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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(MARK ONE) 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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________
Commission file number 000-22935
PEGASUS SYSTEMS, 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 75219
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
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, 1999 of voting stock held by
non-affiliates of the registrant was $454,626,984.
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The number of shares of the registrant's common stock, par value $0.01
per share, outstanding as of March 15, 1999 was 10,606,160.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Selected portions of the Registrant's Annual Report to Stockholders
for the fiscal year ended December 31, 1998 are incorporated by reference into
Part II of this Form 10-K.
2. Selected portions of the Registrant's definitive Proxy Statement for
the 1999 Annual Meeting of Stockholders to be held on May 13, 1999 are
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
Unless the context otherwise requires, the term "Company" or "Pegasus"
when used in this report refers to Pegasus Systems, Inc., a Delaware
corporation, and its predecessors and consolidated subsidiaries. This report
contains certain forward-looking statements within the meaning of the federal
securities laws. Actual results and the timing of certain 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".
GENERAL
Pegasus is a provider of transaction processing services to the hotel
industry worldwide. The Company's services are currently divided into three
operating segments: Pegasus Electronic Distribution, Pegasus Commission
Processing and Pegasus Business Intelligence. Pegasus Electronic Distribution
improves the efficiency and effectiveness of the hotel reservation process by
enabling travel agents and individual travelers to electronically access hotel
room inventory information and conduct reservation transactions. Pegasus
Electronic Distribution includes what was historically referred to as THISCO's
UltraSwitch service, and the Company's Internet-based services known as
TravelWeb, NetBooker and UltraRes. Pegasus Commission Processing improves the
efficiency and effectiveness of the commission payment process for participating
hotels and travel agencies by consolidating payments and providing comprehensive
transaction reports. Pegasus Commission Processing includes what historically
was referred to as The Hotel Clearing Corporation or "HCC". In addition, Pegasus
Business Intelligence began providing information services to hotel industry
participants with transaction specific information on industry trends and guest
behavior. The Company's services benefit many of the participants in the hotel
room distribution process, including hotels, hotel representation firms, Global
Distribution Systems ("GDSs"), travel agencies, convention and other large
meeting organizers, corporate travel departments and Web sites with
travel-related features. For the fiscal year ending December 31, 1998,
approximately 42% of the Company's consolidated revenues was derived from
Electronic Distribution services, approximately 55% of the Company's
consolidated revenues was derived from Commission Processing services and
approximately 3% of the Company's consolidated revenue was derived from Business
Intelligence services.
In August 1998, the Company supplemented its Business Intelligence
services by acquiring all of the equity interest in Driving Revenue L.L.C., a
hotel database marketing and consulting firm, for approximately $6 million. In
addition, in June 1998 the Company purchased a minority interest in Customer
Analytics, Inc., a new venture aimed at providing services to companies in the
fields of data warehousing and data mining. The Company also purchased in
September 1998 a minority interest in Intermezzo, Inc., a developer of hotel
reservation and property management systems and software.
The Company was incorporated in Delaware in 1995, and holds directly or
indirectly all of the outstanding equity securities of (i) The Hotel Industry
Switch Company ("THISCO"), a Delaware corporation formed in 1988 to operate the
electronic distribution business ; (ii) The Hotel Clearing Corporation ("HCC"),
a Delaware corporation formed in 1991 to operate the commission processing
business; (iii) TravelWeb, Inc., a Delaware corporation formed in 1995 to
operate the online electronic distribution business; (iv) Pegasus IQ, Inc., a
Delaware corporation formed in 1997 to operate Pegasus Business Intelligence
services and (v) Driving Revenue L.L.C., a Maryland limited liability company
acquired in August 1998 that operates a hotel database and marketing business
and constitutes part of Pegasus Business Intelligence.
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SERVICES
PEGASUS ELECTRONIC DISTRIBUTION
GDS Interfaces.
Pegasus Electronic Distribution provides an electronic hotel room
reservation processing service that interfaces communications concerning hotel
reservation information between all major GDSs and hotel central reservation
systems. The interface, which is referred to as the "UltraSwitch", enables a
hotel to connect to all major GDSs without having to build and maintain a
separate interface for each GDS. Without the UltraSwitch interface or a similar
service, hotel chains that desire their room inventory to be accessible to
travel agencies electronically on a GDS must develop protocols and message
formats compatible with each GDS, a process that entails significant time and
expense. Alternatively, hotels may rely more heavily on less-automated means,
such as traditional toll-free telephone reservation centers with higher
processing costs. The UltraSwitch enables the processing of hotel room
reservations and also transmits daily millions of electronic status messages,
which are used to update room rates, features and availability on GDS
databases. Many participating hotels also have chosen to utilize the Company's
UltraSelect service, which provides travel agencies using GDSs with direct
access through the UltraSwitch to a hotel's central reservation system
bypassing the GDS databases to obtain the most complete and up-to-date hotel
room information available.
Internet-based Electronic Distribution Services.
TravelWeb. Located at www.travelweb.com, TravelWeb provides individual
travelers direct access to online hotel information and the ability to make
reservations electronically. Individual travelers traditionally obtain
information or reserve a room by contacting a hotel directly by telephone or fax
or indirectly through intermediaries, such as travel agencies, convention and
other large meeting organizers and corporate travel departments. As a result, an
individual traveler cannot easily obtain information from a wide range of hotel
properties in a timely manner. TravelWeb provides travelers with detailed
information regarding a wide array of hotel properties and, through its
connection to the UltraSwitch interface, allows travelers to reserve a hotel
room and receive a confirmation in seconds. In addition to hotel room
reservations, the TravelWeb service offers airline booking through Microsoft's
Expedia.com. Additionally, TravelWeb offers "The Resources Center", which
provides information and links for a variety of travel-related services, such as
weather, food, shopping, area attractions and business services, and "Click-It!
Weekends"(R), a section offering special rates on hotels for each upcoming
weekend.
NetBooker. NetBooker is a service for the operators of third-party Web
sites which combines the Company's hotel information database and the
UltraSwitch interface capability to make hotel room reservations. To conduct
Internet-based electronic commerce successfully, Web site operators must offer
a content set which is sufficiently broad, accurate, up-to-date, graphically
appealing and useful to attract buyers to the Web site. Typically, the
development of such a content set is expensive and time consuming. Furthermore,
in addition to providing individual travelers with access to useful and
graphically appealing information, the operator of a Web site must offer
individual travelers the capability to effect a transaction in order to
generate a transaction fee. The Company's NetBooker service offers operators of
Web sites an extensive and comprehensive set of hotel information and a simple
and fast method of making a hotel room reservation online. The Company's
NetBooker service utilizes advanced technology applications to customize the
hotel database so that it appears to the user to be an integral part of the
third-party Web site. In connection with this service, the operator of the
third-party Web site establishes an interface to the Company's UltraSwitch,
which enables users of the Web site to shop and query room availability,
electronically make a reservation and receive a confirmation in seconds.
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UltraRes. The Company's UltraRes service automates the processing of
hotel room reservations for conventions and large meetings. The manual process
traditionally used to reserve hotel rooms for these events is
information-intensive and inefficient and frequently leads to inaccurate and
delayed information and overbooking or underbooking. With the Company's
UltraRes service, convention and other large meeting organizers are able to
transfer reservation requests to the UltraSwitch, which translates the
information to electronically book a room in each hotel central reservation
system. The UltraRes service eliminates the need to transfer rooming lists for
manual entry at the hotel and allows hotels to deliver reservations and
confirmations electronically in a fast and reliable manner.
UltraDirect. The Company's UltraDirect service provides the corporate
travel management industry with a direct real-time link to the Company's
UltraSwitch through corporate intranet travel management software. With the
UltraDirect service, corporate travelers are able to check availability and
make hotel reservations within seconds at hotel chains or properties with which
the traveler's employer has negotiated rates. The UltraDirect service enables
corporate travel departments of companies to have access to the customized
information negotiated with hotel chains and properties to facilitate hotel
room reservations. Furthermore, this information can be fully integrated into
other components of the intranet site and facilitate the creation of passenger
name records and detailed profile information.
The Company has not received a material amount of revenues for certain
of these electronic hotel room reservation services to date, and there can be
no assurance that such services will produce material revenues to the Company
in the future. See "Risk Factors -- Impact of Technological Advances; Delays in
Introduction of New Services."
PEGASUS COMMISSION PROCESSING
Pegasus Commission Processing gathers commission payment information,
processes that information and transmits to travel agencies one consolidated
check in the travel agency's currency of choice, together with an information
statement that enables the travel agency to reconcile its hotel commission
activity. Typically, a hotel pays to the travel agency that made the hotel
reservation a commission of approximately 10% of the room rate paid by a hotel
guest. However, the payment process related to these commissions historically
has been costly and inefficient, consisting of numerous checks in small amounts
and little information regarding the basis from which the commission was
calculated. Pegasus Commission Processing service streamlines the commission
payment process and consolidates into a single payment the aggregate commission
owed by a participating hotel to all participating travel agencies.
Additionally, the service provides an incentive to travel agencies to make
reservations at hotels participating in the service in countries other than
their own because Pegasus Commission Processing disburses checks denominated in
each travel agency's currency of choice. Furthermore, the monthly and quarterly
marketing reports and statistics prepared for the hotel as part of the
Company's service allow the hotel to identify and market more effectively to
those travel agencies that provide the hotel with the majority of its guests.
The hotel also benefits from the Customer Relations Center, which allows travel
agency inquiries regarding commissions to be resolved by the Company rather
than by the hotel itself.
PEGASUS BUSINESS INTELLIGENCE
Pegasus Business Intelligence provides hotel database marketing and
consulting and is being expanded to provide hotel information to a wide variety
of audiences in the global hotel industry, from hotel chains to travel industry
marketing groups to corporate travel departments. The service compiles data
regarding hotel guests and their use of hotels and organizes that data into
meaningful information. Pegasus Business Intelligence intends to provide
industry trend reports and guest behavior data in an automated,
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timely format for hotels and hotel marketing companies. The service also is
intended to provide benchmark information services that compare a hotel's daily
room and occupancy rates with that of its competition. Furthermore, Pegasus
Business Intelligence intends to provide data in an electronic format to
individual travelers or corporate travel departments regarding a particular
stay at a hotel, together with information provided by payment card companies,
to facilitate automated expense reporting or to ensure travel policy adherence.
INDUSTRY
The room reservation and commission payment processes in the hotel
industry are complex and information intensive. Making a hotel room reservation
requires significant amounts of data, such as room rates, features and
availability. This complexity is compounded by the need to confirm, revise or
cancel room reservations, which generally requires multiple parties to have
ongoing access to real-time reservation information. Similarly, the process of
reconciling and paying hotel commissions to travel agencies is based on
transaction-specific hotel data and consists of a number of relatively small
payments to travel agencies, often including payments in multiple currencies.
In addition, information regarding guest cancellations and "no-shows" needs to
be accurately communicated between hotels and travel agencies in order to
reconcile commission payments.
Reservations for hotel rooms are made either directly by individual
travelers or indirectly through intermediaries. Individual travelers typically
make direct reservations by telephoning or faxing a hotel to ascertain room
rates, features and availability and to make reservations. Increasingly,
individual travelers can conduct all aspects of this transaction through hotel
and travel-related Web sites. Intermediaries for hotel room reservations,
including travel agencies, convention and other large meeting organizers and
corporate travel departments, access hotel information either by telephone or
fax or through a GDS. GDS's maintain databases of room rate, feature and
availability information provided by hotels to which they are connected.
Because each GDS has a unique electronic interface to hotel reservation
systems, each GDS can obtain room information and book rooms only at hotels
that have developed protocols and message formats compatible with that
particular GDS.
A number of current trends are affecting the hotel industry. First,
the hotel industry has been shifting from manual to electronic means of making
hotel room reservations. As more hotels become electronically bookable, the
Company expects that electronic hotel room reservations will grow substantially
in the United States and internationally over the next several years. Second, a
growing number of individual travelers are making hotel room reservations
electronically on the Internet. Third, smaller hotel chains and independent
hotels increasingly have affiliated with large hotel chains through a process
known in the industry as "branding" or "reflagging." This global consolidation
process produces economies of scale and increases the global penetration of
larger hotel chains, many of whom are the Company's stockholders and customers.
Fourth, hotel commissions are becoming increasingly important to travel
agencies as a source of revenue. Travel agencies are looking to increase their
revenue by making more hotel room reservations to offset the effects of
increased competition among travel agencies, new competition from emerging
travel service distribution channels and caps on commissions for airline
reservations, which historically have been the leading revenue source for
travel agencies.
COMPETITION
The Company faces significant competition in connection with its
electronic distribution service. The principal competitor of Pegasus Electronic
Distribution is WizCom International, Ltd. ("WizCom"), which is a wholly owned
indirect subsidiary of HFS Incorporated ("HFS"). Although HFS has continued its
participation in Pegasus Commission Processing, HFS currently uses WizCom for
its electronic hotel room
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reservation processing. There can be no assurance that any additional customers
will not change their electronic reservation interface to WizCom or to another
similar service. Also, hotels can choose to connect directly to one or more
GDSs, thereby bypassing the UltraSwitch and eliminating the need to pay fees to
the Company. In addition, one or more GDSs can choose to bypass the UltraSwitch
and develop and operate a new common electronic interface to hotel central
reservation systems. Such competitors or their affiliates may have greater
financial and other resources than the Company. Factors affecting competitive
success of the electronic hotel room reservation processing service include
reliability, levels of fees, number of hotel properties on the system, ability
to provide a neutral, comprehensive interface between hotels and other
participants in the distribution of hotel rooms and ability to develop new
technological solutions. There can be no assurance that another participant in
the hotel room distribution process or a new competitor will not create
services with features that would reduce the attractiveness of the Company's
services. The Company's inability to compete effectively with respect to these
services could have a material adverse effect on the Company's financial
condition and results of operations.
The market for the Company's TravelWeb, NetBooker and other
Internet-based services is highly competitive. Current competition includes
traditional telephone or travel agency reservation methods and other Internet
travel reservation services. There are a large number of Internet
travel-related services offered by the Company's competitors, and many of these
competitors are larger and have significantly greater financial resources and
name recognition than the Company. Several competitive Web sites such as
Travelocity (a site operated by The SABRE Group Holdings, Inc.) and Expedia.com
(a site operated by Microsoft Corporation) offer a more comprehensive range of
travel services than those provided by the Company. The Company faces
competition in the hotel room reservation business not only from its current
competitors but also from possible new entrants including other Web sites. The
costs of entry into the Internet hotel room reservation business is relatively
low. There can be no assurance that the Company's Internet hotel room
reservation services will compete successfully. The failure of these services
to compete successfully could have a material adverse effect on the Company's
financial condition and results of operations.
The market for the Company's Commission Processing service is
competitive. The Company's competitors in the Commission Processing business
include National Processing Company ("NPC"), WizCom and Citicorp. NPC is a
company that has traditionally provided car rental and cruise line commission
processing services. Citicorp provides commission consolidation services to
hotel chains. In addition, hotels that are current or prospective customers of
the Company's Commission Processing service could decide to process commission
payments without, or in competition with, the Company's Commission Processing
service. Some of these current or potential competitors have substantially
greater financial and other resources than the Company. Furthermore, while the
Company has agreements with all of its hotel customers for the Company's
Commission Processing service, most of the Company's travel agency customers
are not obligated by any agreement with the Company. If a significant
percentage of these travel agencies were to cease using the Company's
Commission Processing service, the Company's financial condition and results of
operations could be materially adversely affected.
The Company faces significant competition in connection with its
Business Intelligence service. The Company's principal competitor is Smith
Travel Research ("Smith"). Smith currently provides information services to
hotels. Accounting firms and other businesses do currently or may in the future
provide information services similar to the Company's current or future service
offerings. Such competitors or their affiliates may have existing customer
relationships that create an impediment to the Company acquiring new customers.
Such competitors may also have greater financial resources than the Company.
There can be no assurance that current or future information service offerings
of such competitors or new competitors will not reduce the attractiveness of
the Company's services. The Company's inability to compete effectively with
respect to these services could have a material adverse effect on the Company's
financial condition and results of operations.
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INTELLECTUAL PROPERTY
The Company is continually developing new processing technology and
enhancing existing proprietary technology. The Company has no patents. The
Company primarily relies on a combination of copyright, trade secrets,
confidentiality procedures and contractual provisions to protect its
technology. Despite these protections, it may be possible for unauthorized
parties to copy, obtain or use certain portions of the Company's proprietary
technology. While any misappropriation of the Company's intellectual property
could have a material adverse effect on the Company's competitive position, the
Company believes that protection of proprietary rights is less significant to
the Company's business than the continued pursuit of its operating strategies
and other factors, such as the Company's relationship with industry
participants and the experience and abilities of its key personnel.
The Company has registered "UltraSwitch," "TravelWeb," "UltraAccess,"
"HCC Hotel Clearing Corporation," "HCC Link," "HCC Cash", "UltraRes,"
"Click-It," "Pegasus" and "Chain Link" as United States federal trademarks, and
an application to register "Powered by Pegasus" is pending with the United
States Patent and Trademark Office. Trademark applications for "TravelWeb" and
"Powered by Pegasus" also have been filed in Canada and Europe.
RESEARCH AND DEVELOPMENT
The Company's research and development activities primarily consist of
software development, development of enhanced communication protocols and
custom user interfaces and database design and enhancement. As of February 26,
1999, the Company employed 83 people in its Information Technology Group and
from time to time, supplements their efforts with the use of independent
consultants and contractors. This group is comprised of information technology,
services development, technical services and product support personnel. The
Company's total research and development expense was $2.2 million, $2.5 million
and $4.2 million for 1996, 1997 and 1998, respectively. The research and
development expenses for 1998 included a $1.5 million write down for in process
research and development.
EMPLOYEES
At February 26, 1999, the Company had 137 employees, 132 of which were
located in the United States, with 83 persons in the Information Technology
Group, 22 persons performing sales and marketing, customer relations and
business development functions and the remainder performing corporate, finance
and administrative functions. The Company had 5 employees in England performing
international sales activities. The Company has no unionized employees. The
Company believes that its employee relations are satisfactory.
RISK FACTORS
SUBSTANTIAL NET LOSSES. In years before fiscal 1997, the Company
experienced substantial net losses. Pegasus Commission Processing and Pegasus
Electronic Distribution services have accounted for the majority of the
Company's revenues to date, and the Company expects no significant revenues in
1999 from many of its other services, which are relatively new in their
respective markets. Any decrease in the revenues from Pegasus Commission
Processing or Pegasus Electronic Distribution, or any increase in expenses
related to any of the Company's services substantially above the amounts
budgeted therefor, could have a material adverse effect on the Company's
financial condition and results of operations. The Company anticipates that its
budgeted operating expenses will increase in the foreseeable future as it
continues to
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develop its services, increase its sales and marketing activities and expand
its distribution channels. To continue its profitability, the Company must
continue to successfully implement its business strategy and increase its
revenues while controlling expenses. The Company can give no assurances
regarding the successful completion of these measures.
COMPETITION. Pegasus Electronic Distribution. The Company faces
significant competition in connection with its electronic distribution service.
The principal competitor of Pegasus Electronic Distribution is WizCom, which is
a wholly owned indirect subsidiary of HFS. Although HFS has continued its
participation in Pegasus Commission Processing, HFS currently uses Wizcom for
its electronic hotel room reservation processing. There can be no assurance that
any additional customers will not change their electronic reservation interface
to WizCom or to another similar service. Also, hotels can choose to connect
directly to one or more GDSs, thereby bypassing the UltraSwitch and eliminating
the need to pay fees to the Company. Such competitors or their affiliates may
have greater financial and other resources than the Company. Factors affecting
the competitive success of an electronic hotel room reservation processing
service include reliability, levels of fees, number of hotel properties on the
system, ability to provide a neutral comprehensive interface between hotels and
other participants in the distribution of hotel rooms and ability to develop new
technological solutions. There can be no assurance that another participant in
the hotel room distribution process or a new competitor will not create services
with features that would reduce the attractiveness of the Company's services.
The Company's inability to compete effectively with respect to these services
could have a material adverse effect on the Company's financial condition and
results of operations.
The market for the Company's TravelWeb, NetBooker and other Internet
services is highly competitive. Current competition includes traditional
telephone or travel agency reservation methods and other Internet travel
reservation services. There are a large number of Internet travel-related
services offered by the Company's competitors, and many of these competitors
are larger and have significantly greater financial resources and name
recognition than the Company. Several competitive Web sites such as Travelocity
(a site operated by The SABRE Group Holdings, Inc.) and Expedia (a site
operated by Microsoft Corporation) offer a more comprehensive range of travel
services than TravelWeb or NetBooker. The Company faces competition in the
online hotel room reservation business not only from its current competitors
but also from possible new entrants, including other Web sites. The costs of
entry into the Internet hotel room reservation business are relatively low.
There can be no assurance that the Company's Internet hotel room reservation
services will compete successfully. The failure of these services to compete
successfully could have a material adverse effect on the Company's financial
condition and results of operations.
Pegasus Commission Processing. The market for Pegasus Commission
Processing is competitive. The Company's competitors in the commission
processing business include NPC, WizCom and Citicorp. NPC is a company that has
traditionally provided car rental and cruise line commission processing
services. Citicorp provides 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. Some of these current or
potential competitors have substantially greater financial and other resources
than the Company. Furthermore, while the Company has agreements with all of its
hotel customers for Pegasus Commission Processing, most of the Company's travel
agency customers are not obligated by any agreement with the Company. If a
significant percentage of these travel agencies were to cease using Pegasus
Commission Processing, the Company's financial condition and results of
operations could be materially adversely affected.
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Pegasus Business Intelligence. The Company faces significant
competition in connection with its Business Intelligence service. The Company's
principal competitor is Smith. Smith currently provides information services to
hotels. Accounting firms and other businesses do currently or may in the future
provide information services similar to the Company's current or future service
offerings. Such competitors or their affiliates may have existing customer
relationships that create an impediment to the Company acquiring new customers.
Such competitors may also have greater financial resources than the Company.
There can be no assurance that current or future information service offerings
of such competitors or new competitors will not reduce the attractiveness of the
Company's services. The Company's inability to compete effectively with respect
to these services could have a material adverse effect on the Company's
financial condition and results of operations.
DEPENDENCE ON HOTEL INDUSTRY; CONSOLIDATION TRENDS. The Company derives
substantially all of its revenues directly and indirectly from the hotel
industry. The hotel industry is sensitive to changes in economic conditions
that affect business and leisure travel and is highly susceptible to unforeseen
events, such as political instability, regional hostilities, recession,
gasoline price escalation, inflation or other adverse occurrences that result
in a significant decline in the utilization of hotel rooms. Any event that
results in decreased travel or increased competition among hotels may lower
hotel room reservation volumes, the average daily rates for hotel rooms or both
and could have a material adverse effect on the Company's financial condition
and results of operations.
The hotel industry recently has witnessed a period of consolidation in
which hotel chains have acquired or merged with other chains. Such activities
may reduce the Company's customer base. Similar consolidation trends have
occurred in the GDS industry. The GDS industry has consolidated to four major
GDSs. If further consolidation were to take place, the value provided by the
Company to participants in the hotel room distribution process and the benefits
to hotel operators of utilizing the UltraSwitch would be reduced. The Company
typically offers volume-based discounting of its fees, which could result in a
higher percentage of discounted fees if the consolidation trends in the hotel
and GDS industries continue. There can be no assurance that any potential
decrease in the Company's customer base or any potential increase in the
percentage of discounted fees will not have a material adverse effect on the
Company's financial condition and results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced in the
past and expects to experience in the future significant fluctuations in
quarterly operating results. Such fluctuations may be caused by many factors,
including but not limited to the introduction of new or enhanced services by
the Company or its competitors, the degree of customer acceptance of new
services, competitive conditions in the industry, seasonal factors, reduction
in client base, changes in pricing, the extent of international expansion, the
mix of international and domestic sales and general economic conditions.
Because the Company's expense budget is set early in a fiscal year and a
significant portion of the Company's operating expenses are relatively fixed in
nature, fluctuations in revenues may cause substantial variation in the
Company's results of operations from quarter to quarter. Due to the foregoing
factors, many of which are beyond the Company's control, quarterly revenues and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as any indication of future
performance. It is likely that the Company's future quarterly operating results
from time to time will not meet the expectations of securities analysts or
investors, which could have a material adverse effect on the market price of
the Company's common stock.
POTENTIAL ADVERSE CHANGES IN HOTEL COMMISSION PAYMENTS. Absent any express
arrangement in individual cases, hotels currently 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%, limit
the
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maximum commission generally paid for a hotel room reservation or eliminate
commissions entirely. In 1995, the airline industry placed a maximum limit on
the amount of commissions payable to travel agencies for any domestic airline
ticket issued. Recently, certain airlines have capped the dollar amount that
they will pay to travel agencies for airline reservations made online. In
addition, hotels increasingly are utilizing other direct distribution channels,
such as the Internet, or offering negotiated rates to major corporate customers
that are non-commissionable to travel agencies. Because a substantial portion
of the Company's revenues are dependent on the dollar volume of travel agency
commissions paid by hotels, any change in the hotel commission payment system
that reduces the commissions payable to travel agencies and any acceleration of
the trend towards direct distribution of rooms by hotels could have a material
adverse effect on the Company's financial condition and results of operations.
DEPENDENCE ON GROWTH OF INTERNET COMMERCE. The market for electronic hotel
reservation services over the Internet is rapidly evolving and depends upon
market acceptance of novel methods for distributing services and products,
which involves a high degree of uncertainty. The success of the Company's
TravelWeb, NetBooker and other Internet services will depend upon the adoption
of the Internet by consumers as a widely used medium for commerce. The Internet
may not prove to be a viable commercial marketplace for any number of reasons,
including inadequate development of the necessary infrastructure or the lack of
complementary services and products, such as high speed modems and high speed
communication lines. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. Moreover,
critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use, accessibility and quality of service)
remain unresolved and may negatively affect the growth or attractiveness of
commerce conducted on the Internet. If critical issues concerning the
commercial use of the Internet are not favorably resolved, if the necessary
infrastructure is not developed or if the Internet does not become a viable
commercial marketplace, the Company's financial condition and results of
operations could be materially adversely affected.
SYSTEM INTERRUPTION AND SECURITY RISKS. The Company's operations are dependent
on its ability to protect its computer systems and databases against damage or
system interruptions from fire, earthquake, power loss, telecommunications
failure, unauthorized entry or other events beyond the Company's control. A
significant amount of the Company's computer equipment is located at a single
site in Phoenix, Arizona. There can be no assurance that unanticipated problems
will not cause a significant system outage or data loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to break-ins, computer viruses or other disruptions caused by its
customers or others. Any damage to the Company's databases, failure of
communication links or security breach or other loss that causes interruptions
in the Company's operations could have a material adverse effect on the
Company's financial condition and results of operations.
IMPACT OF TECHNOLOGICAL ADVANCES; DELAYS IN INTRODUCTION OF NEW SERVICES. The
Company's future success will depend, in part, on its ability to develop
leading technologies, enhance its existing services, develop and introduce new
services that address the increasingly sophisticated and varied needs of its
current and prospective customers and respond to technological advances and
emerging industry standards and practices on a timely and cost effective basis.
Although the Company strives to be a technological leader, there can be no
assurance that future advances in technology will be beneficial to, or
compatible with, the Company's business or that the Company will be able to
economically incorporate such advances into its business. In addition, keeping
abreast of technological advances in the Company's business may require
substantial expenditures and lead time. There can be no assurance that the
Company will be successful in effectively using new technologies, adapting its
services to emerging industry standards or developing, introducing and
marketing service enhancements or new services, or that it will not experience
11
<PAGE> 12
difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If the Company incurs increased
costs or is unable, for technical or other reasons, to develop and introduce
new services or enhancements of existing services in a timely manner in
response to changing market conditions or customer requirements, or if new
services do not achieve market acceptance, the Company's financial condition
and results of operations could be materially adversely affected.
DEPENDENCE ON KEY CUSTOMERS AND THIRD-PARTY SERVICE ARRANGEMENTS. The Company's
business is dependent upon customer arrangements with its hotel stockholders or
their affiliates, other hotel chains and hotel representation firms, travel
agencies, travel agency consortia and GDSs. The Company has not entered into
written agreements with certain travel agencies relating to Pegasus Commission
Processing. There can be no assurance that the Company will be able to continue
or renew these arrangements on equal or better terms or initiate new
arrangements. Any cancellation or non-renewal of these arrangements that
results in a significant reduction in the Company's customer base or revenue
sources could materially adversely affect the Company's financial condition and
results of operations. In addition, the Company relies on third parties to
provide consolidation, remittance and worldwide currency exchange services for
Pegasus Commission Processing and facility maintenance and disaster recovery
services for computer and communications systems used in all of the Company's
services. There can be no assurance that these service contracts will be
successfully extended upon expiration or that the Company can enter into
contracts with alternate service providers at the same or lower cost. Any
failure by the Company to extend these contracts or to secure alternate service
providers could have a material adverse effect on the Company's financial
condition and results of operations.
GOVERNMENT REGULATION. The Company's primary customers are hotel chains and
hotel representation firms. The Company currently has as its stockholders many
of the leading hotel chains in the world based on revenues. While the Company
believes that it has been acting since its inception as an entity independent
of its stockholders, and its stockholders have not engaged in any
anti-competitive activities through or in connection with the Company, there
can be no assurance that federal, state or foreign governmental authorities,
the Company's competitors or its consumers will not raise anti-competitive
concerns regarding the Company's close relationship with its hotel
stockholders. Any such action by federal, state or foreign governmental
authorities or allegations by third parties could have a material adverse
effect on the Company's financial condition and results of operations. While
certain aspects of the travel industry are heavily regulated by the United
States Government, the services currently offered by the Company, including
electronic room reservation processing services, commission processing services
and online reservation services, have not been subject to any material
industry-specific government regulation. However, there can be no assurance
that federal, state or foreign governmental authorities will not attempt to
regulate one or more of the Company's current or future services. Due to the
increasing popularity of the Internet, it is possible that laws and regulations
may be adopted with respect to the Internet, covering issues such as privacy,
pricing, content and quality of products and services. The adoption of laws or
regulations affecting the Company's lines of business could reduce the rate of
growth of the Company or could otherwise have a material adverse effect on the
Company's financial condition and results of operations.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. The Company has in recent years
experienced significant growth and anticipates that significant expansion will
continue to be required in order to address potential market opportunities.
There can be no assurance that if the Company continues to expand, management
will be effective in attracting and retaining additional qualified personnel,
expanding the Company's physical facilities, integrating acquired businesses or
otherwise managing growth. In addition, there can be no assurance that the
Company's systems, procedures or controls will be adequate to support any
expansion of the Company's operations. The Company's inability to manage growth
effectively could have a material adverse effect on the Company's financial
condition and results of operations.
12
<PAGE> 13
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION AND OPERATIONS. Pursuit of
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized. There
can be no assurance as to the extent, if at all, that the Company's plans to
expand in international markets will be successful. The Company's current
international activities and prospects may be adversely affected by factors
such as policies of the United States and foreign governments affecting foreign
trade, privacy issues, investment and taxation, exchange controls, political
risks and currency risks. One or more of these factors could materially
adversely affect the Company's financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its success will
continue to be dependent upon its ability to attract and retain skilled
managers and other key personnel, including its President, John F. Davis, III,
its Chief Operating Officer, Joseph W. Nicholson, and its other present
officers. The loss of the services of any of its present officers could have a
material adverse effect on the Company's financial condition and results of
operations. Although the Company currently has "key-man" insurance covering
Messrs. Davis and Nicholson, there can be no assurance that the amount of such
insurance would be adequate to compensate for the loss of the services of the
insured officers. The Company believes that its future business results will
also depend in significant part upon its ability to identify, attract, motivate
and retain additional highly skilled technical personnel. Competition for such
personnel in the information technology industry is intense. There can be no
assurance that the Company will be successful in identifying, attracting,
motivating and retaining such personnel, and the failure to do so could have a
material adverse effect on the Company's financial condition and results of
operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT. The Company's
success depends upon its proprietary technology, consisting of both its
software and its hardware designs. The Company relies upon a combination of
copyright, trade secrets, confidentiality procedures and contractual provisions
to protect its proprietary technology. There can be no assurance that the
Company's present protective measures will be enforceable or adequate to
prevent misappropriation of its technology or independent third-party
development of the same or similar technology. Many foreign jurisdictions offer
less protection of intellectual property rights than the United States, and
there can be no assurance that the protection provided to the Company's
proprietary technology by the laws of the United States or foreign
jurisdictions will be sufficient to protect the Company's technology. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation, whether
successful or unsuccessful, could result in substantial cost and diversion of
management resources, and a successful claim could effectively block the
Company's ability to use or license its technology in the United States or
abroad or otherwise have a material adverse effect on the Company's financial
condition and results of operations.
The Company has found and may in the future find it necessary or
desirable to procure licenses from third parties relating to current or future
services or technology, but there can be no assurance that the Company will
continue to be able to obtain such licenses or other rights or, if it is able
to obtain them, that it will be able to do so on commercially acceptable terms.
The Company could be placed at a disadvantage if its competitors obtain
licenses with lower royalty fee payments or other terms more favorable than
those received by the Company. If the Company or its suppliers were unable to
obtain licenses relating to current or future services or technology, the
Company could be forced to market services without certain technological
features. The Company's inability to obtain licenses necessary to use certain
technology or its inability to obtain such licenses on competitive terms could
have a material adverse effect on the Company's financial condition and results
of operations.
13
<PAGE> 14
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE. The Company utilizes a significant
number of computer software programs and operating systems in its internal
operations. If these programs or systems are unable to appropriately interpret
dates occurring in the upcoming calendar year 2000, some level of modification
or replacement of such software may be necessary. The Company is currently
evaluating its information technology ("IT") and non-IT Systems for year 2000
compliance. This evaluation includes reviewing what actions are required to
make such systems year 2000 compliant as well as actions necessary to make the
Company less vulnerable to year 2000 compliance problems associated with third
parties' systems.
Even though the Company has implemented a program designed to ensure
that all software used in connection with the Company's services are year 2000
compliant, the Company may fail to identify all year 2000 problems or correct
such problems in a timely manner. Since the Company derives nearly all of its
revenues from processing electronic reservations or consolidating hotel
commissions electronically, the inability or limitation of its ability to
process electronic hotel reservations or consolidate hotel commissions as a
result of year 2000 problems would have a material adverse impact on the
Company's revenues and cash flow.
The Company has no control over services, functions and data provided
by third party vendors and others which may result in the inability for the
Company to provide services. The Company has contacted and is working with its
material customers and vendors to verify their degree of year 2000 compliance.
However, the Company has no control over third parties and if they will be year
2000 compliant. The extent to which third party customers and vendors do not
become year 2000 compliant on a timely basis may have a material adverse effect
on the Company's cash flow and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company regularly evaluates acquisition
opportunities and has made and may in the future make acquisitions of other
companies or technologies. Acquisitions involve numerous risks, including
difficulties in assimilating acquired operations and products, diversion of
management's attention from other business concerns, amortization of acquired
intangible assets and potential loss of key employees of acquired companies. In
August 1998, the Company acquired all of the equity interest in Driving
Revenue L.L.C. Otherwise, the Company has little experience in assimilating
acquired nonaffiliated organizations into the Company's operations. There can
be no assurance as to the ability of the Company to integrate successfully any
operations, personnel or services that might be acquired in the future, and a
failure by the Company to do so could have a material adverse effect on the
Company's financial condition and results of operations.
RISKS ASSOCIATED WITH MINORITY INVESTMENTS IN OTHER BUSINESSES. In June 1998,
the Company purchased a minority interest in Customer Analytics, Inc. a new
venture aimed at providing services to companies in the field of data
warehousing and data mining. In September 1998, the Company also purchased a
minority interest in Intermezzo, Inc., a developer of hotel reservation and
property management systems and software. The Company has little or no control
over the success of Customer Analytics, Inc. or Intermezzo, Inc., and there can
be no assurance of the success of either of these investments. The failure of
either of these companies could have a material adverse effect on the Company's
financial condition and results of operations.
ANTI-TAKEOVER MATTERS. The Company's Third Amended and Restated Certificate of
Incorporation ("Certificate") and Second Amended and Restated By-laws
("By-laws") contain provisions that may have the effect of delaying, deterring
or preventing a potential takeover of the Company. The Certificate and By-laws
provide for a classified Board of Directors serving staggered terms of three
years, prevent stockholders from calling a special meeting of stockholders and
prohibit stockholder action by written consent. The Certificate also authorizes
only the Board of Directors to fill vacancies, including newly created
directorships, and
14
<PAGE> 15
states that directors of the Company 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. In addition, the
Certificate grants the Board of Directors the authority to issue up to
2,000,000 shares of preferred stock, having such rights, preferences and
privileges as designated by the Board. The issuance of preferred stock could,
among other things, adversely affect the voting power or other rights of the
holders of common stock and, under certain circumstances, make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, control of the Company. Section 203 of the Delaware General
Corporation Law, which is applicable to the Company, contains provisions that
restrict certain business combinations with interested stockholders, which may
have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company.
On September 28, 1998, the Board of Directors of the Company adopted a
stockholder rights plan (the "Rights Plan") and declared a dividend
distribution of one right (the "Right") for each outstanding share of the
Company's common stock to stockholders of record at the close of business on
October 13, 1998. Each Right entitles the registered holder to purchase from
the Company 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. The
Rights are exercisable only if a person or group of affiliated persons
acquires, or has announced the intent to acquire, 20% or more of the Company's
common stock. These Rights could make it more difficult for a third party to
acquire, or discourage a third party from acquiring, control of the Company.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price for the common stock may
be highly volatile. The Company believes that factors such as quarterly
fluctuations in financial results or announcements by the Company or by its
competitors, travel agencies, hotel operators or other hotel industry
participants could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market may experience extreme price and
volume fluctuations which often are unrelated to the operating performance of
specific companies. Market fluctuations or perceptions regarding the hotel
industry, as well as general economic or political conditions, may adversely
affect the market price of the common stock. In the past, following periods of
volatility in the market price for a company's securities, securities class
action litigation has often been instituted. Such litigation could result in
substantial costs and a diversion of management attention and resources, which
could have a material adverse effect on the Company's financial condition and
results of operations.
ITEM 2. PROPERTIES.
The Company's principal executive office is a leased facility with
approximately 39,750 square feet of space in Dallas, Texas as of February 26,
1999. The Company leases this space under a lease agreement that expires
December 2002. The Company also maintains an administrative and sales office in
a leased facility with approximately 2,255 square feet of space near London,
England. The lease agreement for the office in England expires in February
2006. Under an agreement with REZsolutions, Inc. certain of the equipment owned
by the Company is housed at a site owned by REZsolutions, Inc. in Phoenix,
Arizona. The Company believes that its existing facilities are well maintained
and in good operating condition and are adequate for its present and
anticipated levels of operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party from time to time to certain routine legal
proceedings arising in the ordinary course of its business. Although the
outcome of any legal proceeding cannot be predicted accurately, the Company
does not believe any liability that might result from such proceedings could
have a material adverse effect on the Company's financial condition and results
of operations.
15
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ending December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's common stock has traded on the Nasdaq National Market
under the symbol "PEGS" since August 7, 1997. At February 26, 1999, there were
approximately 76 record holders of the Company's common stock, although the
Company believes that the number of beneficial owners of its common stock is
substantially greater. The table below sets forth for the fiscal quarters
indicated the high and low sale prices for the common stock.
