were demised to the Tenant for the term and at the yearly rent as in the Lease set out and subject to the tenant's covenants and conditions and to the exceptions and reservations therein contained (2) The Lease contains restrictions on the right of the Tenant to assign (3) The reversion immediately expectant upon the determination of the term created by the Lease is now vested in the Landlord (4) The term created by the Lease is still vested in the Tenant 51 (5) The Tenant desires to assign the demised premises to the Assignee for the unexpired residue of the term created by the Lease and the Tenant has requested the Landlord to grant a Licence for this purpose which the Landlord has agreed to do in consideration of the Assignee entering into the covenant hereinafter contained NOW THIS DEED WITNESSES as follows: 1. IN pursuance of the said agreement and in consideration of the covenants on the part of the Assignee hereinafter contained the Landlord at the request of the Tenant hereby gives Licence and Authority to the assignment by the Tenant to the Assignee of ALL THAT the estate of the Tenant in the Lease PROVIDED that this Licence is restricted to the particular Assignment hereby authorised and that save as aforesaid the covenants in the Lease against assignment or underletting shall remain in full force and effect and PROVIDED FURTHER that this Licence shall lapse unless the Assignment hereinbefore permitted shall have been registered with the Solicitors for the Landlord as required by the Lease within twenty-one days from the date thereof 2. IN consideration of the Licence hereinbefore contained the Assignee HEREBY COVENANTS with the Landlord that as from the date when the Tenant's estate and interest in the Lease shall be assigned to the Assignee pursuant to the Licence hereinbefore contained and thenceforth during the residue of the term granted by the Lease the Assignee will pay the respective rents reserved by the Lease and all other sums and payments therein 52 covenanted to be paid by the tenant at the respective times and in manner therein appointed for the payment thereof and further covenants with the Landlord duly to observe and perform the several covenants and conditions on the part of the Tenant therein contained 3. THE landlord's legal costs in the preparation of this deed in duplicate plus value added tax shall be borne by the Tenant 4. THE Lease shall be deemed varied to the effect that the words "NEWS INTERNATIONAL PLC" appearing in clause 3(21)(d) on page 19 shall be deemed deleted and replaced by the words "REED INTERNATIONAL PLC" IN WITNESS whereof the parties hereto have executed these presents the day and year first above written THE FIRST SCHEDULE above referred to (being short particulars of the Lease) 1. Date of Lease: 1st September 1987 2. Landlord: Bridger Properties Limited 3. Tenant: News International Plc 4. Term: 25 years from the 24th day of June 1987 5. Rent: L.320,000 p.a. (subject to review) THE SECOND SCHEDULE above referred to (Being the premises demised by the Lease) ALL that building and premises known as 2 Kew Bridge Road Brentford Middlesex shown for identification purposes 53 only edged red on the Lease plan together with the rights but subject to the covenants terms and conditions as in the Lease set out. For LBI FINANZ ANSTALT POSTFACH 70 FL 9490 VADUZ LIECHTENSTEIN SIGNED on behalf of ) /s/ [ILLEGIBLE] BARELLA ESTABLISHMENT ) --------------------------- by ) AUTHORISED SIGNATORIES /s/ [ILLEGIBLE] Director Authorised Signatory THE COMMON SEAL of ) REED INTERNATIONAL PLC ) was hereunto affixed ) in the presence of:- ) Director [SEAL] Secretary 54 DATED 26th October 1989 ----------------------- BARELLA ESTABLISHMENT -to- NEWS INTERNATIONAL PLC ---------------------------- LICENCE to make alterations at 2 Kew Bridge Road Brentford Middlesex ---------------------------- Pritchard Englefield & Tobin 23 Great Castle Street London W1N 8NQ Tel: 01-629 8883 Telex: 23836 Ref: CLO/12332/l CLO/5132Q(V2) 17071989 55 THIS DEED is made the 23rd day of October One thousand nine hundred and eighty-nine BETWEEN BARELLA ESTABLISHMENT of P.O. Box 136 Sarnia House Le Truchot St. Peter Port Guernsey Channel Islands (hereinafter called "the Landlord") of the one part and NEWS INTERNATIONAL PLC whose registered office is situate at P.O. Box 495 1 Virginia Street London El 9XY (hereinafter called "the Tenant") of the other part WHEREAS: (1) By a Lease (hereinafter called "the Lease") short particulars whereof appear in the First Schedule hereto ALL THAT the premises described in the Second Schedule hereto (hereinafter called "the demised premises") TOGETHER WITH the rights set out in the Lease were demised to the Tenant for the term and the yearly rent as in the Lease set out and subject to the Tenant's covenants and conditions and to the exceptions and reservations therein contained (2) The Lease contained a covenant on the part of the Tenant inter alia not without the prior written consent of the Landlord such consent not to be unreasonably withheld to make connections to the conducting media in the demised premises (3) The Tenant is desirous of making connections to the conducting media in the demised premises full particulars whereof appear in the Third Schedule hereto and in accordance with the drawing marked "A" annexed hereto all such work and alterations being hereinafter referred to as 56 "the works" and has requested the Landlord to grant a licence to execute the works which the Landlord has agreed to do in consideration of the Tenant entering into the covenants and subject to the terms hereinafter contained NOW THIS DEED WITNESSETH as follows: 1. IN pursuance of the said agreement and in consideration of the covenants on the part of the Tenant hereinafter contained the Landlord at the request of the Tenant hereby gives licence and authority to the execution of the works at the demised premises in accordance with the said drawing 2. IN consideration of the licence hereinbefore contained the Tenant for itself and its successors in title HEREBY COVENANTS with the Landlord as follows:- (a) To carry out the works strictly in accordance with the particulars set out in the Third Schedule hereto and the said drawing and with appropriate materials and in a good and workmanlike manner to the reasonable satisfaction of the surveyor to the Landlord whose fees shall be borne by the Tenant and to make good to the like satisfaction all damage caused directly or indirectly by the carrying out of the works (b) To do all things necessary and make all payments required for obtaining all necessary consents (if any) including the consent of the local and/or any other authority and also the Insurance Company with which the demised premises are insured against fire and to produce the same to the Landlord before the works commence 57 [FLOORPLAN] 58 (c) The works shall become and remain the property of the Landlord (subject to this Licence and the Lease) (d) To observe any conditions imposed by the insurers of the demised premises as a result of the works (e) To indemnify and keep indemnified the Landlord from and against all costs claims demands and liability whatsoever directly or indirectly resulting from or arising out of the works or any breach or non-observance of the covenants on the Tenant's part herein contained and any injury or damage whether to person or property real or personal arising out of or in any way connected with the granting of this licence or the construction or use of the works (f) If reasonably required by the Landlord on the happening of any of the following events the Tenant will at its own cost reinstate the demised premises to their former condition and carry out such works of reinstatement to the reasonable satisfaction and under the supervision of the surveyor to the Landlord whose reasonable fees in connection with the supervision of such work shall be borne by the Tenant The said events are:- (i) the expiration or sooner determination of the Lease (ii) when this Licence becomes void or voidable 3. PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED THAT:- (a) Nothing in this licence shall authorise the carrying out of any works other than the works herein provided and if the works shall not be completed to the 59 satisfaction of landlord and its surveyor within six months from the date hereof then this Licence shall lapse (b) When the carrying out of the works has been completed the restrictions and other covenants on the part of the Tenant and the provisions contained in the Lease shall be applicable to the demised premises in their then altered state in the same manner and as fully and extensively as if the demised premises had continued in the same state as the same are at present 4. THE reasonable costs of this Deed in duplicate and all disbursements including reasonable surveyor's fees and all Value Added Tax shall be borne by the Tenant IN WITNESS whereof the parties hereto have executed these presents the day and year first before written THE FIRST SCHEDULE hereinbefore referred to (being short particulars of the Lease) Date of Lease: 1st September 1987 Landlord: Bridger Properties Limited Tenant: News International Plc Term: 25 years from the 24th day of June 1987 Rent: L.320,000 p.a. (subject to review)
THE SECOND SCHEDULE hereinbefore referred to (being the demised premises) ALL THAT building and premises known as 2 Kew Bridge Road, Brentford, Middlesex shown for identification purposes only edged red on the Lease plan together with 60 the rights but subject to the covenants terms and conditions as in the Lease set out THE THIRD SCHEDULE hereinbefore referred to (being the works) Wiring of 38 electrical data and telephone sockets from existing riser For LBI FINANZ ANSTALT POSTFACH 70 FL 9490 VADUZ LIECHTENSTEIN SIGNED on behalf of ) /s/ [ILLEGIBLE] BARELLA ESTABLISHMENT ) --------------------------- by:- ) AUTHORISED SIGNATORIES /s/ [ILLEGIBLE] Authorised Signatory THE COMMON SEAL of ) NEWS INTERNATIONAL PLC ) was hereunto affixed ) in the presence of:- ) [SEAL] /s/ [ILLEGIBLE] Director /s/ [ILLEGIBLE] Secretary EX-10.20 5 d84582ex10-20.txt EMPLOYMENT AGREEMENT DATED JANUARY 1, 2001 1 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into as of the 1st day of January, 2000, by and between Pegasus Systems, Inc., a Delaware corporation (the "Company") and Ric L. Floyd (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is essential and in the best interest of the Company and its stockholders to enter into this Agreement to retain the services of the Executive and to ensure his continued dedication and efforts; and WHEREAS, in order to induce the Executive to enter into and continue employment by the Company, the Company desires to provide the Executive with certain benefits during the term of his employment and, in the event his employment is terminated, to provide the Executive with the benefits and payments described herein. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. EMPLOYMENT TERM. The "Employment Term" shall commence on January 1, 2000 (the "Effective Date") and shall expire on the fourth (4th) anniversary of the Effective Date. 2. EMPLOYMENT. (a) Subject to the provisions of Section 8 hereof, the Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed as the General Counsel of the Company. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity. He shall also promote, by entertainment or otherwise, the business of the Company. (b) During the Employment Term, excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during usual business hours to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder. The Executive may (1) serve on corporate, civil or charitable boards or committees, (2) manage personal investments and (3) deliver lectures and teach at educational institutions, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. -1- 2 3. COMPENSATION. (a) Base Salary. Beginning on the Effective Date, the Company agrees to pay or cause to be paid to the Executive an annual base salary of Two Hundred Thousand Dollars ($200,000.00), and as may be increased from time to time by the Compensation Committee of the Board (hereinafter referred to as the "Base Salary"). Such Base Salary shall be payable in accordance with the Company's customary practices applicable to its executives. (b) Annual Bonus. In addition to Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Term, an annual discretionary bonus (the "Annual Bonus") in accordance with the terms and conditions of the bonus plan approved by the Compensation Committee. Any actual payment or award under such Annual Bonus plan, and the size of any payment or award, will be in accordance with the terms of the plan. Each such Annual Bonus shall be paid no later than the end of the third (3rd) month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (c) Supplemental Employee Retirement Plan. In addition to the Base Salary and Annual Bonus, the Executive shall be entitled to participate in the Company's Supplemental Employee Retirement Plan, a copy of which is attached hereto, as of January 1, 2000 and shall be entitled to credit for five (5) full Years of Service prior to the Effective Date. Executive shall not be subject to any amendment to the Supplemental Employee Retirement Plan without Executive's written consent. (d) Stock Plans. Executive shall be entitled to participate in the Company's Stock Option Plans, Employee Stock Purchase Plans and such other stock-related plans as may be applicable to executives of the Company and to receive such stock option grants and any and all other rights of participation as may be provided therein. (e) Life Insurance. Executive shall be entitled to the continuation of such life insurance coverage, if any, at the Company's expense, as is currently in effect as of the date of this Agreement. (f) Car Allowance. Executive shall be entitled to a car allowance of Seven Hundred Fifty Dollars ($750.00) per month for each month during the term of this Agreement. (g) Club Dues. Executive shall be entitled to reimbursement by the Company for monthly dues payable to a country club or similar club of Executive's choosing. 4. EMPLOYEE BENEFITS. During the Employment Term and beginning on the Effective Date, the Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees generally, including, without limitation, all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans. Unless otherwise provided herein, the compensation and benefits under, and the Executive's participation in, such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the Company generally, but in no event on a basis less favorable in terms of benefit levels and coverage than offered to other similarly situated executives of the Company. The Company may reduce benefit levels if such changes are part of broad-based changes in the Company's benefit -2- 3 programs offered generally to all employees. Notwithstanding the foregoing, except as otherwise set forth herein, nothing herein shall obligate the Company to adopt such plans, practices or programs. 5. EXECUTIVE BENEFITS. During the Employment Term, the Executive shall be entitled to participate in all executive benefit or incentive compensation plans maintained or established by the Company for the purpose of providing compensation and/or benefits to executives of the Company including, but not limited to, any supplemental retirement, salary continuation, stock option, deferred compensation, supplemental medical or life insurance or other bonus or incentive compensation plans; provided, however, the grant of a stock option in any year is not guaranteed and will be dependent on the Board's evaluation of the Executive's performance. Unless otherwise provided herein, the compensation and benefits under, and the Executive's participation in, such plans shall be on the same basis and terms as other similarly situated executives of the Company. No additional compensation provided under any of such plans shall be deemed to modify or otherwise affect the terms of this Agreement or any of the Executive's entitlements hereunder. Notwithstanding the foregoing, except as otherwise set forth herein, nothing herein shall obligate the Company to adopt such plans, practices or programs. 6. OTHER BENEFITS. (a) Fringe Benefits and Perquisites. During the Employment Term, the Executive shall be entitled to all fringe benefits and perquisites generally made available by the Company to its executives. Unless otherwise provided herein, the fringe benefits and perquisites provided to Executive shall be on substantially the same basis and terms as other similarly situated executives of the Company. (b) Expenses. The Executive shall be entitled to receive reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company in accordance with the accounting procedures and expense reimbursement policies of the Company as it shall adopt from time to time. 7. VACATION AND SICK LEAVE. During the Employment Term, at such reasonable times as the Board shall in its discretion permit, the Executive shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, provided that: (a) The Executive shall be entitled to annual vacation in accordance with the policies as periodically established by the Board. (b) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company's policies as in effect from time to time. 8. TERMINATION. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: -3- 4 (a) Cause. The Company may terminate the Executive's employment for "Cause". A termination of employment is for "Cause" if the Executive: (1) has been convicted of or plead guilty or no contest to a felony; or (2) intentionally engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise or from which he derives an improper material personal benefit; provided, however, that no termination of the Executive's employment shall be for Cause as set forth in this clause (2) until: (i) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in this clause (2) and specifying the particulars thereof in reasonable detail; and (ii) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part shall be considered "intentional" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. (3) commits gross malfeasance or intentionally fails to perform the duties of the Executive's position; provided, however, the Company shall first notify the Executive in writing stating with reasonable specificity the action or inaction of the Executive which forms the basis for such notice and the Executive fails to cure such malfeasance or failure within ten (10) days of the date of such notice. (4) violates any valid non-competition or non-disclosure agreement or the Company's insider trading policy, if any. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after a Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (b) Disability. The Company may terminate the Executive's employment after having established the Executive's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Executive's ability to substantially perform his material duties under this Agreement which continues for a period of at least ninety (90) consecutive days. The Executive shall be entitled to the compensation and benefits provided for under this Agreement for any period during the Employment Term and prior to the establishment of the Executive's Disability during which the Executive is unable to work due to a physical or mental infirmity and as otherwise provided in this Agreement in connection with Disability. Notwithstanding anything contained in this Agreement to the contrary, until the Termination Date specified in a Notice of Termination (as each term is hereinafter defined) relating to the Executive's Disability, the Executive will be entitled to return to his position with the Company as set forth in this Agreement in which event no Disability of the Executive will be deemed to have occurred. (c) Good Reason. -4- 5 (1) The Executive may terminate his employment for "Good Reason". For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the events or conditions described in Subsections (i) through (vi) hereof: (i) If the Executive shall cease to be the General Counsel of the Company (or any successor or parent thereof) or upon the assignment to the Executive of any material duties or responsibilities which are