<TABLE>
<CAPTION>
Fiscal Year Ending December 31, 1998 HIGH LOW
- ------------------------------------ --------- ----------
<S> <C> <C>
Fourth quarter ......................... $ 36.25 $ 8.88
Third quarter .......................... $ 26.88 $ 10.75
Second Quarter ......................... $ 31.00 $ 22.00
First Quarter .......................... $ 27.13 $ 13.63
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ending December 31, 1997 HIGH LOW
- ------------------------------------ --------- ----------
<S> <C> <C>
Fourth quarter ......................... $ 20.75 $ 12.50
Third quarter (from August 7, 1997) .... $ 19.25 $ 15.50
</TABLE>
The Company intends to retain any future earnings for use in its
business and does not intend to pay cash dividends in the foreseeable future.
The payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors and will depend, among other things, upon future
earnings, operations, capital requirements, restrictions in future financing
agreements, the general financial condition of the Company and general business
conditions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
On September 28, 1998, the Board of Directors of the Company declared
a dividend distribution of one right (the "Right") for each outstanding share
of the Company's common stock to stockholders of record at the close of
business on October 13, 1998. Each Right entitles the registered holder to
purchase from the Company 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. The Rights are exercisable only if a person or group of affiliated
persons acquires, or has announced the intent to acquire, 20% or more of the
Company's 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 (IPO) of the Company's common stock.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
This information required by this item is set forth under the caption
"Selected Consolidated Financial Data" of the Company's 1998 Annual Report to
Stockholders, which portion of such Annual Report is filed herewith as Exhibit
13.1 and incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company's 1998 Annual Report to Stockholders, which portion
of such Annual Report is filed herewith as Exhibit 13.1 and incorporated herein
by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company including the independent
accountant's report thereon of the Company's 1998 Annual Report to
Stockholders, which financial statements are filed herewith as Exhibit 13.1,
are incorporated herein by reference.
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 the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the captions "Election of Directors" and "Executive Officers of the Company,"
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Executive Compensation and Other Matters," 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 the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Outstanding Capital Stock and Stock Ownership of Directors,
Certain Executive Officers and Principal Stockholders," which information is
incorporated herein by reference.
17
<PAGE> 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under
the caption "Certain Transactions," which information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The following financial statements are incorporated by reference from
the Company's 1998 Annual Report to Stockholders, which financial
statements are filed herein as Exhibit 13.1 and incorporated herein by
reference:
Report of Independent Accountants.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 1998, 1997
and 1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. The following Financial Statement Schedules of the Company are filed
as part of this Report:
Consolidated Financial Statement Schedule Page
Report of Independent Accountants on Financial
Statement Schedule. S-1
Consolidated Valuation and Qualifying Accounts. S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
18
<PAGE> 19
3. The following documents are filed or incorporated by reference as
exhibits to this Report:
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
+3.1 Third Amended and Restated Certificate of Incorporation, as
amended
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 Third Amended and Restated Certificate of Incorporation and
Second Amended and Restated Bylaws (see Exhibits 3.1 and 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 the Commission on
October 9, 1998)
*10.1 Employment Agreement dated June 25, 1996 between the Company and
John F. Davis, III
*10.2 Employment Agreement dated June 25, 1996 between the Company and
Joseph W. Nicholson
*10.3 Employment Agreement dated August 29, 1996 between the Company
and Jerome L. Galant
*10.4 Employment Agreement dated May 18, 1996 between the Company and
Michael R. Donahue
+*10.5 1996 Stock Option Plan, as amended
+*10.6 1997 Stock Option Plan, as amended
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 known 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 and Second Amendment to Office
Lease dated November 2, 1998 between the Company and the Utah
State Retirement Investment Fund relating to property located at
3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219
19
<PAGE> 20
+13.1 Selected portions of the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1998
16.1 Letter regarding Change in Certifying Accountant
+21.1 Subsidiaries of the Company
+23.1 Consent of PricewaterhouseCoopers LLP
+24.1 Power of Attorney (included on signature page)
+27.1 Financial Data Schedule
- -------------------
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 shareholder without
charge upon written request to Mr. Ric L. Floyd, Secretary, 3811 Turtle
Creek Blvd., Suite 1100, Dallas, Texas 75219.
(b) REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the quarter ended
December 31, 1998:
<TABLE>
<CAPTION>
Financial Statements
Item Description Filing Date Filed
- ---- ----------- ----------- -------------------
<S> <C> <C> <C>
7 A report announcing a dividend distribution October 9, 1998 No
declared by the Board of Directors relating to the
Company's Stockholder Rights Plan.
</TABLE>
20
<PAGE> 21
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Dallas, State of
Texas, on this 30th day of March, 1999.
PEGASUS SYSTEMS, INC.
By: /s/ John F. Davis, III
--------------------------------------
John F. Davis, III
Chief Executive Officer, President
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement 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 Report, 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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ JOHN F. DAVIS, III Chief Executive Officer, President March 30, 1999
---------------------------------- and Director (Principal Executive
John F. Davis, III Officer)
/s/ JEROME L. GALANT Chief Financial Officer March 30, 1999
----------------------------------
Jerome L. Galant (Principal Financial and Accounting
Officer)
/s/ MICHAEL A. BARNETT Director March 30, 1999
----------------------------------
Michael A. Barnett
/s/ ROBERT B. COLLIER Director March 30, 1999
----------------------------------
Robert B. Collier
/s/ WILLIAM C. HAMMETT, JR. Director March 30, 1999
----------------------------------
William C. Hammett, Jr.
/s/ THOMAS F. O'TOOLE Director March 30, 1999
----------------------------------
Thomas F. O'Toole
/s/ MARK C. WELLS Director March 30, 1999
----------------------------------
Mark C. Wells
/s/ BRUCE W.WOLFF Director March 30, 1999
----------------------------------
Bruce W. Wolff
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Pegasus Systems, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 2, 1999 appearing in the 1998 Annual Report to Stockholders of
Pegasus Systems, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule, for each of the three years in the
period ended December 31, 1998, listed in Item 14(a) 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 2, 1999
S-1
<PAGE> 23
SCHEDULE II
PEGASUS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to from Balance
Beginning Costs and Acquired at End
Classification of Period Expenses Companies Deductions of Period
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Allowance for doubtful accounts $ 20 $ 25 $ -- $ -- $ 45
Income tax valuation allowances $ 3,528 $ 1,060 $ -- $ (39) $ 4,549
------- ------- ----- ------- -------
Total reserves and allowances $ 3,548 $ 1,085 $ -- $ (39) $ 4,594
======= ======= ======= ======= =======
December 31, 1997
Allowance for doubtful accounts $ 45 $ 81 $ -- $ (48) $ 78
Income tax valuation allowances $ 4,549 $ -- $ -- $ (237) $ 4,312
------- ------- ----- ------- -------
Total reserves and allowances $ 4,594 $ 81 $ -- $ (285) $ 4,390
======= ======= ======= ======= =======
December 31, 1998
Allowance for doubtful accounts $ 78 $ 35 $ 7 $ (21) $ 99
Income tax valuation allowances $ 4,312 $ 270 $ -- $(4,312) $ 270
------- ------- ----- ------- -------
Total reserves and allowances $ 4,390 $ 305 $ 7 $(4,333) $ 369
======= ======= ======= ======= =======
</TABLE>
- --------------
(a) This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto.
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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
+3.1 Third Amended and Restated Certificate of Incorporation, as
amended
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 Third Amended and Restated Certificate of Incorporation and
Second Amended and Restated Bylaws (see Exhibits 3.1 and 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 the Commission on
October 9, 1998)
*10.1 Employment Agreement dated June 25, 1996 between the Company and
John F. Davis, III
*10.2 Employment Agreement dated June 25, 1996 between the Company and
Joseph W. Nicholson
*10.3 Employment Agreement dated August 29, 1996 between the Company
and Jerome L. Galant
*10.4 Employment Agreement dated May 18, 1996 between the Company and
Michael R. Donahue
+*10.5 1996 Stock Option Plan, as amended
+*10.6 1997 Stock Option Plan, as amended
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 known 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 and Second Amendment to Office
Lease dated November 2, 1998 between the Company and the Utah
State Retirement Investment Fund relating to property located at
3811 Turtle Creek Blvd., Suite 1100, Dallas, Texas 75219
</TABLE>
<PAGE> 25
<TABLE>
<S> <C>
+13.1 Selected portions of the Company's Annual Report to Stockholders
for fiscal year ended December 31, 1998
16.1 Letter regarding Change in Certifying Accountant
+21.1 Subsidiaries of the Company
+23.1 Consent of PricewaterhouseCoopers LLP
+24.1 Power of Attorney (included on signature page)
+27.1 Financial Data Schedule
</TABLE>
- -------------------
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 shareholder without
charge upon written request to Mr. Ric L. Floyd, Secretary, 3811 Turtle
Creek Blvd., Suite 1100, Dallas, Texas 75219.
<PAGE> 1
EXHIBIT 3.1
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF PEGASUS SYSTEMS, INC.
--O0O--
This Third Amended and Restated Certificate of Incorporation amends and
restates the Certificate of Incorporation of Pegasus Systems, Inc., a
corporation originally incorporated in Delaware as "Pegasus Systems, Inc." on
July 10, 1995. This Third Amended and Restated Certificate of Incorporation has
been duly adopted pursuant to Sections 242 and 245 of the Delaware General
Corporation Law.
ARTICLE I
The name of this corporation is Pegasus Systems, Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, New Castle County, Wilmington, Delaware
19805-1297. The name of the registered agent of the Corporation at that address
is The Prentice-Hall Corporation Systems, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful business, act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware. The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
ARTICLE IV
This Corporation is authorized to issue two classes of stock,
designated "Common Stock" and "Preferred Stock". The total number of shares
which this Corporation is authorized to issue is 52,000,000 shares. The number
of shares of Common Stock which this Corporation is authorized to issue is
50,000,000 shares, par value $0.01 per share. The number of shares of Preferred
Stock which this Corporation is authorized to issue is 2,000,000 shares, par
value $0.01 per share, which shall initially be undesignated as to series.
Any Preferred Stock not previously designated as to series may be
issued from time to time in one or more series pursuant to a resolution or
resolutions providing for such
-1-
<PAGE> 2
issue duly adopted by the Board of Directors (authority to do so being hereby
expressly vested in the Board), and such resolution or resolutions shall also
set forth the voting powers, full or limited or none, of each such series of
Preferred Stock and shall fix the designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions of each such series of Preferred Stock. The Board of Directors
is authorized to alter the designation, rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series of Preferred Stock, to increase or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series.
Each share of Preferred Stock issued by the Corporation, if reacquired
by the Corporation (whether by redemption, repurchase, conversion to Common
Stock or other means), shall upon such reacquisition resume the status of
authorized and unissued shares of Preferred Stock, undesignated as to series and
available for designation and issuance by the Corporation in accordance with the
immediately preceding paragraph.
The relative rights, preferences, privileges and restrictions granted
to or imposed upon the Common Stock or the holders thereof are as follows:
(a) Dividend Rights. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the Corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
(b) Liquidation Rights. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation and of any amounts to which the holders of all
classes of stock at the time outstanding having prior rights as to liquidation
are entitled, the holders of all outstanding shares of Common Stock shall be
entitled to share ratably in the remaining assets of the Corporation.
(c) Redemption. The Common Stock is not redeemable.
(d) Voting Rights. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of this Corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law.
(e) Residual Rights. All rights accruing to the outstanding
shares of this
-2-
<PAGE> 3
Corporation not expressly provided for to the contrary herein shall be vested in
the Common Stock.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter, amend or repeal the Bylaws of the Corporation.
ARTICLE VIII
(a) To the fullest extent permitted by the General Corporation
Law of the State of Delaware as the same exists or as may hereafter be amended,
a director of the Corporation shall not be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director.
(b) The Corporation may indemnify to the fullest extent
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his estate or legal representative is or was a
director, officer, employee or agent of the Corporation or any predecessor of
the Corporation or serves or served at any other enterprise as a director,
officer, employee or agent at the request of the Corporation or any other
predecessor to the Corporation.
(c) No amendment nor repeal of this Article VIII, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article VIII, shall eliminate or reduce the effect of
this Article VIII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article VIII, would accrue
or arise, prior to such amendment, repeal or adoption of an inconsistent
provision.
-3-
<PAGE> 4
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE X
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.
ARTICLE XI
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The Board of Directors may
exercise all such authority and powers of the Corporation and do all such lawful
acts and things as are not by statute or this Certificate of Incorporation
directed or required to be exercised or done by the stockholders.
1. Number of Directors
The number of directors of the Corporation shall be fixed from time to
time only by action of not less than a majority of the members of the Board of
Directors then in office. The number of directors comprising the Board of
Directors of the Corporation shall not be less than two (2) or more than
twenty-five (25).
2. Classes
Subject to the rights, if any, of any series of Preferred Stock then
outstanding, the directors shall be divided into three classes, designated Class
I, Class II and Class III. The number of directors in each class shall be the
whole number contained in the quotient arrived at by dividing the authorized
number of directors by three, and if a fraction is also contained in such
quotient then if such fraction is one-third (1/3) the extra director shall be a
member of Class III and if the fraction is two-thirds (2/3) then one of the
extra directors shall be a member of Class III and the other shall be a member
of Class II. The term of office of directors in each class shall expire as
follows: Class I shall expire at the 1998 annual meeting of stockholders, Class
II shall expire at the 1999 annual meeting of stockholders, Class III shall
expire at the 2000 annual meeting of stockholders. At each such meeting of
stockholders, directors shall be elected to succeed those directors whose terms
expire for a term of office to expire at the third succeeding annual meeting of
stockholders after their election. All directors shall hold office until the
annual meeting of
-4-
<PAGE> 5
stockholders for the year in which their term expires and until their successors
are duly elected and qualified, or until their earlier death, resignation,
disqualification or removal.
3. Vacancies
Subject to the rights, if any, of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, disqualification or removal may be
filled only by a majority vote of the directors then in office, though less than
a quorum, and directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to which
they have been elected expires and until such director's successor shall have
been duly elected and qualified.
4. Removal
Any director or the entire Board of Directors may be removed only for
cause and only by the vote of the holders of two-thirds (2/3) of the securities
of the Corporation then entitled to vote at an election of directors voting
together as a single class.
ARTICLE XII
Any action required or permitted to be taken at any annual or special
meeting of stockholders may only be taken upon the vote of the stockholders at
an annual or special meeting duly called and may not be taken by written consent
of the stockholders. Special meetings of the stockholders, unless otherwise
prescribed by statute, may be called at any time only by the Chairman of the
Board or the Chief Executive Officer of the Corporation or the Board of
Directors.
ARTICLE XIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation. In addition to any affirmative
vote required by applicable law or any other provision of this Certificate of
Incorporation or specified in any agreement, the affirmative vote of the holders
of not less than two-thirds (2/3) of the voting power of all securities of the
Corporation entitled to vote generally in the election of directors shall be
required to amend, add, alter, change, repeal or adopt any provisions
inconsistent with Sections 1, 2 or 3 of Article XI, Article XII or this Article
XIII of this Certificate of Incorporation and the affirmative vote of not less
than eighty percent (80%) of the voting power of all securities of the
Corporation entitled to vote generally in the election of directors shall be
required to amend, add, alter, change, repeal or adopt any provisions
inconsistent with Section 4 of Article XI or this Article XIII with respect to
Section 4 of Article XI.
-5-
<PAGE> 6
IN WITNESS WHEREOF, the Corporation has caused this Third Amended and
Restated of Certificate to be duly executed this 26th day of May, 1998.
By: /s/ JOHN F. DAVIS, III
---------------------------------------
John F. Davis, III
President and Chief Executive Officer
ATTEST:
/s/ RIC L. FLOYD
- ---------------------------
Ric L. Floyd, Secretary
<PAGE> 1
EXHIBIT 10.5
PEGASUS SYSTEMS, INC
AMENDED 1996 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary and to promote the success of the
Company's business. Options granted under the Plan may be Incentive Stock
Options or Nonstatutory Stock Options, as determined by the Administrator at the
time of grant of an option and subject to the applicable provisions of Section
422 of the Code and the regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or the Compensation Committee
appointed by the Board.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation Committee appointed by the
Board of Directors.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Pegasus Systems, Inc.
(g) "Consultant" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or Consultant
shall not be considered interrupted in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of the Company or
between the Company, its Parent, any Subsidiary, or any successor. A leave of
absence approved by the Company shall include sick leave, military leave, or any
other personal leave. For purposes of Incentive Stock Options, no such leave may
exceed 90 days, unless reemployment upon expiration of such leave is guaranteed
by statute or contract, including Company policies. If reemployment upon
expiration of a leave of absence approved by the Company is not so guaranteed,
on the 181st day of such leave any Incentive Stock Option held by the Optionee
shall cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
<PAGE> 2
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the Plan.
(p) "Optioned Stock" means the Common Stock subject to an Option.
(q) "Optionee" means an Employee or Consultant who receives an
Option.
(r) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(s) "Permitted Transferee" means a member of a holder's immediate
family, trusts for the benefit of such immediate family members, and
partnerships in which the holder and such immediate family members are the only
partners, provided that no consideration is provided for the transfer.
(t) "Plan" means this Amended 1996 Stock Option Plan.
(u) "Section 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(v) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 below.
(w) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 866,667 Shares. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an option exchange program
authorized by the Administrator, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated); provided, however, that Shares that have actually been
issued under the Plan shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if unvested Shares
are repurchased by the
-2-
<PAGE> 3
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. Administration of the Plan.
(a) Initial Plan Procedure. Prior to the date, if any, upon which
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or the Compensation Committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon Which the Company
becomes Subject to the Exchange Act. With respect to Option grants made to
Employees or Consultants, the Plan shall be administered by (A) the Board or (B)
the Compensation Committee designated by the Board, which committee shall be
constituted to satisfy the legal requirements, if any, relating to the
administration of incentive stock option plans of state corporate and securities
laws, of the Code, and of any stock exchange or national market system upon
which the Common Stock is then listed or traded (the "Applicable Laws"). Once
appointed, such Committee shall serve in its designated capacity until otherwise
directed by the Board. The Board may increase the size of the Committee and
appoint additional members, remove members (with or without cause) and
substitute new members, fill vacancies (however caused), and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
Plan and approval of any relevant authorities, including the approval, if
required, of any stock exchange or national market system upon which the Common
Stock is then listed, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms
and conditions may include, but are not limited to, the exercise price,
the time or times when Options may be exercised, any vesting,
acceleration or waiver of forfeiture and any restriction or limitation
regarding any Option or the Shares relating thereto, based in each case
on such factors as the Administrator, in its sole discretion, shall
determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(e)1 instead of Common
Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value only in the event the reduction of the
exercise price (i) affects less than ten percent (10%) of the Shares
authorized for grant under the Plan, (ii) is for a legitimate corporate
purpose such as retention of one or more key persons, and (iii) is for
the purpose of maintaining option value due to extreme circumstances
beyond management's control;
-3-
<PAGE> 4
(ix) to provide for the early exercise of Options for the
purchase of unvested Shares, subject to such terms and conditions as
the Administrator may determine; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with
respect to the continuation of the Optionee's employment or consulting
relationship with the Company, nor shall it interfere in any way with the
Optionee's right or the Company's right to terminate the Optionee's employment
or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company, as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
-4-
<PAGE> 5
(B) granted to any Employee other than an Employee described
in the preceding paragraph, the per Share exercise price shall be no less than
100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per share
exercise price shall be determined by the Administrator but shall not be less
than one hundred percent (100%) of the Fair Market Value per Share on the date
of grant; provided, however, that a per share exercise price of no less than
eighty-five percent (85%) of the Fair Market Value per Share on the date of
grant shall be permitted for a Nonstatutory Stock Option expressly awarded to an
Employee in lieu of a reasonable amount of salary or cash bonus.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator,
consist of any consideration and method of payment allowable under Section 8(b)
of the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Option. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for three (3) months following the Optionee's termination. In the
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case of an Incentive Stock Option, such period of time for exercise shall not
exceed three (3) months from the date of termination. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, an Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. However, in such event, an
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option three months and one day following such change of status.
(c) Disability of Optionee. In the event of termination of an
Optionee's Continuous Status as an Employee or Consultant as a result of his or
her Disability, the Optionee may, but only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
term of his or her Option as set forth in the Option Agreement), exercise the
Option to the extent the Optionee was otherwise entitled to exercise it on the
date of such termination. To the extent that the Optionee is not entitled to
exercise the Option on the date of termination, or if the Optionee does not
exercise the Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by the Option shall revert to
the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who has acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquires the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
(f) Rule 16b-3. Options granted to persons subject to Section 16(b)
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
10. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this Section 10. When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
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(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but such
Optionee shall be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
11. Transferability of Options and Rights. Incentive Stock Options
granted under the Plan shall not be transferable otherwise than by will or the
laws of descent and distribution, or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. Incentive Stock
Options shall be exercisable during the lifetime of the Employee only by the
Employee or by the Employee's guardian or legal representative (unless such
exercise would disqualify it as an Incentive Stock Option). Unless the Committee
otherwise provides in an agreement regarding the award of non-qualified stock
options or rights (not granted in connection with an Incentive Stock Option),
non-qualified stock options or rights (not granted in connection with Incentive
Stock Options) may be transferred by the holder to Permitted Transferees,
provided that there cannot be any consideration for the transfer.
12. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
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(c) Acquisition Events
(1) Consequences of Acquisition Events. Upon the occurrence of
an Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Options: (i)
provide that outstanding Options shall be assumed or equivalent Options shall be
substituted by the acquiring or succeeding entity (or an affiliate thereof),
provided that any such Options substituted for Incentive Stock Options shall
satisfy, in the determination of the Board, the requirements of Section 424(a)
of the Code; (ii) upon written notice to the Optionees, provide that all then
unexercised Options will become exercisable in full as of a specified date (the
"Acceleration Date") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Optionees between the Acceleration Date and the
consummation of the Acquisition Event or (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price") provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and each Optionee shall receive, in exchange therefor, a cash payment equal to
the amount (if any) by which (A) the Acquisition Price multiplied by the number
of shares of Common Stock subject to such outstanding Options (whether or not
then exercisable), exceeds (B) the aggregate exercise price of such Options.
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or acquiring entity)
less than 60% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such
merger or consolidation; (b) any sale of all or substantially all of the assets
of the Company; (c) the complete liquidation of the Company; or (d) the
acquisition of "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act) of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities (other than
through a merger or consolidation or an acquisition of securities directly from
the Company) by any "person", as such term is used in Sections 13(d) and 14(d)
of the Exchange Act other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or any entity
owned directly or indirectly by the stockholders of the Company in substantially
the same proportion as their ownership of stock of the Company.
(2) Assumption of Options Upon Certain Events. The Board may
grant options under the Plan in substitution for stock and stock-based awards
held by employees of another entity who become Employees as a result of a merger
or consolidation of the employing entity with the Company or the acquisition by
the Company of property or stock of the employing entity. The substitute options
shall be granted on such terms and conditions as the Board considers appropriate
in the circumstances.
13. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any stock exchange or national market system upon
which the Common Stock is then listed), the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
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(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or national market system
upon which the Common Stock is then listed or traded, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
17. Agreements. Options shall be evidenced by written agreements in
such form as the Administrator shall approve from time to time.
18. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is then listed or traded.
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EXHIBIT 10.6
PEGASUS SYSTEMS, INC.
AMENDED 1997 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary, to compensate Non-Employee Directors
of the Company and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant of an option
and subject to the applicable provisions of Section 422 of the Code and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or the Compensation
Committee appointed by the Board.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the Compensation Committee appointed by
the Board of Directors.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Pegasus Systems, Inc.
(g) "Consultant" means any person who is engaged by the
Company or any Parent or Subsidiary to render consulting or advisory services
and is compensated for such services.
(h) "Continuous Status as an Employee or Consultant" means
that the employment or consulting relationship with the Company, any Parent or
Subsidiary is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave. For purposes of Incentive Stock Options, no
such leave may exceed 90 days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract, including Company policies. If
reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the 181st day of such
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leave any Incentive Stock Option held by the Optionee shall cease to be treated
as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(l) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such stock
(or the closing bid, if no sales were reported) as quoted on such exchange or
system for the last market trading day prior to the time of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for
the Common Stock on the last market trading day prior to the day of
determination; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value shall be determined in good faith by
the Administrator.
(m) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(n) "Non-Employee Director" means any person who is a member
of the Board who is not an Employee.
(o) "Nonstatutory Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
(p) "Option" means a stock option granted pursuant to the
Plan.
(q) "Optioned Stock" means the Common Stock subject to an
Option.
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(r) "Optionee" means an Employee, Consultant or Non-Employee
Director who receives an Option.
(s) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(t) "Permitted Transferee" means a member of a holder's
immediate family, trusts for the benefit of such immediate family members, and
partnerships in which the holder and such immediate family members are the only
partners, provided that no consideration is provided for the transfer.
(u) "Plan" means this Amended 1997 Stock Option Plan.
(v) "Section 16(b)" means Section 16(b) of the Securities
Exchange Act of 1934, as amended.
(w) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 below.
(x) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 700,000 Shares, increased, as of the first day of each
fiscal year commencing January 1, 2000, by one percent (1%) of the number of
Shares outstanding as of the date that the Plan is approved by the stockholders
of the Company; provided, however, that the total number of Shares available
under the Plan, when aggregated with all other stock option plans sponsored by
the Company, shall not exceed fifteen percent (15%) of the number of Shares
outstanding as of the first day of each fiscal year. The maximum number of
Shares with respect to which Options may be awarded under the Plan during any
fiscal year to any Employee shall be 500,000. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an option exchange
program authorized by the Administrator, the unpurchased Shares which were
subject thereto shall become available for future grant or sale under the Plan
(unless the Plan has terminated); provided, however, that Shares that have
actually been issued under the Plan shall not be returned to the Plan and shall
not become available for future distribution under the Plan, except that if
unvested Shares are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
4. Administration of the Plan. With respect to Option grants awarded
to Employees, Consultants or Non-Employee Directors, the Plan shall be
administered by (A) the Board or
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(B) the Compensation Committee designated by the Board, which committee shall
be constituted to satisfy the legal requirements, if any, relating to the
administration of incentive stock option plans of state corporate and
securities laws, of the Code, and of any stock exchange or national market
system upon which the Common Stock is then listed or traded (the "Applicable
Laws"). Once appointed, such Committee shall serve in its designated capacity
until otherwise directed by the Board. The Board may increase the size of the
Committee and appoint additional members, remove members (with or without
cause) and substitute new members, fill vacancies (however caused), and remove
all members of the Committee and thereafter directly administer the Plan, all
to the extent permitted by Applicable Laws.
(n) Powers of the Administrator. Subject to the provisions of
the Plan and approval of any relevant authorities, including the approval, if
required, of any stock exchange or national market system upon which the Common
Stock is then listed, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom
Options may from time to time
be granted hereunder;
(iii) to determine whether and to what extent
Options are granted hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions may include, but are not limited to, the exercise price,
the time or times when Options may be exercised, any vesting acceleration or
waiver of forfeiture restrictions, and any restriction or limitation regarding
any Option or the Shares relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what
circumstances an Option may be settled in cash under Section 10(e) instead of
Common Stock;
(viii) to reduce the exercise price of any Option to
the then current Fair Market Value only in the event the reduction of the
exercise price (i) affects less than ten percent (10%) of the Shares authorized
for grant under the Plan, (ii) is for a legitimate corporate purpose such as
retention of one or more key persons, and (iii) is for the purpose of
maintaining option value due to extreme circumstances beyond management's
control;
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(ix) to provide for the early exercise of Options
for the purchase of unvested Shares, subject to such terms and conditions as
the Administrator may determine; and
(x) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan.
(o) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees,
Consultants and Non-Employee Directors. Incentive Stock Options may be granted
only to Employees. An Employee, Consultant or Non-Employee Director who has
been granted an Option may, if otherwise eligible, be granted additional
Options.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the aggregate
Fair Market Value of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds $100,000,
such Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(c) The Plan shall not confer upon any Optionee any right
with respect to the continuation of the Optionee's employment or consulting
relationship with the Company, nor shall it interfere in any way with the
Optionee's right or the Company's right to terminate the Optionee's employment
or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company, as described in Section 15 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than
ten (10) years from the date of grant thereof. However, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the
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<PAGE> 6
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110%
of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an
Employee described in the preceding paragraph, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the
per share exercise price shall be determined by the Administrator but shall
not, except as otherwise provided in Section 9, be less than one hundred
percent (100%) of the Fair Market Value per Share on the date of grant;
provided, however, that a per share exercise price of no less than eighty-five
percent (85%) of the Fair Market Value per Share on the date of grant shall be
permitted for a Nonstatutory Stock Option expressly awarded to an Employee in
lieu of a reasonable amount of salary or cash bonus.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of
Shares acquired upon exercise of an Option have been owned by the Optionee for
more than six months on the date of surrender and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Grants to Non-Employee Directors. Notwithstanding any other
provision of the Plan, each Non-Employee Director shall, on each date of
election or re-election as a Board
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member be granted a Nonstatutory Stock Option for two thousand (2,000) Shares
of Common Stock of the Company at an exercise price equal to eighty five
percent (85%) of the Fair Market Value of the Shares at the end of the business
day immediately preceding the date of election or re-election of the
Non-Employee Director. Additionally, each Non-Employee Director serving more
than a one (1) year term shall, on the date of each annual meeting of the
Company's stockholders preceding each additional year of office, be granted an
additional Nonstatutory Stock Option for two thousand (2,000) Shares of Common
Stock of the Company at an exercise price equal to eighty five percent (85%) of
the Fair Market Value of the Shares at the end of the business day immediately
preceding the date of each meeting. Each such Option shall become fully vested
on the date the director completes one year of service as a director following
the date of grant. If a director's service terminates six (6) months or more
following the date of grant, then the Option shall be partially vested upon
termination, as follows: 50% following six (6) months of service, and an
additional 8.33% for each additional completed month of service as a director
following the date of grant. Each Non-Employee Director Option shall have a
term of three (3) years. Expiration of a Non-Employee Director's term of office
shall not affect a Non-Employee Director's right to exercise its Option to the
extent such Option is vested or becomes vested at or prior to the expiration of
the Director's term.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan.
An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance
with the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may, as authorized by the
Administrator, consist of any consideration and method of payment allowable
under Section 8(b) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such stock certificate promptly
upon exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 13 of the Plan.
Exercise of an Option in any manner shall result in
a decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as
to which the Option is exercised.
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<PAGE> 8
(b) Termination of Employment or Consulting Relationship.
Upon termination of an Optionee's Continuous Status as an Employee or
Consultant, other than upon the Optionee's death or Disability, the Optionee
may exercise his or her Option, but only within such period of time as is
specified in the Notice of Grant, and only to the extent that the Optionee was
entitled to exercise it at the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Notice of Grant).
In the absence of a specified time in the Notice of Grant, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
In the case of an Incentive Stock Option, such period of time for exercise
shall not exceed three (3) months from the date of termination. If, on the date
of termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's
change in status from Consultant to Employee or Employee to Consultant, an
Optionee's Continuous Status as an Employee or Consultant shall not
automatically terminate solely as a result of such change in status. However,
in such event, an Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option three months and one day following such change of
status.
The provisions of this Section 10(b) shall not be applicable to
Non-Employee Directors.
(c) Disability of Optionee. In the event of termination of an
Optionee's Continuous Status as an Employee or Consultant as a result of his or
her Disability, the Optionee may, but only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
term of his or her Option as set forth in the Option Agreement), exercise the
Option to the extent the Optionee was otherwise entitled to exercise it on the
date of such termination. To the extent that the Optionee is not entitled to
exercise the Option on the date of termination, or if the Optionee does not
exercise the Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by the Option shall revert
to the Plan.
(d) Death of Optionee. In the event of the death of an
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who has acquired the right to exercise the Option by
bequest or inheritance, but only to the extent that the Optionee was entitled
to exercise the Option at the date of death. If, at the time of death, the
Optionee was not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall immediately revert to
the Plan. If, after death, the Optionee's estate or a person who acquires the
right to exercise the Option by bequest or inheritance does not exercise the
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
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<PAGE> 9
(e) Buyout Provisions. The Administrator may at any time
offer to buy out for a payment in cash or Shares, an Option previously granted,
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
(f) Rule 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this Section 11 . When an Optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or
disapproval of the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option is exercised but
such Optionee shall be unconditionally obligated to tender back to the Company
the proper number of Shares on the Tax Date.
12. Transferability of Options and Rights. Incentive Stock Options
granted under the Plan shall not be transferable otherwise than by will or the
laws of descent and distribution, or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. Incentive Stock
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<PAGE> 10
Options shall be exercisable during the lifetime of the Employee only by the
Employee or by the Employee's guardian or legal representative (unless such
exercise would disqualify it as an Incentive Stock Option). Unless the
Administrator otherwise provides in an agreement regarding the award of
non-qualified stock options or rights (not granted in connection with an
Incentive Stock Option), non-qualified stock options or rights (not granted in
connection with Incentive Stock Options) may be transferred by the holder to
Permitted Transferees, provided that there cannot be any consideration for the
transfer.
13. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common Stock
which have been authorized for issuance under the Plan but as to which no
Options have yet been granted or which have been returned to the Plan upon
cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares
as to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Acquisition Events
(1) Consequences of Acquisition Events. Upon the
occurrence of an Acquisition Event (as defined below), or the execution by the
Company of any agreement with respect to an Acquisition Event, the Board shall
take any one or more of the following actions with respect to then outstanding
Options: (i) provide that outstanding Options shall be assumed
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<PAGE> 11
or equivalent Options shall be substituted by the acquiring or succeeding
entity (or an affiliate thereof), provided that any such Options substituted
for Incentive Stock Options shall satisfy, in the determination of the Board,
the requirements of Section 422(a) of the Code; (ii) upon written notice to the
Optionees, provide that all then unexercised Options will become exercisable in
full as of a specified date (the "Acceleration Date") prior to the Acquisition
Event and will terminate immediately prior to the consummation of such
Acquisition Event, except to the extent exercised by the Optionees between the
Acceleration Date and the consummation of the Acquisition Event or (iii) in the
event of an Acquisition Event under the terms of which holders of Common Stock
will receive upon consummation thereof a cash payment for each share of Common
Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price")
provide that all outstanding Options shall terminate upon consummation of such
Acquisition Event and each Optionee shall receive, in exchange therefor, a cash
payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options.
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or acquiring entity)
less than 60% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after
such merger or consolidation; (b) any sale of all or substantially all of the
assets of the Company; (c) the complete liquidation of the Company; or (d) the
acquisition of "beneficial ownership" (as defined in Rule 13d-3 under the
Exchange Act) of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities (other than
through a merger or consolidation or an acquisition of securities directly from
the Company) by any "person", as such term is used in Sections 13 (d) and 14
(d) of the Exchange Act other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or any entity
owned directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of stock of the Company.
(2) Assumption of Options Upon Certain Events. The Board may
grant options under the Plan in substitution for stock and stock-based awards
held by employees of another entity who become Employees as a result of a
merger or consolidation of the employing entity with the Company or the
acquisition by the Company of property or stock of the employing entity. The
substitute options shall be granted on such terms and conditions as the Board
considers appropriate in the circumstances.
14. Time of Granting Options. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option, or such other date as is determined by the
Administrator. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
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<PAGE> 12
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 under
the Exchange Act or with Section 422 of the Code (or any other applicable law
or regulation, including the requirements of any stock exchange or national
market system upon which the Common Stock is then listed), the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such
a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee
and the Board, which agreement must be in writing and signed by the Optionee
and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and
the issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or national market
system upon which the Common Stock is then listed or traded, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment
and without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in respect of the failure
to issue or sell such Shares as to which such requisite authority shall not
have been obtained.
18. Agreements. Options shall be evidenced by written agreements in
such form as the Administrator shall approve from time to time.
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<PAGE> 13
19. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before
ore after the date the Plan is adopted. Such stockholder approval shall be
obtained in the degree and manner required under applicable state and federal
law and the rules of any stock exchange or national market system upon which
the Common Stock is then listed or traded.
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<PAGE> 14
PEGASUS SYSTEMS, INC.
1997 AMENDED STOCK OPTION PLAN
NOTICE OF GRANT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Notice of Grant.
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Stock Option
Agreement, as follows:
Grant Number
---------------------
Date of Grant
---------------------
Vesting Commencement Date
---------------------
Exercise Price per Share $
---------------------
Total Number of Shares Granted
Total Exercise Price $
---------------------
Type of Option: Incentive Stock Option
----
Nonstatutory Stock Option
-----
Term/Expiration Date:
---------------------
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
-------------------------------------------------
Termination Period:
This Option may be exercised for three (3) months after termination of
employment or consulting relationship, or such longer period as may be
applicable upon death or Disability of Optionee as provided in the Plan, but in
no event later than the Term/Expiration Date as provided above.
<PAGE> 1
EXHIBIT 10.11
PEGASUS SYSTEMS, INC.
1997 AMENDED EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I-PURPOSE
I.1. PURPOSE.
The Pegasus Systems, Inc. 1997 Amended Employee Stock Purchase Plan
(the "Plan") is intended to provide a method whereby employees of Pegasus
Systems, Inc. and its subsidiary corporations (hereinafter referred to, unless
the context otherwise requires, as the "Company") will have an opportunity to
acquire a proprietary interest in the Company through the purchase of shares of
the common stock of the Company. It is the intention of the Company to have the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the
Plan shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
ARTICLE II-DEFINITIONS
II.1. BASE PAY
"Base Pay" shall mean regular straight-time earnings excluding payments
for overtime, shift premium, bonuses and other special payments, commissions and
other marketing incentive payments.
II.2. COMMITTEE
"Committee" shall mean the individuals described in Article XI.
II.3. EMPLOYEE
"Employee" means any person who is customarily employed on a full-time
or part-time basis by the Company or Subsidiary Corporation and is regularly
scheduled to work more than 20 hours per week and five months per year.
II.4. SUBSIDIARY CORPORATION
"Subsidiary Corporation" shall mean any present or future corporation
that (i) would be a "subsidiary corporation" of Pegasus Systems, Inc., as that
term is defined in Section 424 of the Code, and (ii) is designated as a
participating employer under the Plan by the Committee.
<PAGE> 2
ARTICLE III-ELIGIBILITY AND PARTICIPATION
III.1. INITIAL ELIGIBILITY.
Any Employee who shall have completed 90 days' employment and shall be
employed by the Company on the date his or her participation in the Plan is to
become effective shall be eligible to participate in offerings under the Plan
which commence on or after such 90-day period has concluded.
III.2. LEAVE OF ABSENCE.
For purposes of participation in the Plan, an Employee on leave of
absence shall be deemed to remain an Employee for the first ninety (90) days of
such leave of absence and such Employee's employment shall be deemed to have
terminated at the close of business on the ninetieth day of such leave of
absence unless such Employee shall have returned to regular full-time or
part-time employment (as the case may be) prior to the close of business on such
ninetieth day. Termination by the Company of any Employee's leave of absence,
other than termination of such leave of absence on return to full-time or
part-time employment, shall terminate an Employee's employment for all purposes
of the Plan and shall terminate such Employee's participation in the Plan and
right to exercise any option.
III.3. RESTRICTIONS ON PARTICIPATION.
Notwithstanding any provisions of the Plan to the contrary, no Employee
shall be granted an option to participate in the Plan:
(a) if, immediately after the grant, such Employee would own stock,
and/or hold outstanding options to purchase stock, possessing five percent (5%)
or more of the total combined voting power or value of all classes of stock of
the Company (for purposes of this paragraph, the rules of Section 424(d) of the
Code shall apply in determining stock ownership of any Employee); or
(b) that permits such Employee's rights to purchase stock under all
employee stock purchase plans of the Company to accrue at a rate which exceeds
$25,000 in fair market value of the stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding.
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<PAGE> 3
III.4. COMMENCEMENT OF PARTICIPATION.
An eligible Employee may become a participant by completing an
authorization for a payroll deduction on the form provided by the Company and
filing it with the Company on or before the date set therefor by the Committee,
which date shall be prior to the Offering Commencement Date for the Offering (as
such terms are defined below). Payroll deductions for a participant shall
commence on the applicable Offering Commencement Date when the authorization for
a payroll deduction becomes effective and shall end on the Offering Termination
Date of the Offering to which such authorization is applicable unless sooner
terminated by the participant as provided in Article VIII. This Section 3.04 is
subject to the Company's right to terminate the Plan as provided in Section
12.05.
ARTICLE IV-OFFERINGS
IV.1. ANNUAL OFFERINGS.
The Plan will be implemented by annual offerings of the Company's
common stock (the "Offerings") beginning on each November 15 and terminating on
the following November 14. As used in the Plan, "Offering Commencement Date"
means the November 15 on which the particular Offering begins, and "Offering
Termination Date" means the November 14 on which the particular Offering
terminates.
ARTICLE V-PAYROLL DEDUCTIONS AND OTHER FUNDING
V.1. AMOUNT OF PAYROLL DEDUCTION.
At the time of filing an authorization for payroll deduction, a
participant shall elect to have deductions made from his or her pay on each
payday while a participant in an Offering at the rate of any whole percentage
(not to exceed 10%) of such Employee's Base Pay in effect at the Offering
Commencement Date of such Offering. In the case of a part-time hourly Employee,
such Employee's Base Pay during an Offering shall be determined by multiplying
such Employee's hourly rate of pay in effect on the Offering Commencement Date
by the number of regularly scheduled hours of work for such Employee during the
Offering.
V.2. PARTICIPANT'S ACCOUNT.
All payroll deductions made for a participant shall be credited to such
participant's account under the Plan. A participant may not make any separate
cash payment into such account except when on leave of absence, and then only as
provided in Section. 5.04.
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<PAGE> 4
V.3. CHANGES IN PAYROLL DEDUCTIONS.
A participant may discontinue participation in the Plan as provided in
Article VIII. In addition, a participant may, during the first ninety (90) days
following the Offering Commencement Date of each Offering, make one change
(either to increase or decrease) the amount of the participant's payroll
deductions. No other change can be made during an Offering in the amount of
payroll deductions for that Offering.
V.4. LEAVE OF ABSENCE.
If a participant goes on a leave of absence, such participant may elect
to: (a) withdraw the balance in his or her account pursuant to Section 7.02, (b)
discontinue contributions to the Plan but remain a participant in the Plan, or
(c) remain a participant in the Plan during such leave of absence, authorizing
deductions to be made from payments by the Company to the participant during
such leave of absence and undertaking to make cash payments to the Plan at the
end of each payroll period to the extent that amounts payable by the Company to
such participant are insufficient to meet such participant's authorized Plan
deductions.
V.5. OTHER FUNDING DURING OFFERING PERIOD.
During an Offering Period, the Company may permit eligible Employees to
make lump sum contributions by check payable to the Company, subject to such
uniform conditions and limitations as the Committee may direct from time to
time; provided, that the total amount contributed during each Offering (from
payroll deductions and other contributions) does not exceed 10% of an Employee's
Base Pay in effect at the Offering Commencement Date of such Offering.
ARTICLE VI-GRANTING OF OPTION
VI.1. NUMBER OF OPTION SHARES.
On the Commencement Date of each Offering, a participating Employee
shall be deemed to have been granted an option to purchase a maximum number of
shares of the stock of the Company equal to an amount determined as follows: an
amount equal to (i) the percentage of the Employee's Base Pay that he or she
elects to have withheld or otherwise contributes by check during the Offering
Period but not in any case in excess of 10%) multiplied by (ii) the Employee's
Base Pay during the period of the offering (iii) divided by 85% of the market
value of the stock of the Company on the applicable Offering Commencement Date.
The market value of the Company's stock shall be determined as provided in
Section 6.02, below. An Employee's Base Pay during the period of an Offering
shall be determined by multiplying his or her normal weekly rate of pay (as in
effect on the last day prior to the Commencement Date of the particular
Offering) by 52 or the hourly rate by 2080, as the case may be; provided that,
in the case of a part-time
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<PAGE> 5
Employee, the Employee's Base Pay during the period of an Offering shall be
determined by multiplying such Employee's hourly rate by the number of regularly
scheduled hours of work for such Employee during the Offering (or, for a
part-time salaried employee, by multiplying such Employee's normal weekly rate
of pay by the number of weeks such Employee is expected to work during the
period of the Offering).
VI.2. OPTION PRICE.
The option price of stock purchased during such Offering for a
participant therein shall be the lower of:
(a) 85% of the closing price of the Company's common stock on the
Offering Commencement Date or the nearest prior business day on which trading
occurred on Nasdaq or any other national stock exchange; or
(b) 85% of the closing price of the Company's common stock on the
Offering Termination Date or the nearest prior business day on which trading
occurred on Nasdaq or any other national stock exchange. If the common stock of
the Company is not admitted to trading on any of the aforesaid dates for which
closing prices of the stock are to be determined, then reference shall be made
to the fair market value of the stock on that date, as determined on such basis
as shall be established or specified for the purpose by the Committee.
ARTICLE VII-EXERCISE OF OPTION
VII.1. EXERCISE.
Unless a participant gives written notice to the Company as hereinafter
provided, his or her option to purchase stock with payroll deductions and/or
other contributions made during any Offering will be deemed to have been
exercised automatically on the Offering Termination Date applicable to such
Offering, for the purchase of the number of full shares of stock which the
accumulated payroll deductions and other contributions credited to his or her
account at that time will purchase at the applicable option price.
Alternatively, the participant may make a lump-sum payment of the exercise
price. In no case, however, shall the participant purchase more shares than were
granted pursuant to Section 6.01.
VII.2. WITHDRAWAL OF ACCOUNT.
By written notice to the Company, at any time prior to the Offering
Termination Date applicable to any Offering, a participant may elect to withdraw
all the accumulated payroll deductions and other contributions at such time.
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<PAGE> 6
VII.3. FRACTIONAL SHARES.
Fractional shares will not be issued under the Plan and any accumulated
payroll deductions and other contributions which would have been used to
purchase fractional shares will be retained in the account for the subsequent
Offering unless the participant does not participate in the next Offering, and
in such event, the balance will be refunded to the participant.
VII.4. TRANSFERABILITY OF OPTION.
During a participant's lifetime, options held by such participant shall
be exercisable only by that participant.
VII.5. DELIVERY OF STOCK.
As promptly as practicable after the Offering Termination Date of each
Offering, the Company will deliver to each participant, as appropriate, the
stock purchased upon exercise of the option.
ARTICLE VIII-WITHDRAWAL
VIII.1. IN GENERAL.
As indicated in Section 7.02, a participant may withdraw payroll
deductions and other contributions credited to his or her account under the Plan
at any time by giving written notice to the Company. All of the participant's
payroll deductions and other contributions credited to such participant's
account will be paid promptly after receipt of notice of withdrawal, and no
further payroll deductions or other contributions will be allowed during such
Offering. The Company may, at its option, treat any attempt to borrow by an
Employee on the security of accumulated payroll deductions or other
contributions as an election, under Section 7.02, to withdraw such account.
VIII.2. EFFECT ON SUBSEQUENT PARTICIPATION.
A participant's withdrawal from any Offering will not have any effect
upon eligibility to participate in any succeeding Offering or in any similar
plan which may hereafter be adopted by the Company.
VIII.3. TERMINATION OF EMPLOYMENT.
Upon termination of the participant's employment for any reason,
including retirement (but excluding death while in the employ of the Company or
continuation of a leave of absence for a period beyond 90 days), the payroll
deductions and other contributions credited to such participant account will be
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<PAGE> 7
returned, or, in the case of death subsequent to the termination of employment,
to the person or persons entitled thereto under Section 12.01.
VIII.4. TERMINATION OF EMPLOYMENT DUE TO DEATH.
Upon termination of the participant's employment because of death, his
or her beneficiary (as defined in Section 12.01) shall have the right to elect,
by written notice given to the Company prior to the earlier of the Offering
Termination Date or the expiration of a period of sixty (60) days commencing
with the date of the death of the participant, either to:
(a) withdraw all of the payroll deductions and other contributions
credited to the participant's account under the Plan, or
(b) exercise the participant's option for the purchase of stock on the
Offering Termination Date next following the date of the participant's death for
the purchase of the number of full shares of stock which the accumulated payroll
deductions and other contributions in the participant's account at the date of
the participant's death will purchase at the applicable option price, and any
excess in such account will be returned to said beneficiary.
In the event that no such written notice of election shall be duly
received by the office of the Company, the beneficiary shall automatically be
deemed to have elected, pursuant to paragraph (b), to exercise the participant's
option.
VIII.5. LEAVE OF ABSENCE.
A participant on leave of absence shall, subject to the election made
by such participant pursuant to Section 5.04, continue to be a participant in
the Plan so long as such participant is on continuous leave of absence. A
participant who has been on leave of absence for more than ninety days and who
therefore is not an Employee for the purpose of the Plan shall not be entitled
to participate in any offering commencing after the ninetieth day of such leave
of absence. Notwithstanding any other provisions of the Plan, unless a
participant on leave of absence returns to regular full-time or part-time
employment with the Company at the earlier of: (a) the termination of such leave
of absence or (b) three months from the ninetieth day of such leave of absence,
such participant's participation in the Plan shall terminate on whichever of
such dates first occurs.
ARTICLE IX-INTEREST
IX.1. PAYMENT OF INTEREST.
Interest shall be paid on amounts contributed to the Plan that were not
used to purchase shares of the Company's common stock. Such amounts will be
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deemed to have earned simple interest during the period from the date of
withholding or contribution, as applicable, to the date of return at the regular
passbook savings account rates per annum in effect at the NationsBank, during
the applicable offering period or, if such rates are not published or otherwise
available for such purpose, at the regular passbook savings account rates per
annum in effect during such period at another major commercial bank selected by
the Committee.
ARTICLE X-STOCK
X.1. MAXIMUM SHARES.
The maximum number of shares which shall be issued under the Plan,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 12.04 shall not to exceed 500,000 for all Offerings. If the total
number of shares for which options are exercised on any Offering Termination
Date in accordance with Article VI exceeds the maximum number of shares for the
applicable offering, the Company shall make a pro rata allocation of the shares
available for delivery and distribution in as nearly a uniform manner as shall
be practicable and as it shall determine to be equitable, and the balance of
payroll deductions and other contributions credited to the account of each
participant under the Plan shall be returned to him or her as promptly as
possible.
X.2. PARTICIPANT'S INTEREST IN OPTION STOCK.
The participant will have no interest in stock covered by an option
until such option has been exercised.
X.3. REGISTRATION OF STOCK.
Stock to be delivered to a participant under the Plan will be
registered in the name of the participant, or, if the participant so directs by
written notice to the Company prior to the Offering Termination Date applicable
thereto, in the names of the participant and one such other person as may be
designate by the participant, as joint tenants with rights of survivorship or as
tenants by the entireties, to the extent permitted by applicable law.
X.4. RESTRICTIONS ON EXERCISE.
The Board of Directors may, in its discretion, require as conditions to
the exercise of any option that the shares of common stock reserved for issuance
upon the exercise of the option shall have been duly listed, upon official
notice of issuance, upon a stock exchange, and that either:
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<PAGE> 9
(a) a Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of purchase, in
form and substance satisfactory to the Company, that such participant intends to
purchase the shares for investment and not for resale or distribution.
ARTICLE XI-ADMINISTRATION
XI.1. APPOINTMENT OF COMMITTEE.
The Board of Directors shall appoint a committee (the "Committee") to
administer the Plan, which shall consist of no fewer than three members of the
Board of Directors. No member of the Committee shall be eligible to purchase
stock under the Plan.
XI.2. AUTHORITY OF COMMITTEE.
Subject to the express provisions of the Plan, the Committee shall have
plenary authority in its discretion to interpret and construe any and all
provisions of the Plan, to adopt rules and regulations for administering the
Plan, and to make all other determinations deemed necessary or advisable for
administering the Plan. The Committee's determination on the foregoing matters
shall be conclusive.
XI.3. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE.
The Board of Directors may from time to time appoint members of the
Committee in substitution for or in addition to members previously appointed and
may fill vacancies, however caused, in the Committee. The Committee may select
one of its members as its Chairman and shall hold its meetings at such times and
places as it shall deem advisable and may hold telephonic meetings. A majority
of its members shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members. The Committee may correct any defect
or omission or reconcile any inconsistency in the Plan, in the manner and to the
extent is shall deem desirable. Any decision or determination reduced to writing
and signed by a majority of the members of the Committee shall be as fully
effective as if it had been made by a majority vote at a meeting duly called and
held. The Committee may appoint a secretary and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
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<PAGE> 10
ARTICLE XII-MISCELLANEOUS
XII.1. DESIGNATION OF BENEFICIARY.
A participant may file a written designation of a beneficiary who is to
receive any stock and/or cash. Such designation of beneficiary may be changed by
the participant at any time by written notice to the Company. Upon the death of
a participant and upon receipt by the Company of proof of identity and existence
at the participant's death of a beneficiary validly designated by him under the
Plan, the Company shall deliver such stock and/or cash to such beneficiary. In
the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such stock and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such stock and/or cash to the spouse
or to any one or more dependents of the participant as the Company may
designate. No beneficiary shall, prior to the death of the participant by whom
he has been designated, acquire any interest in the stock or cash credited to
the participant under the Plan.
XII.2. TRANSFERABILITY.
Neither payroll deductions nor other contributions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant other than by will or the
laws of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company may
treat such act as an election to withdraw funds in accordance with Section 7.02.
XII.3. USE OF FUNDS.
All payroll deductions and other contributions received or held by the
Company under this Plan may be used by the Company for any corporate purpose and
the Company shall be not be obligated to segregate such payroll deductions or
contributions.
XII.4. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) If, while any options are outstanding, the outstanding shares of
common stock of the Company have increased, decreased, changed into, or been
exchanged for a different number or kind of shares or securities of the Company
through reorganization, merger, recapitalization, reclassification, stock split,
reverse stock split or similar transaction, appropriate and proportionate
adjustments may be made by the Committee in the number and/or kind of shares
10
<PAGE> 11
which are subject to purchase under outstanding options and on the option
exercise price or prices applicable to such outstanding options. In addition, in
any such event, the number and/or kind of shares which may be offered in the
Offerings described in Article IV hereof shall also be proportionately adjusted.
No adjustments shall be made for stock dividends. For the purposes of this
paragraph, any distribution of shares to shareholders in an amount aggregating
20% or more of the outstanding shares shall be deemed a stock split and any
distributions of shares aggregating less than 20% of the outstanding shares
shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or stock of the Company to
another corporation, the holder of each option then outstanding under the Plan
will thereafter be entitled to receive at the next Offering Termination Date
upon the exercise of such option for each share as to which such option shall be
exercised, as nearly as reasonably may be determined, the cash, securities
and/or property which a holder of one share of the Common stock was entitled to
receive upon and at the time of such transaction. The Board of Directors shall
take such steps in connection with such transactions as the Board shall deem
necessary to assure that the provisions of this Section 12.04 shall thereafter
be applicable, as nearly as reasonably may be determined, in relation to the
said cash, securities and/or property as to which such holder of such option
might thereafter be entitled to receive.
XII.5. AMENDMENT AND TERMINATION.
The Board of Directors shall have complete power and authority to
terminate or amend the Plan; provided, however, that the Board of Directors
shall not, without the approval of the stockholders of the Corporation (i)
increase the maximum number of shares which may be issued under any Offering
(except pursuant to Section 12.04); or (ii) amend the requirements as to the
class of employees eligible to purchase stock under the Plan or permit the
members of the Committee to purchase stock under the Plan. No termination,
modification, or amendment of the Plan may, without the consent of an Employee
then having an option under the Plan to purchase stock, adversely affect the
rights of such Employee under such option.
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<PAGE> 12
XII.6. EFFECTIVE DATE.
The Plan shall be effective as of September 23, 1997, subject to
approval by the holders of the majority of the common stock present and
represented at a special or annual meeting of the shareholders (or by any other
method of approval adequate under Texas sate law). If the Plan is not so
approved within 12 months of the date the Plan is adopted by the Company's board
of directors, the Plan shall be deemed to have not become effective.
XII.7. NO EMPLOYMENT RIGHTS.
The Plan does not, directly or indirectly, create any right for the
benefit of any Employee or class of Employees to purchase any shares under the
Plan, or create in any Employee or class of Employees any right with respect to
continuation of employment by the Company, and it shall not be deemed to
interfere in any way with the Company's right to terminate, or otherwise modify,
an Employee's employment at any time.
XII.8. EFFECT OF PLAN.
The provisions of the Plan shall, in accordance with its terms, be
binding upon, and inure to the benefit of, all successors of each Employee
participating in the Plan, including, without limitation, such Employee's estate
and the executors, administrators or trustees thereof, heirs and legatees, and
any receiver, trustee in bankruptcy or representative of creditors of such
Employee.
XII.9. NOTICES.
All notices or other communications by a participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, that is designated by the Company from time to time for the receipt
thereof, and, in the absence of such a designation, the Company's Human
Resources Department.
XII.10. GOVERNING LAW.
The law of the State of Texas will govern all matters relating to this
Plan except to the extent it is superseded by the laws of the United States.
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<PAGE> 1
EXHIBIT 10.12
OFFICE LEASE
This Lease is made and executed as of this 1st day of
October, 1995, by the parties hereinafter identified as Landlord and Tenant and
upon the following terms and conditions:
ARTICLE 1.
BASIC LEASE PROVISIONS
For purposes of this Lease, the following terms shall have the meanings
ascribed to them in this Article 1:
1.01 LANDLORD AND ADDRESS:
The Utah State Retirement Investment Fund
c/o CB Commercial Realty Advisors
533 S. Fremont Avenue
Los Angeles, CA 90071
Attn: Director of Asset Management
1.02 TENANT AND CURRENT ADDRESS:
The Hotel Industry Switch Company
3811 Turtle Creek Blvd., Suite 1100
Dallas, Texas 75219
1.03 GUARANTOR(S) AND CURRENT ADDRESS(ES):
N/A
1.04 BUILDING: That certain property, building and other improvements
located on the land described in EXHIBIT A, attached hereto and
incorporated herein by this reference, with the street address of 3811
Turtle Creek Boulevard, Dallas, Texas 75219, and commonly referred to
as Turtle Creek Centre.
1.05 PREMISES: Suites No. 1100 and 1200, Floors 11 and 12 of the Building
as shown on the floor plan attached hereto as EXHIBIT 1.
1.06 AREA OF PREMISES: approximately 29,750 square feet, which number is
the final agreement of the parties and not subject to adjustment.
1.07 TERM: 7 years and 1 month
1.08 COMMENCEMENT DATE: The later of December 1, 1995 or the date Tenant
first occupies any portion of Floor 12, but in no event later than
February 1, 1996.
1.09 EXPIRATION DATE: December 31, 2002
1.10 MONTHLY BASE RENT:
Dates Monthly Base Rent
----- -----------------
Commencement Date - June 30, 1996 $29,964.00 ($20,453.13 as
to Floor 11 and $9,510.87
as to Floor 12)
July 1, 1996 - December 31, 1996 $35,435.13
January 1, 1997 - September 30, 1998 $40,906.25
October 1, 1998 - December 31, 2002 $45,864.58
The foregoing Monthly Base Rent amounts have been calculated based
upon an annual Monthly Base Rent of $16.50 per rentable square foot
for years 1 through 3 and $18.50 per rentable square foot for years 4
through the remainder of the Term, provided that the foregoing
Monthly Base Rent has been reduced by $16.50 per rentable square foot
for 7,958 square feet from Commencement Date through June 30, 1996,
and by $16.50 per rentable square foot for 3,979 square feet from
July 1, 1996 through December 31, 1996. Commencing January 1, 1997,
Tenant will pay $16.50 per rentable square foot for all 29,750 square
feet.
1.11 TOTAL MONTHLY BASE RENT FOR THE TERM: $3,620,483.61
1.12 TENANT'S SHARE: 10.038%, which is calculated by dividing the number of
rentable square feet contained in the Premises, which is 29,750, by
the number of rentable square feet contained in the Building, which is
296,378.
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1.13 BASE OPERATING YEAR: 1996
1.14 BASE EXPENSES: The total amount of Operating Expenses for the Base
Operating Year
1.15 SECURITY DEPOSIT: $1,528.58
1.16 LEASING BROKER(S) (IF ANY) AND ADDRESS(ES): Fults Associates
1.17 LANDLORD'S MANAGEMENT AGENT AND ADDRESS:
Compass Management, Inc.
3811 Turtle Creek Boulevard, Suite 240
Dallas, Texas 75219
or such other Management Agent as Landlord may designate from time to
time.
1.18 RENT PAYMENT ADDRESS:
The Utah State Retirement Investment Fund
P.O. Box 910517
Dallas, Texas 75391-0517
1.19 PARKING SPACES: the sum of (a) 89 parking spaces located in the
parking facilities located inside the Building's adjacent parking
garage ("Adjacent Garage Parking Spaces") all of which shall be
designated non-reserved parking spaces ("Non-Reserved Parking
Spaces"), provided that up to 12 Non-Reserved Parking Spaces may be
converted to executive non-reserved parking spaces ("Executive
Non-Reserved Parking Spaces"), plus (b) 2 parking spaces ("Reserved
Executive Parking Spaces") located in the parking facilities located
inside the Building's executive parking garage beneath the Building
("Executive Garage"). In addition, upon Tenant's request, Landlord
will temporarily make additional Non-Reserved Parking Spaces
("Additional Non-Reserved Parking Spaces") available to Tenant if and
to the extent available for an amount equal to the number of employees
of Tenant in excess of 89, Additional Non-Reserved Parking Spaces shall
be deemed available to Tenant only to the extent such spaces have not
been leased or committed to other tenants or potential tenants of the
Building. Landlord may terminate Tenant's right to use any Additional
Non-Reserved Parking Spaces that Landlord determines to lease or make
available to other tenants of the Building, provided that Landlord
shall be permitted to terminate Tenant's right to use spaces only to
the extent necessary to provide another tenant of the Building up to
but no more than one (1) parking space for every three hundred
thirty-three (333) rentable square feet contained in such other
tenant's premises.
ARTICLE 2.
DEMISE
2.01 INITIAL PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the Premises for the Term and upon the terms,
covenants and conditions set forth in this Lease. Subject to the
provisions of Section 30.15 below, this Lease shall be in full force
and effect from the date it is fully executed by both parties. Tenant
covenants as a material part of the consideration for this Lease to
keep and perform each and all of the terms, covenants and conditions
by it to be kept and performed. This Lease is made upon the condition
of such performance.
2.02 RIGHT OF FIRST REFUSAL. If the Lease is then in full force and effect
and there is no Default hereunder, Tenant shall have the right of
first refusal to lease an additional 6,917 square feet of rentable
area located on the third (3rd) floor identified as such on Exhibit 2
attached hereto and incorporated herein for all purposes and all of
the rentable area on the tenth (10th) and thirteenth (13th) floors of
the Building ("ROFR Area").Such right of first refusal shall be
exercisable at the following times and upon the following conditions:
(a) If Landlord receives a bona fide offer from a
prospective tenant (the "Prospective Tenant") to lease premises (the
"Offered Premises") in the Building containing all or any part of the
ROFR Area (other than an offer to renew the term of or expand the
premises demised under an existing lease, as Tenant's right of first
refusal shall be subordinate to any renewal of the term of and any
expansion of premises demised under an existing lease) and Landlord
desires to accept such offer, then Landlord shall notify Tenant of
such fact. Tenant shall have a period of five (5) business days from
the date of delivery of such notice to notify Landlord whether Tenant
elects to exercise the right granted hereby to lease the Offered
Premises. If Tenant fails to give any notice to Landlord within the
required five (5) business day period, Tenant shall be deemed to have
refused its right to lease all or any portion of the ROFR Area.
(b) If Tenant refuses its right to lease the Offered
Premises, either by giving written notice thereof or by failing to
give any notice, Landlord shall thereafter have the right to lease the
Offered Premises to the Prospective Tenant on such terms and
provisions as may be acceptable to Landlord, provided such terms and
provisions are not materially more favorable to the Prospective Tenant
than the terms and provision set forth in the notice from Landlord to
Tenant. If Landlord and the Prospective Tenant fail to enter into a
lease, Tenant shall have the right of first refusal described herein
with respect to any subsequent bona fide offers from other prospective
tenants.
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<PAGE> 3
(c) If Tenant exercises its right to lease the Offered
Premises, Landlord and Tenant shall, within thirty (30) days after
Tenant delivers to Landlord notice of its election, enter into a lease
agreement with respect to the Offered Premises on the same terms,
covenants, and conditions as are contained in this Lease, except as
follows:
(i) The rentable area of the Offered Premises
shall be equal to the area offered to be leased by the
Prospective Tenant.
(ii) The Monthly Base Rent rate to be paid for the
Offered Premises shall be equal to the Monthly Base Rent
offered to be paid by the Prospective Tenant, including any
offered increases from time to time in such rental rate.
(iii) The additional rental relating the Operating
Expenses for the Offered Premises shall be equal to the
additional rental relating Operating Expenses offered to be
paid by the Prospective Tenant, including any offered
increases from time to time in such rate.
(iv) The payment of monthly installments of
Monthly Base Rent with respect to the Offered Premises shall
continence on the effective date of the lease of the Offered
Premises as offered to the Prospective Tenant, or in the event
no specific effective date was so offered on the date mutually
acceptable to Landlord and Tenant, and rent for any partial
month shall be prorated.
(v) Possession of such portion of the Offered
Premises shall be delivered to Tenant on the basis offered to
the Prospective Tenant, subject to paragraph (vii) below.
Landlord will use reasonable diligence to make the Offered
Premises available to Tenant as soon after the effective date
stated above as it can, Landlord shall not be liable for the
failure to give possession of the Offered Premises on said
date by reason of the holding over or retention of possession
of any tenant, tenants, or occupants, nor shall such failure
impair the validity of this Lease, nor extend the term hereof,
but the rent for the Offered Premises shall be abated until
possession is delivered to Tenant and such abatement shall
constitute full settlement of all claims that Tenant might
otherwise have against Landlord by reason of said failure to
give possession of the Offered Premises to Tenant on the
scheduled effective date.
(vi) The term of the lease of the Offered Premises
shall commence on the date determined pursuant to subparagraph
(c)(iv) above, and shall continue thereafter until the date
on which the initial Term terminates.
(vii) If the term of the lease offered to the
Prospective Tenant exceeds the remainder of the then current
Term, any and all allowances and credits offered to the
Prospective Tenant (including, without limitation, any
leasehold improvement allowances and expenses) shall be
multiplied by a fraction, the numerator of which shall be the
total number of months remaining in the then current Term, and
the denominator of which shall be equal to the number of
months in the term offered to the Prospective Tenant.
(d) Any assignment or subletting of the Premises by
Tenant, or any termination of the Lease, shall terminate the refusal
right of Tenant hereby granted.
2.03 TERMINATION OF EXISTING LEASE. Tenant leases the eleventh floor and a
portion of the third floor pursuant to an existing lease entered into by
Landlord's predecessor in interest as previously amended. Effective upon the
Commencement Date, the existing lease shall automatically terminate, except for
Tenant's obligations thereunder that expressly survive such termination or
Tenant's obligations thereunder that have not been, but should have been,
performed prior to the Commencement Date.
ARTICLE 3.
TERM
3.01 INITIAL TERM. The term of this Lease shall commence on the
Commencement Date and expire on the Expiration Date unless sooner terminated as
provided in this Lease. If Landlord shall be unable to deliver possession of
the Premises to Tenant on the Commencement Date for any reason whatsoever, this
Lease shall not be void or voidable and Landlord shall not be subject to any
liability for the failure to deliver possession on said date nor shall such
failure to deliver possession on the Commencement Date affect the validity of
this Lease or the obligations of Tenant hereunder, provided that Tenant shall
be entitled to an abatement of rent applicable to Floor 12 if and to the extent
Landlord delivers Floor 12 to Tenant after December 1, 1995.
3.02 RENEWAL OPTION. Provided this Lease is then in full force and effect
and if there is no Default by Tenant under this Lease, Tenant shall have the
right to renew the Term, for an (1) additional period of five (5) years upon
the same terms, conditions and provisions applicable to the preceding Term of
this Lease (unless otherwise expressly provided herein), except that the
Monthly Base Rent for the additional term of five (5) year shall be the product
of (i) the number of rentable square feet then contained in the Premises
multiplied by (ii) an amount equal to the then prevailing market base rental
rate per rentable square foot per annum, as reasonably determined by Landlord,
charged for comparable office space in comparable buildings located north of
Woodall Rogers Freeway, south of Fitzhugh, west of McKinney Avenue and east of
Oak Lawn Avenue. Tenant shall exercise its right of renewal by delivering to
Landlord written notice ("Tenant's Notice") of Tenant's desire to renew the
term of this Lease as aforesaid at least nine (9) months (but not more than
twelve (12)
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<PAGE> 4
Landlord shall deliver to Tenant a written notice ("Landlord's Notice")
specifying the Monthly Base Rent rate per square foot per annum for the
additional term of five (5) years. Tenant shall have until thirty (30) days
following delivery of Landlord's Notice in which to notify Landlord of Tenant's
continued exercise of its rights to renew the Term. Failure to notify Landlord
within such period or to timely deliver Tenant's Notice shall automatically
extinguish Tenant's rights to renew.
ARTICLE 4.
RENT
4.01 DEFINITIONS. For purposes of this Lease, the following terms shall
have the meanings ascribed to them in this Section 4.01:
(a) "ADJUSTMENT YEAR" shall mean each calendar year or
part thereof during the Term exclusive of the Base Year.
(b) "OPERATING EXPENSES" shall mean and include all
amounts, expenses and costs of whatever nature that Landlord incurs or
pays because of or in connection with the ownership, control,
operation, repair, management, replacement or maintenance of the
Building, all related improvements thereto or thereon and all
machinery equipment, landscaping, fixtures and other facilities,
including personal property, as may now or hereafter exist in or on
the Building. Except as otherwise provided below, Operating Expenses
shall be determined in accordance with generally accepted accounting
principles consistently applied and shall include, but shall not be
limited to, the following:
(1) Wages, salaries, fees, related taxes,
insurance costs, benefits (including amounts payable under
medical, pension and welfare plans and any amounts payable
under collective bargaining agreements) and reimbursement of
expenses of and relating to all personnel engaged in
operating, repairing, managing, replacing and maintaining the
Property;
(2) All supplies and materials for the Building,
including sales tax imposed in connection with the purchase
thereof;
(3) Legal and accounting fees and expenses
(except for legal fees incurred in connection with the
negotiation of, or the collection of amounts due under,
leases);
(4) Cost of all utilities for the Building,
including, without limitation, water, sewer, and fuel,
exclusive of electrical service;
(5) Fees and other charges payable under or in
respect of all maintenance, repair, janitorial and other
service agreements for or pertaining to the Building;
(6) Cost of all insurance, including all
deductibles thereunder, relating to the Building, or the
ownership, its occupancy or operations thereof;
(7) Cost of repairs and maintenance of the
Building, excluding only such costs which are paid by the
proceeds of insurance, by Tenant or by other third parties
(other than payment by Tenant or other tenants of the
Operating Expenses);
(8) Amortization of the cost (plus interest at
the then current market rate on the unamortized portion of
such cost from time to time) of purchasing and installing
capital investment items (including "retrofitting" or capital
replacements) that are for the purpose of reducing costs
includable in the definition of Operating Expenses or that may
be required by governmental authority, including but not
limited to, pursuant to the Americans with Disabilities Act.
All such costs shall be amortized over the reasonable life of
the capital investment items, with the reasonable life and
amortization schedule being determined in accordance with
sound management accounting principles;
(9) Management fees and reimbursed expenses of
Landlord's Management Agent (not to exceed a market management
fee for comparable buildings in the Dallas metropolitan area)
and administrative expenses not borne by the Landlord's
Management Agent;
(10) Fees and charges under any declaration of
covenants, easements or restrictions affecting the Building;
and
(11) All federal, state and local government
taxes, assessments and charges of any kind or nature, whether
general, special, ordinary or extraordinary, paid by Landlord
in a calendar year with respect to the Building ("Taxes");
provided, real estate taxes and special assessments (except as
provided below) shall be included in Operating Expenses for a
calendar year only to the extent such taxes and assessments
are paid during such calendar year, regardless of when
assessed. In addition, "Taxes" shall include, without
limitation, real estate and transit district taxes and
assessments, sales and use taxes, ad valorem taxes, personal
property taxes, any lease or lease transaction tax and all
taxes, assessments and charges in lieu of, substituted for, or
in addition to, any or all of the foregoing taxes, assessments
and charges. Taxes shall not include any federal, state or
local government income, franchise, capital stock, inheritance
or estate taxes, except to the extent such taxes are in lieu
of or a substitute for any of the taxes,
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<PAGE> 5
assessments and charges previously described in this Section
4.01 (b). "Taxes" shall also include the amount of all fees,
costs and expenses (including, without limitation, attorneys'
fees and court costs) paid or incurred by Landlord each
calendar year in seeking or obtaining any refund or reduction
of Taxes or for contesting or protesting any imposition of
Taxes, whether or not successful and whether or not
attributable to Taxes assessed, paid or incurred in such
calendar year. If any special assessment payable in
installments is levied against all or any part of the Property,
then at the Landlord's discretion, Taxes for the calendar year
in which such assessment is levied and for each calendar year
thereafter shall include only the amount of any installments of
such assessment plus interest thereon paid or payable during
such calendar year (without regard to any right to pay, or
payment of, such assessment in a single payment).
Notwithstanding the foregoing, Operating Expenses shall not include:
(1) Principal or interest payments with respect
to mortgages against the Building;
(2) Ground lease payments;
(3) Depreciation;
(4) The cost of replacement of capital investment
items (except as provided in Section 4.01(b)(8));
(5) Charges for special items or services billed
separately to (and in addition to Expense Adjustment
Statements) and paid by tenants of the Building;
(6) Leasing commissions or other expenses solely
related to marketing space in the Building;
(7) The cost of electrical service; or
(8) For purposes of determining the Base Expenses
only, any Operating Expense incurred during the Base Year
which is not an ordinary, typical year-to-year Operating
Expense for the Building.
If at any time the Building is less than ninety-five percent (95%) occupied or
Landlord is not supplying services to ninety-five percent (95%) of all rentable
areas of the Building during an entire calendar year, then Landlord may adjust
that portion of each element of actual Operating Expenses that vary with
occupancy of the Building to Landlord's estimate of that amount which would
have been paid or incurred by the Landlord as Operating Expenses had the
Building been ninety-five percent (95%) occupied or serviced, and the Operating
Expenses as so adjusted shall be deemed to be the actual Operating Expenses for
such calendar year. If Landlord does not furnish during any Adjustment Year any
particular work or service (the cost of which, if performed by Landlord, would
constitute an Operating Expense) to a tenant which has undertaken to perform
such work or service in lieu of the performance thereof by Landlord, then
Operating Expenses shall be deemed to be increased by an amount equal to the
additional expense which would reasonably have been incurred during such
Adjustment Year by Landlord if it had, at its cost, furnished such work or
service to such tenant. The provisions of the preceding sentences will apply
only to those Operating Expenses that either vary with occupancy or by reason of
one or more tenants not receiving goods or services the cost of which
constitutes all or part or such Operating Expenses. If the Property is not
assessed as fully improved for any calendar year or part thereof, Landlord may
make an adjustment to the amount of Taxes for each such calendar year to reflect
the amount of Taxes which would have been assessed if the Property had been
assessed as fully improved, and the amount of any such adjustment shall be
included in the amount of Taxes for such calendar year. If the Building is not
fully leased and occupied by tenants during all or any portion of a calendar
year, then Landlord may make an adjustment to the amount of Taxes for such
calendar year to reflect the amount of Taxes which would have been assessed if
the Building had been fully leased and occupied by tenants during such calendar
year, and the amount of any such adjustment shall be included in the amount of
Taxes for such calendar year. Landlord shall calculate Operating Expenses (and
any adjustment thereto as provided above) during 1996 in the same manner as, and
consistent with, calculations to be made during subsequent years.
4.02 PAYMENT OF RENT. Tenant shall pay to Landlord's Management Agent, at
the address set forth in Article I above as the Rent Payment Address or to such
other person or entity and/or at such other place as Landlord may from time to
time direct in writing, all amounts due Landlord from Tenant hereunder,
including, without limitation, Monthly Base Rent, Expense Adjustment and
Electrical Cost (all amounts due hereunder being referred to collectively as
"Rent"). Except as specifically provided in this Lease, Rent shall be paid
without abatement, deduction or setoff of any kind, it being the intention of
the parties that, to the full extent permitted by law, Tenant's covenant to pay
Rent shall be independent of all other covenants contained in this Lease,
including Tenant's continued occupancy of the Premises. Tenant's obligation
hereunder to pay Rent accruing during the Term (whether or not the amount
thereof is determined or determinable as of the date of termination or
expiration of this Lease) shall survive the termination of this Lease, except
as otherwise provided herein.
4.03 PAYMENT OF MONTHLY BASE RENT. Monthly Base Rent shall be payable
monthly, in advance, on the first day of each calendar month during the Term,
except that Monthly Base Rent for the first full calendar month of the Term for
which Monthly Base Rent is due shall be paid concurrently with the execution of
this Lease by Tenant. If the Term commences on a day other than the first day
of a calendar month, then Monthly Base Rent for such month will be prorated on
a per diem basis based on a 30 day month and the excess of the installment or
Monthly Base Rent paid concurrently with the execution of this Lease by Tenant
over such prorated amount for the first calendar month of the Term shall be
applied against Monthly Base Rent for the first full calendar month of the
Term.
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4.04 EXPENSE ADJUSTMENT. In addition to Monthly Base Rent, Tenant shall pay
with respect to each Adjustment Year an amount equal to Tenant's Share of
Operating Expenses for the Adjustment Year in excess of the Base Expenses
("Expense Adjustment"). As to any Adjustment Year during the Term which does not
begin on January 1st or does not end on December 31st, Expense Adjustment with
respect to such Adjustment Year shall be prorated on a per diem basis.
Notwithstanding anything contained herein to the contrary, Operating Expenses
shall be deemed not to increase more than $.50 per rentable square foot per
calendar year (determined on a cumulative basis throughout the Term of the
Lease); provided that the foregoing cap on Operating Expenses shall not apply
to the following components of Operating Expenses: taxes, insurance, and
utilities.