inconsistent with his position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect him to any such offices or positions, except during a period of disability or in connection with the termination of his employment for Disability, Cause, as a result of his death, or by the Executive other than for Good Reason; (ii) A reduction in the Executive's Base Salary or any failure to pay the Executive any compensation or benefits to which he is entitled within thirty (30) days of the due date; (iii) A Change of Control as hereinafter defined; (iv) Any material breach by the Company of any provision of this Agreement; provided, however, the Executive shall first notify the Company in writing stating with reasonable specificity the breach by the Company and the Company fails to cure such breach within ten (10) days of the date of such notice; (v) Any purported termination of the Executive's employment for Cause by the Company which is found by a court of competent jurisdiction or an arbitrator not to comply with the terms of Section 8(a); or (vi) The failure of the Company to obtain an agreement, reasonably satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement, as contemplated in Section 13 hereof. (2) The Executive's right to terminate his employment pursuant to this Section 8(c) shall not be affected by his incapacity due to physical or mental illness. (d) Voluntary Termination. Upon thirty (30) days prior written notice, either the Executive or the Company may voluntarily terminate the Executive's employment hereunder at any time; provided, however, in the event of any such termination by the Company, the Company shall pay to the Executive the amounts set forth in Section 9(c) hereof. 9. COMPENSATION UPON TERMINATION. Upon termination of the Executive's employment during the Employment Term, the Executive shall be entitled to the following benefits: (a) If the Executive's employment with the Company shall be terminated by the Company for Cause or by the Executive other than for Good Reason, the Company shall pay -5- 6 the Executive all amounts earned and accrued through the Termination Date but not paid as of the Termination Date, including: (1) the Base Salary, (2) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, (3) vacation pay, and (4) sick leave (collectively, "Accrued Compensation"). (b) If the Executive's employment with the Company shall be terminated by the Company for Disability, the Company shall pay the Executive all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including the Accrued Compensation. In addition, the Company shall pay to the Executive the following: (1) the Base Salary and all other benefits customarily received for a period of one (1) year from the date of such Disability, (2) an amount equal to the "Pro Rata Bonus". The "Pro Rata Bonus" is an amount equal to the maximum bonus amount the Executive would have been entitled to in the fiscal year which includes the Termination Date (the "Bonus") multiplied by a fraction, the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365, and (3) a monthly payment upon reaching age sixty (60) as more specifically provided by the Supplemental Employee Retirement Plan. (c) If the Executive's employment with the Company shall be terminated by the Company by reason of the Executive's death , the Company shall pay the Executive all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including the Accrued Compensation. In addition, the Company shall pay to the Executive's beneficiaries the following: (1) the Base Salary and all other benefits customarily received for a period of one (1) year from the date of such death, (2) an amount equal to the "Pro Rata Bonus". The "Pro Rata Bonus" is an amount equal to the maximum bonus amount the Executive would have been entitled to in the fiscal year which includes the Termination Date (the "Bonus") multiplied by a fraction, the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365, and (3) a single payment equal to Executive's total accrued benefit under the Supplemental Employee Retirement Plan. -6- 7 (d) If the Executive's employment with the Company shall be terminated by the Company without Cause or by the Executive for Good Reason, the Company shall pay to the Executive the following: (1) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus, (2) the Company shall continue to pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, an amount equal to the sum of (A) the Executive's Base Salary in effect for the month immediately preceding the Termination Date and (B) the Bonus, for a period of twenty-four (24) months following the Termination Date, (3) during the twelve (12) month period immediately following the Termination Date (the "Continuation Period"), the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits provided (A) to the Executive immediately prior to the Notice of Termination or (B) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 9(c)(3) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries, than the most favorable coverages and benefits provided to the Executive during any of the periods referred to in clauses (A) and (B) above. The Company's obligation hereunder with respect to the foregoing benefits shall terminate in the event the Executive obtains any such benefits (regardless of level and scope of coverage) pursuant to a subsequent employer's benefit plans. This Section 9(c)(3) shall not be interpreted as to limit any benefits to which the Executive, his dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation retiree medical and life insurance benefits, (4) the restrictions on any outstanding stock options (including restricted stock and granted performance shares or units) granted to the Executive under any stock option plans or under any other incentive plan or arrangement shall lapse and such incentive award shall become 100% vested, all stock options and stock appreciation rights granted to the Executive shall become immediately exercisable and shall become 100% vested, and all performance units granted to the Executive shall become 100% vested, (5) for a period of two (2) years after the date of termination, the Company shall continue to contribute to the Supplemental Employee Retirement Plan for the benefit of the Executive and the Executive shall be entitled to the benefits of the Supplemental Employee Retirement Plan in the same manner as if the Executive had continued as an employee for the additional two (2) years . (6) the Company shall reimburse to the Executive the costs of any outplacement services incurred by Executive, up to a maximum amount of Fifteen Thousand Dollars ($15,000.00). -7- 8 (e) The amounts provided for in Sections 9(a), 9(b)(2) and 9(c)(1) shall be paid within thirty (30) days after the Executive's Termination Date. Expenses incurred by Executive under Section 9(c)(5) shall be paid within thirty (30) days of the receipt by the Company of a claim for reimbursement submitted by the Executive. (f) The Executive hereby acknowledges that full payment and/or performance by the Company of its obligations as set forth in Sections 9(b) or 9(c) hereof shall be in lieu of any other remedy or cause of action the Executive may have, either at law or in equity, as a result of the termination of the Executive's employment pursuant to such Sections. 10. DEFINITIONS. (a) Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement, if any, relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (b) Termination Date, Etc. For purposes of this Agreement, "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company for Cause, the date of the Notice of Termination, (2) If the Executive's employment is terminated by the Company due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days, and (3) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall be not more than thirty (30) days from the date the Notice of Termination is given to the Company. (d) Change In Control. For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (1) An acquisition of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 12(d) or 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than any parent, subsidiary or affiliate of the Company immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained -8- 9 by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Subsidiary") or (ii) the Company or its Subsidiaries, (2) The individuals who, as of the date of this Agreement is approved by the Board, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least one half (1/2) of the members of the Board; provided, however, that if the election, or nomination for election of any new director was approved by a vote of the members of the Board as provided by Section 3.2.3 of the Company's Bylaws, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, or (3) Approval by the stockholders of the Company of: (i) A complete liquidation or dissolution of the Company, or (ii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary or a parent in a Non-Control Acquisition). 11. EXCISE TAX PAYMENTS. In the event of a determination that a portion of any payment or benefit to the Executive or for his benefit payable or distributable pursuant to the terms of this Agreement is or will be deemed to be an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code") (a "Payment" or "Payments"), the Company shall be responsible for the payment of any excise or similar tax assessed in connection therewith. 