4.05 PAYMENT OF ADJUSTMENTS. The Expense Adjustment with respect to each
Adjustment Year shall be paid in monthly installments in advance on the first
day of each calendar month during such Adjustment Year in amounts sufficient to
satisfy payment of the Expense Adjustment for such Adjustment Year as
reasonably estimated by Landlord from time to time prior to or during any
Adjustment Year and communicated to Tenant by written notice ("Estimated
Expense Adjustment"). If Landlord does not deliver such a notice ("Estimate")
prior to commencement of any Adjustment Year, Tenant shall continue to pay
Estimated Expense Adjustment as provided in the most recently received Estimate
(or Updated Estimate, as defined below) or the latest determined Expense
Adjustment, whichever is greater, until the Estimate for such Adjustment Year
is delivered to Tenant. If, during any Adjustment Year, Landlord reasonably
determines that Operating Expenses for such Adjustment Year have increased or
will increase, Landlord may deliver to Tenant an updated Estimate ("Updated
Estimate") for such Adjustment Year. Monthly installments of Estimated Expense
Adjustment paid subsequent to Tenant's receipt of the Estimate or Updated
Estimate for any Adjustment Year shall be in the amounts provided in such
Estimate or Updated Estimate, as the case may be. In addition, Tenant shall pay
to Landlord within thirty (30) days after receipt of such Estimate or Updated
Estimate, the amount, if any, by which the aggregate installments or the
Estimated Expense Adjustment provided in such Estimate or Updated Estimate, as
the case may be, with respect to prior months in such Adjustment Year exceed
the aggregate installments of the Estimated Expense Adjustment paid by Tenant
with respect to such prior months. Within one hundred twenty (120) days after
the end of each Adjustment Year, or as soon thereafter as practicable, Landlord
shall send to Tenant a statement ("Final Adjustment Statement") showing (i) the
calculation of the Expense Adjustment for such Adjustment Year, (it) the
aggregate amount of the Estimated Expense Adjustment previously paid by Tenant
for such Adjustment Year, and (iii) the amount, if any, by which the aggregate
amount of the installments of Estimated Expense Adjustment paid by Tenant with
respect to such Adjustment Year exceeds or is less than the Expense Adjustment
for such Adjustment Year. Tenant shall pay the amount of any deficiency to
Landlord within thirty (30) days after the date of such statement. Any excess
shall be refunded by Landlord, provided Tenant is not then in default under
this Lease, within thirty (30) days after the delivery of the Final Adjustment
Statement to Tenant. In addition, Tenant shall have the right, within three (3)
months after Tenant's receipt of the Final Adjustment Statement, on written
notice to Landlord, to have Landlord's books and records relating to
Operating Expenses audited by a qualified professional selected by Tenant and
approved by Landlord. Landlord shall have an opportunity to verify the findings
of the audit. If such audit, as verified by Landlord, reveals any errors,
Tenant's payments of its share of Operating Expenses shall be adjusted, and
appropriate payments shall be made by Landlord or Tenant, as the case may be,
within forty-five (45) days after completion of such audit. If the audit reveals
that Operating Expenses reflected in the Final Adjustment Statement were
overstated by more than five percent (5%), then Landlord shall pay the costs of
such audit. Otherwise all costs incurred by Tenant in connection with such audit
shall be paid by Tenant.
4.06 ELECTRICAL SERVICE. In addition to Monthly Base Rent and Tenant's
Share of Operating Expenses, Tenant shall pay with respect to the Base Year and
each Adjustment Year, as additional rental, (i) Tenant's Share of all
electrical service to the common areas of the Building ("Common Area Electrical
Service") and (ii) the cost of electrical service to the Premises ("Premises
Electrical Service") (the cost of the Common Area Electrical Service and the
Premises Electrical Service, the "Electrical Cost"). In the event the
electrical service to the Premises is submetered or otherwise measured in
accordance with the provisions of Section 8.03, Tenant shall pay to Landlord
the cost of such electrical service based upon rates determined by Landlord
from time to time (which shall not exceed the amount Tenant would have been
charged for such service by the local utility company furnishing such service).
In the event electrical service to the Premises is not measured by a submeter
or periodic determination by Landlord's engineers or other competent
consultants selected by Landlord (or a combination of such methods), then
Tenant shall pay to Landlord Tenant's Share of the cost of all electrical
service to tenants in the Building which does not exceed Building standard
consumption as established from time to time by Landlord. Tenant's Share shall
be based upon the statements therefor received by Landlord from the electrical
utility company providing such service, adjusted as Landlord determines
appropriate to eliminate over-standard consumption. In the event that other
tenants of the Building pay directly either to Landlord or third parties for
electricity supplied to their respective premises (e.g. separately metered
electricity), then Landlord shall adjust Tenant's Share by excluding from its
calculation the rentable area of all tenants making such payments. The cost of
electrical service shall include without limitation all fuel adjustment
charges, demand charges, and taxes. If, during any period of time, the area of
the Building is not ninety-five percent (95%) occupied, then, for purposes of
this Section 4.06, Landlord may adjust the actual costs of electrical service
that vary with the occupancy of the Building to Landlord's estimate of that
amount which would have been paid or incurred by Landlord for electrical
service had the Building been ninety-five percent (95%) occupied, and the costs
of electrical service as so adjusted shall be deemed to be actual electrical
costs for such calendar year. Landlord shall calculate the costs of electrical
service (and any adjustment thereto as provided above) during 1996 in the same
manner as, and consistent with, calculations to be made during subsequent
years.
4.07 ESTIMATED PAYMENTS. Tenant's Share of Electrical Costs with respect to
the Base Year and each Adjustment Year shall be paid in monthly installments in
advance on the first day of each calendar month during the Base Year and each
such Adjustment Year in amounts sufficient to satisfy payment of Tenant's Share
of Electrical Costs for the Base Year and each such Adjustment Year as
reasonably estimated by Landlord from time to time prior to or during the Base
Year and any
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<PAGE> 7
Adjustment Year and communicated to Tenant by written notice ("Estimated
Electrical Cost Payments"). If Landlord does not deliver such a notice
("Electrical Estimate") prior to the commencement of any Adjustment Year,
Tenant shall continue to pay Estimated Electrical Cost Payments as provided in
the most recently received Electrical Estimate (or Updated Electrical Estimate,
as defined below) or the latest determined Estimated Electrical Cost Payment,
whichever is greater, until the Electrical Estimate for such Adjustment Year is
delivered to Tenant. If, during the Base Year or any Adjustment Year, Landlord
reasonably determines that the Electrical Costs for such Adjustment Year have
increased or will increase, Landlord may deliver to Tenant an updated Electrical
Estimate ("Updated Electrical Estimate") for the Base Year or such Adjustment
Year. Monthly installments of Estimated Electrical Cost Payments paid
subsequent to Tenant's receipt of the Electrical Estimate or Updated Electrical
Estimate for the Base Year or any Adjustment Year shall be in amounts provided
in such Electrical Estimate or Updated Electrical Estimate, as the case may be.
In addition, Tenant shall pay to landlord within thirty (30) days after receipt
of such Electrical Estimate or Updated Electrical Estimate, the amount, if any,
by which the aggregate installments of the Estimated Electrical Cost Payments
provided in such Electrical Estimate or Updated Electrical Estimate, as the
case may be,with respect to prior months in the Base Year or such Adjustment
Year exceed the aggregate installments of the Estimated Electrical Cost
Payments paid by Tenant with respect to such prior months. Within one hundred
twenty (120) days after the end of each Adjustment year, or as soon thereafter
as practicable, Landlord shall send to Tenant a statement ("Final Electrical
Cost Statement") showing (i) the calculation of Tenant's Share of Electrical
Cost for the Base Year or such Adjustment Year, (ii) the aggregate amount of
the Estimated Electrical Cost Payments previously paid by Tenant with respect
to such Adjustment Year, and (iii) the amount, if any, by which the aggregate
amount of the installments of the Estimated Electrical Cost Payments paid by
Tenant with respect to such Adjustment Year exceeds or is less than Tenant's
share of the Electrical Costs for the Base Year or such Adjustment Year. Tenant
shall pay the amount of any deficiency to Landlord within thirty (30) days
after the date of such statement. Any excess shall be refunded by Landlord,
provided Tenant is not then in default under this lease within thirty (30) days
after the delivery of the final Adjustment Statement to Tenant.
ARTICLE 5.
SECURITY DEPOSIT
As security for the performance of its obligations under this Lease,
Tenant, on execution of this Lease, shall deposit with Landlord a security
deposit in the amount set forth in Article I hereof ("Security Deposit"), and
agrees from time to time to pay Landlord within three (3) business days
following receipt of a request therefor, any sum or sums of money paid or
deducted therefrom by Landlord pursuant to the provisions of this Lease, in
order that at all times during the Term there shall be continually deposited
with the Landlord, a sum which shall never be less than the amount originally
deposited. The Security Deposit shall not be deemed an advance payment of Rent,
nor a measure of damages for any default by Tenant under this Lease, nor shall
the Security Deposit be a bar or a defense to any action that Landlord may
commence against Tenant. In the event of any default by Tenant hereunder,
Landlord shall have the right, but shall not be obligated, to apply or retain
all or any portion of the Security Deposit in payment of Tenant's obligations
hereunder, but any such application or retention shall not be obligated to hold
the Security Deposit as a separate fund, but may commingle the same with its
other funds. Upon expiration of the Term hereof, the Security Deposit (or the
balance thereof remaining after payment out of the same or deductions therefrom
as provided above) shall be returned to the Tenant within a reasonable period
of time following such expiration. No interest shall be payable with respect to
the Security Deposit. Landlord may commingle the Security Deposit with other
monies of Landlord. Landlord or any owner of the Building may transfer or
assign the Security Deposit to any new owner of the Building or to any assignee
or transferee of this Lease or may credit the Security Deposit against the
purchase price of the Building and upon such transfer or credit all liability
of the transferor or assignor of such security shall cease and come to an end.
No Mortgagee (as hereinafter defined) or person or entity who acquires legal or
beneficial title to the Building from such Mortgagee shall be liable for the
return of the Security Deposit unless such funds are actually received by such
Mortgagee or purchaser.
ARTICLE 6.
USE OF PREMISES; PARKING
6.01 PERMITTED USE. Tenant shall use and occupy the Premises solely for
general office purposes and for no other use or purpose. Notwithstanding
anything to the contrary in this Lease, the Premises shall not be used for any
purpose which would (i) adversely affect the appearance of the Building, (ii)
be visible from the exterior of, or the public areas of, the Building, (iii)
adversely affect ventilation in other areas of the Building (including without
limitation, the creation of offensive odors), (iv) create unreasonable elevator
loads, (v) cause structural loads to be exceeded, (vi) create unreasonable
noise levels, (vii) otherwise unreasonable interfere with Building operations
or other tenants of the Building, or (viii) violate legal requirements. In all
events, Tenant shall not engage in any activity which is not in keeping with
the first-class standards of the Building. Without limiting the foregoing,
Tenant will not use any part of the Premises for the following uses: health care
services, telephone or telegraph agency, radio, television or other
communication station, employment agency, public restaurant or bar, retail,
wholesale or discount shop for the sale of merchandise, retail service shop,
school or classroom (except as incidental to office uses but not as the
principal use thereof), or governmental or quasi-governmental bureau,
department or agency.
6.02 NO NUISANCE. Tenant shall not commit, or suffer to be committed, any
annoyance, waste, nuisance,act or thing against public policy, or which may
disturb the quiet enjoyment of Landlord or any other tenant or occupant of the
building. Tenant agrees not to deface or damage the Building in any manner.
6.03 PARKING. Landlord shall provide and Tenant shall lease and pay for,
from the commencement Date until expiration of the Term, the Parking Spaces.
Tenant does not have the right to use any specific parking spaces but only has
the right to use the number of Parking Spaces located in the parking facilities
generally. Tenant may not use additional
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parking spaces without the prior written consent of Landlord, in its sole
discretion. Tenant and its agents, employees, contractors, invitees or
licensees shall not interfere with the rights of Landlord or others entitled to
similar use of the parking facilities. All parking facilities furnished by
Landlord shall be subject to the reasonable control and management of Landlord,
who may, from time to time, establish, modify and enforce reasonable rules and
regulations with respect thereto. Landlord further reserves the right to
change, reconfigure, or rearrange the parking areas, to construct or repair
any portion thereof, and to restrict or eliminate the use of any parking areas
and do such other acts in and to such areas as Landlord deems necessary or
desirable without such actions being deemed an eviction of Tenant or a
disturbance of Tenant's use of the Premises and without Landlord being deemed
in default hereunder. Landlord may, in its sole discretion, convert the parking
facilities to a reserved and/or controlled parking facility. If specific
parking spaces are not assigned pursuant to the terms of this Lease, Landlord
reserves the right at any time to assign specific parking spaces and Tenant
shall thereafter be responsible to insure that its employees park in the
specifically designated parking spaces. Tenant shall, if requested by Landlord,
furnish to Landlord a complete list of the license plate numbers of all
vehicles operated by Tenant, Tenant's employees and agents. Landlord shall not
be liable for any damage of any nature to, or any theft of, vehicles, or
contents thereof, in or about such parking facility. At Landlord's request,
Tenant shall cause its employees and agents using Tenant's parking spaces to
execute an agreement confirming the foregoing. Excessive use of the parking
facilities by another tenant shall not be a default or breach of this Lease by
Landlord, and shall not suspend or terminate any of Tenant's obligations under
this Lease, and shall not entitle Tenant to exercise any other right or remedy
it may be afforded hereunder or at law or in equity. For the Parking Spaces,
Tenant shall pay Landlord during the term additional rental hereunder (a) the
sum of $0 per month during the first five years of the Term of this Lease and
thereafter $40.00 per month (plus any applicable sales tax) for each
Non-Reserved Parking Space, (b) if Tenant elects to convert a Non-Reserved
Parking Space to an Executive Non-Reserved Parking Space, then the sum of
$60.00 per month (plus any applicable sales tax) for each Executive
Non-Reserved Parking Space, (c) the sum of $100.00 per month (plus any
applicable sales tax) for each Reserved Executive Parking Space, and (d) the
sum of $40.00 per month (plus any applicable sales tax) for each Additional
Non-Reserved Parking Space, such sums to be payable monthly in advance on the
first day of each and every month during the Term, and a pro rata portion of
such sum shall be payable for any partial calendar month in the event this
Lease commences or ends on a date other than the first or last day of a
calendar month. Tenant's obligation to pay the above described parking rental
shall be considered an obligation to pay Rent for all purposes hereunder and
shall be secured in a like manner as is Tenant's obligation to pay any other
Rent. If the Parking Spaces are not available to Tenant during any portion of
the term of this Lease due to causes beyond the control of Landlord (including
casualty or condemnation), this Lease shall continue without abatement of Rent
and Landlord shall use reasonable efforts to make available to Tenant
sufficient substitute parking spaces within a one-half (.5) mile radius of the
Building until the Parking Spaces are again made available to Tenant at a
rental rate not to exceed the above described rental rate. Tenant shall have
the right at any time to convert up to twelve (12) Non-Reserved Parking Spaces
to twelve (12) Executive Non-Reserved Parking Spaces, provided Tenant provides
Landlord fifteen (15) days prior written notice. The sums described above
payable for each Executive Non-Reserved Parking Space shall be prorated for any
partial month.
ARTICLE 7.
RULES AND REGULATIONS
Tenant agrees to observe the reservations and rights reserved to
Landlord in this Lease. Tenant shall comply, and shall cause its employees,
agents, clients, customers, guests and invitees to comply, with the rules and
regulations attached hereto as EXHIBIT 3, and such revised or additional rules
and regulations adopted by Landlord during the Term and applied generally to
all office tenants of the Building. Any violation by Tenant or any of its
employees, agents, clients, customers, guests or invitees of any of the rules
and regulations so adopted by Landlord shall be a default by Tenant under this
Lease and may be restrained by court injunction; but whether or not so
restrained, Tenant acknowledges and agrees that it shall be and remain liable
for all damages, loss, costs and expense resulting from any violation by Tenant
or such other persons of any of said rules and regulations. Landlord shall use
reasonable efforts to cause tenants to comply with said rules and regulations
on a non-discriminatory basis, provided nothing in this Lease contained shall
be construed to impose upon Landlord any duty or obligation to enforce said
rules and regulations or the terms, covenants and conditions of any other lease
against any other tenant or any other persons, and Landlord shall not be liable
to Tenant for violation of the same by any other tenant, its employees, agents,
guests, invitees, licensees, customers, clients, family members, or by any
other person.
ARTICLE 8.
SERVICES PROVIDED
8.01 LANDLORD'S SERVICES. Landlord shall furnish:
(a) Cooled or heated air in season to provide a temperature
condition required, in Landlord's reasonable judgment, for comfortable
occupancy of the Premises under normal business operations and in the absence
of the use of equipment which affects the temperature or humidity which would
otherwise be maintained in the Premises, daily from 7:00 A.M. to 6:00 P.M.
(Saturdays 8:00 A.M. to 1:00 P.M.), Sundays and Holidays (as defined below)
excepted. If Tenant shall request, at least one (1) business day in advance,
Landlord shall provide after hours cooled or heated air for the Premises;
provided, that the Tenant shall pay Landlord's charges for such service
currently in the amount of Landlord's cost (including reasonable overhead) per
hour with a two (2) hour minimum charge (which hourly or minimum charges are
subject to change from time to time without notice) within ten (10) days after
receipt of Landlord's invoices therefor. Further, if the use of heat generating
equipment in the Premises different from that already maintained in the Premises
already occupied by Tenant as of the date hereof, affects the temperatures
otherwise maintained by the air conditioning system for normal business
operations, and thereby requires, in the sole judgment of Landlord, the
modification of the air conditioning or ventilation systems (including
installation of supplementary air conditioning units in the Premises) Landlord
may elect to perform such modification, and the cost thereof shall be paid by
Tenant to Landlord at the time of completion of such modification, or Landlord
may elect to require Tenant to perform such modification, at Tenant's sole cost
and expense. Any increased
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expense in maintaining or operating the system resulting, in Landlord's sole
opinion, from such modification shall be paid by Tenant. In addition, Tenant
shall, at Tenant's expense, perform all maintenance on any supplementary air
conditioning units installed in accordance with this Section 8.01(a) unless, in
the exercise of its right hereby expressly reserved, Landlord elects to perform
part or all of such maintenance at Tenant's expense. Tenant agrees to keep and
cause to be kept closed all windows in the Premises and at all times to
cooperate fully with Landlord in the operation of said system and to abide by
all reasonable regulations and requirements which Landlord may prescribe to
permit the proper functioning and protection of said heating, ventilation and
air conditioning systems. For purposes of this Lease, "Holidays" means those
federal or state holidays or such other days which Landlord, in its reasonable
discretion, designates to Tenant as "Holidays" for purposes of this Lease, such
designation being subject to change from time to time;
(b) Washroom facilities, not within the Premises (unless Tenant
leases an entire floor), for use by Tenant in common with other tenants in the
Building;
(c) Janitor service in and about the Premises as customarily
provided in similar office buildings in the submarket area that the Building is
located within;
(d) Passenger elevator service in common with other tenants and
occupants, daily from 8:00 A.M. to 6:00 P.M., Saturdays, Sundays and Holidays
excepted. Such normal passenger elevator service, if furnished at other times,
shall be optional with Landlord and shall never be deemed a continuing
obligation. Landlord, however, shall provide limited passenger service daily at
all times such normal passenger service is not furnished. Landlord shall
provide limited freight elevator service at such times as Landlord shall
determine; and
(e) Replacement of fluorescent lamps, bulbs, ballasts, and starters
in the building with standard ceiling mounted fixtures installed by Landlord
and incandescent bulb replacements in all public areas.
8.02 GOVERNMENT RESTRICTIONS. Tenant agrees that compliance with any
mandatory or voluntary energy conservation measures or other legal requirements
instituted by any appropriate governmental authority shall not be considered a
violation of any terms of this Lease and shall not entitle Tenant to terminate
this Lease or require abatement or reduction of Rent hereunder.
8.03 ELECTRICAL CONSUMPTION. Landlord shall provide or cause to be provided
to the Premises all electrical current required by Tenant in the normal use and
occupancy of the Premises. Without Landlord's prior written consent, Tenant
shall not install any equipment which would result in Tenant's connected load
exceeding, either in voltage, rated capacity, or overall load, that which
Landlord deems to be standard for the Building ("Building Standard Load") or
which would generate sufficient heat to affect the temperature otherwise
maintained in the Premises by the normal operation of the Building air
conditioning equipment serving the Premises. The obligation of Landlord to
provide or cause to be provided electrical service shall be subject to the
rules and regulations of the supplier of such electricity and of any municipal
or other governmental authority regulating the business of providing electrical
utility service. Except to the extent of Landlord's gross negligence, Landlord
shall not be liable or responsible to Tenant for any loss, damage or expense
which Tenant may sustain or incur if either the quantity or character of the
electric service is changed or is no longer available or no longer suitable for
Tenant's requirements. At any time when Landlord is furnishing electric current
to the Premises, Landlord may, at its option, upon not less than thirty (30)
days prior written notice to Tenant, discontinue the furnishing of such
electric current. If Landlord gives such notice of discontinuance, Landlord
shall make all reasonably necessary arrangements with the public utilities
supplying the electric current with respect to connecting electric current to
the Premises, but tenant shall contract directly with such public utility with
respect to supplying such service. Landlord shall have the right to measure
electrical usage in the Premises (1) by installing a submeter, (2) by periodic
determinations by Landlord's engineers or other competent consultants selected
by Landlord, or (3) by any combination of such methods. If Tenant's electrical
usage exceeds Building Standard Load, the cost of purchase and installation of
a submeter in the Premises shall be borne by Tenant. If Tenant's connected load
for electrical design exceeds the Building Standard Load, Tenant shall pay as
Additional Rent a surcharge of a proportionate part of all electrical service
costs which are attributable to the aggregate over-standard electrical
consumption by all tenants in the Building. Such proportion shall be equal to
the product of the aggregate cost of all over-standard electrical consumption
in the Building (as determined by Landlord) times a fraction in which the
numerator is Tenant's electrical design load in excess of the Building Standard
Load and the denominator is the aggregate of the total electrical design load
of all tenants in the Building in excess of the Building Standard Load.
Tenant's proportionate share of such sums shall be due within ten (10) days
after the date of receipt of a statement therefor from Landlord setting forth
the amount of the charges involved and calculating Tenant's proportionate share
thereof. If the electrical current consumed relative to the Premises shall be
separately metered, Tenant shall pay for all such electrical current directly
to the utility company supplying said service. Tenant agrees to purchase from
Landlord all replacement lamps, bulbs, ballasts and starters used in the
Premises and to pay Landlord a standard charge for furnishing and replacing
such lamps, bulbs, ballasts and starters. At no time shall Tenant permit the
use of electricity consumed in the Premises to exceed the capacity of feeders
to the Building or the risers or wiring installation. Landlord does not warrant
or represent that such capacity shall be adequate for Tenant's purposes.
8.04 ADDITIONAL SERVICES. Landlord shall in no event be obligated to furnish
any services or utilities, other than those specified in Article 8. Tenant
acknowledges that it shall be responsible for making arrangements for and shall
pay the cost of the installation, repair and maintenance of its own telephone
system. If Landlord elects to furnish services or utilities requested by Tenant
in addition to those specified herein (including utility services at times
other than those specified), Tenant shall pay to Landlord, Landlord's then
prevailing rates for such services and utilities within ten (10) days after
receipt of Landlord's invoices therefor. If Tenant shall fail to make any such
payment, Landlord may, without notice to Tenant, and in addition to Landlord's
other remedies under this Lease, discontinue any or all of the additional
services. Failure by Landlord to any extent to furnish any of the
aforementioned services to Tenant, the Premises or the Building, or any
cessation
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Landlord to any extent to furnish any of the aforementioned services to Tenant,
the Premises or the Building, or any cessation (including any partial
curtailment) thereof, shall not render Landlord liable in any respect for
damages to person, property or otherwise, nor to be construed as an eviction of
Tenant, nor work an abatement of Rent, nor relieve Tenant from fulfillment of
any covenant or agreement hereof. Should any of the equipment or machinery
utilized in supplying the services listed herein break down, or for any cause
cease to function properly, such failure shall not work as an abatement of
Rent, nor be construed as an eviction of Tenant, nor relieve Tenant from
fulfilling any covenant or agreement contained herein, nor render Landlord
liable for damages; however, Landlord shall use reasonable diligence to repair
same promptly. Notwithstanding the foregoing, if Tenant is prevented from
making reasonable use of the Premises for more than fifteen (15) consecutive
days, as its exclusive remedy therefor, Tenant shall be entitled to a
reasonable abatement of rent for each consecutive day (after such fifteen (15)
day period) that Tenant is so prevented from making reasonable use of the
Premises. In addition, and notwithstanding the foregoing, if Tenant is unable
to operate its business in the Premises as a result of such unavailability of
such services, and such unavailability is due to Landlord's gross negligence or
willful misconduct, then, if such unavailability continues for five (5)
consecutive business days, Tenant shall have the right, as its sole and
exclusive remedy, to a reasonable abatement of rent for each consecutive day
(after such five (5) day period) that Tenant is unable to operate its business
in the Premises.
8.05 MONUMENT SIGNAGE. The monument sign currently located on Blackburn
Driveway is encumbered by the rights of another tenant. Landlord also may use
such monument sign for purposes of identifying the Building generally. Tenant
shall be entitled to the non-exclusive use of the Tenant Portion of such sign
as identified on Exhibit 5, provided all uses thereof, including the signage
placed thereon, are approved by Landlord in all respects in Landlord's
reasonable discretion. In addition, to the extent of the portion of the sign
used by Tenant (but in no event less than 50%), Tenant shall pay its
proportionate share (but in no event less than 50%) of all costs in connection
therewith, provided Landlord will pay the costs of causing the monument sign to
comply with applicable law, Tenant acknowledging that such sign or the use
thereof may not currently comply with such laws and may have to be moved or
reconfigured to so comply. Landlord shall have the right to add the names of
other tenants and signage identifying the Building generally to such monument
sign before or after Tenant uses such monument sign and/or causes such monument
sign to comply with applicable laws, provided Tenant shall be entitled to use
at least 50% of the Tenant Portion of the signage surface area. Landlord shall
have the right to use the Landlord Portion of such sign, as identified on
Exhibit 5, to identify the Building generally. Landlord shall have the right to
determine whether the names of Tenant and other tenants are side by side
(horizontal), on top of each other (vertical), and the order of names.
ARTICLE 9.
LEASEHOLD IMPROVEMENTS; ALTERATIONS
9.01 ALTERATIONS. Except as may be otherwise provided in this Lease as to
initial Tenant improvements in accordance with Exhibit 4. Tenant shall not,
without Landlord's prior written consent, permit any alteration, improvement,
addition or installation in or to the Premises (all of which is collectively
referred to as "Work"), including installation of telephone, computer or
internal sound or paging systems or other similar systems, or the performance
of any decorating, painting and other similar work in the Premises. In the
event Landlord consents to any Work, Landlord reserves the right to cause such
Work to be performed by contractors and subcontractors designated by Landlord.
Tenant shall pay the cost of preparation of the plans for the Work, all permit
fees and the fees of said contractors and subcontractors. Except with respect
to Work performed by Landlord's designated contractor as general contractor,
Tenant shall pay to Landlord's then applicable construction supervision fee.
Before commencement of any Work or delivery of any materials into the Premises
or the Building, Tenant shall furnish to Landlord, for its prior written
approval, which approval shall not be unreasonably withheld or delayed,
architectural plans and specifications certified by a licensed architect or
engineer reasonably acceptable to Landlord, and such other documentation as
Landlord shall reasonably request. Tenant agrees to hold Landlord, its
beneficiaries and their respective agents, partners, officers, servants and
employees forever harmless against all claims and liabilities of every kind,
nature and description which may arise out of or in any way be connected with
any such Work, except to the extent caused by Landlord's gross negligence. At
the request of Landlord, Tenant will deliver a written indemnity against claims
or damages to tenants or occupants of any other premises affected by such Work.
Tenant shall pay Landlord's reasonable costs of reviewing plans and materials
submitted to Landlord for approval. Tenant shall pay the cost of all such Work
and the cost of decorating and altering the Premises and the Building
occasioned by any such Work. Landlord shall have the right to require Tenant to
deliver to Landlord cash or other security in an amount and form acceptable to
Landlord be held in escrow by Landlord to assure prompt payment for the cost of
any such Work and to require Tenant's contractors to evidence workman's
compensation, general liability and other insurance coverage, as reasonably
required by Landlord. All alterations, improvements, additions and installations
to or in the Premises shall become part of the Premises at the time of
installation.
9.02 TENANT'S WORK. In the event that Landlord permits Tenant to hire its
own contractors for the performance of any Work, then in addition to the
provisions of Section 9.01, the following shall apply: (i) prior to the
commencement of the Work or the delivery of any materials to the Building,
Tenant shall submit to Landlord for Landlord's approval, the names and
addresses of all contractors, contracts, necessary permits and licenses,
certificates of insurance (including, without limitation, Workmen's
Compensation, comprehensive general liability and adequacy of design insurance)
and instruments of indemnification and waivers of lien against any and all
claims, costs, expenses, damages and liabilities which may arise in connection
with the Work, all in such form and amount as shall be satisfactory to
Landlord; (ii) all such Work shall be done only by contractors or mechanics
approved by Landlord and at such time and in such manner as Landlord may from
time to time designate; (iii) upon completion of any Work, Tenant shall furnish
Landlord with as-built plans, contractors' affidavits, full and final waivers
of lien, receipted bills covering all labor and materials expended and used in
connection with such Work, and (iv) all such Work shall comply with all
insurance requirements, all laws, ordinances, rules and regulations
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good and workmanlike manner and with the use of new, quality grade materials.
9.03 NO MECHANIC'S LIENS. Without limitation of the provisions of Section
9.01, Tenant agrees not to suffer or permit any lien on any mechanic or
materialman to be placed or filed against the Premises or the Building. In case
any such lien shall be filed, Tenant shall immediately satisfy and release such
lien of record. If Tenant shall fail to have such lien satisfied, released of
record, or bonded around within thirty (30) days after its filing, Landlord may,
on behalf of Tenant, without being responsible for making any investigation as
to the validity of such lien and without limiting or affecting any other
remedies Landlord may have, pay the same and Tenant shall pay Landlord on demand
the amount so paid by Landlord.
9.04 REMOVAL OF TENANT'S PROPERTY. Subject to the rules and regulations,
Tenant, at any time Tenant is not in default hereunder, may remove from the
Premises its movable trade fixtures and personal property. Tenant shall
repair any damage to the Premises caused by such removal, failing which Landlord
may remove the same and repair the Premises and Tenant shall pay the cost
thereof to Landlord on demand.
9.05 INITIAL TENANT IMPROVEMENT. Initial Tenant improvements shall be made
to the Premises in accordance with Exhibit 4.
9.06 REFURBISHMENT ALLOWANCE. On December 1, 2000, Landlord shall pay to
Tenant a refurbishment allowance not to exceed $2.00 per rentable square foot
in the Premises of $59,500.00, for use by Tenant to refurbish the Premises,
upon satisfaction of the same conditions as set forth in Section 9.05.
ARTICLE 10.
CONDITION OF PREMISES
10.01 PREMISES CONDITION. No agreements or representations, except such as
are expressly contained herein and in the Work Letter attached hereto, if any,
have been made to Tenant respecting the condition of the Premises. By taking
possession, except as provided in the Work Letter, Tenant conclusively waives
all claims relating to the condition of the Premises and accepts the Premises
as being free from defects and in good, clean and sanitary order, condition and
repair, and agrees to keep the Premises in such condition, ordinary wear and
tear excepted. Landlord shall be responsible to cause restrooms and elevator
lobbies on each floor of the Premises to comply with applicable ADA standards
for handicapped persons, provided Tenant does not make alterations that require
changes to the elevator lobbies or restrooms, in which case Tenant shall then be
responsible for causing compliance.
10.02 CARE OF THE PREMISES. Subject to Article 12, and ordinary wear and tear
excepted, Tenant shall, at its own expense, keep the Premises clean and safe and
in as good repair and condition as when all of the work described in the Work
Letter was completed (or as to subsequent Work, as and when such Work was
completed) and shall promptly and adequately repair all damage to the Premises
and the Building caused by Tenant or any of its employees, agents, guests or
invitees, including replacing or repairing all damaged or broken glass, fixtures
and appurtenances resulting from any such damage, under the supervision and with
the approval of Landlord. If Tenant does not promptly and adequately make such
repairs or replacements, Landlord may, but need not, make such repairs and
replacements and Tenant shall pay Landlord the cost thereof on demand. Tenant,
at its sole expense, shall comply with all laws, orders and regulations of
federal, state, county and municipal authorities and with any directive of any
public officer or officers pursuant to law which shall impose any violation,
order or duty upon Landlord or Tenant with respect to the Premises or the use,
condition, or occupation thereof, including all handicapped access laws. Tenant
shall not do or permit to be done any act or thing in, on or about the Premises
or store anything therein which (i) will in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or which may
hereafter be enacted or promulgated, (ii) is not appropriate to the permitted
use of the Premises, or (iii) will in any way increase the existing rate of, or
adversely affect, or cause a cancellation of, any fire or other insurance
policies covering the Building or any of its contents.
10.03 CARE OF THE BUILDING. Landlord, subject to Articles 12 and 14, shall be
obligated only to maintain and make necessary repairs to the structural
elements of the Building, the public corridors, public washrooms and lobby of
the Building, the exterior windows of the Building, and subject to the
provisions of Articles 8, 12 and 14, the electrical, plumbing, heating,
ventilation and air conditioning systems of the Building.
ARTICLE 11.
SURRENDER OF THE PREMISES
11.01 SURRENDER. At the termination of this Lease, by lapse of time or
otherwise, Tenant shall surrender possession of the Premises to Landlord and
deliver all keys to the Premises and all locks therein to Landlord and make
known to the Landlord the combination of all combination locks in the Premises,
and shall, subject to Articles 12 and 13, return the Premises and all equipment
and fixtures of the Landlord therein to Landlord in broom clean condition and
in as good condition as when Tenant originally took possession, ordinary wear
and tear excepted, failing which Landlord may restore the Premises and such
equipment and fixtures to such condition and the Tenant shall pay the cost
thereof to Landlord on demand.
11.02 REMOVAL OF FIXTURES. Upon termination of this Lease or of Tenant's right
to possession of the Premises, by lapse of time or otherwise, all installations,
additions, partitions, hardware, light fixtures, floor coverings, non-trade
fixtures and improvements, temporary or permanent, whether placed there by
Tenant or Landlord, shall be Landlord's property and shall remain upon the
Premises, all without compensation, allowance or credit to Tenant.
11.03 SURVIVAL. All obligations of Tenant under this Article II shall
survive the expiration or earlier termination of this
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<PAGE> 12
Lease.
ARTICLE 12.
DAMAGE OR DESTRUCTION
12.01 DAMAGE BY FIRE OR OTHER CASUALTY. If, during the Term, more than
twenty-five percent (25%) of either of the Premises or the Building is damaged
or made untenantable by fire or other casualty, cause, condition or thing
whatsoever, Landlord may, by written notice to Tenant given within sixty (60)
days after such damage, terminate this Lease. Such termination shall become
effective as of the date of such damage. Unless this Lease is terminated, if the
Premises are made partially or wholly untenantable as aforesaid, Landlord,
subject to the provisions of this Article 12 shall restore the same at
Landlord's expense with reasonable promptness. If, as a result of a fire or
other casualty, the Premises are made partially or wholly untenantable, Tenant
may terminate this Lease if (A) Landlord fails to commence such restoration
within sixty (60) days after Landlord is able to take possession of the damaged
space in the Premises and fails to reasonably diligently complete the
restoration of the Premises, by giving notice thereof to Landlord (i) not later
than seventy (70) days after Landlord is able to take possession if Landlord has
not theretofore commenced such restoration or (ii) prior to the substantial
completion of such restoration, if Landlord commences such restoration within
said sixty (60) day period, but fails to complete the restoration of the
Premises within one hundred eighty (180) days from the date of casualty, and
such termination shall be effective as of the fifth (5) day after receipt of
said notice by Landlord, or (B) the restoration will take more than one hundred
eighty (180) days to complete by giving notice thereof to Landlord prior to
Landlord's commencement of restoration and within twenty (20) days after
Landlord notifies Tenant in writing of the estimated time necessary to complete
such restoration determined by an architect selected by Landlord, provided
Tenant shall have the right to select an architect to make such determination if
Landlord has not done so within thirty (30) days after such casualty, and
Tenant's termination right, if applicable shall be exercised within twenty (20)
days after Tenant's receipt of such architect's estimate. In the event of
termination of this Lease, Monthly Base Rent and Adjustments shall be prorated
on a per diem basis and paid only the effective date of such termination. If all
of the Premises are untenantable but this Lease is not terminated, all Monthly
Base Rent and Adjustments shall abate from the date of the fire or other
casualty until the Premises are ready for occupancy and reasonably accessible to
Tenant; if part of the Premises is untenantable, Monthly Base Rent and
Adjustments shall be prorated on a per diem basis and apportioned in accordance
with the part of the Premises which is usable by Tenant until the damaged part
is ready for Tenant's occupancy. In all cases, with respect to Landlord's
obligations under this Article 12, such obligations shall be adjusted and all
time periods extended by the period on account of delay caused by adjustment or
insurance loss, strikes, governmental approvals, labor difficulties or any cause
beyond Landlord's reasonable control. Notwithstanding anything to the contrary
in this Section 12.01, Tenant shall not have the right to terminate this Lease
and Rent shall in no event abate if such fire or other casualty, cause,
condition or thing was caused by the act or neglect of Tenant, its employees or
agents.
12.02 RENT CONCESSION AND CASUALTY. This following provision shall apply if,
as an economic concession set forth in the Rider hereto, Landlord has granted
Tenant a credit against Monthly Base Rent, Expense Adjustment, or Electrical
Cost, or has granted Tenant an abatement period with respect to Monthly Base
Rent, Expense Adjustment, or Electrical Cost (such credits or the amount of
Monthly Base Rent, Expense Adjustment, or Electrical Cost, which would have
accrued but for such abatement period being hereinafter referred to as "Rent
Concession"): In the event that, pursuant to any provision of this Lease,
Monthly Base Rent, Expense Adjustment, or Electrical Cost abate, in whole or in
part, by reason of the occurrence of a fire or other casualty ("Casualty
Abatement") and this Lease is not terminated, then to the extent that the
period of any Casualty Abatement coincides with any period that a Rent
Concession would otherwise have been applicable, the Rent Concession or such
portion thereof as would otherwise have been applicable if the Casualty
Abatement had not occurred ("Rent Concession Balance") will be deferred until
the Casualty Abatement period expires and the Rent Concession Balance will be
effective and applied at the rate set forth in the Rider during the period
immediately following the expiration of the Casualty Abatement. Notwithstanding
the foregoing, (a) the Rent Concession Balance will not be applicable to the
extent it exceeds the amount of rent loss insurance proceeds recovered by
Landlord with respect to the Casualty Abatement, (b) Tenant will not be
entitled to any cash refund or credit against any other amounts due Landlord by
reason of the foregoing provision and (c) the Term will not be extended by
reason of the applicability of the foregoing provision.
12.03 RESTORATION. If Landlord repairs and restores the Premises as provided
in Section 12.01 above, Landlord shall repair or restore any decorations
(excluding personal property), alterations or improvements to the Premises
installed or approved by Landlord; provided, and to the extent, Landlord's
and/or Tenant's casualty insurance proceeds, as hereinafter provided under
Article 15.02, applicable to such decorations, alterations and improvements are
received by or provided to Landlord for such purposes. Tenant shall be
responsible for repair and replacement of trade fixtures, furnishings,
equipment, personalty property or leasehold improvements belonging to Tenant.
Notwithstanding any provision of this Article 12 to the contrary, Landlord shall
not be obligated to make any restorations or repairs to the Premises, the cost
of which would exceed the proceeds of insurance received by Landlord with
respect thereto.
ARTICLE 13.
EMINENT DOMAIN
13.01 CONDEMNATION OF THE PREMISES. In the event that the whole or a
substantial part of the Building or the Premises shall be condemned or taken in
any manner for any public or quasi-public use (or sold under threat of such
taking), and as a result thereof, the remainder of the Premises cannot be used
for the same purpose as prior to such taking, the Lease shall terminate as of
the date possession is taken.
13.02 PARTIAL CONDEMNATION OF THE PREMISES. If less than a substantial part
of the Premises shall be so condemned or taken (or sold under threat thereof)
and after such taking the Premises can be used for the same purposes as prior
thereto, the Lease shall cease only as to the part so taken as of the date
possession shall be taken by such authority, and Tenant shall
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pay full Rent up to that date (with appropriate refund by Landlord of such Rent
attributable to the part so taken as may have been paid in advance for any
period subsequent to the date possession is taken) and thereafter Monthly Base
Rent, Expense Adjustment, and Electrical Cost shall be equitably adjusted to
reflect the reduction in the Premises by reason of such taking. Landlord shall,
at its expense, make all necessary repairs or alterations to the Building so as
to constitute the remaining Premises a complete architectural unit, provided
that Landlord shall not be obligated to undertake any such repairs or
alterations if the cost thereof exceeds the award actually received by Landlord
resulting from such taking.
13.03 BUILDING CONDEMNATION. If part of the Building shall be so condemned
or taken (or sold under threat thereof), or if any adjacent property or street
shall be condemned or improved by a public or quasi-public authority in such a
manner as to alter the use of any part of the Premises or the Building and, in
the opinion of Landlord, the Building or any part thereof should be altered,
demolished or restored in such a way as to materially alter the Premises,
Landlord may terminate this Lease by notifying Tenant of such termination
within sixty (60) days following the taking of possession by such public or
quasi-public authority, and this Lease shall expire on the date of the taking,
as fully and completely as if such date were the date hereinbefore set forth as
the expiration of the Term, and the Monthly Base Rent and Adjustments hereunder
shall be apportioned as of such date.
13.04 AWARD. Landlord shall be entitled to receive the entire award,
including the damages for the property taken and damages to the remainder, with
respect to any condemnation proceedings affecting the Building. Tenant agrees
not to make any claim against Landlord or the condemning authority for any
portion of such award or compensation, whether attributable to the value of any
unexpired portion of the Term, the loss of profits, goodwill, leasehold
improvements or otherwise, Tenant irrevocably assigning any and all such claims
to Landlord.
ARTICLE 14.
WAIVER OF CERTAIN CLAIMS
14.01 RELEASE. To the extent not expressly prohibited by law, Tenant
releases Landlord, its mortgage, stockholders, agents, partners, officers,
servants and employees, and their respective stockholders, agents, partners,
officers, servants and employees (collectively, "Related Parties"), from and
waives all claims for damages to person or property sustained by Tenant or by
any occupant of the Premises, the Building, or by any other person, resulting
directly or indirectly from fire or other casualty, any existing or future
condition, defect, matter or thing in the Premises, the Building, or any
portions thereof, or from any equipment or appurtenance therein, or from any
accident in or about the Building, or from any act of neglect of any tenant or
other occupant of the Building or of any other person, other than Landlord or
its agents. The foregoing provision shall not limit or reduce Landlord's
maintenance and repair obligations contained herein.
14.02 INDEMNIFICATION. Except as provided otherwise in this Lease, Tenant
agrees to hold harmless and indemnify Landlord and Landlord's Related Parties
against claims and liabilities, including reasonable attorneys' fees, from any
damage to person or property caused by the negligence or intentional torts of
Tenant or its agents. Landlord may, at its option, repair such damage or
replace such loss, and Tenant shall upon demand by Landlord reimburse Landlord
for all costs of such repairs, replacement and damages in excess of amounts, if
any, paid to Landlord under insurance covering such damages. In the event any
action or proceeding is brought against Landlord or Landlord's Related Parties
by reason of any such claims, then, upon notice from Landlord, Tenant covenants
to defend such action or proceeding by counsel reasonably satisfactory to
Landlord. In addition, except as provided otherwise in this Lease, Landlord
agrees to hold harmless and indemnify Tenant against claims and liabilities,
including reasonable attorneys' fees, from any damage to person or property
caused by the negligence or intentional torts of Landlord or its agents.
14.03 TENANT'S FAULT. If any damage to the Building or any equipment or
appurtenance therein, whether belonging to Landlord or to other tenants in the
Building, results from any act or neglect of Tenant, its agents, employees,
guests or invitees, Tenant shall be liable therefor and Landlord may, at
Landlord's option repair such damage, and Tenant shall, upon demand by
Landlord, reimburse Landlord the total cost of such repairs and damages to the
Building. If Landlord elects not to repair such damage, Tenant shall promptly
repair such damages at its own cost and in accordance with the provisions of
Sections 9.02 and 9.03 as if such repair constituted Work under such Sections.
If Tenant occupies space in which there is exterior glass, then Tenant shall be
responsible for the damage, breakage or repair of such glass, except to the
extent such loss or damage is recoverable under Landlord's insurance, if any.
ARTICLE 15.
INSURANCE; WAIVER OF SUBROGATION
15.01 TENANT'S INSURANCE. Tenant shall procure and maintain at its own cost
policies of comprehensive general public liability and property damage
insurance with contractual liability coverage for the agreements of indemnity
provided for under this Lease and a broad form general liability endorsement to
afford protection with such limits as may be reasonably requested by Landlord
from time to time (which as of the date hereof shall be not less than
$3,000,000 under a combined single limit of coverage) insuring Landlord and
Landlord's Related Parties from all claims, demands or actions for injury to or
death of any person or persons and for damage to property made by, or on behalf
of, any person or persons, firm or corporation, arising from, related to or
connected with the Premises. The insurance shall be issued by companies and be
in form and substance satisfactory to Landlord and any mortgagee of the
Building and shall name Landlord and Landlord's Managing Agent (and, if
requested by Landlord or any mortgagee, include any mortgagee) and their
respective agents and employees as additional insureds. The aforesaid insurance
policies shall provide that they shall not be subject to cancellation except
after at least thirty (30) days' prior written notice to Landlord and all such
mortgagees (unless such cancellation is due to non-payment of premiums, in which
event ten (10) days' prior written notice shall be required). The original
insurance policies (or certificates thereof satisfactory to Landlord), together
with satisfactory evidence of payment of the premium thereof, shall be
deposited with Landlord prior to the commencement of the Term and renewals
thereof not less
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<PAGE> 14
than fifteen (15) days prior to the end of the term of each such coverage.
15.02 CASUALTY INSURANCE. Tenant shall carry fire and extended coverage
insurance of the type typically referred to as "all risk" insurance,
including water damage, insuring its interest in the tenant improvements in the
Premises (to the extent not covered by Landlord's property insurance) and its
interest in all its personal property and trade fixtures located on or within
the Building, including, without limitation, its office furniture, equipment
and supplies.
15.03 WAIVER OF SUBROGATION. NOTWITHSTANDING ANY OTHER PROVISION OF THIS
LEASE TO THE CONTRARY, LANDLORD AND TENANT EACH HEREBY WAIVE ALL RIGHTS OF
ACTION AGAINST THE OTHER FOR LOSS OR DAMAGE TO THE PREMISES, OR THE BUILDING
AND PROPERTY OF LANDLORD AND TENANT IN THE BUILDING, WHICH LOSS OR DAMAGE IS
INSURED OR IS REQUIRED PURSUANT TO THIS LEASE TO BE INSURED BY VALID AND
COLLECTIBLE INSURANCE POLICIES TO THE EXTENT OF THE PROCEEDS COLLECTED OR
COLLECTIBLE UNDER SUCH INSURANCE POLICIES, SUBJECT TO THE CONDITION THAT THIS
WAIVER SHALL BE EFFECTIVE ONLY WHEN THE WAIVER IS PERMITTED BY SUCH INSURANCE
POLICIES OR WHEN, BY THE USE OF GOOD FAITH EFFORT, SUCH WAIVER COULD HAVE BEEN
PERMITTED IN THE APPLICABLE INSURANCE POLICIES, EVEN IF CAUSED BY THE
NEGLIGENCE OF SUCH OTHER PARTY. THE POLICIES OF INSURANCE REQUIRED TO BE
MAINTAINED BY TENANT UNDER THE TERMS OF THIS LEASE SHALL CONTAIN WAIVER OF
SUBROGATION CLAUSES IN FORM AND CONTENT SATISFACTORY TO LANDLORD.
15.04 INCREASED COSTS. Tenant shall not conduct or permit to be conducted by
its employees, agents guests or invitees any activity, or place any equipment
in or about the Premises or the Building that will in any way increase the
cost of fire insurance or other Landlord insurance on the Building. If any
increase in the cost of fire insurance or other insurance is stated by any
insurance company or by the applicable Insurance Rating Bureau, if any, to be
due to any activity or equipment of Tenant in or about the Premises or the
Building, such statement shall be conclusive evidence that the increase in such
cost is due to such activity or equipment and, as a result thereof, Tenant
shall be liable for the amount of such increase. Tenant shall reimburse
Landlord for such amount upon written demand from Landlord and any such sum
shall be considered additional Rent payable hereunder. Tenant, at its sole
expense, shall comply with any and all requirements of any insurance
organization or company necessary for the maintenance of reasonable fire and
public liability insurance covering the Premises and the Building.
ARTICLE 16.
LANDLORD'S RIGHT OF ACCESS
16.01 ENTRY INTO PREMISES. Landlord and its contractors and representatives
shall have the right to enter the Premises at all reasonable times to perform
janitorial, cleaning, security, and other services and, after reasonable verbal
notice (except in the case of emergencies), to inspect the same, to make
repairs, alterations and improvements, to maintain the Premises and the
Building, specifically including, but without limiting the generality of the
foregoing, to make repairs, additions or alterations within the Premises to
mechanical, electrical and other facilities serving other premises in the
Building, to post such reasonable notices as Landlord may desire to protect its
rights, to exhibit the Premises to mortgagees and purchasers, and, during the
one hundred eighty (180) days prior to the expiration of the term, to exhibit
the Premises to prospective tenants. In the event the Premises are vacant,
Landlord may place upon the doors or in the windows of the Premises any usual or
ordinary ""To Let,'' "To Lease," or "For Rent" signs. To the extent that
Tenant's conduct of its business from the Premises is not materially interfered
with, Tenant shall permit Landlord to erect, use, maintain and repair pipes,
cables, conduit, plumbing, vents and wires, in, to and through the Premises to
the extent Landlord may now or hereafter deem necessary or appropriate for the
proper operation, maintenance and repair of the Building and any portion of the
Premises.
16.02 LANDLORD'S REPAIRS. Landlord shall also have the right to take all
material into the Premises that may be required for the purposes set forth in
the foregoing Section 16.01 without the same constituting a constructive
eviction of Tenant, in whole or in part, and, except as otherwise provided in
this Lease, Rent shall not abate (except as provided in Article 12) while said
repairs, alterations, improvements or additions are being made, by reason of
loss or interruption of business of Tenant, or otherwise. If Tenant shall not
be personally present to open and permit entry into the Premises, at any time,
when for any reason entry therein shall be reasonably necessary under the
circumstances, such as in an emergency or to make repairs, Landlord or
Landlord's agents may enter the Premises by a master key, or may forcibly enter
the same, without rendering Landlord or such agents liable therefor (if during
such entry Landlord or Landlord's agents shall accord reasonable care to
Tenant's property), and without in any manner affecting the obligations and
covenants of this Lease.
16.03 MINIMIZE INTERFERENCE. In exercising its rights under this Article 16,
Landlord will use reasonable efforts in minimize any interference with Tenant's
use or occupancy of the Premises, provided that Landlord will not be obligated
to provide overtime labor or perform work after regular Building hours.
ARTICLE 17.
RIGHTS RESERVED TO LANDLORD
Landlord shall have the following rights exercisable without notice and
without liability to Tenant for damage or injury to property, person or
business (all claim's for damage being hereby waived and released by Tenant)
and without effecting an eviction or disturbance of Tenant's use or
possession giving rise to any claim for set-offs or abatement of Rent:
(a) To change the name or street address of the Building (but not
the suite number of the Premises);
(b) To install and maintain signs on the exterior and interior of
the Building (without adversely affecting
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Tenant's signage rights granted in this Lease);
(c) To designate all sources furnishing sign painting and lettering,
towels, coffee cart service, vending machines or toilet supplies used or
consumed on the Premises and the Building;
(d) To have pass keys to the Premises;
(e) To grant to anyone the exclusive right to conduct any business or
render any service in the Building, provided such exclusive right
shall not operate, to exclude Tenant from the use expressly permitted
by this Lease;
(f) To make repairs, additions or alterations to the Building which
may change, eliminate or remove common areas, parking areas, if any, or
the method of ingress to or egress from the Building and such areas, to
convert common areas into leasable areas, or otherwise alter, repair or
reconstruct the common areas or change the use thereof, to change the
arrangement or location of entrances or passageways, doors and doorways,
corridors, elevators, stairs, toilets or other public parts of the
Building, and to close entrances, doors, corridors, elevators, plaza or
other facilities, and to perform any acts related to the safety,
protection, preservation, reletting, sale or improvement of the Premises
or the Building;
(g) To have access to all mail chutes or boxes according to the rules
of the United States Postal Service;
(h) To require all persons entering or leaving the Building during
such hours as Landlord may from time to time reasonably determine to
identify themselves to security personnel by registration or otherwise,
and to establish their right to enter or leave and to exclude or expel
any peddler, solicitor or beggar at any time from the Premises or the
Building;
(i) To close the Building at 7:00 p.m. on weekdays, 1:00 p.m. on
Saturdays, and all day on Sundays and Holidays, or at such other
reasonable times as Landlord may determine, subject, however, to
Tenant's right to admittance under such regulations as shall be
prescribed from time to time by Landlord in its sole discretion.
ARTICLE 18.
ABANDONMENT
Tenant shall not abandon the Premises at any time during the Term. Any
re-entry by Landlord following abandonment by Tenant shall not, unless Landlord
so elects in a written notice to Tenant, constitute or be deemed to constitute
acceptance by Landlord of a surrender of this Lease, but rather, upon such
abandonment, Tenant's right to possession of the Premises shall cease, but
Tenant shall remain liable for all of its obligations under this Lease. Without
limitation of the foregoing, upon any such abandonment, Landlord shall have the
remedies provided for in Article 21 below. If Tenant shall abandon or surrender
the Premises or be dispossessed by process of law or otherwise during the Term
or at termination of the Term, any personal property left on the Premises shall
be deemed to be abandoned at the option of Landlord, and title thereto shall
pass to Landlord under this Lease as a bill of sale. For purposes of this Lease,
and at the option of Landlord, the Premises shall be deemed vacated or abandoned
if Tenant, or an agent or employee of Tenant, shall not have conducted Tenant's
ordinary business upon the Premises during any period of fifteen (15)
consecutive days or shall have transferred all or substantially all of its
personnel, furniture and fixtures from the Premises without replacement.
ARTICLE 19.
TRANSFER OF LANDLORD'S INTEREST
As used in this Lease, the term "Landlord" means only the current owner
of the fee title to the Building or the leasehold estate under a ground lease
of the Building at the time in question. Each Landlord is obligated to perform
the obligations of Landlord under this Lease only during the time such Landlord
owns such interest or title. Any Landlord who transfers its title or interest
in the Building is relieved of all liabilities for the obligations of Landlord
under this Lease to be performed on or after the date of transfer. Tenant
agrees to look solely to the transferee with respect to all matters in
connection with this Lease.
ARTICLE 20.
TRANSFER OF TENANT'S INTEREST
20.01 LANDLORD'S CONSENT. Tenant shall not sell, assign, encumber, mortgage
or transfer this Lease or any interest therein, sublet or permit the occupancy
or use by others of the Premises or any part thereof, or allow any transfer
hereof of any lien upon Tenant's interest by operation of law or otherwise
(collectively, a "Transfer") without the prior written consent of Landlord in
its sole discretion. Any Transfer which is not in compliance with the
provisions of this Article 20 shall, at the option of Landlord, be void and of
no force or effect. Tenant shall, by written notice in the form specified in
the following sentence, advise Landlord of Tenant's intention on a stated date
(which shall not be less than sixty (60) days after the date of Tenant's
notice) to sublet, assign, mortgage or otherwise Transfer any part or all of
the Premises or its interest therein for the balance or any part of the Term,
and, in such event, Landlord shall have the right, to be exercised by giving
written notice to Tenant within thirty (30) days after receipt of Tenant's
notice, to recapture the space described in Tenant's notice and such recapture
notice shall, if given, cancel and terminate this Lease with respect to the
space therein described as of the date stated in Tenant's notice. Tenant's
notice shall state the name and address of the proposed subtenant, assignee,
pledgee, mortgage or transferee, and a true and complete copy of the proposed
sublease, assignment, pledge, mortgage or other conveyance and all related
documentation, executed by both parties, shall be delivered to Landlord with
said notice. If Tenant's notice shall cover all of the space hereby demised,
and Landlord shall elect to give the aforesaid recapture notice
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with respect thereto, then the Term shall expire and end on the date stated in
Tenant's notice as fully and completely as if that date had been herein
definitely fixed for the expiration of the Term. If, however, this Lease is
terminated pursuant to the foregoing with respect to less than the entire
Premises, the Monthly Base Rent, Expense Adjustment, and Electrical Cost then in
effect shall be adjusted on the basis of the number of rentable square feet
retained by Tenant in proportion to the original Area of the Premises, and this
Lease as so amended shall continue thereafter in full force and effect. In such
event, Tenant shall pay the cost of erecting demising walls and public corridors
and making other required modifications to physically separate the portion of
the Premises remaining subject to this Lease from the rest of the Premises. If
Landlord, upon receiving Tenant's notice that it intends to sublet or assign any
such space, shall not exercise its right to recapture the space described in
Tenant's notice. Landlord will, as hereinabove provided, determine whether to
approve the Tenant's request to sublet or assign the space covered by its
notice. Notwithstanding the foregoing provisions, Landlord will not unreasonably
withhold such consent to an assignment or sublease if the following conditions
are satisfied:
(a) In the reasonable judgment of Landlord, the subtenant or
assignee (A) is of a character or engaged in a business or proposes to
use the Premises in a manner which is in keeping with the standards of
Landlord for the Building, (B) will not violate the provisions of any
lease or agreement affecting the Building, and (C) does not have an
unfavorable reputation or credit standing;
(b) Either the area of the Premises to be sublet or the remaining
area of the Premises is regular in shape with appropriate means of
ingress or egress suitable for normal renting purposes;
(c) Tenant is not in default under this Lease;
(d) The proposed sublease or assignee is not a person or entity
with whom Landlord is then negotiating to lease space in the Building;
(e) The amount of the aggregate rent to be paid by the proposed
assignee or subtenant is not less than the current prevailing rent for
comparable direct lease space in the Building;
(f) The use of the Premises by such proposed assignee or sublessee
is permitted under this Lease; and
(g) In no event shall the following be considered as suitable
assignees or sublessees under this subsection; any governmental body,
agency or bureau (of the United States, any state, county, municipality
or any subdivision thereof); any foreign government or subdivision
thereof; any health care professional or health care service
organization; schools or similar organizations; employment agencies;
radio; television or other communication stations; restaurants; and
retailers offering retail services from the Premises.
If Landlord consents to such sublet or assignment, such consent shall be
expressly contingent upon Tenant's payment to Landlord, as Rent, the Landlord's
costs and expenses incurred in connection therewith, including, but not limited
to, attorney's fees and Landlord's construction supervision fee, if applicable.
Without limiting the foregoing, in no event shall the following be considered
suitable assignees or sublessees under this Section 20.01: any governmental
body, agency or bureau (of the United States, any state, county, municipality
or any subdivision thereof); any foreign government or subdivision thereof; any
health care professional or health care service organization; schools or
similar organizations; employment agencies; radio, television or other
communication stations; restaurants; and retailers.
20.02 EXCESS RENT. If Tenant individually, or as debtor or debtor in
possession or if a trustee in bankruptcy acting on behalf of Tenant pursuant to
the Bankruptcy Code, 11 U.S.C. 101 et seq., shall sublet or assign the Premises
or any part thereof or assign any interest in this Lease at a rental rate (or
additional consideration) in excess of the then current Monthly Base Rent,
Expense Adjustment, and Electrical Cost per rentable square foot, said excess
Rent (or additional consideration) shall be and become the property of Landlord
and shall be paid to Landlord as it is received by Tenant, less the Tenant's
reasonable brokerage (excluding commissions paid to brokers who are Tenant's
affiliates), legal and other expenses ("Tenant's Costs") incurred in connection
with such assignment or, in the case of a sublease, less the monthly pro rata
share of such Tenant's Costs as determined by dividing such Tenant's Costs by
the number of months in the term of such sublease. If Tenant shall sublet the
Premises or any part thereof, Tenant shall be responsible for all actions and
neglect of the subtenant and its officers, partners, employees, agents, guests
and invitees as if such subtenant and such persons were employees of Tenant.
Nothing in this Section 20.02 shall be construed to relieve Tenant from the
obligation to obtain Landlord's prior written consent to any proposed sublease.
20.03 NO WAIVER. The consent by Landlord to any Transfer shall not be
construed as a waiver or release of Tenant from liability for the performance
of all covenants and obligations to be performed by Tenant under this Lease,
and Tenant shall remain liable therefor, nor shall the collection or acceptance
of Rent from any assignee, subtenant or occupant constitute a waiver or release
of Tenant from any of its obligations or liabilities under this Lease. Any
consent given pursuant to this Article 20 shall not be construed as relieving
Tenant from the obligation of obtaining Landlord's prior written consent to any
subsequent assignment or subletting.
20.04 INCLUDED TRANSFERS. If Tenant is a partnership, a withdrawal or
change, whether voluntary, involuntary or by operation of law or in one or more
transactions, of partners owning a controlling interest in Tenant shall be
deemed a voluntary assignment of this Lease and subject to the provisions of
this Article 20. If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale, transfer or
redemption of a controlling interest of the capital stock of Tenant in one or
more transactions, shall be deemed a voluntary assignment of this Lease and
subject to the provisions of this Article 20. However, the preceding sentence
shall not apply to corporations the stock of which is traded through a national
or regional exchange or over-the-counter. Neither this Lease nor any interest
therein nor any estate
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created thereby shall pass by operation of law or otherwise to any trustee,
custodian or receiver in bankruptcy of Tenant or any assignee for the
assignment of the benefit of creditors of Tenant.
ARTICLE 21.
DEFAULT: LANDLORD'S RIGHTS AND REMEDIES
21.01 DEFAULT. The occurrence of any one or more of the following matters
constituted a default ("Default") by Tenant under this Lease:
(a) Failure by Tenant to pay any Rent or any other amounts due and
payable by Tenant under this Lease and such failure continues for five
(5) days after the giving of written notice of such failure by Landlord
to Tenant provided Landlord shall not be obligated to give more than two
(2) notices in any calendar year, and Tenant shall for all subsequent
failures to pay be in default immediately without the requirement of
Landlord to give notice of such failure to Tenant;
(b) Failure by Tenant to observe or perform any of the covenants in
this Lease in respect to assignment and subletting;
(c) Abandonment of the Premises as prohibited in Article 18;
(d) Failure by Tenant to cure forthwith, after notice thereof from
Landlord or another tenant acquiring knowledge thereof, any hazardous
condition that Tenant has created in violation of law or of this Lease;
(e) Failure by Tenant to observe or perform any other covenant,
agreement, condition or provision of this Lease, if such failure shall
continue for twenty (20) days after written notice thereof to Tenant by
Landlord;
(f) The levy upon execution of the attachment by legal process of
the leasehold interest of Tenant, or the filing or creation of a lien in
respect of such leasehold interest;
(g) Tenant or any guarantor of this Lease becomes insolvent or
bankrupt or admits in writing its inability to pay its debts as they
mature, makes an assignment for the benefit of creditors, or applies for
or consents to the appointment of a trustee or receiver for itself or
for all or a part of its property;
(h) Proceedings for the appointment of a trustee, custodian or
receiver of Tenant or any guarantor of this Lease or for all or a part
of Tenant's or such guarantor's property are filed against Tenant or
such guarantor and are not dismissed within thirty (30) days;
(i) Proceedings in bankruptcy, or other proceedings for relief under
any law for the relief of debtors, are instituted by or against Tenant
or any guarantor of this Lease, and, if instituted against Tenant or
such guarantor, are allowed against either or are consented to by either
or are not dismissed within sixty (60) days thereof;
(j) Tenant shall repeatedly default in the timely payment of Rent or
any other charges required to be paid, or shall repeatedly default in
keeping, observing or performing any other covenant, agreement,
condition or provision of this Lease, whether or not Tenant shall timely
cure any such payment or other default. For the Purposes of this
subsection, the occurrence of similar defaults three (3) times during
any twelve (12) month period shall constitute a repeated default.
Any notice periods provided for under this Article 21.01 shall run concurrently
with any statutory notice periods, and any notice given hereunder may be given
simultaneously with or incorporated into any such statutory notice.
21.02 LANDLORD'S REMEDIES. If a Default occurs, Landlord shall have the
following rights and remedies, which shall be distinct, separate and cumulative,
and which may be exercised by Landlord concurrently or consecutively in any
combination and which shall not operate to exclude or deprive Landlord of any
other right or remedy which Landlord may have in law or equity:
(a) Landlord may terminate this Lease by giving to Tenant notice of
the Landlord's intention to do so, in which event the Term shall end,
and all right, title and interest of Tenant hereunder shall expire, on
the date stated in such notice;
(b) Landlord may terminate the right of Tenant to possession of the
Premises without terminating this Lease by giving notice to Tenant that
Tenant's right of possession shall end on the date stated in such
notice, whereupon the right of Tenant to possession of the Premises or
any part thereof shall cease on the date stated in such notice but
Tenant's obligations under this Lease shall continue in full force and
effect; and
(c) Landlord may enforce the provisions of this Lease and may
enforce and protect the rights or Landlord hereunder by a suit or suits
in equity or at law for the specific performance of any covenant or
agreement contained herein, or for the enforcement of any other
appropriate legal or equitable remedy, including injunctive relief and
recovery of all moneys due or to become due from Tenant under any of the
provisions of this Lease.
21.03 SURRENDER OF POSSESSION. If Landlord exercises either of the remedies
provided for in subparagraphs (a) and (b) of Article 21.02, Tenant shall
surrender possession and vacate the Premises immediately and deliver possession
thereof to
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Landlord, and Landlord may then, or at any time thereafter, re-enter and take
complete and peaceful possession of the Premises, full and complete license so
to do being granted to Landlord, and Landlord may remove all property
therefrom, without being deemed in any manner guilty of trespass, eviction or
forcible entry and detainer and without relinquishing Landlord's right to Rent
or any other right given to Landlord hereunder or by operation of law.
21.04 DAMAGES. If Landlord terminates the right of Tenant to possession of
the Premises without terminating this Lease, such termination of possession
shall not release Tenant, in whole or in part, from Tenant's obligation to pay
the Rent hereunder for the full stated Term, and Landlord shall have the right
to the immediate recovery of all such amounts. Alternatively, at Landlord's
option, Landlord shall have the right, from time to time, to recover from
Tenant, and Tenant shall remain liable for, all Monthly Base Rent, Expense
Adjustment, Electrical Cost and any other sums then due under this Lease during
the period from the date of such notice or termination of possession to the end
of the Term. Landlord may file suit from time to time to recover any such sums
and no suit or recovery by Landlord of any such sums or portion thereof shall
be a defense to any subsequent suit brought for any other sums due under this
Lease. Alternatively, if Landlord elects to terminate this Lease, Landlord
shall be entitled to recover from Tenant all Monthly Base Rent, Expense
Adjustment, and Electrical Cost accrued and unpaid for the period up to and
including such termination date, as well as all other additional sums payable
by Tenant hereunder. In addition, Landlord shall be entitled to recover, as
damages for loss of the benefit of its bargain and not as a penalty, the sum of
(x) the unamortized cost to Landlord, computed and determined in accordance
with generally accepted accounting principles, of any tenant improvements
provided by Landlord at its expense, (y) the aggregate sum which at the time of
such termination represents the excess, if any, of the present value of the
aggregate Monthly Base Rent, Expense Adjustment, and Electrical Cost (as
reasonably estimated by Landlord) for the remainder of the Term over the then
present value of the then aggregate fair rental value of the Premises for the
balance of the Term, immediately prior to such termination, such present worth
to be computed in each case on the basis of a six percent (6%) per annum
discount from the respective dates upon which rentals would have been payable
hereunder had the Term not been terminated, and (z) any damages in addition
thereto, including reasonable attorney's fees and court costs, which Landlord
shall have sustained by reason of the breach of any of the covenants of this
Lease other than for the payment of Rent.
21.05 RELETTING. In the event Landlord terminates the right of Tenant to
possession of the Premises without terminating this Lease as aforesaid,
Landlord shall have no obligation to, but may relet the Premises or any part
thereof for the account of Tenant for such rent, for such time (which may be
for a term extending beyond the Term) and upon such terms as Landlord in
Landlord's sole discretion shall determine, and Landlord shall not be required
to accept any tenant offered by Tenant or to observe any instructions given by
Tenant relative to such reletting and may give the leasing of any unleased
space in the Building priority over the reletting of the Premises. Also, in any
such event, Landlord may make repairs, alterations and additions in or to the
Premises and redecorate (using only Building standard materials in
substantially the same configuration as the Premises) the same to the extent
deemed by Landlord necessary or desirable, and, in connection therewith, change
the locks to the Premises, and Tenant shall upon demand pay the cost thereof
together with Landlord's expenses of reletting. Landlord may collect the rents
from any such reletting and apply the same first to the payment of the expenses
of re-entry, redecoration, repair and alterations and the expense of reletting
(including without limitation brokers' commissions and attorneys' fees) and
second to the payment of Rent herein provided to be paid by Tenant. Any excess
of residue shall operate only as an offsetting credit against the amount of
Rent as the same theretofore became or thereafter becomes due and payable
hereunder, but the use of such offsetting credit to reduce the amount of Rent
due Landlord, if any, shall not be deemed to give Tenant any right, title or
interest in or to such excess or residue and any such excess or residue shall
belong solely to Landlord. No such re-entry or repossession, repairs,
alterations and additions, or reletting shall be construed as an eviction or
ouster of Tenant, an election on Landlord's part to terminate this Lease or an
acceptance of a surrender of this Lease, unless a written notice of such
intention be given to Tenant, or shall operate to release Tenant in whole or in
part from any of Tenant's obligations hereunder. Landlord may, at any time and
from time to time, sue and recover judgment for any deficiencies remaining
after the application of the proceeds of any such reletting.
21.06 REMOVAL OF TENANT'S PROPERTY. All property removed from the Premises by
Landlord pursuant to any provisions of this Lease or of law shall be handled,
removed or stored by Landlord at the cost, expense and risk of Tenant, and
Landlord, shall in no event be responsible for the value, preservation or
safekeeping thereof. Tenant shall pay Landlord upon demand for all expenses
incurred by Landlord in such removal and storage.
21.07 COSTS. Tenant shall pay all costs, charges and expenses, including
court costs and reasonable attorneys' fees incurred by Landlord or its
beneficiaries in enforcing Tenant's obligations under this Lease, in the
exercise by Landlord of any of its remedies in the event of a default, in any
litigation, negotiation or transactions in which Tenant causes Landlord,
without Landlord's fault, to become involved or concerned, or in consideration
of any request for approval of or consent to any action by Tenant which is
prohibited by this Lease or which may be done only with Landlord's approval or
consent, whether or not such approval or consent is given.
21.08 CUMULATIVE RIGHTS. All of Landlord's rights and remedies under this
Lease shall be cumulative with and in addition to any and all rights and
remedies which Landlord may have at law or equity. Any specific remedy provided
for in any provision of this Lease shall not preclude the concurrent or
consecutive exercise of a remedy provided for in any other provision hereof.
21.09 LOCK-OUT. If a Default occurs, Landlord is entitled and is hereby
authorized, without any notice to Tenant whatsoever, to enter upon the Premises
by use of a master key, a duplicate key, picking the locks, or other peaceable
means, and to change, alter, and/or modify the door locks on all entry doors of
the Premises, thereby excluding Tenant, and its officers, principals, agents,
employees, visitors and representatives therefrom. In the event that Landlord
has either terminated Tenant's right of possession to the Premises pursuant to
the foregoing provisions of this Lease, or has terminated this Lease by reason
of the Default, Landlord shall not thereafter be obligated to provide Tenant
with a key to the Premises at any time; provided, however, that in any such
instance, during Landlord's normal business hours and at the convenience
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of Landlord, and upon the written request of Tenant accompanied by such written
waivers and releases as Landlord may require, Landlord will escort Tenant or
its authorized personnel to the Premises to retrieve any personal belongings or
other property of Tenant not subject to Landlord's liens or security interests
described in this Lease or available under applicable laws. If Landlord elects
to exclude Tenant from the Premises without permanently repossessing the
Premises or terminating this Lease pursuant to the foregoing provisions of this
Lease, then Landlord (at any time prior to permanent repossession or
termination) shall not be obligated to provide Tenant a key to re-enter the
Premises until such time as all delinquent Rent has been paid in full and all
other Defaults, if any, have been completely cured to Landlord's satisfaction,
and Landlord has been given assurance reasonably satisfactory to Landlord
evidencing Tenant's ability to satisfy its remaining obligations under this
Lease. During any such temporary period of exclusion, Landlord will, during
Landlord's regular business hours and at Landlord's convenience, upon written
request by Tenant, escort Tenant or its authorized personnel to the Premises to
retrieve personal belongings of Tenant or its employees, and such other
property of Tenant as is not subject to Landlord's liens and security interests
described in this Lease or available under applicable laws. The provisions
hereof shall override and control any conflicting provisions of Section 93.002
of the Texas Property Code (as amended).
ARTICLE 22.
LIMITATION OF LIABILITY
22.01 LIMITATION. If Tenant obtains a money judgment against Landlord
resulting from any default or other claim arising under this Lease, that
judgment shall be satisfied only out of the rents, issues, profits, and other
income thereafter actually received on account of Landlord's right, title and
interest in the Building, and no other real, personal or mixed property of
Landlord (or of any of the partners which comprise Landlord, or of partners,
officers, shareholders, directors or principals of such partners comprising
Landlord, if any, or of Landlord's officers, shareholders, directors, or
owners, if any) wherever situated, shall be subject to levy, attachment or
execution, or otherwise used to satisfy any such judgment. Tenant hereby waives
any right to satisfy a judgment against Landlord except from the rents, issues,
profits and other income thereafter actually received on account of Landlord's
right, title and interest in the Building.
ARTICLE 23.
HOLDING OVER
If Tenant retains possession of the Premises or any part thereof after
the termination of the Term or any extension thereof, by lapse of time or
otherwise, Tenant, unless Landlord otherwise elects, shall become a tenant at
sufferance and shall pay Landlord monthly Rent, at one and one-half times the
rate of Monthly Base Rent, Expense Adjustment, and Electrical Cost in effect
for the month immediately preceding said holding over, computed on a per month
basis, for each month or part thereof (without reduction for any such partial
month) that Tenant thus remains in possession. Alternatively, at the election
of Landlord expressed in a written notice to Tenant and not otherwise, such
retention of possession shall constitute a renewal of this Lease for one (1)
year, requiring the payment by Tenant of Monthly Base Rent, Expense Adjustment,
and Electrical Cost then in effect, as adjusted for said year as if said year
were an extension of the Term. The provisions of this Article 23 do not exclude
Landlord's right of reentry or any other right hereunder.
ARTICLE 24.
SUBORDINATION AND ATTORNMENT
24.01 SUBORDINATION. Landlord may have heretofore encumbered or may
hereafter encumber with a mortgage or trust deed the Building, or any interest
therein, and may have heretofore sold and leased back or may hereafter sell and
lease back the land on which the Building is located, and may have heretofore
encumbered or may hereafter encumber the leasehold estate under such lease with
a mortgage or trust deed. (Any such mortgage or trust deed is herein called a
"Mortgage" and the holder of any such mortgage or the beneficiary under any
such trust deed is herein called a "Mortgagee." Any such lease of the
underlying land is herein called a "Ground Lease", and the lessor under any
such lease is herein called a "Ground Lessor." Any Mortgage which is a first
lien against the Building, the land on which the Building is located, the
leasehold estate or the lessor under a Ground Lease (if the property is not
then subject to an unsubordinated mortgage) is herein called a "First Mortgage"
and the holder or beneficiary of or Ground Lessor under any First Mortgage is
herein called a "First Mortgagee.") This Lease is, or shall be, subject and
subordinate to any First Mortgage now or hereafter encumbering the Building.
This provision shall be self-operative, and no further instrument of
subordination shall be required to effectuate such subordination. If requested
by a First Mortgagee, Tenant will either (i) subordinate its interest in this
Lease to said First Mortgage, and to any and all advances made thereunder and
to the interest thereon, and to all renewals, replacements, supplements,
amendments, modifications and extensions thereof, or (ii) make certain of
Tenant's rights and interest in this Lease superior thereto; and Tenant will
promptly execute and deliver such agreement or agreements as may be reasonably
required by such Mortgagee or Ground Lessor, provided, however, Tenant
covenants it will not subordinate this Lease to any Mortgage or Ground Lease
other than a First Mortgage (including a Ground Lease defined as a First
Mortgage hereunder) without the prior written consent of the First Mortgagee.
Tenant agrees that Landlord may assign the rents and interests in this Lease to
the holder of any Mortgage or Ground Lease. In conjunction with the foregoing
provisions, Tenant hereby acknowledges its agreement to execute the
Subordination, Non-Disturbance and Attornment Agreement and/or the Lease
Estoppel Certificate required by such Mortgagee and/or Ground Lessor within ten
(10) days following the receipt of a written request therefor. Landlord shall
attempt to obtain a non-disturbance agreement reasonably satisfactory to Tenant
from any future First Mortgagee, provided Landlord's failure to obtain such an
agreement shall not create any liability on the part of Landlord to Tenant,
create a default by Landlord under this Lease, or create a defense, offset, or
counterclaim to Tenant's obligations under this Lease.
24.02 ATTORNMENT. It is further agreed that (a) if any Mortgage shall be
foreclosed, or if any Ground Lease be terminated, (i) the liability of the
Mortgagee or purchaser at such foreclosure sale or the liability of a
subsequent owner designated as Landlord under this Lease shall exist only so
long as such Mortgagee, purchaser or owner is the owner of the Building or
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the land on which the Building is located, and such liability shall not continue
or survive after further transfer of ownership; and (ii) upon request of the
Mortgagee, if the Mortgage shall be foreclosed, Tenant will attorn, as Tenant
under this Lease, to the purchaser at any foreclosure sale under any Mortgage or
upon request of the Ground Lessor, if any Ground Lease shall be terminated,
Tenant will attorn as Tenant under this Lease to the Ground Lessor, and Tenant
will execute such instruments as may be necessary or appropriate to evidence
such attornment; (b) this Lease may not be modified, amended, canceled or
surrendered, without the prior written consent, in each instance, of the First
Mortgagee; and (c) Tenant waives the provisions of any statute or rule of law,
now or hereafter in effect, that may give or purport to give Tenant any right to
terminate or otherwise adversely affect Landlord's interest in this Lease or
reduce or limit the obligations of Tenant hereunder in the event of the
prosecution or completion of any such foreclosure proceeding. No Mortgagee or
any purchaser at a foreclosure sale shall be liable for any act or omission of
the Landlord which occurred prior to such sale or conveyance, nor shall Tenant
be entitled to any offset against or deduction from Rent due after such date by
reason of any act or omission of the Landlord prior to such date. Further,
Tenant agrees that no Mortgagee shall be bound by the prepayment of Rent made in
excess of thirty days before the date on which such payment is due or any
amendment or modification made with such Mortgagee's consent to the extent such
consent is required as provided above.
24.03 MORTGAGEE REQUIREMENTS. Should any prospective First Mortgagee require a
modification or modifications of this Lease, which modification or modifications
will not cause an increased cost or expense to Tenant or in any other way
materially and adversely change the rights and obligations of Tenant hereunder,
in the reasonable judgment of Tenant, then and in such event, Tenant agrees that
this Lease may be so modified and agrees to execute whatever documents are
required therefor and deliver the same to Landlord within fifteen (15) days
following the request therefor. Should any prospective Mortgagee or Ground
Lessor require execution of a short form of lease for recording (containing,
among other customary provisions, the names of the parties, a description of the
Premises and the Term of this Lease), Tenant agrees to execute such short form
of Lease and deliver the same to Landlord within fifteen (15) days following the
request therefor.