12. NONCOMPETITION. (a) Except with the prior written consent of the Company authorized by a resolution adopted by the Board, for the period beginning upon the date hereof and ending on (i) in the event of the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 8(c) or by the Company pursuant to Section 8(d) hereof and the Executive is receiving payments from the Company pursuant to Section 9(c)(2) hereof, the date on which the last such payment is received; or (ii) in the event of the voluntary termination of the Executive's employment by the Executive pursuant to Section 8(d) hereof, the date which is nine (9) months from the Termination Date; or (iii) in the event of the termination of the Executive's employment for any other reason, the Termination Date, Executive shall not directly or indirectly as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any capacity whatsoever engage in, become substantially financially interested in, employed by or have any connection with, any business engaged principally in the processing of electronic hotel reservations and travel agent commissions in any country where the Company or any of its subsidiaries is then engaged in -9- 10 such business; provided, however, that Executive may own any securities of any corporation which is engaged in such business and is publicly traded stock or securities of such corporation. (b) Executive agrees that for a period of one (1) year following termination of employment with the Company, he will not solicit or in any manner encourage employees of the Company, its subsidiaries or parent to leave its employ. Executive further agrees that during such period he will not offer or cause to be offered employment to any person who is employed by the Company, its subsidiaries or parent at any time during the six (6) months prior to the termination of his employment with the Company. (c) In case one or more of the terms contained in Subsections (a) or (b) of this Section 12 shall for any reason become invalid, illegal, or unenforceable, such invalidity, illegality or unenforceability shall not affect any other terms herein, but such terms shall be deemed deleted and such deletion shall not affect the validity of the other terms of this Section. In addition, if any one or more of the terms contained in Subsections (a) or (b) of this Section shall for any reason be held to be excessively broad with regard to time, duration, geographic scope or activity that term shall be construed in a manner to enable it to be enforced to the extent compatible with applicable law. 13. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 14. FEES AND EXPENSES. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as a result of the breach or default by the Company of the terms hereof. 15. NOTICE. For purposes of this Agreement, notice and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third (3rd) business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. -10- 11 16. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 17. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off (except against amounts actually owed by the Executive to the Company as evidenced by promissory notes, loan agreements and similar documents executed by the Executive), counterclaim, defense, recoupment or other right which the Company may have against the Executive or others. 18. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas without giving effect to the conflict of law principles thereof. Subject to Section 22 of this Agreement, any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Dallas County, Texas. 20. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provisions hereof shall not affect the validity or enforceability of the other provisions hereof. 21. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. -11- 12 22. ARBITRATION. Any dispute or controversy arising out of or relating to this Agreement shall be determined and settled by arbitration in the City of Dallas, Texas, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association then in effect, and judgement upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Such arbitrator shall have no power to modify any of the provisions of this Agreement, and his or her jurisdiction is limited accordingly. A party requesting arbitration hereunder shall give ten (10) days' written notice to the other party to request such arbitration. Unless the arbitrator decides otherwise, the successful party in any such arbitration shall be entitled to reasonable attorneys' fees and costs associated with such arbitration. If the parties hereto cannot agree upon an arbitrator, then one shall be appointed by the governing office of the American Arbitration Association. Any arbitrator so appointed shall have extensive experience in a profession connected with the subject matter of the dispute. Whenever any action is required to be taken under this Agreement within a specified period of time and the taking of such action is materially affected by a matter submitted to arbitration, such period shall automatically be extended by the number of days plus ten (10) that are taken for the determination of that matter by the arbitrator. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman of the Board or Chairman of the Compensation Committee and the Executive has executed this Agreement as of the date and year first above written. PEGASUS SYSTEMS, INC. EXECUTIVE: By: /s/ W.C. HAMMETT, JR. By: /s/ RIC L. FLOYD ----------------------------------------- ---------------------------- Ric L. Floyd Print: W.C. HAMMETT, JR. -------------------------------------- Title: CHAIRMAN OF THE BOARD -------------------------------------- -12- EX-10.21 6 d84582ex10-21.txt EMPLOYMENT AGREEMENT - MARK C. WELLS 1 EXHIBIT 10.21 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into as of the 17th day of January, 2000, by and between Pegasus Systems, Inc., a Delaware corporation (the "Company") and Mark C. Wells (the "Executive"). WHEREAS, the Board of Directors of the Company (the "Board") has determined that it is essential and in the best interest of the Company and its stockholders to enter into this Agreement to retain the services of the Executive and to ensure his continued dedication and efforts; and WHEREAS, in order to induce the Executive to enter into and continue employment by the Company, the Company desires to provide the Executive with certain benefits during the term of his employment and, in the event his employment is terminated, to provide the Executive with the benefits and payments described herein. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. EMPLOYMENT TERM. The "Employment Term" shall commence on January 17, 2000 (the "Effective Date") and shall expire on the fourth (4th) anniversary of the Effective Date. 2. EMPLOYMENT. (a) Subject to the provisions of Section 8 hereof, the Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed as an Executive Vice President of the Company. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity. He shall also promote, by entertainment or otherwise, the business of the Company. (b) During the Employment Term, excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during usual business hours to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder. The Executive may (1) serve on corporate, civil or charitable boards or committees, (2) manage personal investments and (3) deliver lectures and teach at educational institutions, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. -1- 2 3. COMPENSATION. (a) Base Salary. Beginning on the Effective Date, the Company agrees to pay or cause to be paid to the Executive an annual base salary of Two Hundred Sixty Five Thousand Dollars ($265,000.00), and as may be increased from time to time by the Compensation Committee of the Board (hereinafter referred to as the "Base Salary"). Such Base Salary shall be payable in accordance with the Company's customary practices applicable to its executives. (b) Annual Bonus. In addition to Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Term, an annual discretionary bonus (the "Annual Bonus") in accordance with the terms and conditions of the bonus plan approved by the Compensation Committee. Any actual payment or award under such Annual Bonus plan, and the size of any payment or award, will be in accordance with the terms of the plan. Each such Annual Bonus shall be paid no later than the end of the third (3rd) month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (c) Supplemental Employee Retirement Plan. In addition to the Base Salary and Annual Bonus, the Executive shall be entitled to participate in the Company's Supplemental Employee Retirement Plan, a copy of which is attached hereto, as of January 1, 2000. Executive shall not be subject to any amendment to the Supplemental Employee Retirement Plan without Executive's written consent. (d) Stock Plans. Executive shall be entitled to participate in the Company's Stock Option Plans, Employee Stock Purchase Plans and such other stock-related plans as may be applicable to executives of the Company and to receive such stock option grants and any and all other rights of participation as may be provided therein. (e) Life Insurance. Executive shall be entitled to the continuation of such life insurance coverage, if any, at the Company's expense, as is currently in effect as of the date of this Agreement. (f) Car Allowance. Executive shall be entitled to a car allowance of Nine Hundred Fifty Dollars ($950.00) per month for each month during the term of this Agreement. (g) Club Dues. Executive shall be entitled to reimbursement by the Company for monthly dues payable to a country club or similar club of Executive's choosing. 4. EMPLOYEE BENEFITS. During the Employment Term and beginning on the Effective Date, the Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees generally, including, without limitation, all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans. Unless otherwise provided herein, the compensation and benefits under, and the Executive's participation in, such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the Company generally, but in no event on a basis less favorable in terms of benefit levels and coverage than offered to other similarly situated executives of the Company. The Company may reduce benefit levels if such changes are part of broad-based changes in the Company's benefit programs offered generally to all employees. Notwithstanding the foregoing, except as -2- 3 otherwise set forth herein, nothing herein shall obligate the Company to adopt such plans, practices or programs. 