24.04 POWER OF ATTORNEY. If Tenant fails within fifteen (15) days after
written demand therefor to execute and deliver any instruments as may be
necessary or proper to effectuate any of the covenants of Tenant set forth above
in this Article, Tenant hereby makes, constitutes and irrevocably appoints any
one of the Landlord or its representatives as its attorney-in-fact (such power
of attorney being coupled with an interest) to execute and deliver any such
instruments for and in the name of Tenant.
ARTICLE 25.
ESTOPPEL CERTIFICATE
Tenant agrees that from time to time, upon not less than seven (7) days'
prior written request by Landlord, Tenant will, and Tenant will cause any
subtenant, licensee, concessionaire or other occupant of the Premises to,
promptly complete, execute and deliver to Landlord or any party or parties
designated by Landlord a statement in writing certifying: (i) that this Lease is
unmodified and in full force and effect (or if there have been modifications
that the same are in full force and effect as modified and identifying the
modifications); (ii) the dates to which the Rent and other charges have been
paid; (iii) that the Premises have been unconditionally accepted by the Tenant
(or if not, stating with particularity the reasons why the Premises have not
been unconditionally accepted); (iv) the amount of any Security Deposit held
hereunder; (v) that, so far as the party making the certificate knows, Landlord
is not in default under any provisions of this Lease, if such is the case, and
if not, identifying all defaults with particularity; and (vi) any other matter
reasonable requested by Landlord. Any purchaser or Mortgagee of any interest in
the Building shall be entitled to rely on said statement. Failure to give such a
statement within seven (7) days after said written request shall be conclusive
evidence, upon which Landlord and any such purchaser or Mortgagee shall be
entitled to rely that this Lease is in full force and effect and Landlord is not
in default and Tenant shall be estopped from asserting against Landlord or any
such purchaser or Mortgagee any defaults of Landlord existing at that time but
Tenant shall not thereby be relieved of the affirmative obligation to give such
statement. Moreover, if Tenant fails to deliver or cause to be delivered such
statement within said seven (7) day period, Landlord shall be entitled to
collect from Tenant upon demand, as liquidated damages occasioned by such delay
and not as a penalty (the actual damages resulting from such delay being
impossible to ascertain), a sum equal to one-fifteenth of the Monthly Base Rent
for each day, up to fifteen (15) days, after the expiration of said seven (7)
day period that Tenant fails to deliver such statement. If such failure persists
after such fifteen (15) day period, Landlord shall be entitled to pursue any and
all remedies it may have with respect to such Default, including termination of
this Lease or Tenant's right to possession and collection of damages, including
consequential damages, arising by reason for such Default.
ARTICLE 26.
INTENTIONALLY DELETED
ARTICLE 27.
NOTICES AND DEMANDS
27.01 PARTIES' NOTICES. All notices, demands, approvals, consents, requests
for approval or consent or other writings in this Lease provided to be given,
made or sent by either party hereto to the other ("Notice") shall be in writing
and shall be deemed to have been fully given, made or sent when made by personal
service or two (2) business days after deposit in the United States mail,
certified or registered and postage prepaid and properly addressed as follows:
To Landlord: The Utah State Retirement Investment Fund
c/o CB Commercial Real Estate Group, Inc.
533 South Fremont Avenue
Los Angeles, California 90071
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<PAGE> 21
Attn: Managing Director
with a copy to:
The Utah State Retirement Investment Fund
c/o CB Commercial Realty Advisors, Inc.
533 South Fremont Avenue
Los Angeles, California 90071
Attn: Director of Asset Management
and a copy to:
Compass Management, Inc.
3811 Turtle Creek Boulevard, Suite 240
Dallas, Texas 75219
Attn: Property Manager for Turtle Creek
To Tenant: (i) If any Notice is to be given Tenant
prior to occupancy, to the address set forth
in Section 1.02.
(ii) If any Notice is to be given
Tenant after occupancy, to the
Premises; provided, however, if the
Premises shall have been vacated,
Notice may be posted on the door to the
Premises, except as Landlord may be
otherwise notified in writing.
The address to which any Notice should be given, made or sent to either party
may be changed by written notice given by such party as above provided.
27.02 MORTAGEE'S NOTICE AND CURE RIGHTS. Tenant agrees to give any First
Mortgagee, by registered or certified mail, a copy of any notice or claim of
default served upon the Landlord by Tenant, provided that prior to such notice
Tenant has been notified in writing (by way of service on Tenant of a copy or
an assignment of Landlord's interests in leases, or otherwise) of the address
of such First Mortgagee. Tenant further agrees that if Landlord shall have
failed to cure such default within twenty (20) days after such notice to
Landlord (or if such default cannot be cured or corrected within that time,
then such additional time as may be necessary if Landlord has commenced within
such twenty (20) days and is diligently pursuing the remedies or steps
necessary to cure or correct such default), then the First Mortgagee shall have
an additional thirty (30) days within which to cure or such default (or if such
default cannot be cured or corrected within that time, then such additional time
as may be necessary if such First Mortgagee has commenced within such thirty
(30) days and is diligently pursuing the remedies or steps necessary to cure or
correct such default, including the time necessary to obtain possession if ion
is to cure or correct such default) before Tenant may exercise any right or
remedy which it may have on account of any such default of Landlord. The
foregoing provision shall not limit Tenant's right to abate rent under Sections
8.04, 12.01, and 13.02.
27.03 NOTICE TO TENANT. Any notice, demand, request or consent to be made
by or required of Landlord, may be made and given by Landlord's Management
Agent with the same force and effect as if made and given by Landlord.
ARTICLE 28.
CONSTRUCTION OF LEASE
28.01 CONSTRUCTION. The language in all parts of this Lease shall in all
cases be construed as a whole according to its fair meaning and neither strictly
for nor against either Landlord or Tenant. Article and Section headings in this
Lease are for convenience only and are not to be construed as part of this Lease
or in any way defining, limiting, amplifying, construing, or describing the
provisions hereof. Time is of the essence of this Lease and every term, covenant
and condition hereof. The words "Landlord" and "Tenant," as herein used, shall
include the plural as well as the singular. The neuter gender includes the
masculine and feminine. In the event there is more than one person or entity
which executes this Lease as Tenant, the obligations to be performed and
liability of all such persons and entities shall be joint and several. All of
the covenants of Tenant here under shall be and deemed construed to be
"conditions" as well as "covenants" as though the words specifically expressing
or importing conditions were used in each separate instance. Landlord and Tenant
agree that in the event any term, covenant or condition herein contained (other
than with respect to the payment of Rent) is held to be invalid or void by any
court of competent jurisdiction, the invalidity of any such term, covenant or
condition shall in no way affect any other term, covenant or condition herein
contained.
28.02 Amendments. This Lease contains and embodies the entire agreement of
the parties hereto, and no representation, inducements or agreements, oral or
otherwise, not contained in this Lease shall be of any force or effect. This
Lease may not be modified in whole or in part in any manner other than by an
instrument in writing duly signed by both parties hereto.
ARTICLE 29.
REAL ESTATE BROKERS
Tenant represents and warrants unto Landlord that Tenant has directly
dealt with and only with the Broker(s), if any, identified in Article 1 of this
Lease as broker in connection with this Lease, and agrees to indemnify and hold
harmless Landlord from and against any and all claims or demands, damages,
liabilities and expenses of any type or nature whatsoever arising by reason of
the incorrectness or breach of the aforesaid representation or warranty.
Landlord shall pay, and agrees
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<PAGE> 22
to indemnify and hold harmless Tenant from and against any claim by the
Broker(s) for its commission arising out of the execution and delivery of this
Lease pursuant to a separate agreement between Landlord and Broker.
ARTICLE 30.
MISCELLANEOUS
30.01 BENEFIT. Subject to the provisions of Articles 19 and 20 hereof, all
terms, covenants and conditions on this Lease shall be binding upon and inure
to the benefit of and shall apply to the respective heirs, executors,
administrators, successors, assigns and legal representatives or Landlord and
Tenant.
30.02 EXECUTION AND DELIVERY. The execution of this Lease by Tenant and
delivery of the same to Landlord or Landlord's Management Agent do not
constitute a reservation of or option to lease the Premises or an agreement by
Landlord to enter into a Lease, and this Lease shall become effective only if
and when Landlord executes and delivers a counterpart hereof to Tenant;
provided, however, the execution and delivery by Tenant of this Lease to
Landlord or Landlord's Management Agent shall constitute an irrevocable offer
by Tenant to lease the Premises on the terms and conditions herein contained,
which offer may not be withdrawn or revoked for thirty (30) days after such
execution and delivery. If Tenant is a corporation, it shall deliver to
Landlord concurrently with the delivery to Landlord of an executed Lease, a
certified resolution of Tenant's directors authorizing execution and delivery
of this Lease and the performance by Tenant of its obligations hereunder. If
Tenant is a partnership, it shall deliver to Landlord concurrently evidence of
execution and performance authority. Tenant shall not record this Lease or any
memorandum or other evidence hereof.
30.03 DEFAULT UNDER OTHER LEASE. If the term of any lease (other than this
Lease) made by Tenant for any demised premises in the Building shall be
terminated or terminable after the making of this Lease, because of any default
by Tenant under such other lease, such fact shall empower Landlord, at
Landlord's sole option, to declare this Lease to be in default by written
notice to Tenant.
30.04 APPLICABLE LAW. This Lease shall be governed by and construed in
accordance with the laws of the state in which the Building is located.
30.05 LATE CHARGES AND DEFAULT INTEREST. At the option of Landlord, Landlord
may impose a late payment fee equal to the lesser of five percent (5%) of the
amount due or the maximum amount permitted by applicable law if any payment of
Rent is paid more than five (5) days after its due date. In addition, any
amount due hereunder shall bear interest after default in the payment thereof
at the annual rate of the lesser of (i) the rate of eighteen percent (18%) per
annum or (ii) the maximum lawful interest rate permitted by applicable law.
30.06 NON-WAIVER OF DEFAULTS. No waiver of any provision of this Lease shall
be implied by any failure of Landlord to enforce any remedy on account or the
violation of such provision, even if such violation be continued or repeated
subsequently, and no express waiver shall affect any provision other than the
one specified in such waiver and in that event only for the time and in the
manner specifically stated. No receipt of monies by Landlord from Tenant
after the termination of this Lease will in any way alter the length of the
Term of Tenant's right of possession hereunder or, after the giving of any
notice, shall reinstate, continue or extend the Term or affect any notice given
Tenant prior to the receipt of such monies, it being agreed that after the
service of notice or the commencement of a suit or after final judgment for
possession of the Premises, Landlord may receive and collect any Rent due, and
the payment of Rent shall not waive or affect said notice, suit or judgment,
nor shall any such payment be deemed to be other than an account of the amount
due, nor shall the acceptance of Rent be deemed a waiver of any breach by
Tenant of any term, covenant or condition of this Lease. No endorsement or
statement on any check or any letter accompanying any check or payment of Rent
shall be deemed an accord and satisfaction. Landlord may accept any such check
or payment without prejudice to Landlord's right to recover the balance due of
any installment or payment of Rent or pursue any other remedies available to
Landlord with respect to any existing Defaults. None of the terms, covenants
or conditions of this Lease can be waived by either Landlord or Tenant except
by appropriate written instrument.
30.07 FORCE MAJEURE. Neither Landlord nor Tenant shall not be deemed in
default with respect to the failure to perform any of the terms, covenants and
conditions of this Lease on its part to be performed, if such failure is due in
whole or in part to any strike, lockout, labor dispute (whether legal or
illegal), civil disorder, inability to procure materials, failure of power,
restrictive governmental laws and regulations, riots, insurrections, war, fuel
shortages, accidents, casualties, Acts of God, acts caused directly or
indirectly by the other (or the other's agents, employees, guest or invitees),
acts of other tenants or occupants of the Building or any other cause beyond
reasonable control. In such event, the time for performance shall be extended
by an amount of time equal to the period of the delay so caused. Except to
extent such release is prohibited by law, Landlord shall not be liable to
Tenant for any expense, injury, loss or damage resulting from work done in or
upon, or the use of, any adjacent or nearby building, land, street, alley or
underground vault or passageway. The foregoing shall not limit, reduce, or
otherwise affect Tenant's obligation to make payments due under this Lease,
except for abatement provided for in Sections 8.04, 12.01, and 13.02.
30.08 LANDLORD'S RIGHT TO PERFORM TENANT'S DUTIES. If Tenant fails timely to
perform any of its duties under this Lease, Landlord shall have the right (but
not the obligation), after the expiration of any grace period specifically
provided by this Lease, to perform such duty on behalf and at the expense of
Tenant without further notice to Tenant, and all sums expended or expenses
incurred by Landlord in performing such duty shall be deemed to be Rent under
this Lease and shall be due and payable to Landlord upon demand by Landlord.
30.09 RIDER, WORK LETTER AND EXHIBITS. Any Rider, Work Letter and/or Exhibit
attached hereto are hereby
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<PAGE> 23
incorporated in this Lease by reference.
30.10 FINANCIAL STATEMENTS. Tenant shall, when requested by Landlord from
time to time, furnish a true and accurate audited statement of its financial
condition prepared in conformity with generally accepted accounting principles
and in a form reasonably satisfactory to Landlord.
30.11 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall create
any relationship between the parties hereto other than that of Landlord and
Tenant, and it is acknowledged and agreed that Landlord shall not be deemed to
be a partner of Tenant in the conduct of its business, or a joint venturer or a
member of a joint or common enterprise with Tenant.
30.12 NO RECORDING. Tenant shall not record this Lease or any memorandum
thereof without the prior written consent of Landlord.
30.13 HAZARDOUS WASTE. During the term of the Lease, Tenant shall comply with
all statutes, ordinances, rules, orders, regulations and requirements of the
federal, state, county and city governments and all departments thereof
applicable to the presence, storage, use, maintenance and removal of petroleum
or petroleum products, natural or synthetic gas, urea formaldehyde foam
insulation, radon gas, asbestos, PCB transformers, other toxic, hazardous,
contaminated or pollutant substances, and underground storage tanks
(collectively, "Hazardous Materials") in, on or about the Premises, which
generation treatment, release, presence, storage, use, maintenance, removal or
disposition is caused or permitted by Tenant. In no event shall the aforesaid
be construed to mean that Landlord acquiesces, has given or will give its
consent or that Tenant need not obtain Landlord's consent prior to Tenant's
storing, using, maintaining, or removing Hazardous Materials in, on or about
the Premises, and Tenant shall not store, use, maintain, or remove Hazardous
Materials in, on or about the Premises. Tenant agrees to indemnify and forever
hold harmless Landlord, its agents, successors, and assigns, and Landlord's
Mortgagee(s), as their interest may appear, from all claims, losses, damages,
expenses and costs, including, but not limited to, losses, damages, expenses and
costs, incurred by reason of Tenant's use, storage, maintenance or removal of
Hazardous Materials in, on, or about the Premises, or any part of the Property.
30.14 BANKRUPTCY. Landlord and Tenant understand that, notwithstanding certain
provisions to the contrary contained herein, a trustee or debtor in possession
under the United States Bankruptcy Code ("Code") may have certain rights to
assume or assign this Lease. Landlord and Tenant further understand that, in
such event, Landlord is entitled under the Code to adequate assurance of future
performance of the terms and provisions of this Lease. The parties hereto agree
that, with respect to any such assumption or assignment, the term "adequate
assurance" shall include at least the following: (1) since the financial
condition and resources of Tenant were a material inducement to Landlord in
entering into this Lease, in order to assure Landlord that the proposed assignee
will have the resources with which to pay all Rent payable pursuant to the terms
hereof, any proposed assignee must have, as demonstrated to Landlord's
satisfaction, a net worth (as defined in accordance with generally accepted
accounting principles consistently applied) of not less than the net worth of
tenant on the date this Lease became effective, increased by seven percent (7%),
compounded annually, for each year from the Commencement Date through the date
of the proposed assignment; (2) since Landlord's asset will be substantially
impaired if the trustee in bankruptcy or any assignee of this Lease makes any
use of the Premises other than the Permitted Use, any proposed assignee must
have been engaged in the conduct of business for the five (5) years prior to any
such proposed assignment, which business does not violate the Permitted Use, and
such proposed assignee shall continue to engage in the Permitted Use; and (3)
any proposed assignee of this Lease must assume and agree to be personally bound
by the terms, covenants and provisions of this Lease.
30.15 LANDLORD'S CONTINGENCY. Tenant acknowledges and agrees that the terms
and conditions of this Lease are specifically contingent upon the approval by
Landlord's Mortgagee(s) of this Lease. Accordingly, in the event that
Landlord's Mortgagee(s) fails to approve this Lease, this Lease shall
automatically terminate and be of no further force or effect.
30.16 SECURITY. LANDLORD SHALL HAVE NO RESPONSIBILITY TO PREVENT, AND SHALL
NOT BE LIABLE TO TENANT, ITS AGENTS, EMPLOYEES, CONTRACTORS, VISITORS OR
INVITEES FOR, LOSSES DUE TO THEFT OR BURGLARY, OR FOR DAMAGES OR INJURY TO
PERSONS OR PROPERTY DONE BY PERSONS GAINING ACCESS TO THE PREMISES OR THE
BUILDING, AND TENANT HEREBY RELEASES LANDLORD FROM ALL LIABILITY FOR SUCH
LOSSES, DAMAGES OR INJURY, EVEN IF CAUSED BY LANDLORD'S NEGLIGENCE, EXCEPT TO
EXTENT SUCH WAIVER IS PROHIBITED BY LAW.
30.17 LIMITATION ON WARRANTIES. LANDLORD'S DUTIES AND WARRANTIES ARE LIMITED
TO THOSE EXPRESSLY STATED IN THIS LEASE AND SHALL NOT INCLUDE ANY IMPLIED DUTIES
OR IMPLIED WARRANTIES, NOW OR IN THE FUTURE. NO REPRESENTATIONS OR WARRANTIES
HAVE BEEN MADE BY LANDLORD OTHER THAN THOSE CONTAINED IN THIS LEASE. TENANT
HEREBY WAIVES ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
PREMISES WHICH MAY EXIST BY OPERATION OF LAW OR IN EQUITY, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY OF HABITABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the day and year first above written.
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<PAGE> 24
LANDLORD: TENANT:
THE UTAH STATE RETIREMENT THE HOTEL INDUSTRY SWITCH COMPANY
INVESTMENT FUND,
an independent agency of the By: /s/ JOHN F. DAVIS, III
State of Utah --------------------------------
Name: John F. Davis, III
By: CB Commercial Realty Title: President
Advisors, Inc., a Delaware
corporation, Agent
By: /s/ MATTHEW C. HURLBUT
- --------------------------------
Name: Matthew C. Hurlbut
Title Vice President
By: /s/ JOSEPH W. MARKLING
- --------------------------------
Name: Joseph W. Markling
Title: First Vice President
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<PAGE> 25
EXHIBIT A
LEGAL DESCRIPTION
BEING a tract of land situated in the City of Dallas, Dallas County, Texas, and
being part of the W. Grigsby Survey, Abstract 501, and also being part of Block
1345 in the City of Dallas, and being the tracts of land conveyed to Turtle
Creek Square Limited, an Illinois partnership, with Turtle Creek Square, Inc.,
a Texas corporation, sole general partner, by deed dated 8/31/79, and recorded
in Volume 79172, Page 580, Deed Records, Dallas County, Texas, and being more
particularly described as follows:
BEGINNING at the intersection of the Northeasterly Line of Blackburn Street
with the Northwesterly Line of Turtle Creek Boulevard;
THENCE N 44 degrees 35' 00" W along said Northeasterly line of Blackburn Street
a distance of 326.65 feet to an iron rod set for corner;
THENCE N 45 degrees 25' 00" E departing along said Northeasterly Line of
Blackburn Street a distance of 1.92 feet to an iron rod set for corner, said
iron rod also being the beginning of a curve to the right;
THENCE along said curve to the right having a central angle of 40 degrees
22' 00", a radius of 70.00 feet and an arc length of 49.32 feet to an iron rod
set for corner;
THENCE N 85 degrees 47' 00" E a distance of 110.25 feet to an iron rod set for
corner, said iron rod also being the beginning of a curve to the left;
THENCE along said curve to the left having a central angle of 74 degrees 47'
00", a radius of 110.00 feet, and an arc length of 143.57 feet to an iron rod
set for corner;
THENCE N 11 degrees 00' 00" E a distance of 438.38 feet to an iron rod set for
corner;
THENCE S 79 degrees 00' 00" E a distance of 132.75 feet to an iron rod set for
corner;
THENCE S 11 degrees 00' 00" W a distance of 92.16 feet to an iron rod set for
corner;
THENCE S 79 degrees 00' 00" E a distance of 13.00 feet to an iron rod set for
corner;
THENCE S 11 degrees 00' 00" W a distance of 17.60 feet to an iron rod set for
corner;
THENCE S 79 degrees 00' 00" E a distance of 364.33 feet to an iron rod set for
corner situated in said Northwesterly Line of Turtle Creek Boulevard;
THENCE S 22 degrees 44' 30" W along said Northwesterly Line of Turtle Creek
Boulevard a distance of 212.69 feet to an iron rod set for corner;
THENCE N 79 degrees 00' 00" W departing said Northwesterly Line of Turtle Creek
Boulevard a distance of 309.80 feet to an iron rod set for corner;
THENCE S 11 degrees 00' 00" W a distance of 16.00 feet to an iron rod set for
corner;
THENCE N 79 degrees 00' 00" W a distance of 33.0 feet to an iron rod set for
corner;
THENCE S 11 degrees 00' 00" W a distance of 102.00 feet to an iron rod set for
corner;
THENCE N 79 degrees 00' 00" W a distance of 12.99 feet to an iron rod set for
corner;
THENCE S 33 degrees 30' 00" W a distance of 92.76 feet to an iron rod set for
corner;
THENCE S 56 degrees 30' 00" E a distance of 113.36 feet to an iron rod set for
corner;
THENCE S 33 degrees 30' 00" W a distance of 57.96 feet to an iron rod set for
corner;
THENCE S 56 degrees 30' 00" E a distance of 39.57 feet to an iron rod set for
corner;
THENCE N 86 degrees 57' 48" E a distance of 53.17 feet to an iron rod set for
corner;
THENCE S 56 degrees 35' 49" E a distance of 30.82 feet to an iron rod set for
corner;
THENCE S 56 degrees 30' 00" E a distance of 90.43 feet to an iron rod set for
corner situated in said Northwesterly Line of Turtle Creek Boulevard, said iron
rod also the beginning of a curve to the right;
THENCE along said Northwesterly Line of Turtle Creek Boulevard the following:
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<PAGE> 26
Along said curve to the right having a central angle of 26 degrees 48' 58", a
radius of 274.10 feet and an arc length of 128.13 feet to an iron rod set for
corner;
S 84 degrees 44' 30" W a distance of 56.00 feet to an iron rod set for corner,
said iron rod the beginning of a curve to the left;
Along said curve to the left having a central angle of 23 degrees 25' 02", a
radius of 403.34 feet an arch length of 164.85 feet to the POINT OF BEGINNING
and containing 5.0237 acres or 218,831 square feet of land, more or less.
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<PAGE> 27
EXHIBIT 1
FLOOR PLAN
[FLOOR PLAN]
TURTLE CREEK CENTRE FLOOR 11
14,386 USF 2/21/92
14,875 RSF
[FLOOR PLAN]
TURTLE CREEK CENTRE FLOOR 12
12,498 USF
14,875 RSF
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<PAGE> 28
EXHIBIT 2
THIRD FLOOR ROFR AREA
[FLOOR PLAN]
TURTLE CREEK CENTRE FLOOR 3
12,577 USF
14,653 RSF
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<PAGE> 29
EXHIBIT 3
RULES AND REGULATIONS
(1) Tenant shall not, whether temporarily, accidentally or
otherwise, allow anything to remain in, place or store anything in, or obstruct
in any way, any portion of the Building other than the Premises, including any
sidewalk, plaza area, driveway, passageway, entrance, exit, stairway, lobby,
corridor, hall, elevator, shipping platform, truck concourse or vault area in or
about the Building. All passageways, entrances, exits, elevators, stairways,
corridors, halls and roofs of the Building are not for the use of the general
public, and Landlord shall in all cases retain the right to control and prevent
access thereto by all persons in whose presence, in the judgment of Landlord,
shall be prejudicial to the safety, character, reputation or other interests of
the Building, its tenants or Landlord; provided, however, that nothing herein
contained shall be construed to prevent ingress and egress to persons with whom
Tenant deals within the normal course of Tenant's business. Tenant shall not
enter nor permit its employees, agents, guests or invitees to enter into areas
of the Building designated for the exclusive use of Landlord, its employees,
guests or invitees. Tenant shall not use, nor permit the use by its employees,
agents, guests or invitees, if any common area in the Building other than for
access to and from the Premises. No bicycle or motorcycle shall be brought into
the Building or kept on the Premises without the consent of Landlord.
(2) No deliveries of any nature nor freight, furniture or bulky
matter of any description will be received into the Building or carried into the
elevators except in such a manner, during such hours and using only the freight
elevators and those passageways as may be approved by Landlord, and then only
upon having been scheduled in advance. Any hand trucks, carryalls or similar
appliances used for the delivery or receipt of merchandise, supplies or
equipment shall be equipped with rubber tires, side guards and such other
safeguards as Landlord shall require.
(3) Tenant, or the employees, agents, servants, visitors or
licensees of Tenant shall not at any time place, leave or discard any rubbish,
paper, articles, or objects of any kind whatsoever outside the doors of the
Premises or in the corridors or passageways of the Building. No animals
(except for guide dogs for sight impaired persons) of any kind shall be brought
or kept in or about the Building. Tenant shall not permit any noise, odor or
litter which is objectionable to Landlord or other tenants of the Building to
emanate from the Premises.
(4) Any person in the Building will be subject to identification
by employees and agents of Landlord. All persons in or entering the Building
shall be required to comply with the security policies of the Building. Tenant
shall keep doors to unattended areas locked and shall otherwise exercise
reasonable precautions to protect property from theft, loss, or damage. Tenant
shall not attach or permit to be attached additional locks or similar devices to
any door or window, change existing locks or the mechanism thereof, or make or
permit to be made any keys for any door other than those provided by Landlord.
If more than two keys for one lock area desired, Landlord will provide them upon
payment therefor by Tenant. Upon termination of this Lease, or of the Tenant's
possession, the Tenant shall surrender to Landlord all keys to the Premises.
Landlord shall not be responsible for the theft, loss or damage of any property.
Landlord may at all times keep a pass key to the Premises. Canvassing,
soliciting or peddling in the Building is prohibited, and Tenant shall cooperate
to prevent same.
(5) Except for portions of the Premises specifically designated by
Tenant and consented to in writing by Landlord in advance to be used for an
employee kitchen or lounge area, Tenant shall not cook, sell, purchase or
permit the preparation, sale or purchase of food on the Premises.
(6) Tenant shall not mark, paint, drill into or in any way deface
any part of the Building or Premises. No boring, driving of nails or screws,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Landlord, and as Landlord may direct. Tenant shall not install any
resilient tile or similar floor covering in the Premises except with the prior
approval of Landlord.
(7) Tenant shall give immediate notice to Landlord in case of
theft, unauthorized solicitation or accident in the Premises or in the Building
or of defects therein or in any fixtures or equipment, or of any known
emergency in the Building.
(8) Tenant shall not use the Premises or permit the Premises to be
used for any other purpose than the Permitted Use, without Landlord's prior
permission.
(9) Tenant shall not advertise for laborers giving the Premises as
an address, nor pay such laborers at a location in the Premises.
(10) The requirements of Tenant will be attended to only upon
application at the office of Landlord in the Building. Employees of Landlord
shall not perform any Work or do anything outside of their regular duties,
unless under special instructions from the office of Landlord.
(11) Tenant shall at all times keep the Premises neat and orderly.
(12) Tenant shall not make excessive noises, cause disturbances or
vibrations or use or operate any electrical or mechanical devices that emit
excessive sound or other waves or disturbances or create obnoxious odors, any
of which may be offensive to the other tenants and occupants of the Building,
or that would interfere with the operation of any device, equipment, radio,
television broadcasting or reception from or within the Building or elsewhere
and shall not place or install any projections, antennas, aerials or similar
devices inside or outside of the Premises or on the Building without Landlord's
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<PAGE> 30
prior written approval.
(13) Tenant shall comply with all applicable federal, state and
municipal laws, ordinances and regulations, and building rules and shall not
directly or indirectly make any use of the Premises which may be prohibited by
any of the foregoing or which may be dangerous to persons or property or may
increase the cost of insurance or require additional insurance coverage. Tenant
shall not use, suffer or permit the Premises or any part hereof to be used for
the manufacture, sale or distribution by gift or otherwise of any spirituous,
fermented or intoxicating liquors or any drugs. Tenant shall not bring or store
firearms of any kind into the Building. Tenant shall not use the Premises for
the manufacture, distribution or sale of any merchandise or other materials.
Tenant shall not install any equipment utilizing an ammonia or other process
necessitating venting. Tenant shall not permit any odors, acids, vapors or
other gases or materials to be discharged from the Premises into the common
areas, waste lines, vents, flues or other tenant spaces in the Building. Tenant
shall not use, suffer or permit the use of the Premises or any part thereof for
housing accommodations, for lodging or sleeping purposes or for any immoral or
illegal purpose.
(14) The water and wash closets, drinking fountains and other
plumbing fixtures shall not be used for any purpose other then those for which
they were constructed, and no sweepings, rubbish, rags, coffee grounds or other
substances shall be thrown therein. All damages resulting from any misuse of
the fixtures shall be borne by the Tenant who, or whose servants, employees,
agents, visitors or licensees, shall have caused the same. No person shall waste
water by interfering or tampering with the faucets or otherwise.
(15) Tenant, its servants, employees, customers, invitees and
guests shall, when using the parking facilities in and around the building,
observe and obey all signs regarding fire lanes and no parking zones, and when
parking always park between the designated lines. Landlord reserves the right
to tow away, at the expense of the owner, any vehicle which is improperly
parked or parked in a no-parking zone. All vehicles shall be parked at the sole
risk of the owner, and Landlord assumes no responsibility for any damage to or
loss of vehicles, except to the extent of Landlord's gross negligence.
(16) Except as otherwise provided in the Lease, Tenant shall not
employ persons to do janitor, repair or decorating work in the Premises, and no
persons other than the janitors or contractors designated by Landlord shall
clean, decorate, remodel or repair the Premises without prior written consent
of Landlord.
(17) Tenant shall not install or operate any refrigerating, heating
or air-conditioning equipment, nor any equipment of any type or nature that
will or may necessitate any changes, replacements or additions to, or in the
use or, the water system heating system, plumbing system, air-conditioning
system or electrical system of the Premises or the Building, without first
obtaining the prior written consent of Landlord. Business machines and
mechanical equipment belonging to or installed by or at the direction of Tenant
that cause noise or vibration capable of being transmitted to the structure of
the Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenant in the Building shall be installed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to reduce such noise and vibration to a level satisfactory to
Landlord and such other tenants.
(18) Landlord reserves the right to prescribe and to approve the
weight, size and location of safes, book shelves and other heavy equipment,
fixtures and articles in and about the Premises and the Building and to require
all such items to be moved in and out of the Building and the Premises only at
such times and in such manner as Landlord shall direct and in all events at
Tenant's sole risk and responsibility. Tenant shall not overload any floors.
(19) Tenant shall not, without the prior written consent of
Landlord, install any shades, draperies, blinds or other window covering,
awning, sign, lettering, picture, notice, advertisement or object unacceptable
to Landlord on or against glass partitions, doors or windows that would be
visible outside the Premises or any sign, lettering, picture, notice or
advertisement within the Premises that would be visible outside the Premises.
Landlord shall have the right to prohibit any advertisement of or by Tenant in
any public media, by direct solicitation or otherwise, which advertisement, in
Landlord's opinion, tends to impair the reputation of Building or its
desirability as a high-quality office building. Upon written notice from
Landlord, Tenant shall immediately refrain from and discontinue any such
advertisement.
(20) Landlord reserves the right to rescind, add to and amend any
rules or regulations, to add reasonable new rules or regulations, and to waive
any rules or regulations with respect to any tenant or tenants.
(21) The Building shall be a no-smoking building, with no smoking
allowed in the Premises or in any other area of the Building, including any
exterior portions thereof, provided that Landlord may provide for a smoking
area, in which case Tenant shall ensure that its employees smoke only in such
smoking area.
<PAGE> 31
EXHIBIT 4
Work Letter
The terms used herein shall have the meanings ascribed to them
in the Lease, unless otherwise stated herein.
1. Construction of the Premises. The Landlord and the
Tenant agree that their respective rights and obligations in reference to the
construction of the Premises shall be as provided herein. Floor 11 either is
complete or will be subject to a minor amount of work. None of such work will
have an impact on the Commencement Date for Floor 11, which shall be the date
provided in Section 1.08. The Allowance, as defined below, shall be determined
based on the square footage of both Floor 11 and Floor 12, though Landlord and
Tenant acknowledge and agree that Tenant need not spend it equally on the cost
of work on Floor 11 and Floor 12, but may spend proportionally more on Floor
12. In addition, the Landlord's Work will be completed in phases and Tenant
shall be entitled to apply those portions of the Allowance not spent in early
phases to the cost of the work in later phases.
1.01 Tenant's Plans and Specifications.
(a) Landlord shall cause to be prepared detailed
architectural, telephone, mechanical and engineering plans including all
dimensions and specifications for all work to be performed by Landlord in the
Premises substantially in accordance with the space plan provided by Tenant or
Tenant's architect and previously submitted to Landlord ("Plans").
(b) Tenant shall cooperate as necessary in connection
with the preparation of the Plans, in a complete and timely manner, and without
limiting the foregoing, shall provide to Landlord all information as shall be
required by Landlord's engineers to prepare mechanical plans pursuant to
Section 1.02 hereof, which information shall include, but not be limited to,
the following:
(1) any special floor-loading conditions which
may exceed the structural weight limits of the floor.
(2) specifications of any heat emanating
equipment to be installed by Tenant which may require special air conditioning,
(3) electrical specifications of any equipment
that requires non-standard electrical power outlets, and
(4) complete specifications of any data-line
wiring required, including cable routing, conduit size, cable type and similar
items (provided Landlord shall have the right to approve but shall not perform,
and the Landlord's Work, as hereinafter defined, shall exclude all data-line
wiring and cable routing in and to the Premises).
(c) The Plans shall be delivered to Tenant for its review
and consideration as soon as reasonably possible. Any change or modification of
such Plans shall not be valid or binding unless consented to by Landlord in
writing.
1.02 Landlord's Work.
(a) Landlord shall furnish and install substantially in
accordance with the Plans the materials and items described therein
("Landlord's Work"). The Plans, the costs of Tenant's space plan, Landlord's
Work, and the installation of cable described in Section 1.01 (b)(4), shall be
at Tenant's sole cost and expense, provided that Tenant shall be entitled to a
credit against the cost of the Plans, the costs of Tenant's space plan,
Landlord's Work, and the installation of cable described in Section 1.01(b)(4),
in an amount up to the lesser of (a) $178,500, (i.e., $6.00, multiplied by the
area of the Premises) or (b) the actual costs of the Plans and the Landlord's
Work (the "Allowance").
(b) If Landlord determines that the cost of the
Landlord's Work, will exceed the Allowance, then prior to commencement of the
Landlord's Work, Landlord will submit to Tenant a cost estimate for the
Landlord's Work ("Cost Estimate") which Tenant shall approve or reject within
seven (7) days after receipt thereof. It is understood that the cost of
Landlord's Work shall include Landlord's then applicable construction
supervision fee which shall not exceed four percent (4%) of the total cost of
the Landlord's Work, the cost of Tenant's space plan, the cost of the Plans,
and the costs of the installation of the cable described in Section 1.01(b)(4).
Tenant's failure to reject the Cost Estimate within said seven (7) day period
shall be to be an acceptance thereof. If Tenant rejects the Cost Estimate,
Tenant shall, together with such rejection, propose such changes to the Plans
as will cause the Cost Estimate to be acceptable. If the accepted Cost exceeds
the Allowance, then Tenant shall pay to Landlord the amount of such excess
within ten (10) business days after receipt by Tenant of a bill therefor, but
in no event later than the Commencement Date.
1.03 Extra Work.
(a) Tenant may request substitutions, additional or extra
work and/or materials over and above Landlord's Work ("Extra Work") to be
performed by Landlord provided that the Extra Work, in Landlord's judgment, (1)
shall not delay completion of Landlord's Work or the Commencement Date of the
Lease; (2) shall be practicable and consistent with existing physical
conditions in the Building and any other plans for the Building which have been
filed with the appropriate municipality or other governmental authorities
having jurisdiction thereover (3) shall not impair Landlord's ability to
perform any of Landlord's obligation hereunder or under the Lease or any other
lease of space in the Building; and (4) shall not affect any portion of the
Building other than the Premises.
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<PAGE> 32
(b) (1) In the event Tenant requests Landlord to perform
Extra Work and if Landlord accedes to such request, then and in that event,
prior to commencing such Extra Work, Landlord shall submit to Tenant a written
estimate ("Estimate") for said Extra Work to be performed. Within seven (7)
days after Landlord's submission of the Estimate, Tenant shall, in writing,
either accept or reject the Estimate. Tenant's failure either to accept or
reject the Estimate within said seven (7) day period shall be deemed rejection
thereof.
(2) In the event that Tenant rejects the Estimate or the
Estimate is deemed rejected, Tenant shall within seven (7) days after such
rejection propose to Landlord such necessary revisions of the Plans so as to
enable Landlord to proceed as though no such Extra Work had been requested.
Should Tenant fail to submit such proposals regarding necessary revisions of
the Plans within said seven (7) day period, Landlord, in its sole discretion,
may proceed to complete Landlord's Work in accordance with the Plans already
submitted, with such variations as in Landlord's sole discretion may be
necessary so as to eliminate the Extra Work.
(c) (1) All Extra Work shall require the installation of new
materials at least comparable to Building standards and any substitution shall
be of equal or greater quality than that for which it is substituted.
(2) Tenant may request the omission of an item of
Landlord's Work, provided that such omission shall not delay the completion of
Landlord's Work and Landlord thereafter shall not be obligated to install the
same. Credits for items deleted or not installed shall be granted in amounts
equal to credits obtainable from subcontractors or materialmen. In no event
shall there be any cash credits.
(d) In the event Landlord performs Extra Work hereunder,
Tenant shall pay to Landlord, upon acceptance of the Estimate or submission of
Landlord's bid therefor, as the case may be, a sum equal to twenty percent
(20%) of the Estimate or bid price to the extent the Estimate together with the
amount set forth in the Cost Estimate exceeds the Allowance. In the event of
any such excess, Tenant shall pay to Landlord such excess cost for the Extra
Work within seven (7) days after receipt by Tenant of a bill therefore or at
such other time or times as agreed to, but in no event shall the entire balance
be paid later than the completion of the Extra Work.
2. COMPLETION-PUNCH LIST. When the Landlord is of the opinion
that the Landlord's Work is complete, then the Landlord shall so notify the
Tenant. The Tenant agrees that upon such notification, the Tenant promptly (and
not later than two (2) business days after the date of Landlord's said notice)
will inspect the Premises and furnish to the Landlord a written statement that
the Landlord's Work have been completed and are complete as required by the
provisions of this EXHIBIT 4 and the Lease with the exception of certain
specified and enumerated items (hereinafter referred to as the "Punch List").
The Tenant agrees that at the request of the Landlord from time to time
thereafter, the Tenant will indicate in writing to Landlord whether any prior
Punch List items have been completed. If the Punch List consists only of items
which would not materially impair the Tenant's use or occupancy of the
Premises, then, in such event, the Landlord's Work shall be deemed complete and
Tenant shall be deemed to have accepted possession of the Premises, provided,
Landlord shall promptly complete all such Punch List items; provided, however,
that in no event shall Landlord be obligated to repair latent defects, not
originally listed on the Punch List, beyond a period of six (6) months after
the Completion Date. The date on which the Landlord's Work is complete,
pursuant to the provisions of this subsection, is sometimes referred to as the
"Date of Substantial Completion" or "Substantial Completion Date." The
Landlord's Work shall be deemed to be substantially complete and the Date of
Substantial Completion will be deemed to have occurred upon the issuance of a
certificate of occupancy or other similar license, permit, or authorization.