5. EXECUTIVE BENEFITS. During the Employment Term, the Executive shall be entitled to participate in all executive benefit or incentive compensation plans maintained or established by the Company for the purpose of providing compensation and/or benefits to executives of the Company including, but not limited to, any supplemental retirement, salary continuation, stock option, deferred compensation, supplemental medical or life insurance or other bonus or incentive compensation plans; provided, however, the grant of a stock option in any year is not guaranteed and will be dependent on the Board's evaluation of the Executive's performance. No additional compensation provided under any of such plans shall be deemed to modify or otherwise affect the terms of this Agreement or any of the Executive's entitlements hereunder. Notwithstanding the foregoing, except as otherwise set forth herein, nothing herein shall obligate the Company to adopt such plans, practices or programs. 6. OTHER BENEFITS. (a) Fringe Benefits and Perquisites. During the Employment Term, the Executive shall be entitled to all fringe benefits and perquisites generally made available by the Company to its executives. Unless otherwise provided herein, the fringe benefits and perquisites provided to Executive shall be on substantially the same basis and terms as other similarly situated executives of the Company. (b) Expenses. The Executive shall be entitled to receive reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company in accordance with the accounting procedures and expense reimbursement policies of the Company as it shall adopt from time to time. 7. VACATION AND SICK LEAVE. During the Employment Term, at such reasonable times as the Board shall in its discretion permit, the Executive shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, provided that: (a) The Executive shall be entitled to annual vacation in accordance with the policies as periodically established by the Board. (b) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company's policies as in effect from time to time. 8. TERMINATION. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: (a) Cause. The Company may terminate the Executive's employment for "Cause". A termination of employment is for "Cause" if the Executive: -3- 4 (1) has been convicted of or plead guilty or no contest to a felony; or (2) intentionally engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise or from which he derives an improper material personal benefit; provided, however, that no termination of the Executive's employment shall be for Cause as set forth in this clause (2) until: (i) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in this clause (2) and specifying the particulars thereof in reasonable detail; and (ii) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part shall be considered "intentional" unless he has acted, or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. (3) commits gross malfeasance or intentionally fails to perform the duties of the Executive's position; provided, however, the Company shall first notify the Executive in writing stating with reasonable specificity the action or inaction of the Executive which forms the basis for such notice and the Executive fails to cure such malfeasance or failure within ten (10) days of the date of such notice. (4) violates any valid non-competition or non-disclosure agreement or the Company's insider trading policy, if any. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after a Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (b) Disability. The Company may terminate the Executive's employment after having established the Executive's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Executive's ability to substantially perform his material duties under this Agreement which continues for a period of at least ninety (90) consecutive days. The Executive shall be entitled to the compensation and benefits provided for under this Agreement for any period during the Employment Term and prior to the establishment of the Executive's Disability during which the Executive is unable to work due to a physical or mental infirmity and as otherwise provided in this Agreement in connection with Disability. Notwithstanding anything contained in this Agreement to the contrary, until the Termination Date specified in a Notice of Termination (as each term is hereinafter defined) relating to the Executive's Disability, the Executive will be entitled to return to his position with the Company as set forth in this Agreement in which event no Disability of the Executive will be deemed to have occurred. (c) Good Reason. (1) The Executive may terminate his employment for "Good Reason". For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the events or conditions described in Subsections (i) through (vi) hereof: -4- 5 (i) If the Executive shall cease to be an Executive Vice President of the Company (or any successor or parent thereof) or upon the assignment to the Executive of any material duties or responsibilities which are inconsistent with his position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect him to any such offices or positions, except during a period of disability or in connection with the termination of his employment for Disability, Cause, as a result of his death, or by the Executive other than for Good Reason; (ii) A reduction in the Executive's Base Salary or any failure to pay the Executive any compensation or benefits to which he is entitled within thirty (30) days of the due date; (iii) A Change of Control as hereinafter defined; (iv) Any material breach by the Company of any provision of this Agreement; provided, however, the Executive shall first notify the Company in writing stating with reasonable specificity the breach by the Company and the Company fails to cure such breach within ten (10) days of the date of such notice; (v) Any purported termination of the Executive's employment for Cause by the Company which is found by a court of competent jurisdiction or an arbitrator not to comply with the terms of Section 8(a); or (vi) The failure of the Company to obtain an agreement, reasonably satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement, as contemplated in Section 13 hereof. (2) The Executive's right to terminate his employment pursuant to this Section 8(c) shall not be affected by his incapacity due to physical or mental illness. (d) Voluntary Termination. Upon thirty (30) days prior written notice, either the Executive or the Company may voluntarily terminate the Executive's employment hereunder at any time; provided, however, in the event of any such termination by the Company, the Company shall pay to the Executive the amounts set forth in Section 9(c) hereof. 9. COMPENSATION UPON TERMINATION. Upon termination of the Executive's employment during the Employment Term, the Executive shall be entitled to the following benefits: (a) If the Executive's employment with the Company shall be terminated by the Company for Cause or by the Executive other than for Good Reason, the Company shall pay the Executive all amounts earned and accrued through the Termination Date but not paid as of the Termination Date, including: (1) the Base Salary, -5- 6 (2) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date, (3) vacation pay, and (4) sick leave (collectively, "Accrued Compensation"). (b) If the Executive's employment with the Company shall be terminated by the Company for Disability, the Company shall pay the Executive all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including the Accrued Compensation. In addition, the Company shall pay to the Executive the following: (1) the Base Salary and all other benefits customarily received for a period of one (1) year from the date of such Disability, (2) an amount equal to the "Pro Rata Bonus". The "Pro Rata Bonus" is an amount equal to the maximum bonus amount the Executive would have been entitled to in the fiscal year which includes the Termination Date (the "Bonus") multiplied by a fraction, the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365, and (3) a monthly payment upon reaching age sixty (60) as more specifically provided by the Supplemental Employee Retirement Plan. (c) If the Executive's employment with the Company shall be terminated by the Company by reason of the Executive's death , the Company shall pay the Executive all amounts earned or accrued through the Termination Date but not paid as of the Termination Date, including the Accrued Compensation. In addition, the Company shall pay to the Executive's beneficiaries the following: (1) the Base Salary and all other benefits customarily received for a period of one (1) year from the date of such death, (2) an amount equal to the "Pro Rata Bonus". The "Pro Rata Bonus" is an amount equal to the maximum bonus amount the Executive would have been entitled to in the fiscal year which includes the Termination Date (the "Bonus") multiplied by a fraction, the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365, and (3) a single payment equal to Executive's total accrued benefit under the Supplemental Employee Retirement Plan. (d) If the Executive's employment with the Company shall be terminated by the Company without Cause or by the Executive for Good Reason, the Company shall pay to the Executive the following: (1) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus, -6- 7 (2) the Company shall continue to pay the Executive as severance pay and in lieu of any further compensation for periods subsequent to the Termination Date, an amount equal to the sum of (A) the Executive's Base Salary in effect for the month immediately preceding the Termination Date and (B) the Bonus, for a period of twenty-four (24) months following the Termination Date, (3) during the twelve (12) month period immediately following the Termination Date (the "Continuation Period"), the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits provided (A) to the Executive immediately prior to the Notice of Termination or (B) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 9(c)(3) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries, than the most favorable coverages and benefits provided to the Executive during any of the periods referred to in clauses (A) and (B) above. The Company's obligation hereunder with respect to the foregoing benefits shall