Promptly after the Substantial Completion Date, upon Landlord's request, Tenant
will execute an instrument in the form attached hereto as EXHIBIT 4.1, setting
forth the Commencement Date of the Lease, so that said date is certain and such
instrument, when executed, is hereby made part of this Lease and incorporated
herein by reference.
3. POSSESSION-EXTENSION OF TERM AND ACKNOWLEDGMENTS.
(a) The Tenant will take possession of the Premises as of and
on the Commencement Date which, as set forth in Section 1.08 of the Lease,
shall be the later of (a) the date set forth in Section 1.08(a) or (b) the date
which is two (2) days following the Date of Substantial Completion of the
Landlord's Work as to 6917 rentable square foot area on Floor 12, but in no
event later than February 1, 1996. Landlord has not agreed or represented that
the Premises will be substantially ready for occupancy on the date specified in
Section 1.08(a) of the Lease. If for any reason whatsoever the Landlord's Work
as to such 6917 rentable square feet on Floor 12 is not complete on said date,
this Lease shall nevertheless continue in full force and effect, and no
liability shall arise against Landlord because of any such delay, provided,
however, that all Rent due hereunder shall abate on a per diem basis and, as
hereinabove provided, the Commencement Date shall be deferred until the Date of
Substantial Completion of the Landlord's Work as to such 6917 rentable square
foot area on Floor 12. Notwithstanding the foregoing, there shall be no
abatement of Rent and no deferral of the Commencement Date if the Landlord's
Work is not substantially complete due to any special equipment, fixtures or
materials, changes, alterations or additions requested by Tenant, any delay of
Tenant in submitting information necessary for the preparation of the Plans,
the failure of Tenant to timely approve or reject the Cost Estimate, the
failure of the Tenant to submit revisions following rejection or deemed
rejection of the Estimate, the requirement of Tenant for any Extra Work, or the
failure of the Tenant in supplying information of approving or authorizing
plans, specifications, estimates or other matters, or any other act or omission
of Tenant ("Tenant Delay"). If Tenant shall occupy all or any part of the
Premises prior to the Commencement Date, all of the covenants and conditions of
this Lease, including the obligation to pay Rent, shall be binding upon the
parties hereto in respect to such occupancy as if the first day of the Term had
been the date when Tenant began such occupancy.
(b) In the event the Date of Substantial Completion of the
Landlord's Work as to such 6917 rentable square foot area on Floor 12, or the
date Landlord's Work would have been complete but for any Tenant Delays, is
later than the date setforth in Section 1.08(a) of the Lease, (1) the Date of
Substantial Completion of the Landlord's Work as to such
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<PAGE> 33
6917 rentable square foot area on Floor 12, shall be modified to be the earlier
of the Date of Substantial Completion of the Landlord's Work as to such 6917
rentable square foot area on Floor 12, or the date Landlord's Work would have
been complete but for any Tenant Delays and Monthly Base Rent, Expense
Adjustment, and Electrical Cost will commence accordingly, (2) the Expiration
Date shall be on the last day of the calendar month in which the original Term
as set forth in Article I would expire if it were measured from the earlier of
the Date of Substantial Completion of the 6917 rentable square foot area on
Floor 12, or the date Landlord's Work would have been complete but for any
Tenant Delays, and (3) the Term shall be modified to be the period from the Date
of Substantial Completion of the 6917 rentable square foot area on Floor 12 to
the Expiration Date. Promptly after the Date of Substantial Completion of the
6917 rentable square foot area on Floor 12, the parties will execute an
instrument in the form attached as Addendum 1 hereto, setting forth the
Expiration Date of the Lease, as so modified, so that said dates are certain
and such instrument, when executed, is hereby made a part of this Lease and
incorporated herein by reference.
4. TENANT'S ENTRY PRIOR TO COMPLETION DATE. Landlord may permit
Tenant or its agents or laborers to enter the Premises at Tenant's sole risk
prior to the Commencement Date in order to perform through Tenant's own
contractors such work as Tenant may desire, at the same time that Landlord's
contractors are working in the Premises. The foregoing License to enter prior
to the Commencement Date, however, is conditioned upon Tenant's labor not
interfering with Landlord's contractors or with any other tenant or its labor.
If at any time such entry shall cause disharmony. interference or union
disputes of any nature whatsoever, or if Landlord shall, in Landlord's
reasonable judgment, determine that such entry, such work or the continuance
thereof shall interfere with, hamper or prevent Landlord from proceeding with
the completion of the Building or Landlord's Work at the earliest possible
date, this license may be withdrawn by Landlord immediately upon written notice
to Tenant. Such entry shall be deemed to be under and subject to all of the
terms, covenants and conditions of the Lease, and Tenant shall comply with
all of the provisions of the Lease which are the obligations or covenants of
the Tenant, including, but not limited to, the provisions of Section 9.01 of the
Lease, except that the obligation to pay Rent shall not commence until the
Commencement Date. In the event that Tenant's agents or laborers incur any
charges from Landlord, including, but not limited to, charges for use of
construction or hoisting equipment on the Building site, such charges shall be
deemed an obligation of Tenant and shall be collectible as Rent pursuant to the
Lease, and upon default in payment thereof, Landlord shall have the same
remedies as for a default in payment of Rent pursuant to the Lease.
5. LANDLORD'S ENTRY AFTER SUBSTANTIAL COMPLETION. At any time
after the Commencement Date, Landlord may enter the Premises to complete Punch
List items, and such entry by Landlord, its agents, servants, employees or
contractors for such purpose shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of Rent, or relieve Tenant from any obligation under this Lease, or impose any
liability upon Landlord or its agents.
6. DELAYS. Landlord and Tenant mutually acknowledge that the
Landlord's construction process in order to complete the Premises requires a
coordination of activities and a compliance by the Landlord and Tenant without
delay of all obligations imposed upon the Landlord and Tenant pursuant to this
EXHIBIT 4 and that time is of the essence in the performance of Landlord's and
Tenant's obligations hereunder and Landlord's and Tenant's compliance with the
terms and provisions or this EXHIBIT 4.
7. PROVISIONS SUBJECT TO LEASE. The provisions of this EXHIBIT 4
are specifically subject to the provisions of the Lease.
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<PAGE> 34
EXHIBIT 4.1
NOTICE OF LEASE TERM DATES
Re: Office Building Lease (the "Lease") dated _________,199__ between The
Utah State Retirement Investment Fund, an independent agency of the
State of Utah ("Landlord") and _______________ a ____________
corporation ("Tenant") for the premises located at 3811 Turtle Creek
Boulevard, Suite _______, Dallas, Texas and commonly known as Turtle
Creek Centre ("Premises")
The undersigned, as Tenant, hereby confirms as of this _____ day of ______,
199_, the following:
1. The Substantial Completion Date for the Premises occurred on ______,
199_, and Tenant is currently occupying the same.
2. The Commencement Date, Expiration Date, and expiration date of the
Abatement Period, as each is defined in the Lease, are as follows:
Commencement Date:__________________
Expiration Date:____________________
3. All alterations and improvements required to be performed by
Landlord pursuant to the terms of the Lease to prepare the entire Premises
for Tenant's initial occupancy have been satisfactorily completed.
4. As of the date hereof, Landlord has fulfilled all of its obligations
under the Lease.
5. The Lease is in full force and effect and has not been modified,
altered, or amended.
6. There are no offsets or credits against Rent.
LANDLORD:
THE UTAH STATE RETIREMENT INVESTMENT FUND,
an independent agency of the State of Utah
By: CB Commercial Realty Advisors, Inc.
a Delaware corporation, Agent
By: /s/ MATTHEW C. HURLBUT
-----------------------------------------
Its: Vice President
-----------------------------------------
By:
-----------------------------------------
Its:
-----------------------------------------
Date:
-----------------------------------------
TENANT:
-----------------------------------------
-----------------------------------------
By: /s/ JOHN F. DAVIS, III
-----------------------------------------
Its:
-----------------------------------------
Date:
-----------------------------------------
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<PAGE> 35
FIRST AMENDMENT TO OFFICE LEASE
THIS FIRST AMENDMENT TO OFFICE LEASE (this "Amendment") is effective
as of the 25th day of February, 1998 (the "Effective Date"), by and between THE
UTAH STATE RETIREMENT INVESTMENT FUND, an independent agency of the State of
Utah ("Landlord"), and PEGASUS SYSTEMS, INC. ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and The Hotel Industry Switch Company ("Original
Tenant") entered into that certain Office Lease (the "Lease") dated October 1,
1995, covering approximately 29,750 square feet of rentable area on the
eleventh (11th) and twelfth (12th) floors in the building (the "Building")
commonly known as Turtle Creek Centre in Dallas, Texas;
WHEREAS, Original Tenant assigned all of its interests under the Lease
to Tenant; and
WHEREAS, Landlord and Tenant desire to modify the terms of the Lease
to expand the Premises and to modify certain other provisions of the Lease as
set forth herein but not otherwise.
NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars
($10.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby mutually acknowledged and confessed, Landlord and Tenant,
intending to be and being legally bound, do hereby agree as follows:
1. Defined Terms. All capitalized terms used herein and not defined
herein shall have the meanings set forth in the Lease.
2. Expansion of Premises. Commencing on the earlier to occur of (a)
July 1, 1998, or (b) two (2) days following the Date of Substantial Completion,
as provided in the Work Letter attached hereto and made a part hereof as
Exhibit B (the "Expansion Date"), Section 1.05 of the Lease shall be amended to
expand the Premises to include an additional 4,585 rentable square feet on the
fifth (5th) floor of the Building (the "Expansion Space") as shown on Exhibit A
attached hereto and incorporated herein, such that the total rentable square
footage of the Premises as of the Expansion Date shall be 34,335 rentable
square feet. The Expansion Space shall be added to and become part of the
Premises for all purposes of the Lease and shall be subject to all of the terms
and conditions contained in the Lease (including, without limitation, the
payment of Monthly Base Rent, Expense Adjustment, and Electrical Cost in
accordance with Article 1 and Article 4 of the Lease as modified herein),
subject to the modifications contained in this Amendment.
3. Lease Term for Expansion Space. The Term for the Expansion Space
shall commence on the Expansion Date and shall terminate on the Expiration Date
(as defined in Section 1.09 of the Lease), which is December 31, 2002, unless
the Initial Term of the Lease is extended pursuant to Section 3.02 of the Lease
and Tenant gives notice to Landlord in accordance with the provisions of
Section 3.02 of the Lease that it intends to renew the Lease as to the
Expansion Space, in which case the Term for the Expansion Space shall terminate
on the last day of the renewal Term. If Tenant elects to exercise its renewal
option set forth in Section 3.02 of the Lease, Tenant shall not be required to
renew the Term of the Lease as to the Expansion Space but may, at Tenant's
option, renew the Term of the Lease as to the Expansion Space in accordance
with the provisions of Section 3.02 of the Lease and this Paragraph 3.
4. Monthly Base Rent. Commencing on the Expansion Date and continuing
through and until the Expiration Date, Tenant's Monthly Base Rental for the
Expansion Space only (which amounts shall be in addition to and not in lieu of
the Monthly Base Rental as to the Existing Premises [defined below]) shall be
determined in accordance with this Paragraph 4. With respect to the Expansion
Space only, Tenant shall pay Monthly Base Rental in the following amounts:
<PAGE> 36
<TABLE>
<CAPTION>
Dates Annual Base Rent Monthly Base Rent
----- ---------------- -----------------
<S> <C> <C>
Expansion Date through $114,625.00 $9,552.08
the Expiration Date
</TABLE>
The foregoing Annual Base Rent amount is calculated based upon an Annual Base
Rent equal to the product of (x) $25.00, multiplied by (y) the rentable square
feet comprising the Expansion Space. Such amount is subject to increase
pursuant to Article 4 of the Lease.
As used in this Amendment, "Existing Premises" means the Premises
excluding the Expansion Space.
Commencing on the Expansion Date and continuing through and until the
Expiration Date, with respect to the Expansion Space only, Tenant shall be
obligated to pay (a) Tenant's Share of the Common Area Electrical Service and
the cost of electrical service to the Expansion Space in accordance with
Article 4 of the Lease, (b) Tenant's Share of Operating Expenses in accordance
with Article 4 of the Lease, and (c) other amounts payable under the Lease;
provided that effective as of the Expansion Date (i) Tenant's Share (as defined
in Section 1. 1 2 of the Lease) as to the Expansion Space only shall be 1.547%
and (ii) the Base Operating Year (as defined in Section 1.13 of the Lease) as
to the Expansion Space only shall be 1998. The Monthly Base Rent, Tenant's
Share of Electrical Costs, and Tenant's Share of Operating Expenses shall be
payable in accordance with the timing and procedures applicable thereto
pursuant to Article 4 of the Lease.
5. Tenant Improvements. Tenant shall accept the Expansion Space in its
current condition, as-is, without recourse to Landlord. ADDITIONALLY, LANDLORD
SHALL MAKE NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASEHOLD
IMPROVEMENTS IN THE EXPANSION SPACE. ALL IMPLIED WARRANTIES WITH RESPECT
THERETO, INCLUDING BUT NOT LIMITED TO THOSE OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE, ARE EXPRESSLY NEGATED AND WAIVED. Notwithstanding the
foregoing, Landlord hereby authorizes Tenant to undertake certain improvements
in the Expansion Space, and Landlord and Tenant each shall comply with the
provisions of the Work Letter attached hereto as Exhibit B in the construction
of such improvements to the Expansion Space.
6. Parking. Commencing on the Expansion Date and continuing through
and until the Expiration Date, Section 1. 19 of the Lease shall be amended to
provide that in addition to and not lieu of the Parking Spaces provided for
therein, Landlord shall furnish to Tenant and Tenant shall lease from Landlord
additional parking rights for (i) nineteen (19) Non-Reserved Parking Spaces,
and (ii) at Tenant's discretion up to three (3) Reserved Executive Parking
Spaces (collectively, the "Additional Parking Spaces"). The Additional Parking
Spaces shall become part of the Parking Spaces for all purposes under the Lease
and rental for the Additional Parking Spaces shall be due and payable in
accordance with the provisions of and in the amounts provided under Section
6.03 of the Lease.
7. Address Changes.
(a) As of the Effective Date, Section 1.01 of the Lease shall be
deleted in its entirety and replaced with the following:
The Utah State Retirement Investment Fund
c/o Westmark Realty Advisors, LLC
865 South Figueroa Street, Suite 3500
Los Angeles, California 90017-2543
Attn: Director of Asset Management
2
<PAGE> 37
(b) As of the Effective Date, Section 1.02 of the Lease shall be
deleted in its entirety and replaced with the following:
Pegasus Systems, Inc.
3811 Turtle Creek Boulevard
Suite 1100
Dallas, Texas 75219
(c) As of the Effective Date, Section 1.16 of the Lease shall be
deleted in its entirety and replaced with the following:
Fults Realty Corporation
3811 Turtle Creek Boulevard, Suite 240
Dallas, Texas 75219
Cawley International
5420 LBJ Freeway
Suite 740
Dallas, Texas 75240
(d) As of the Effective Date, the address provided in Section 1.17
of the Lease shall be deleted in its entirety and replace with the following:
Bradford Management Company of Dallas, Inc.
3811 Turtle Creek Boulevard, Suite 240
Dallas, Texas 75219
(e) As of the Effective Date, Section 1. 1 8 of the Lease shall be
deleted in its entirety and replaced with the following:
The Utah State Retirement Investment Fund
P.O. Box 730208
Dallas, Texas 75373-0208
(f) As of the Effective Date, Landlord's address for notice
purposes in Section 27.01 of the Lease shall be deleted and replaced with the
following:
To Landlord: Westmark Realty Advisors, LLC
865 South Figueroa Street Suite 3500
Los Angeles, California 90017-2543
Attn: Director of Asset Management
with a copy of each Notice to Landlord to be sent to:
Westmark Realty Advisors, LLC
5400 LB Freeway
Suite 1100
Dallas, Texas 75240-6249
Attn: Asset Manager
and a copy to:
Bradford Management Company of Dallas, Inc.
3811 Turtle Creek Boulevard, Suite 240
Dallas, Texas 75219
Attn: Property Manager for 3811 Turtle Creek
8. Brokerage Commission. Except for the commission payable to Cawley
International ("Broker") which commission is Landlord's responsibility pursuant
to a separate agreement signed by Landlord and Broker, Landlord and Tenant
hereby represent and warrant to each other that no commission is due and
payable to any broker or other leasing agent in connection with this Amendment
as a result of its own dealings with any such broker or leasing
3
<PAGE> 38
agent, and Landlord and Tenant hereby agree to indemnify and hold each other
harmless from and against all loss, damage, cost and expense (including
reasonable attorneys' fees) suffered by the other party as a result of a breach
of the foregoing representation and warranty.
9. Full Force and Effect. In the event any of the terms of the Lease
conflict with the terms of this Amendment, the terms of this Amendment shall
control. Except as amended hereby, all terms and conditions of the Lease shall
remain in full force and effect, and Landlord and Tenant hereby ratify and
confirm the Lease as amended hereby. The Lease, as amended herein, constitutes
the entire agreement between the parties hereto and no further modification of
the Lease shall be binding unless evidenced by an agreement in writing signed
by Landlord and Tenant.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed on the day and year first written above.
LANDLORD:
THE UTAH STATE RETIREMENT INVESTMENT
FUND, an independent agency of the State of Utah
By: Westmark Realty Advisors, L.L.C., a
Delaware limited liability company, its Agent
By: /s/ Matthew C. Hurlburt
-----------------------------------------------
Name: Matthew C. Hurlbut
Its: Authorized Signatory
By: /s/ Joseph W. Markling
-----------------------------------------------
Name: Joseph W. Markling
Its: Authorized Signatory
TENANT:
PEGASUS SYSTEMS, INC.
By: /s/ John F. Davis
-----------------------------------------------
Name: John F. Davis
Its: President
4
<PAGE> 39
EXHIBIT A
EXPANSION SPACE
A-1
<PAGE> 40
EXHIBIT B
WORK LETTER
The terms used herein shall have the meanings ascribed to them in this
Amendment, unless otherwise stated herein.
1. CONSTRUCTION OF THE EXPANSION SPACE. The Landlord and the Tenant
agree that their respective rights and obligations in reference to the
construction of the Expansion Space shall be as follows:
1.01 TENANT'S PLANS AND SPECIFICATIONS.
(a) Landlord shall cause to be prepared detailed
architectural, telephone, mechanical and engineering plans including all
dimensions and specifications for all work to be performed by Landlord in the
Expansion Space substantially in accordance with the space plan to be approved
by the parties ("Plans").
(b) Tenant shall cooperate as necessary in connection with
the preparation of the Plans, in a complete and timely manner, and without
limiting the foregoing, shall provide to Landlord all information as shall be
required by Landlord's engineers to prepare mechanical plans pursuant to
Section 1.02 hereof, which information shall include, but not be limited to,
the following:
(1) any special floor-loading conditions which may exceed
the structural weight limits of the floor,
(2) specifications of any heat emanating equipment to be
installed by Tenant which may require special air conditioning,
(3) electrical specifications of any equipment that
requires non-standard electrical power outlets, and
(4) complete specifications of any data-line wiring
required, including cable routing, conduit size, cable type and similar items
(provided Landlord shall have the right to approve but shall not perform, and
the Landlord's Work, as hereinafter defined, shall exclude all data-line wiring
and cable routing in and to the Expansion Space).
(c) The Plans shall be delivered to Tenant for its review and
consideration as soon as reasonably possible. Any change or modification of
such Plans shall not be valid or binding unless consented to by Landlord in
writing.
1.02 LANDLORD'S WORK.
(a) Landlord shall furnish and install substantially in
accordance with the Plans the materials and items described therein
("Landlord's Work"). The Plans and Landlord's Work shall be at Tenant's sole
cost and expense, provided that Tenant shall be entitled to a credit against
the cost of the Plans and Landlord's Work in an amount up to the lesser of (a)
$77,945.00 (i.e., $17.00, multiplied by the area of the Expansion Space) or (b)
the actual costs of the Plans and the Landlord's Work (the "Allowance"). If the
cost of the Landlord's Work is less than the Allowance, Landlord shall retain
such excess and Tenant shall not be entitled to receive such excess.
(b) If Landlord determines that the cost of the Landlord's
Work, will exceed the Allowance, then prior to commencement of the Landlord's
Work, Landlord will submit to Tenant a cost estimate for the Landlord's Work
("Cost Estimate") which Tenant shall approve or reject within seven (7) days
after receipt thereof. It is understood that the cost of Landlord's Work shall
include Landlord's construction supervision fee which shall be either (a) five
percent (5%) of the Job Cost (defined below) between $50,000 and $100,000, or
(b) four (4%) of the Job Cost that exceeds $100,000. Tenant's failure to reject
the Cost Estimate within said seven (7) day period shall be deemed to be an
acceptance thereof. If Tenant rejects the Cost Estimate, Tenant shall, together
with such rejection, propose such changes to the Plans as will cause the Cost
Estimate to be acceptable. If the accepted Cost Estimate exceeds the Allowance,
then
<PAGE> 41
Tenant shall pay to Landlord the amount of such excess within ten (10) business
days after receipt by Tenant of a bill therefor, but in no event later than the
Expansion Date.
As used herein, "Job Cost" shall mean the actual costs of the
Plans, Landlord's Work, and Extra Work (defined below), if any.
1.03 EXTRA WORK.
(a) Tenant may request substitutions, additional or extra
work and/or materials over and above Landlord's Work ("Extra Work") to be
performed by Landlord provided that the Extra Work, in Landlord's judgment, (1)
shall not delay completion of Landlord's Work or the Expansion Date of the
Lease; (2) shall be practicable and consistent with existing physical
conditions in the Building and any other plans for the Building which have been
filed with the appropriate municipality or other governmental authorities
having jurisdiction thereover; (3) shall not impair Landlord's ability to
perform any of Landlord's obligation hereunder or under the Lease or any other
lease of space in the Building; and (4) shall not affect any portion of the
Building other than the Expansion Space.
(b) (1) In the event Tenant requests Landlord to perform
Extra Work and if Landlord accedes to such request, then and in that event,
prior to commencing such Extra Work, Landlord shall submit to Tenant a written
estimate ("Estimate") for said Extra Work to be performed. Within seven (7)
days after Landlord's submission of the Estimate, Tenant shall, in writing,
either accept or reject the Estimate. Tenant's failure either to accept or
reject the Estimate within said seven (7) day period shall be deemed rejection
thereof.
(2) In the event that Tenant rejects the Estimate or the
Estimate is deemed rejected, Tenant shall within seven (7) days after such
rejection propose to Landlord such necessary revisions of the Plans so as to
enable Landlord to proceed as though no such Extra Work had been requested.
Should Tenant fail to submit such proposals regarding necessary revisions of
the Plans Within said seven (7) day period, Landlord, in its sole discretion,
may proceed to complete Landlord's Work in accordance with the Plans already
submitted, with such variations as in Landlord's sole discretion may be
necessary so as to eliminate the Extra Work.
(c) (1) All Extra Work shall require the installation of new
materials at least comparable to Building standards and any substitution shall
be of equal or greater quality than that for which it is substituted.
(2) Tenant may request the omission of an item of
Landlord's Work, provided that such omission shall not delay the completion of
Landlord's Work and Landlord thereafter shall not be obligated to install the
same. Credits for items deleted or not installed shall be granted in amounts
equal to credits obtainable from subcontractors or materialmen. In no event
shall there be any cash credits.
(d) In the event Landlord performs Extra Work hereunder,
Tenant shall pay to Landlord, upon acceptance of the Estimate or submission of
Landlord's bid therefor, as the case may be, a sum equal to twenty percent
(20%) of the Estimate or bid price to the extent the Estimate together with the
amount set forth in the Cost Estimate exceeds the Allowance. In the event of
any such excess, Tenant shall pay to Landlord such excess cost for the Extra
Work within seven (7) days after receipt by Tenant of a bill therefore or at
such other time or times as agreed to, but in no event shall the entire balance
be paid later than the completion of the Extra Work.
2. COMPLETION-PUNCH LIST. When the Landlord is of the opinion that the
Landlord's Work is complete, then the Landlord shall so notify the Tenant. The
Tenant agrees that upon such notification, the Tenant promptly (and not later
than two (2) business days after the date of Landlord's said notice) will
inspect the Expansion Space and furnish to the Landlord a written statement
that the Landlord's Work have been completed and are complete as required by
the provisions of this EXHIBIT B and the Lease with the exception of certain
specified and enumerated items (hereinafter referred to as the "Punch List").
The Tenant agrees that at the request of the Landlord from time to time
thereafter, the Tenant will indicate in writing to Landlord whether any prior
Punch List items have been completed. If the Punch List consists
B-2
<PAGE> 42
only of items which would not materially impair the Tenant's use or occupancy
of the Expansion Space, then, in such event, the Landlord's Work shall be
deemed complete and Tenant shall be deemed to have accepted possession of the
Expansion Space, provided, Landlord shall promptly complete all such Punch List
items; provided, however, that in no event shall Landlord be obligated to
repair latent defects, not originally listed on the Punch List, beyond a period
of six (6) months after the Completion Date. The date on which the Landlord's
Work is complete, pursuant to the provisions of this subsection, is sometimes
referred to as the "Date of Substantial Completion" or "Substantial Completion
Date." The Landlord's Work shall be deemed to be substantially complete and the
Date of Substantial Completion will be deemed to have occurred upon the
issuance of a certificate of occupancy or other similar license, permit, or
authorization. Promptly after the Substantial Completion Date, upon Landlord's
request, Tenant will execute an instrument in the form attached hereto as
EXHIBIT B-1, setting forth the Expansion Date of the Expansion Space, so that
said date is certain and such instrument, when executed, is hereby made part of
this Amendment incorporated herein by reference.
3. POSSESSION-EXTENSION OF TERM AND ACKNOWLEDGMENTS.
(a) The Tenant will take possession of the Expansion Space as of
and on the Expansion Date which, as set forth in Paragraph 2 of this Amendment,
shall be the earlier to occur of (a) July 1, 1998 or (b) the date which is two
(2) days following the Date of Substantial Completion. Landlord has not agreed
or represented that the Expansion Space will be substantially ready for
occupancy on July 1, 1998; provided however that Landlord has agreed that
Landlord will use its commercially reasonable efforts to cause the Expansion
Space to be substantially ready for occupancy on July 1, 1998. If for any
reason whatsoever the Landlord's Work is not complete on said date, this
Amendment shall nevertheless continue in full force and effect, and no
liability shall arise against Landlord because of any such delay, provided,
however, that all Rent due hereunder as to the Expansion Space only shall abate
on a per them basis and, as hereinabove provided, the Expansion Date shall be
deferred until the Date of Substantial Completion. Notwithstanding the
foregoing, there shall be no abatement of Rent and no deferral of the Expansion
Date if the Landlord's Work is not substantially complete due to any special
equipment, fixtures or materials, changes, alterations or additions requested
by Tenant, any delay of Tenant in submitting information necessary for the
preparation of the Plans, the failure of Tenant to timely approve or reject the
Cost Estimate, the failure of the Tenant to submit revisions following
rejection or deemed rejection of the Estimate, the requirement of Tenant for
any Extra Work, or the failure of the Tenant in supplying information of
approving or authorizing plans, specifications, estimates or other matters, or
any other act or omission of Tenant ("Tenant Delay"). If Tenant shall occupy
all or any part of the Expansion Space prior to the Expansion Date, all of the
covenants and conditions of this Amendment, including the obligation to pay
Rent, shall be binding upon the parties hereto in respect to such occupancy as
if the first day of the term of the Expansion Space had been the date when
Tenant began such occupancy.
(b) In the event the Date of Substantial Completion or the date
Landlord's Work would have been complete but for any Tenant Delays, is later
than July 1, 1998, (1) the Date of Substantial Completion shall be modified to
be the earlier of the Date of Substantial Completion or the date Landlord's
Work would have been complete but for any Tenant Delays and Monthly Base Rent,
Expense Adjustment, and Electrical Cost as to the Expansion Space will commence
accordingly, and (2) the Expiration Date shall not be adjusted.
4. TENANT'S ENTRY PRIOR TO COMPLETION DATE. Landlord may permit Tenant
or its agents or laborers to enter the Expansion Space at Tenant's sole risk
prior to the Expansion Date in order to perform through Tenant's own
contractors such work as Tenant may desire, at the same time that Landlord's
contractors are working in the Expansion Space. The foregoing license to enter
prior to the Expansion Date, however, is conditioned upon Tenant's labor not
interfering with Landlord's contractors or with any other tenant or its labor.
If at any time such entry shall cause disharmony, interference or union
disputes of any nature whatsoever, or if Landlord shall, in Landlord's sole
judgment, determine that such entry, such work or the continuance thereof shall
interfere with, hamper or prevent Landlord from proceeding with the completion
of the Building or Landlord's Work at the earliest possible date, this license
may be withdrawn by Landlord immediately upon written notice to Tenant. Such
entry shall be deemed to be under and subject to all of the terms, covenants
and conditions of this Amendment and the Lease, and Tenant shall comply with
all of the provisions of this Amendment and the Lease
B-3
<PAGE> 43
which are the obligations or covenants of the Tenant, including, but not
limited to, the provisions of Section 9.01 of the Lease, except that the
obligation to pay Rent as to the Expansion Space only shall not commence until
the Expansion Date. In the event that Tenant's agents or laborers incur any
charges from Landlord, including, but not limited to, charges for use of
construction or hoisting equipment on the Building site, such charges shall be
deemed an obligation of Tenant and shall be collectible as Rent pursuant to the
Lease, and upon default in payment thereof, Landlord shall have the same
remedies as for a default in payment of Rent pursuant to the Lease.
5. LANDLORD'S ENTRY AFTER SUBSTANTIAL COMPLETION. After the Expansion
Date, Landlord may enter the Expansion Space (i) during normal business hours
only after giving reasonable notice to Tenant, and (ii) at any time after
normal business hours with no requirement for notice to Tenant to complete
Punch List items, and such entry by Landlord, its agents, servants, employees
or contractors for such purpose shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of Rent, or relieve Tenant from any obligation under this Amendment or the
Lease, or impose any liability upon Landlord or its agents.
6. DELAYS. Landlord and Tenant mutually acknowledge that the
Landlord's construction process in order to complete the Expansion Space
requires a coordination of activities and a compliance by the Tenant without
delay of all obligations imposed upon the Tenant pursuant to this EXHIBIT B and
that time is of the essence in the performance of Tenant's obligations
hereunder and Tenant's compliance with the terms and provisions or this EXHIBIT
B.
7. PROVISIONS SUBJECT TO LEASE. The provisions of this EXHIBIT B are
specifically subject to the provisions of this Amendment and the Lease.
B-4
<PAGE> 44
EXHIBIT B-1
NOTICE OF AMENDED LEASE TERM DATES
Re: Office Building Lease (the "Original Lease") dated October 1, 1995
(the "Original Lease"), as assigned by that certain Assignment and
Assumption of Lease dated _____________, 1998 (the "Assignment"), as
amended by that certain First Amendment to Office Lease dated
____________, 1998 (the "First Amendment"; together with the Original
Lease and the Assignment, the "Lease") by and between The Utah State
Retirement Investment Fund, an independent agency of the State of Utah
("Landlord") and Pegasus Systems, Inc., a corporation ("Tenant") for
the premises located at 3811 Turtle Creek Boulevard, Suite 1100 &
1200, Dallas, Texas and commonly known as Turtle Creek Centre
("Premises"), including approximately 4,585 square feet of expansion
space ("Expansion Space") added to the Premises pursuant to the First
Amendment.
The undersigned, as Tenant, hereby confirms as of this _____ day of
._____________., 19___, the following:
1. The Substantial Completion Date for the Expansion Space occurred on
_________________, 199___, and Tenant is currently occupying the same.
2. The Expansion Date and Expiration Date, as each is defined in the First
Amendment, are as follows:
Expansion Date:
------------------------------------
Expiration Date: December 31, 2002
3. All alterations and improvements required to be performed by Landlord
pursuant to the terms of the First Amendment to prepare the Expansion Space for
Tenant's initial occupancy have been satisfactorily completed.
4. As of the date hereof, Landlord has fulfilled all of its obligations
under the Lease.
5. The Lease is in full force and effect and has not been modified,
altered, or amended (except by the First Amendment).
6. There are no offsets or credits against Rent.
B-1-1
<PAGE> 45
LANDLORD:
THE UTAH STATE RETIREMENT INVESTMENT
FUND, an independent agency of the
State of Utah
By: Westmark Realty Advisors, L.L.C.,
a Delaware limited liability company,
its Agent
By:
-----------------------------------------
Name: Matthew C. Hurlbut
Its: Authorized Signatory
By:
-----------------------------------------
Name: Joseph W. Markling
Its: Authorized Signatory
TENANT:
PEGASUS SYSTEMS, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
B-1-2
<PAGE> 46
SECOND AMENDMENT TO OFFICE LEASE
THIS SECOND AMENDMENT TO OFFICE LEASE (this "Amendment") is effective
as of 2 day of November, 1998 (the "Effective Date"), by and between THE UTAH
STATE RETIREMENT INVESTMENT FUND, an independent agency of the State of Utah
("Landlord"), and PEGASUS SYSTEMS, INC. ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and The Hotel Industry Switch Company ("Original
Tenant") entered into that certain Office Lease dated October 1, 1995, as
amended by that certain First Amendment to Office Lease dated February 25,
1998, and as assigned by that certain Assignment and Assumption of Lease dated
February 25, 1998 (as amended and assigned, the "Lease,") covering
approximately 34,335 square feet of rentable area on the fifth (5th), eleventh
(11th) and twelfth (12th) floors in the building (the "Building") commonly
known as Turtle Creek Centre in Dallas, Texas;
WHEREAS, Original Tenant assigned all of its interests under the Lease
to Tenant; and
WHEREAS, Landlord and Tenant desire to modify the terms of the Lease
to expand the Premises and to modify certain other provisions of the Lease as
set forth herein but not otherwise.
NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars
($10.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby mutually acknowledged and confessed, Landlord and Tenant,
intending to be and being legally bound, do hereby agree as follows:
1. Defined Terms. All capitalized terms used herein and not defined
herein shall have the meanings set forth in the Lease.
2. Expansion of Premises. Commencing on the Expansion Date (as defined
below) as to each portion of the Expansion Space (defined below) as set forth
in this paragraph below, the Leased Premises shall be expanded to include the
following space (collectively, the "Expansion Space"):
(i) 10,000 rentable square feet on the seventeenth (17th) floor of
the Building as shown on Exhibit A attached hereto ("First Space"); and
(ii) 4,568 rentable square feet on the seventeenth (17th) floor of
the Building as shown on Exhibit A attached hereto ("Second Space").
As used in this Amendment, the term "Applicable Expansion
Space" shall mean the First Space or the Second Space, as applicable.
As used in this Amendment, the term "Expansion Date" shall mean
the date set forth below for the Applicable Expansion Space:
<TABLE>
<CAPTION>
Applicable Expansion Space Expansion Date
-------------------------- --------------
<S> <C>
First Space January 1, 1999
Second Space April 1, 1999
</TABLE>
The Expansion Space shall be added to and become part of the Premises
for all purposes of the Lease and shall be subject to all of the terms and
conditions contained in the Lease (including, without limitation, the payment
of Monthly Base Rent, Expense Adjustment, and Electrical Cost in accordance
with Article 1 and Article 4 of the Lease as modified herein), subject to the
modifications contained in this Amendment.
3. Lease Term for Expansion Space. The Term for each Applicable
Expansion Space shall commence on the Expansion Date set forth in Paragraph 2
above as to such space,
<PAGE> 47
and shall terminate on the Expiration Date (as defined in Section 1.09 of the
Lease), which is December 31, 2002, unless the Initial Term of the Lease is
extended pursuant to Section 3.02 of the Lease, in which case the Term for the
Expansion Space shall terminate on the last day of the renewal Term. If Tenant
elects to exercise its renewal option set forth in Section 3.02 of the Lease,
Tenant shall renew the Term of the Lease as to all of the Premises, including
the Expansion Space.
4. Monthly Base Rent. Commencing on the Expansion Date as to each
Applicable Expansion Space and continuing through and until the Expiration
Date, Tenant's Monthly Base Rent for the Expansion Space only (which amounts
shall be in addition to and not in lieu of the Monthly Base Rent as to the
Existing Premises [defined below]) shall be determined in accordance with this
Paragraph 4. With respect to the Expansion Space only, Tenant shall pay Monthly
Base Rent in the following amounts:
<TABLE>
<CAPTION>
Dates Annual Base Rent Monthly Base Rent
----- ---------------- -----------------
<S> <C> <C>
Expansion Date for the First $270,000.00 $22,500.00
Space through the Expiration
Date
Expansion Date for the Second $123,336.00 $10,278.00
Space through the Expiration
Date
</TABLE>
The foregoing Annual Base Rent amount is calculated based upon an Annual Base
Rent equal to the product of (x) $27.00, multiplied by (y) the rentable square
feet comprising the Expansion Space. Such amount is subject to increase
pursuant to Article 4 of the Lease.
As used in this Amendment, "Existing Premises" means the
Premises excluding the Expansion Space.
Commencing on the Expansion Date and continuing through and
until the Expiration Date, with respect to the Expansion Space only, Tenant
shall be obligated to pay (a) Tenant's Share of the Common Area Electrical
Service and the cost of electrical service to the Expansion Space in accordance
with Article 4 of the Lease, (b) Tenant's Share of Operating Expenses in
accordance with Article 4 of the Lease, and (c) other amounts payable under the
Lease; provided that effective as of the Expansion Date (i) Tenant's Share (as
defined in Section 1.12 of the Lease) as to the First Space only shall be
3.374% and as to the Expansion Space only shall be 4.915%, and (ii) the Base
Operating Year (as defined in Section 1.13 of the Lease) as to the Expansion
Space only shall be 1999. The Monthly Base Rent, Tenant's Share of Electrical
Costs, and Tenant's Share of Operating Expenses shall be payable in accordance
with the timing and procedures applicable thereto pursuant to Article 4 of the
Lease.
5. Tenant Improvements. Tenant shall accept the Expansion Space in its
current condition, as-is, without recourse to Landlord. ADDITIONALLY, LANDLORD
SHALL MAKE NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE LEASEHOLD
IMPROVEMENTS IN THE EXPANSION SPACE. ALL IMPLIED WARRANTIES WITH RESPECT
THERETO, INCLUDING BUT NOT LIMITED TO THOSE OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE, ARE EXPRESSLY NEGATED AND WAIVED. Notwithstanding the
foregoing, Landlord hereby authorizes Tenant to undertake certain improvements
in the Expansion Space, and Landlord and Tenant each shall comply with the
provisions of the Work Letter attached hereto as Exhibit B in the construction
of such improvements to the Expansion Space. Notwithstanding the foregoing,
Landlord represents to Tenant that the restrooms and utilities on the
seventeenth (17th) floor are in good working order.
6. Right of First Notice. (a) After the first six (6) months of the
initial Lease Term, if space on floor 18 of the Building (the "First Notice
Space") is available for lease and Landlord receives an expression of interest
in the First Notice Space from a prospective tenant, Landlord shall deliver a
notice to Tenant offering to lease the First Notice Space to Tenant. Landlord's
2
<PAGE> 48
notice must specify the First Notice Rate (defined below). The term "available
for lease" means that the First Notice Space is not then subject to any
existing rights of third parties, including, without limitation, rights of
first notice, expansion rights, extension rights, options to lease, or other
rights.