terminate in the event the Executive obtains any such benefits (regardless of level and scope of coverage) pursuant to a subsequent employer's benefit plans. This Section 9(c)(3) shall not be interpreted as to limit any benefits to which the Executive, his dependents or beneficiaries may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation retiree medical and life insurance benefits, (4) the restrictions on any outstanding stock options (including restricted stock and granted performance shares or units) granted to the Executive under any stock option plans or under any other incentive plan or arrangement shall lapse and such incentive award shall become 100% vested, all stock options and stock appreciation rights granted to the Executive shall become immediately exercisable and shall become 100% vested, and all performance units granted to the Executive shall become 100% vested, (5) for a period of two (2) years after the date of termination, the Company shall continue to contribute to the Supplemental Employee Retirement Plan for the benefit of the Executive and the Executive shall be entitled to the benefits of the Supplemental Employee Retirement Plan in the same manner as if the Executive had continued as an employee for the additional two (2) years provided further that Executive shall be entitled to a lump sum payment at the expiration of the additional two (2) years equal to the early retirement payment amount as set forth in the Supplemental Employee Retirement Plan. (6) the Company shall reimburse to the Executive the costs of any outplacement services incurred by Executive, up to a maximum amount of Fifteen Thousand Dollars ($15,000.00). (e) The amounts provided for in Sections 9(a), 9(b)(2) and 9(c)(1) shall be paid within thirty (30) days after the Executive's Termination Date. Expenses incurred by Executive -7- 8 under Section 9(c)(5) shall be paid within thirty (30) days of the receipt by the Company of a claim for reimbursement submitted by the Executive. (f) The Executive hereby acknowledges that full payment and/or performance by the Company of its obligations as set forth in Sections 9(b) or 9(c) hereof shall be in lieu of any other remedy or cause of action the Executive may have, either at law or in equity, as a result of the termination of the Executive's employment pursuant to such Sections. 10. DEFINITIONS. (a) Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement, if any, relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (b) Termination Date, Etc. For purposes of this Agreement, "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company for Cause, the date of the Notice of Termination, (2) If the Executive's employment is terminated by the Company due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days, and (3) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall be not more than thirty (30) days from the date the Notice of Termination is given to the Company. (d) Change In Control. For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (1) An acquisition of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 12(d) or 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than any parent, subsidiary or affiliate of the Company immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or -8- 9 indirectly, by the Company (for purposes of this definition, a "Subsidiary") or (ii) the Company or its Subsidiaries, (2) The individuals who, as of the date of this Agreement is approved by the Board, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least one half (1/2) of the members of the Board; provided, however, that if the election, or nomination for election of any new director was approved by a vote of the members of the Board as provided by Section 3.2.3 of the Company's Bylaws, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, or (3) Approval by the stockholders of the Company of: (i) A complete liquidation or dissolution of the Company, or (ii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary or a parent in a Non-Control Acquisition). 11. EXCISE TAX PAYMENTS. In the event of a determination that a portion of any payment or benefit to the Executive or for his benefit payable or distributable pursuant to the terms of this Agreement is or will be deemed to be an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the "Code") (a "Payment" or "Payments"), the Company shall be responsible for the payment of any excise or similar tax assessed in connection therewith. 12. NONCOMPETITION. (a) Except with the prior written consent of the Company authorized by a resolution adopted by the Board, for the period beginning upon the date hereof and ending on (i) in the event of the termination of the Executive's employment by the Executive for Good Reason pursuant to Section 8(c) or by the Company pursuant to Section 8(d) hereof and the Executive is receiving payments from the Company pursuant to Section 9(c)(2) hereof, the date on which the last such payment is received; or (ii) in the event of the voluntary termination of the Executive's employment by the Executive pursuant to Section 8(d) hereof, the date which is nine (9) months from the Termination Date; or (iii) in the event of the termination of the Executive's employment for any other reason, the Termination Date, Executive shall not directly or indirectly as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, or in any capacity whatsoever engage in, become substantially financially interested in, employed by or have any connection with, any business engaged principally in the processing of electronic hotel reservations and travel agent commissions in any country where the Company or any of its subsidiaries is then engaged in such business; provided, however, that Executive may own any securities of any corporation which is engaged in such business and is publicly traded stock or securities of such corporation. -9- 10 (b) Executive agrees that for a period of one (1) year following termination of employment with the Company, he will not solicit or in any manner encourage employees of the Company, its subsidiaries or parent to leave its employ. Executive further agrees that during such period he will not offer or cause to be offered employment to any person who is employed by the Company, its subsidiaries or parent at any time during the six (6) months prior to the termination of his employment with the Company. (c) In case one or more of the terms contained in Subsections (a) or (b) of this Section 12 shall for any reason become invalid, illegal, or unenforceable, such invalidity, illegality or unenforceability shall not affect any other terms herein, but such terms shall be deemed deleted and such deletion shall not affect the validity of the other terms of this Section. In addition, if any one or more of the terms contained in Subsections (a) or (b) of this Section shall for any reason be held to be excessively broad with regard to time, duration, geographic scope or activity that term shall be construed in a manner to enable it to be enforced to the extent compatible with applicable law. 13. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term "Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 14. FEES AND EXPENSES. The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as a result of the breach or default by the Company of the terms hereof. 15. NOTICE. For purposes of this Agreement, notice and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third (3rd) business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. -10- 11 16. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 17. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off (except against amounts actually owed by the Executive to the Company as evidenced by promissory notes, loan agreements and similar documents executed by the Executive), counterclaim, defense, recoupment or other right which the Company may have against the Executive or others. 18. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas without giving effect to the conflict of law principles thereof. Subject to Section 22 of this Agreement, any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Dallas County, Texas. 20. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provisions hereof shall not affect the validity or enforceability of the other provisions hereof. 21. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. -11- 12 22. ARBITRATION. Any dispute or controversy arising out of or relating to this Agreement shall be determined and settled by arbitration in the City of Dallas, Texas, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association then in effect, and judgement upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. Such arbitrator shall have no power to modify any of the provisions of this Agreement, and his or her jurisdiction is limited accordingly. A party requesting arbitration hereunder shall give ten (10) days' written notice to the other party to request such arbitration. Unless the arbitrator decides otherwise, the successful party in any such arbitration shall be entitled to reasonable attorneys' fees and costs associated with such arbitration. If the parties hereto cannot agree upon an arbitrator, then one shall be appointed by the governing office of the American Arbitration Association. Any arbitrator so appointed shall have extensive experience in a profession connected with the subject matter of the dispute. Whenever any action is required to be taken under this Agreement within a specified period of time and the taking of such action is materially affected by a matter submitted to arbitration, such period shall automatically be extended by the number of days plus ten (10) that are taken for the determination of that matter by the arbitrator. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman of the Board or Chairman of the Compensation Committee and the Executive has executed this Agreement as of the date and year first above written. PEGASUS SYSTEMS, INC. EXECUTIVE: By: /s/ W.C. HAMMETT, JR. By: /s/ MARK C. WELLS ----------------------------------------- ---------------------------- Mark C. Wells Print: W.C. HAMMETT, JR. -------------------------------------- Title: CHAIRMAN OF THE BOARD -------------------------------------- -12- EX-10.22 7 d84582ex10-22.txt SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN 1 EXHIBIT 10.22 PEGASUS SYSTEMS, INC. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN 2 TABLE OF CONTENTS ARTICLE I ESTABLISHMENT AND PURPOSE PAGE ---- 1.1 Establishment 1 1.2 Purpose 1 ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 Definitions 2 2.2 Construction 5 ARTICLE III PARTICIPATION 3.1 Selection of Participants 6 ARTICLE IV BENEFITS 4.1 Eligibility for Benefits 7 4.2 Amount of Benefits 7 4.3 Form of Payment 8 4.4 Optional From of Payment 8 ARTICLE V FUNDING AND OTHER MATTERS 5.1 Funding 9 5.2 Continued Employment 9 5.3 Restriction on Assignment 9 5.4 Binding on Company, Participants and Their Successors 9 5.5 Governing Law 9 5.6 Severability 9 ARTICLE VI ADMINISTRATION 6.1 Administration 10 6.2 Finality of Determination 10 6.3 Expenses 10 6.4 Indemnification and Exculpation 10 ARTICLE VII AMENDMENT AND TERMINATION 7.1 Amendment and Termination 11
i 3 PEGASUS SYSTEMS, INC. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ARTICLE I ESTABLISHMENT AND PURPOSE 1.1 Establishment. Pegasus Systems, Inc. hereby establishes the PEGASUS SYSTEMS, INC. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN, effective as of January 1, 2000. 1.2 Purpose. The purpose of this Plan is to provide supplemental retirement benefits to certain selected management employees of the Company on the terms and conditions set forth herein. 1 4 ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 Definitions. The following words and phrases shall have the meaning set forth below unless a different meaning is plainly required by the context: (a) The term "ACCRUED BENEFIT" shall mean a Participant's monthly retirement benefit equal to 3% of the Participant's Final Average Compensation multiplied by the Participant's Years of Service, not to exceed 60% of the Participant's Final Average Compensation. However, the maximum benefit for the Chief Executive Officer of the Company is 70% of Final Average Compensation. (b) The term "ACTUARIALLY EQUIVALENT" shall mean a benefit differing in time, period, and/or manner of payment from a specified benefit provided under this Plan, but having the same value at the date of commencement of benefits when computed using the 1994 GAM Static Male Table and an interest rate of 8% compounded annually. (c) The term "BENEFICIARY" shall mean the person or persons designated by a Participant to receive payment of all or a designated portion of the Participant's benefit payable under this Plan in the event of the Participant's death. In the event of the Participant's death, the Company shall make benefit payments payable under this Plan to the Participant's Beneficiary. Any payment made by the Company to the Participant's Beneficiary in good faith shall fully discharge the Company from its obligations with respect to such payment, and the Company shall have no further obligation to see to the application of any money so paid. (d) The term "BENEFIT COMMENCEMENT DATE" shall mean the first day a benefit is paid to a Participant under this Plan. (e) The term "CAUSE " shall mean: (i) "cause" (or any corresponding term) as defined in the employment agreement then in effect between the Company and the Participant; or (ii) If there is no employment agreement then in effect between the Company and the Participant, a reason which is based on the Participant's dishonest conduct, which is materially injurious to the Company. For this purpose, a determination of whether dishonest conduct materially injurious to the Company has been committed by the Participant shall be made by the Compensation Committee in good faith only after a full investigation of such alleged dishonest conduct and after an opportunity has been given the Participant to present the Participant's case to the 2 5 Compensation Committee. The decision made by the Compensation Committee shall be final and binding on the Participant and other persons affected by such decision. (f) The term "COMPENSATION COMMITTEE" shall mean the Compensation Committee of the board of directors of the Company; provided, however, that during any period the Compensation Committee is not constituted, the term shall mean the board of directors of the Company. (g) The term "CODE" shall mean the Internal Revenue Code of 1986, as amended. (h) The term "COMPANY" shall mean Pegasus Systems, Inc., a Delaware Corporation, its corporate successors, and the surviving corporation resulting from any merger of Pegasus Systems, Inc. with any other corporation or corporations. (i) The term "COMPENSATION" shall mean the sum of a Participant's base salary and bonus actually paid during a calendar month. (j) The term "DATE OF PARTICIPATION" shall mean the date the Compensation Committee specifies as the first day an Employee commences participation in the Plan. (k) The term "DETERMINATION DATE" shall mean the date on which a Participant ceases to be an Employee for any reason. (l) The term "EARLY RETIREMENT " shall mean the termination of the Participant's status as an Employee after the Participant attains age fifty (50), provided such termination is approved by the Compensation Committee as a "retirement" for purposes of this Plan. (m) The term "EFFECTIVE DATE" shall mean January 1, 2000. (n) The term "EMPLOYEE" shall mean a common law employee of the Company. (o) The term "FINAL AVERAGE COMPENSATION" shall mean the highest average monthly Compensation received by the Participant from the Company during any period of thirty-six (36) consecutive calendar months within the period of one hundred and twenty (120) consecutive calendar months ending on the Participant's Determination Date. If the Participant is an Employee of the Company for less than thirty-six (36) consecutive calendar months, the Participant's Final Average Compensation shall be the average monthly Compensation received by the Participant from the Company during the Participant's period as an Employee ending on the Participant's Determination Date. 3 6 (p) The terms "NORMAL RETIREMENT" and "LATE RETIREMENT" shall each mean the termination of the Participant's status as an Employee after the Participant attains age sixty (60). (q) The term "PARTICIPANT" shall mean an Employee who is selected to participate in the Plan pursuant to Article III. (r) The term "PLAN" shall mean the Pegasus Systems, Inc. Supplemental Employee Retirement Plan as set forth herein, as amended from time to time. (s) The term "PLAN YEAR" shall mean the 12-month period beginning on each January 1st and ending on the subsequent December 31st. (t) The term "TOTAL AND PERMANENT DISABILITY" shall mean: (i) The mental or physical disability, either occupational or non-occupational in cause, which satisfies the definition of "total and permanent disability" (or any corresponding term) as set forth in the employment agreement then in effect between the Company and the Participant; or (ii) If there is no employment agreement then in effect between the Company and the Participant or if the employment agreement then in effect has no such defined term or concept, the mental or physical disability, either occupational or non-occupational in cause, which satisfies the definition of "total and permanent disability" (or any corresponding term) as set forth in the principal long-term disability policy or plan provided by the Company then covering the Participant; or (iii) If there is no such policy then covering the Participant, the mental or physical disability which, as determined by the Compensation Committee in good faith upon receipt of and in reliance on sufficient competent medical advice from one or more individuals selected by the Compensation Committee who are qualified to give professional medical advice, impairs or is expected to impair the Participant's ability to substantially perform the Participant's duties as an Employee of the Company for a period of at least one hundred eighty (180) consecutive days. (u) The term "YEAR OF PARTICIPATION" shall mean the period of time, computed to the nearest completed month, commencing on the Participant's Date of Participation in the Plan and ending on the Participant's Determination Date. (v) The term "YEAR OF SERVICE" shall mean the period of time, computed 4 7 to the nearest completed month, commencing on the Participant's date of hire as an Employee of the Company and ending on the Participant's Determination Date. Notwithstanding the preceding sentence, the Compensation Committee may credit a Participant with additional full or partial Years of Service for all or any period during which the Participant rendered services for the Company in a status other than as an Employee. 2.2 Construction. Except when otherwise indicated by the context, the masculine shall also include the feminine gender and the singular shall also mean the plural. 5 8 ARTICLE III PARTICIPATION 3.1 Selection of Participants. Participation in the Plan shall be limited to those select management Employees of the Company who are designated as Participants by the Compensation Committee. No person shall have an automatic right to be selected as a Participant. 6 9 ARTICLE IV BENEFITS 4.1 Eligibility for Benefits. A Participant shall be eligible for a benefit determined in accordance with the provisions of Section 4.2 if the Participant's Determination Date occurs due to one of the following reasons: (a) Normal Retirement or Late Retirement; (b) Early Retirement; (c) Death; (d) Total and Permanent Disability; or (e) If Paragraphs (a) through (d) do not apply, termination as an Employee after the completion of (4) four Years of Participation for any reason other than Cause. 4.2 Amount of Benefits. The benefit payable to the Participant or the Participant's Beneficiary under the Plan shall be determined as follows: (a) Normal Retirement or Late Retirement. A monthly benefit equal to the Participant's Accrued Benefit commencing on the first day of the month following the Participant's Determination Date. (b) Early Retirement. A monthly benefit equal to the Participant's Accrued Benefit commencing on the first day of the month coinciding with or next following the Participant's sixtieth (60th) birthday. Alternatively, the Participant may, no later than six (6) months prior to the Participant's Determination Date, elect to receive reduced monthly payments commencing on the first (1st) day of any month after the Participant's Determination Date. The reduced benefit is equal to the Participant's Accrued Benefit reduced by 4% for each year (pro-rated for partial years) between the date of the Participant's first benefit payment and the first month coinciding with or next following the Participant's sixtieth (60th) birthday. (c) Death. A single lump sum payment that is Actuarially Equivalent to the Participant's Accrued Benefit. (d) Total and Permanent Disability. A monthly benefit commencing on the first (1st) day of the month coinciding with or next following the 7 10 Participant's sixtieth (60th) birthday. The amount of the benefit is the Participant's Accrued Benefit determined using the Years of Service the Participant would have at age sixty (60) and the Participant's Final Average Compensation at the time of the Participant's termination as an Employee for Total and Permanent Disability. Such benefit shall be reduced by any benefit the Participant receives from the long term disability plan provided by the Company. (e) Termination. A monthly benefit equal to the Participant's Accrued Benefit commencing on the first (1st) day of the month coinciding with or next following the Participant's sixtieth (60th) birthday. 4.3. Form of Payment. Except as otherwise specifically provided, payment of benefits from this Plan, if any, shall be payable as a single life annuity during the Participant's lifetime with the last payment to be made for the month in which the Participant's death occurs. 4.4 Optional Forms of Payment. In lieu of the form and amount of benefit payable under Section 4.3, a Participant may, no later than six (6) months prior to the date benefits commence, elect a benefit of Actuarially Equivalent value to the payment specified in Section 4.3 in one of the following forms: (a) Monthly payments to the Participant during the Participant's life and, if the Participant is survived by a Beneficiary, continuing monthly payments in the amount of 50% or 100% of the amount payable to the Participant to such Beneficiary for the Beneficiary's lifetime. (b) Monthly payments to the Participant during the Participant's life and, if the Participant dies within one hundred twenty (120) months of the date the Participant's benefits commenced, continuing monthly payments of the same amount to the Participant's Beneficiary for the balance of such one hundred twenty (120) month period. (c) Monthly payments to the Participant or the Participant's Beneficiary for a period of one hundred twenty (120) months. 8 11 ARTICLE V FUNDING AND OTHER MATTERS 5.1 Funding. All amounts paid under the Plan shall be paid in cash from the general assets of the Company or in such form from such other funding vehicle as the Board of Directors shall provide; provided, however, that all assets paid into any funding vehicle hereunder shall at all times prior to payment to the Participant or Beneficiary remain subject to the general creditors of the Company. No participants shall have any right, title, or interest whatever in or to, or any preferred claim in or to, any investment reserves, accounts, or funds that the Company may purchase, establish, or accumulate to aid in providing the payments described in the Plan. Nothing contained in the Plan and no action taken pursuant to its provisions, shall create or be construed to create a trust or a fiduciary relationship of any kind between the Company and the Participant or any other person. Neither the Participant nor a Beneficiary of the Participant shall acquire any interest greater than that of an unsecured creditor in any assets of the Company or in any investment reserves, accounts, or funds that the Company may purchase, establish or accumulate for the purposes of paying benefits hereunder. 5.2 Continued Employment. Nothing contained in the Plan shall be construed as conferring upon the Participant the right to continue in the employment of the Company in any capacity or as otherwise affecting the employment relationship. 5.3 Restriction on Assignment. The benefits provided hereunder are intended for the personal security of persons entitled to payment under the Plan and are not subject in any manner to the debts or other obligations of the persons to whom they are payable. The interest of any Participant or his Beneficiary may not be sold, transferred, assigned, or encumbered in any manner, either voluntarily or involuntarily, and any attempt to so anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be null and void; neither shall the benefits hereunder be liable for or subject to the debts, contracts, liabilities, engagements, or torts of any person to whom such benefits or funds are payable, nor shall they be subject to garnishment, attachment, or other legal equitable process nor shall they be an asset in bankruptcy. 5.4 Binding on Company, Participants and Their Successors. The Plan shall be binding upon the parties hereto, the successors and assigns of the Company and the heirs, executors and administrators of the Participants. 5.5 Governing Law. The Plan shall be construed in accordance with and governed by the laws of the State of Texas. 5.6 Severability. In the event any provision of the Plan shall be held invalid or illegal for any reason, any illegality or invalidity shall not affect the remaining parts of the Plan, but the Plan shall be construed and enforced as if the illegal or invalid provision had never been inserted. 9 12 ARTICLE VI ADMINISTRATION 6.1 Administration. The Compensation Committee shall be responsible for the general administration of the Plan. The Compensation Committee shall have that authority to make rules to administrator and interpret the Plan, to decide questions arising under the Plan, and to take such other action as may be appropriate to carry out the purposes of the Plan. 6.2 Finality of Determination. The determination of the Compensation Committee as to any disputed questions arising under the Plan, including questions of construction and interpretation shall be final, binding, and conclusive upon all persons. The Compensation Committee's determinations as to which Employees shall be Participants and the specific benefits which shall be paid to or on behalf of each such Participant shall be final, binding, and conclusive upon all persons. 6.3 Expenses. The expenses of administering the Plan shall be borne by the Company. 6.4 Indemnification and Exculpation. The members of the Compensation Committee, the board of directors, and the officers, directors, and employees of the Company shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability, or expense that may be imposed upon or reasonably incurred by them in connection with or resulting from any claim, action, suit, or proceeding to which they may be a party or in which they may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by them in settlement (with the Company's written approval) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability, or expense is due to such person's fraud or willful misconduct. 10 13 ARTICLE VII AMENDMENT AND TERMINATION 7.1 Amendment and Termination. The board of directors of the Company may at any time amend or terminate the Plan. However, if the Plan should be amended or terminated, the Company shall be liable for any benefits accrued under the Plan as of the date of such action for Participants who are or have been employed by the Company, where such accrued benefits shall be the actuarially determined benefits as of such date of amendment or discontinuance which each Participant or Beneficiary is receiving under the Plan or, with respect to Participants who are in the employment of the Company on such date, which each such Participant would have received as of such date under the Plan if the Participant's employment had terminated as of the date of amendment or termination, unless such benefit is otherwise provided by the Company. 11 EX-21.1 8 d84582ex21-1.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES Pegasus No. 1, LLC Delaware Pegasus GP, LLC Delaware Pegasus Business Intelligence, LP Delaware Pegasus No. 2, LLC Delaware TravelWeb, LP Delaware Pegasus Solutions, Inc. (UK) Limited UK Pegasus Solutions Acquisition Company Delaware Pegasus Solutions Limited UK Pegasus Solutions Companies Delaware Anasazi (UK) Ltd. UK Anasazi Travel Resources GmbH Germany Anasazi Travel Resources K.K Japan Anasazi Travel Resources Pte Ltd Singapore Golden Tulip Worldwide Ltd. UK Paycom Limited UK PT Utell International Indonesia Pegasus Solutions, S.A. de C.V. Mexico Pegasus Solutions Pension Trustees Limited UK Summit International Hotels Limited UK Pegasus Solutions (Netherlands) B.V. Netherlands Pegasus Solutions/Utell (Singapore) Pte Ltd Singapore Pegasus Solutions Australia Pty Limited Australia Utell India Private Limited India Utell International UK Pegasus Solutions (Chile) Limitada Chile Utell International (Ireland) Limited Ireland Utell International (Thailand) Ltd. Thailand Utell International (U.K.) Limited UK Utell International Columbia Ltda Columbia Utell International Do Brasil Turismo Ltda Brazil Pegasus Solutions Korea Ltd. Korea Pegasus Solutions Srl Italy
EX-23.1 9 d84582ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-93713) and the Registration Statements on Form S-8 (Nos. 333-40039, 333-40033, and 333-40035) of Pegasus Solutions, Inc. of our report dated February 6, 2001, except as to Note 19, which is as of March 7, 2001, relating to the financial statements and our report dated February 6, 2001 related to the financial statement schedule, which appear in this Annual Report on Form 10-K. We also consent to the reference to us under the heading "Selected Financial Data" in such Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Dallas, Texas March 22, 2001 -----END PRIVACY-ENHANCED MESSAGE-----