(b) Tenant may elect to lease the First Notice Space by
delivering a notice (the "Response Notice") to Landlord within 7 business days
after the date of Landlord's notice specifying that Tenant elects either (i) to
lease all, but not less than all, of the First Notice Space or (ii) to decline
to lease the First Notice Space.
(c) If (i) Landlord does not receive the Response Notice
within the 7 business day period or (ii) in the Response Notice Tenant does not
elect to lease all of the First Notice Space, Tenant is deemed to waive its
right to lease the First Notice Space and Tenant has no further rights under
this Paragraph 6.
(d) If Tenant timely delivers a Response Notice electing to
lease all of the First Notice Space, Tenant's lease of the First Notice Space
commences not later than 90 days after Landlord's receipt of the Response
Notice (unless Landlord and Tenant agree on an earlier commencement date) and
is on the same terms as the Lease except that the Monthly Base Rent and other
applicable terms for the First Notice Space adjust based on the First Notice
Rate. Landlord shall prepare, and Landlord and Tenant will execute and deliver,
within 10 days after Landlord's receipt of the Response Notice, an amendment to
the Lease adding the First Notice Space to the Premises upon the terms
specified in this Paragraph, Tenant shall execute and deliver the amendment to
Landlord within 10 days after Tenant's receipt of the amendment, and Landlord
will deliver to Tenant a counterpart of the amendment executed by Landlord.
(e) Landlord is not obligated to offer the First Notice Space
to Tenant, and Tenant may not exercise its option to lease the First Notice
Space, if at the time Landlord would otherwise be obligated to give the Notice
to Tenant, Tenant is in default under this Lease.
(f) The terms "First Notice Rate" means the Base Rent, as
determined by Landlord in its sole discretion to be the then market base rent
for the First Notice Space.
(g) Tenant may not assign this option to lease the First
Notice Space to any assignee of the Lease, nor may any sublessee or assignee
exercise this option.
(h) Section 2.02 of the Lease is hereby amended to provide
that Tenant shall have no further rights of refusal during the last two years
of the then Term of this Lease.
7. Monument Signage. Section 8.05 of the Lease shall be amended to
provide that in addition to and not in lieu of the Monument Signage provided
for therein, for so long as (a) either (1) Tenant leases not less than three
(3) full floors of the Building under the Lease, or (2) Tenant is the largest
tenant in the Building, and (b) there is no uncured Default under the Lease,
Tenant shall have the exclusive right to use and maintain the existing monument
("Monument") signage generally located at the comer of Turtle Creek Boulevard
and Blackburn Street. The location, design, method of attachment, size,
materials, coloring, lettering and lighting of all such Monument signage shall
be subject to Landlord's approval, which approval shall not be unreasonably
withheld if such signage is similar to Tenant's existing monument signage, and
further subject to all other approvals as may be required including without
limitation the City of Dallas or any applicable scenic district, and in any
event to be consistent with the Building's design, signage and graphics
program. If at any time it is necessary to remove the signage due to the
requirements of applicable laws, rules or regulations, Landlord shall be
entitled, at Landlord's cost, to replace the signage with another sign on or
about the Building which provides substantially the same exposure for Tenant.
Landlord shall at all times be entitled to make such changes in the signage as
may be required by applicable laws as a condition of the continued use of the
Monument at Landlord's cost. Any change in the names displayed on the Monument
(i) shall be made by Landlord at Tenant's sole cost and expense, (ii) shall
utilize the materials, colors, method of illumination and lettering type
currently utilized, and (iii) must be approved by Landlord in its reasonable
discretion. In the event Tenant's name is changed, Landlord will not
unreasonably withhold approval of a change to the name displayed on the
Monument. Upon the expiration or earlier termination of this Lease (as concerns
all signage), or in the event Tenant no longer leases more than three (3) full
floors of the Building pursuant to the Lease or is otherwise
3
<PAGE> 49
not entitled to maintain such signage under the terms of the Lease, or if there
is an uncured Default under the Lease, Landlord, at Landlord's expense, shall
have the right to remove all such signage and make all necessary repairs to the
Monument so as to return the Monument to its respective original condition.
Tenant shall have no right to install any signage on the Building or in any
other location except as expressly set forth in the Lease. In addition,
Tenant's rights under this Paragraph shall terminate upon Tenant's assignment
of this Lease or sublease of the Premises.
8. Premises Condition. Landlord shall be responsible as an Operating
Expense to ensure the restrooms on the seventeenth (17th) floor of the Building
comply with applicable ADA standards for handicapped persons and other
accessibility requirements and laws, provided Tenant does not make alterations
that require changes to the restrooms, in which case Tenant shall then be
responsible for causing compliance.
9. Termination of Lease as to Fifth Floor Premises. Effective as of
January 1, 1999 (the "Reduction Date"), the Premises shall be reduced by, and
the Lease terminated as to, the 4,585 square feet of rentable area on the fifth
(5th) floor of the Building (as added to the Premises pursuant to the First
Amendment) as shown on Exhibit C attached hereto and incorporated herein (the
"Terminated Space"). As of the Reduction Date and through and until the
Expiration Date, the Premises shall consist of 39,750 square feet of rentable
area on the eleventh (11th), twelfth (12th) and seventeenth (17th) floors of
the Building (which square footage shall be increased by 4,568 square feet to
44,318 square feet of rentable area as of the Expansion Date for the Second
Space pursuant to Paragraph 2 above) for all purposes of the Lease. From and
after the Reduction Date, Tenant shall no longer have any rights (including the
right of possession) in the Terminated Space, and Landlord and Tenant shall be
released of all further obligations, covenants and agreements as to the
Terminated Space accruing under the Lease after the Reduction Date.
Notwithstanding the foregoing, in no event shall Landlord or Tenant be released
from (i) any of its obligations, covenants or agreements with respect to the
Terminated Space which accrue under the Lease prior to the Reduction Date
(including, without limitation, Tenant's obligation to pay rent with respect to
the Terminated Space for the period prior to the Reduction Date in accordance
with the provisions of the Lease), or (ii) any other provisions of the Lease
which by their terms survive the termination or expiration of the Lease.
10. Surrender of Terminated Space. Subject to Landlord delay of
completion of construction of improvements to the First Space, Tenant agrees to
surrender the Terminated Space to Landlord on the Reduction Date in the
condition required by Section 11.01 of the Lease without any subleases or
leases in effect with respect thereto, and free of occupancy by any person or
entity. Tenant represents and warrants to Landlord that there are no
agreements, written or oral, between Tenant and any other person or entity with
respect to the occupancy of all or any portion of the Terminated Space after
the Reduction Date. Subject to Landlord delay of completion of construction of
improvements to the First Space, if Tenant fails to timely surrender the
Terminated Space to Landlord in accordance with the provisions of this
Amendment, the provisions of Article 23 of the Lease shall apply to any such
holding over by Tenant with respect to the Terminated Space and Tenant shall
not be released from its obligations, covenants and agreements under the Lease
relating to the Terminated Space during such holdover period. From the date
hereof until the Reduction Date, upon reasonable prior verbal notice to Tenant,
Landlord shall have access to the Terminated Space for purposes of trying to
lease the Terminated Space.
11. Parking. Commencing on the Expansion Date and continuing through
and until the Expiration Date, Section 1.19 of the Lease shall be amended to
provide that in lieu of (but not in addition to) the Parking Spaces provided
for therein, (a) all parking spaces added pursuant to the First Amendment shall
be terminated, Tenant no longer being entitled to such spaces, and (b) Landlord
shall furnish to Tenant and Tenant shall lease from Landlord additional parking
rights for (i) forty-four (44) Non-Reserved Parking Spaces, and (ii) four (4)
Reserved Executive Parking Spaces (collectively, the "Additional Parking
Spaces"). The Additional Parking Spaces shall become part of the Parking Spaces
for all purposes under the Lease and rental for the Additional Parking Spaces
shall be due and payable in accordance with the provisions of and in the
amounts provided under Section 6.03 of the Lease.
Additional Non-Reserved Parking Spaces may be available to Tenant
on an as available basis ("Additional Temporary Spaces") at the same rates for
Non-Reserved Parking
4
<PAGE> 50
Spaces set forth in Section 6.03 of the Lease. Additional Temporary Spaces
shall be made available on a month-to-month basis and may be terminated by
Landlord at any time if Landlord determines that such Additional Temporary
Spaces can no longer be made available to Tenant because Landlord needs such
Additional Temporary Spaces to provide existing or new tenants of the Building
parking spaces in the ratio of one (1) space for every three hundred (300)
rentable square feet.
12. Brokerage Commission. Except for the commission payable to Cawley
International ("Broker") which commission is Landlord's responsibility pursuant
to a separate agreement signed by Landlord and Broker, Landlord and Tenant
hereby represent and warrant to each other that no commission is due and
payable to any broker or other leasing agent in connection with this Amendment
as a result of its own dealings with any such broker or leasing agent, and
Landlord and Tenant hereby agree to indemnify and hold each other harmless from
and against all loss, damage, cost and expense (including reasonable attorneys'
fees) suffered by the other party as a result of a breach of the foregoing
representation and warranty.
13. In the event any of the terms of the Lease conflict with the terms
of this Amendment, the terms of this Amendment shall control. Except as amended
hereby, all terms and conditions of the Lease shall remain in full force and
effect, and Landlord and Tenant hereby ratify and confirm the Lease as amended
hereby. The Lease, as amended herein, constitutes the entire agreement between
the parties hereto and no further modification of the Lease shall be binding
unless evidenced by an agreement in writing signed by Landlord and Tenant.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed on the day and year first written above.
LANDLORD:
THE UTAH STATE RETIREMENT INVESTMENT FUND,
an independent agency of the State of Utah
By: CB Richard Ellis Investors, LLC,
its Agent
By: /s/ Matthew C. Hurlbut
--------------------------------------
Name: Matthew C. Hurlbut
By: /s/ Victor R. Moore
--------------------------------------
Name: Victor R. Moore
TENANT:
PEGASUS SYSTEMS, INC.
By: /s/ John F. Davis, III
--------------------------------------
Name: John F. Davis, III
Title: President
5
<PAGE> 51
EXHIBIT A
EXPANSION SPACE
A-1
<PAGE> 52
EXHIBIT B
WORK LETTER
The terms used herein shall have the meanings ascribed to them in the Lease,
unless otherwise stated herein.
1. CONSTRUCTION OF THE PREMISES. The Landlord and the Tenant agree
that their respective rights and obligations in reference to the construction
of the Premises shall be as follows:
1.01 TENANT'S PLANS AND SPECIFICATIONS.
(a) Landlord, shall cause to be prepared detailed architectural,
telephone, mechanical and engineering plans including all dimensions and
specifications for all work to be performed by Landlord in the Premises
substantially in accordance with the space plan to be approved by Landlord and
Tenant ("Plans").
(b) Tenant shall cooperate as necessary in connection with the
preparation of the Plans, in a complete and timely manner, and without limiting
the foregoing, shall provide to Landlord all information as shall be required
by Landlord's engineers to prepare mechanical plans pursuant to Section 1.02
hereof, which information shall include, but not be limited to, the following:
(1) any special floor-loading conditions which may exceed the
structural weight limits of the floor,
(2) specifications of any heat emanating equipment to be
installed by Tenant which may require special air conditioning,
(3) electrical specifications of any equipment that requires
non-standard electrical power outlets, and
(4) complete specifications of any data-line wiring required,
including cable routing, conduit size, cable type and similar items (provided
Landlord shall have the right to approve but shall not perform, and the
Landlord's Work, as hereinafter defined, shall exclude all data-line wiring and
cable routing in and to the Premises).
(c) The Plans shall be delivered to Tenant for its review and
consideration as soon as reasonably possible. Any change or modification of
such Plans shall not be valid or binding unless consented to by Landlord in
writing.
1.02 LANDLORD'S WORK.
(a) Landlord shall furnish and install substantially in accordance
with the Plans the materials and items described therein ("Landlord's Work").
The Plans and Landlord's Work shall be at Tenant's sole cost and expense,
provided that Tenant shall be entitled to a credit against the cost of the
Plans and Landlord's Work in an amount up to the lesser of (a) $116,544.00,
(i.e., $8.00, multiplied by the area of the Premises) or (b) the actual costs
of the Plans and the Landlord's Work (the "Allowance").
(b) If Landlord determines that the cost of the Landlord's Work
will exceed the Allowance, then prior to commencement of the Landlord's Work,
Landlord will submit to Tenant a cost estimate for the Landlord's Work ("Cost
Estimate") which Tenant shall approve or reject within five (5) days after
receipt thereof. It is understood that the cost of Landlord's Work shall
include Landlord's then applicable construction supervision fee. Tenant's
failure to reject the Cost Estimate within said five (5) day period shall be
deemed to be an acceptance thereof. If Tenant rejects the Cost Estimate, Tenant
shall, together with such rejection, propose such changes to the Plans as will
cause the Cost Estimate to be acceptable. If the accepted Cost Estimate exceeds
the Allowance, then Tenant shall pay to Landlord the amount of such excess
within ten (10) business days after receipt by Tenant of a bill therefor, but
in no event later than the Expansion Date for the Applicable Expansion Space.
B-1
<PAGE> 53
1.03 EXTRA WORK.
(a) Tenant may request substitutions, additional or extra work
and/or materials over and above Landlord's Work ("Extra Work") to be performed
by Landlord provided that the Extra Work, in Landlord's judgment, (1) shall not
delay completion of Landlord's Work or the Expansion Date for the Applicable
Expansion Space pursuant to this Amendment; (2) shall be practicable and
consistent with existing physical conditions in the Building and any other
plans for the Building which have been filed with the appropriate municipality
or other governmental authorities having jurisdiction thereover; (3) shall not
impair Landlord's ability to perform any of Landlord's obligation hereunder or
under the Lease or any other lease of space in the Building; and (4) shall not
affect any portion of the Building other than the Premises.
(b) (1) In the event Tenant requests Landlord to perform Extra Work
and if Landlord accedes to such request, then and in that event, prior to
commencing such Extra Work, Landlord shall submit to Tenant a written estimate
("Estimate") for said Extra Work to be performed. Within five (5) days after
Landlord's submission of the Estimate, Tenant shall, in writing, either accept
or reject the Estimate. Tenant's failure either to accept or reject the
Estimate within said five (5) day period shall be deemed rejection thereof.
(2) In the event that Tenant rejects the Estimate or the
Estimate is deemed rejected, Tenant shall within five (5) days after such
rejection propose to Landlord such necessary revisions of the Plans so as to
enable Landlord to proceed as though no such Extra Work had been requested.
Should Tenant fail to submit such proposals regarding necessary revisions of
the Plans within said five (5) day period, Landlord, in its sole discretion,
may proceed to complete Landlord's Work in accordance with the Plans already
submitted, with such variations as in Landlord's sole discretion may be
necessary so as to eliminate the Extra Work.
(c) (1) All Extra Work shall require the installation of new
materials at least comparable to Building standards and any substitution shall
be of equal or greater quality than that for which it is substituted.
(2) Tenant may request the omission of an item of Landlord's
Work, provided that such omission shall not delay the completion of Landlord's
Work and Landlord thereafter shall not be obligated to install the same.
Credits for items deleted or not installed shall be granted in amounts equal to
credits obtainable from subcontractors or materialmen. In no event shall there
be any cash credits.
(d) In the event Landlord performs Extra Work hereunder, Tenant
shall pay to Landlord, upon acceptance of the Estimate or submission of
Landlord's bid therefor, as the case may be, a sum equal to twenty percent
(20%) of the Estimate or bid price to the extent the Estimate together with the
amount set forth in the Cost Estimate exceeds the Allowance. In the event of
any such excess, Tenant shall pay to Landlord such excess cost for the Extra
Work within five (5) days after receipt by Tenant of a bill therefore or at
such other time or times as agreed to, but in no event shall the entire balance
be paid later than the completion of the Extra Work.
2. COMPLETION-PUNCH LIST. When the Landlord is of the opinion that the
Landlord's Work is complete, then the Landlord shall so notify the Tenant. The
Tenant agrees that upon such notification, the Tenant promptly (and not later
than two (2) business days after the date of Landlord's said notice) will
inspect the Premises and furnish to the Landlord a written statement that the
Landlord's Work has been completed and is complete as required by the
provisions of this EXHIBIT B, this Amendment and the Lease with the exception
of certain specified and enumerated items (hereinafter referred to as the
"Punch List"). The Tenant agrees that at the request of the Landlord from time
to time thereafter, the Tenant will indicate in writing to Landlord whether any
prior Punch List items have been completed. If the Punch List consists only of
items which would not materially impair the Tenant's use or occupancy of the
Premises, then, in such event, the Landlord's Work shall be deemed complete and
Tenant shall be deemed to have accepted possession of the Premises, provided,
Landlord shall promptly complete all such Punch List items; provided, however,
that in no event shall Landlord be obligated to repair latent defects, not
originally listed on the Punch List, beyond a period of six (6) months after
the
B-2
<PAGE> 54
Completion Date. The date on which the Landlord's Work is complete, pursuant to
the provisions of this subsection, is sometimes referred to as the "Date of
Substantial Completion" or "Substantial Completion Date. " The Landlord's Work
shall be deemed to be substantially complete and the Date of Substantial
Completion will be deemed to have occurred upon the issuance of a certificate
of occupancy or other similar license, permit, or authorization.
Notwithstanding the foregoing, Tenant shall be obligated to pay Monthly Base
Rent, Tenant's Share of Electrical Costs, Tenants' Share of Operating Expenses,
and any other amounts pursuant to the Lease and this Amendment as of the
Expansion Date for the Applicable Expansion Space.
3. POSSESSION-EXTENSION OF TERM AND ACKNOWLEDGMENTS.
(a) The Tenant will take possession of the Premises as of and on
the Expansion Date for the Applicable Expansion Space as set forth in Section 2
of this Amendment. Landlord has not agreed or represented that the Premises
will be substantially ready for occupancy on the date specified in Section 2 of
this Amendment. If for any reason whatsoever the Landlord's Work is not
complete on said date, this Amendment shall nevertheless continue in full force
and effect, and no liability shall arise against Landlord because of any such
delay, provided, however, that all Rent due hereunder shall abate on a per them
basis. Notwithstanding the foregoing, there shall be no abatement of Rent and
no deferral of the Expansion Date for the Applicable Expansion Space if the
Landlord's Work is not substantially complete due to any special equipment,
fixtures or materials, changes, alterations or additions requested by Tenant,
any delay of Tenant in submitting information necessary for the preparation of
the Plans, the failure of Tenant to timely approve or reject the Cost Estimate,
the failure of the Tenant to submit revisions following rejection or deemed
rejection of the Estimate, the requirement of Tenant for any Extra Work, or the
failure of the Tenant in supplying information of approving or authorizing
plans, specifications, estimates or other matters, or any other act or omission
of Tenant ("Tenant Delay"). If Tenant shall occupy all or any part of the
Premises prior to the Expansion Date for the Applicable Expansion Space, all of
the covenants and conditions of this Amendment, including the obligation to pay
Rent, shall be binding upon the parties hereto in respect to such occupancy as
if the first day of the Term had been the date when Tenant began such
occupancy.
4. TENANT'S ENTRY PRIOR TO COMPLETION DATE. Landlord may permit Tenant
or its agents or laborers to enter the Premises at Tenant's sole risk prior to
the Expansion Date for the Applicable Expansion Space in order to perform
through Tenant's own contractors such work as Tenant may desire, at the same
time that Landlord's contractors are working in the Premises. The foregoing
license to enter prior to the Expansion Date, however, is conditioned upon
Tenant's labor not interfering with Landlord's contractors or with any other
tenant or its labor. If at any time such entry shall cause disharmony,
interference or union disputes of any nature whatsoever, or if Landlord shall,
in Landlord's sole judgment, determine that such entry, such work or the
continuance thereof shall interfere with, hamper or prevent Landlord from
proceeding with the completion of the Building or Landlord's Work at the
earliest possible date, this license may be withdrawn by Landlord immediately
upon written notice to Tenant. Such entry shall be deemed to be under and
subject to all of the terms, covenants and conditions of the Lease, and Tenant
shall comply with all of the provisions of the Lease which are the obligations
or covenants of the Tenant, including, but not limited to, the provisions of
Section 9.01 of the Lease, except that the obligation to pay Rent shall not
commence until the Expansion Date for the Applicable Expansion Space. In the
event that Tenant's agents or laborers incur any charges from Landlord,
including, but not limited to, charges for use of construction or hoisting
equipment on the Building site, such charges shall be deemed an obligation of
Tenant and shall be collectible as Rent pursuant to the Lease, and upon default
in payment thereof, Landlord shall have the same remedies as for a default in
payment of Rent pursuant to the Lease.
5. LANDLORD'S ENTRY AFTER SUBSTANTIAL COMPLETION. At any time after
the Expansion Date for the Applicable Expansion Space, Landlord may enter the
Premises to complete Punch List items, and such entry by Landlord, its agents,
servants, employees or contractors for such purpose shall not constitute an
actual or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of Rent, or relieve Tenant from any obligation under
this Amendment or the Lease, or impose any liability upon Landlord or its
agents.
B-3
<PAGE> 55
6. DELAYS. Landlord and Tenant mutually acknowledge that the
Landlord's construction process in order to complete the Premises requires a
coordination of activities and a compliance by the Tenant without delay of all
obligations imposed upon the Tenant pursuant to this EXHIBIT B and that time is
of the essence in the performance of Tenant's obligations hereunder and
Tenant's compliance with the terms and provisions or this EXHIBIT B.
7. PROVISIONS SUBJECT TO LEASE. The provisions of this EXHIBIT B are
specifically subject to the provisions of this Amendment.
<PAGE> 56
EXHIBIT C
FIFTH (5TH) FLOOR TERMINATED SPACE
C-1
<PAGE> 1
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA(1)
The following selected consolidated financial data as of and for the years
ended December 31, 1998 and 1997 and for the year ended December 31, 1996 are
derived from the Consolidated Financial Statements of the Company that have
been audited by PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this Annual Report. Selected consolidated financial data
as of December 31, 1996 are derived from the Company's financial statements
that have been audited by PricewaterhouseCoopers LLP, but are not included
herein. The selected consolidated financial data as of and for the years ended
December 31, 1995 and 1994 are derived from the Company's financial statements
that have been audited by Belew Averitt LLP, independent accountants, 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" and
with the Company's Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $ 29,064 $ 20,903 $ 15,869 $ 9,296 $ 4,666
Net income (loss) 5,396 589 (3,485) (3,571) (423)
Net income (loss) per share(2)
Basic 0.52 0.08 (0.66) (1.30) (0.56)
Diluted 0.48 0.07 (0.66) (1.30) (0.56)
Working capital (deficit) 44,398 38,397 2,068 (1,560) (844)
Total assets 60,320 49,923 13,892 10,316 4,150
Long-term obligations, net of current portion 58 661 6,353 6,994 4,718
Total stockholders' equity (deficit) 54,264 43,478 1,954 (2,380) (2,649)
</TABLE>
(1) The Company's selected consolidated financial data for 1994 consist of the
accounts of The Hotel Industry Switch Company (THISCO), a wholly owned
subsidiary of the Company. Selected consolidated financial data for
periods thereafter reflect the operations of the Company, including the
depreciation and amortization of the following:
o Acquisition of 83.3% of the outstanding capital stock of The Hotel
Clearing Corporation (HCC) in July 1995;
o Acquisition of the remaining 16.7% of the outstanding capital stock of
HCC in June 1996; and
o Acquisition of Driving Revenue L.L.C. (Driving Revenue) in August 1998.
Amortization applicable to the acquisition of HCC totaled approximately
$798,000, $1,534,000, $1,412,000 and $645,000 in 1998, 1997, 1996 and
1995, respectively. Amortization applicable to Driving Revenue totaled
approximately $125,000 in 1998.
(2) Certain net income (loss) per share amounts were retroactively adjusted
for a one hundred-for-one stock split that occurred in June 1996 and a
four-for-three stock split that occurred in August 1997. Such calculations
reflect the adoption of Statement of Financial Accounting Standards No.
128, "Earnings per Share" (FAS 128) in 1997. In accordance with FAS 128,
all prior periods presented were restated.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report. This
Annual Report contains certain forward-looking statements that involve risks
and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those discussed in the forward-looking
statements as a result of certain factors including those set forth in the
Company's filings with the Securities and Exchange Commission, including its
Form 10-K for the fiscal year ended December 31, 1998.
OVERVIEW
Pegasus is a leading provider of transaction processing services to the hotel
industry worldwide. The Company is organized based on the products and services
offered through its three core businesses: Electronic Distribution, Commission
Processing and Business Intelligence.
Pegasus Electronic Distribution. Services provided by the Electronic
Distribution segment, consisting of the THISCO, TravelWeb, NetBooker and other
Internet-based hotel reservation services, improve the efficiency and
effectiveness of the hotel reservation process by enabling travel agents and
individual travelers to electronically access hotel room inventory information
and conduct reservation transactions.
THISCO provides an electronic interface between a hotel's central reservation
system and the global distribution systems (GDS) that travel agents use to book
hotel and airline reservations. Pegasus derives revenues from its THISCO
service by charging its hotel participants a fee based on the number of
reservations made, less the number cancelled ("net reservations"), and a fee
for "status messages" processed through the THISCO service. Status messages are
electronic messages sent by hotels to GDSs 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. This process of recognizing revenues
creates a deferred revenue balance during early periods of the year, which is
reflected in interim balance sheets. The deferred revenue balance created
during the early periods of the year is fully utilized and eliminated by the
end of each year. Additionally, Pegasus generally charges new participants in
the THISCO service a one-time set-up fee for work associated with the
implementation of the interface with the THISCO service. Revenue for these
one-time set-up fees is recognized on a percentage of completion basis as the
services are performed over the set-up period, which generally ranges from two
to six months. The Company also charges certain GDSs a fee based on the number
of net reservations to compensate for the management and consolidation of
multiple interfaces.
TravelWeb provides hotel and airline reservation capabilities to individual
travelers through the Internet (www.travelweb.com). Pegasus derives its
TravelWeb revenues by charging participating hotels subscription fees based on
the number of their properties included in the database and a combination of
transaction fees or commissions. Transaction fees are based on the number of
net reservations made at participating properties through the TravelWeb
service, and commissions are based on the value of the guest stay for
reservations booked through the TravelWeb service.
NetBooker is a private label version of the TravelWeb database and booking
capability that Pegasus offers to third-party Web sites. Pegasus realizes
revenues from NetBooker by charging third-party Web sites an initial
development and licensing fee and by charging hotels a fee based on the number
of net reservations made through the NetBooker service.
Pegasus Commission Processing. The Commission Processing segment, formerly
referred to as HCC, is the global leader in hotel commission payment
processing. Commission Processing services improve the efficiency and
effectiveness of the commission payment process for participating hotels and
travel agencies by consolidating payments
1
<PAGE> 3
and providing comprehensive transaction reports. Pegasus derives revenues from
its Commission Processing service by charging a participating travel agency a
fee based on a percentage of commissions paid to that agency through the HCC
service. The Company also generally charges a participating hotel a fee based
on the number of commissionable transactions arising from that hotel. Revenues
from Commission Processing 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.
Pegasus Business Intelligence. The Business Intelligence segment, formerly
referred to as the Pegasus IQ service, provides data mining and reporting
services for benchmark analysis and strategic planning for the hotel industry.
Pegasus derives its Business Intelligence revenues by charging hotels fees for
the development of hotel databases and for consulting services.
Historically, the Company has derived a majority of its revenues from
Electronic Distribution and Commission Processing services. For the year ended
December 31, 1998, approximately 42% of the Company's consolidated revenues was
derived from Electronic Distribution services, approximately 55% of the
Company's consolidated revenues was derived from Commission Processing services
and approximately 3% of the Company's consolidated revenues was derived from
Business Intelligence services. The Company has experienced substantial growth
since its inception. Revenues increased at a compound annual rate of
approximately 48% to $29.1 million in 1998 from $2.8 million in 1992, excluding
1992 revenues from the HCC service which was acquired in 1995. However, there
can be no assurance that the Company will experience the same rate of revenue
growth in the future. Any significant decrease in the rate of revenue growth
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company has developed or is in the process of developing several new
services to capitalize on its existing technology and customer base and to
provide additional electronic hotel reservation capabilities and information
services to existing Pegasus customers and to other participants in the hotel
room distribution process. New services for Electronic Distribution include
services that automate the processing of hotel bookings for large meetings and
conventions and for corporate travelers. New services for Business Intelligence
include data mining and reporting services for benchmark analysis and strategic
planning for the hotel industry. The Company 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. The Company's
future success will depend, in part, on its ability to:
o develop leading technologies;
o enhance its existing services;
o develop and introduce new services that address the increasingly
sophisticated and varied needs of its current and prospective
customers; and
o respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis.
The Company's cost of services consists principally of personnel costs relating
to information technology, facilities and equipment maintenance costs and fees
paid to the Company's processing bank for the processing of travel agency
commissions. 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 and goodwill. Interest expense includes interest on notes payable
to certain stockholders of the Company and interest on payments made under
capital equipment leases. Minority interest represents certain former minority
interests in subsidiaries that have been wholly owned by the Company since June
1996.
2
<PAGE> 4
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net revenues. The Company's net revenues for 1998 increased to $29.1 million
from $20.9 million in 1997, an increase of 39.0%. The increase in revenues was
primarily driven by higher transaction levels for the Company's Electronic
Distribution and Commission Processing services as well as revenue derived from
new Business Intelligence services.
Electronic Distribution revenues increased 24.8% in 1998 compared to 1997
primarily due to an increase in the number of hotel reservations made through
the Company's site on the Internet (www.travelweb.com) and an increase in the
average fee earned per transaction. In addition, there was an increase in the
number of hotel reservations made through other Internet sites that use the
Company's NetBooker service. Also, more hotel companies paid fees to be listed
in the Company's hotel database. Net reservations made through the Company's
THISCO service increased by 22.6% in 1998 compared to 1997, but this increase
was offset by a reduction in the average fee per reservation. As a result, net
revenues from the THISCO service remained consistent with the prior year.
Commission Processing revenues increased 43.6% in 1998 compared to 1997 as a
result of a 34.4% 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
the Commission Processing service. The value of commissions paid by the Company
increased 48.5% in 1998 compared to 1997 because of an increase in the number
of hotel commission transactions processed by the Company combined with an
increase in the average value of the commissions processed. The average value
of commissionable transactions processed by the Company increased due to rising
overall average daily rates for hotel rooms as well as a higher proportion of
transactions generated by full-service and luxury hotel chains. 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.
Business Intelligence revenues were $903,000 for 1998 and consisted of fees
charged to hotels for the development and maintenance of hotel databases and
for consulting services.
Cost of services. Cost of services increased by $2.3 million, or 30.5%, to $9.7
million in 1998 from $7.4 million in 1997. Cost of services increased due to
additional staffing, higher pay rates for technology personnel and the
increased number of Commission Processing transactions, which added to the
processing fees paid to the Company's processing bank.
Research and development; Write-off of purchased in-process R&D. Research and
development expenses increased $1.7 million, or 65.9%, to $4.2 million in 1998
from $2.5 million in 1997. Excluding the effect of the one-time charge taken in
1998 for in-process research and development expenses relating to the
acquisition of Driving Revenue L.L.C. (Acquisition), research and development
expenses increased $170,000, or 6.8%, to $2.7 million in 1998 from $2.5 million
in 1997. This increase was primarily due to expenditures relating to the
development of Business Intelligence services. Based on a third party
valuation, approximately $1.5 million of the Acquisition 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.
General and administrative expenses. General and administrative expenses
increased $727,000, or 19.6%, to $4.4 million in 1998 from $3.7 million in
1997. The increase was primarily due to higher legal, accounting, insurance,
printing and reporting costs associated with operating as a public company.
Marketing and promotion expenses. Marketing and promotion expenses increased
$826,000, or 20.7%, to $4.8 million in 1998 from $4.0 million in 1997.
Marketing and promotion expenses grew primarily due to the addition of sales
and marketing staff, the promotion of the TravelWeb service and amortization of
new customer contract incentives.
3
<PAGE> 5
Depreciation and amortization. Depreciation and amortization expenses decreased
$327,000, or 10.8%, to $2.7 million in 1998 from $3.0 million in 1997. This
decrease was primarily due to the final amortization of capitalized software
related to the Company's acquisition of 83.3% of HCC's outstanding capital
stock in 1995. The decrease was partially offset by the addition of
amortization related to software purchased from Wetherly International in
December 1997 and the addition of goodwill and software amortization related to
the acquisition of Driving Revenue L.L.C. (Driving Revenue) in August 1998.
Interest income. Interest income increased $1.5 million to $2.5 million in 1998
from $994,000 in 1997. Interest income increased as a result of short-term
investment of operating cash balances and of a portion of the proceeds from the
Company's secondary public offering of its common stock in February 1998. In
addition, 1998 included a full year of interest income earned on proceeds from
the Company's initial public offering of common stock in August 1997.
Interest expense. Interest expense decreased $453,000, or 75.5%, to $147,000 in
1998 from $600,000 in 1997. The 1998 expense reflects payments made under
capital equipment leases. The 1997 expense consisted of interest accrued on
promissory notes payable to certain Company stockholders as well as interest
accrued on payments made under capital equipment leases. The Company repaid all
of its promissory notes in August 1997 using a portion of the proceeds from its
initial public offering.
Income taxes. Income taxes for 1998 reflect state and foreign income taxes
payable as the Company was able to realize the benefit of its federal net
operating loss carryforwards. In the fourth quarter of 1998, the Company
released a significant portion of the valuation allowance as management
believes it is more likely than not that the net deferred tax asset will be
realized. Income taxes for 1997 reflect foreign income taxes payable with
respect to the taxable earnings of the Company's United Kingdom subsidiary,
which reports earnings on a cost-plus basis. In 1997, the net deferred tax
asset was fully reserved because of uncertainty regarding the Company's ability
to realize the benefit of the asset in future years.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net revenues. The Company's net revenues for 1997 increased to $20.9 million
from $15.9 million in 1996, an increase of 31.7%. The increase in revenues was
primarily driven by higher transaction levels for the Company's Electronic
Distribution and Commission Payment services.
Electronic Distribution revenues increased 21.2% in 1997 compared to 1996. Net
reservations made through the Company's THISCO service increased 25.7% in 1997
compared to 1996. Revenues contributed by the Company's TravelWeb service
decreased by 7.7% in 1997 compared to 1996. This decrease was primarily a
result of the transition from revenues based on Web page building and
maintenance fees to revenues based on monthly subscription fees and booking
fees per net reservation.
Commission Processing revenues increased 42.8% as a result of a 38.0% increase
in hotel commission transactions processed during 1997 compared to 1996. The
increase in the number of transactions was due in part to the addition of hotel
properties, including those of Marriott Corporation, and travel agencies
participating in the Commission Processing service. The net revenues to the
Company per commissionable transaction increased in 1997 because of an increase
in overall average daily rates for hotel rooms.
Cost of services. Cost of services increased by $1.2 million, or 20.1%, to $7.4
million in 1997 from $6.2 million in 1996. Cost of services increased due to
additional staffing in support of the Company's Electronic Distribution and
Commission Processing services and the increased number of Commission
Processing transactions, which added to the processing fees paid to the
Company's processing bank.
Research and development; Write-off of purchased in-process R&D. Research and
development expenses increased $298,000, or 13.5%, to $2.5 million in 1997 from
$2.2 million in 1996. Excluding the effect of the one-time charge taken in 1996
for in-process research and development expenses relating to the acquisition
of HCC, research and development expenses increased $543,000, or 27.7%, to
$2.5 million in 1997 from $2.0 million in 1996. This increase was primarily
due to additional work on TravelWeb including the development of the hotel
database.
4
<PAGE> 6
General and administrative expenses. General and administrative expenses
decreased $84,000, or 2.2%, to $3.7 million in 1997 from $3.8 million in 1996.
This decrease was primarily due to a number of non-recurring expenses incurred
in 1996 associated with the closing of a financial transaction.
Marketing and promotion expenses. Marketing and promotion expenses increased
$1.2 million, or 41.5%, to $4.0 million in 1997 from $2.8 million in 1996.
Marketing and promotion expenses grew primarily due to the addition of sales
and marketing staff, the promotion of TravelWeb and, to a lesser degree, the
promotion of the other Electronic Distribution services and Commission
Processing services.
Depreciation and amortization. Depreciation and amortization expenses decreased
$409,000, or 11.9%, to $3.0 million in 1997 from $3.4 million in 1996. This
decrease was primarily due to the 1996 completion of amortization for a number
of software development projects that had been previously capitalized.
Interest income. During 1997, the Company realized $994,000 in interest income
as a result of short-term investment of operating cash balances and of the
proceeds from its initial public offering.
Interest expense. Interest expense decreased $293,000, or 32.8%, to $600,000 in
1997 from $893,000 in 1996. The expense reflects interest accrued on promissory
notes payable to certain stockholders of the Company and interest accrued on
payments made under capital equipment leases. Interest expense decreased
primarily due to the repayment of all promissory notes in August 1997 using
proceeds from the Company's initial public offering of common stock.
Income taxes. Income taxes reflect foreign income taxes payable with respect to
the taxable earnings of the Company's United Kingdom subsidiary, which reports
earnings on a cost-plus basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at December 31, 1998 included cash
and cash equivalents of $25.0 million, short-term investments of $15.8 million
and restricted cash of $2.1 million. Restricted cash represents funds for
travel agency commission checks that have not cleared the processing bank and
are returned to the Company. The portion of restricted cash not remitted to
travel agents will be escheated to the appropriate state, as required. The
Company has financed its cash requirements for investments in equipment
primarily through cash generated from operations, the sale of capital stock and
capital lease financing.
Working capital increased from $38.4 million in 1997 to $44.4 million in 1998,
and net cash provided by operating activities increased from $2.8 million in
1997 to $6.8 million in 1998 due to the Company's improved operating
performance.
Capital expenditures consist of purchases of software, furniture and equipment
and amounted to $1.7 million in 1998 compared to $1.6 million in 1997. In
addition, the Company acquired no equipment under capital leases in 1998
compared with $79,000 in 1997. Additional uses of cash for investing activities
in 1998 included the purchase of Driving Revenue, strategic equity investments
and marketable securities.
The Company completed an initial public offering of its common stock in August
1997, raising proceeds of $40.5 million, net of offering expenses.
Approximately $5.2 million of the proceeds was used to repay notes payable to
stockholders and to repay certain lease obligations. The remainder of the
proceeds was placed in short-term marketable securities. The Company completed
a secondary offering of its common stock in February 1998, raising net proceeds
to the Company of $4.2 million. A portion of the proceeds was used to repay
certain lease obligations, with the remaining proceeds placed in short-term
marketable securities.
5
<PAGE> 7
The Company 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 the Company's results of operations
to the extent such increases are not passed along to customers.
The Company believes that there are sufficient funds available from operations
to adequately manage the expansion of the business in the foreseeable future.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue is primarily the result of information technology
(IT) and non-IT systems and programs with date sensitive devices, such as
embedded chips or code, using only the last two digits to refer to a year. The
failure of these devices to interpret dates beyond the year 1999 could cause a
system failure or other errors, with the resultant disruption in the operation
of such systems.
State of readiness. Beginning in July 1997, the Company established internally
staffed project teams to address Year 2000 issues related to the services
provided to customers as well as any IT and non-IT internal systems supporting
the Company's operations. The Company is currently in the process of testing
and upgrading, if necessary, its systems and processes to comply with the
requirements of the Year 2000 date transition. Company personnel are
researching internal IT and non-IT hardware, software and data issues related
to dates and date range processing, and each product line is undergoing
extensive internal and external testing. Any non-compliant hardware or software
discovered during testing will be upgraded or replaced. This process includes
contacting material third-party suppliers and customers to assess their Year
2000 readiness. The following is a table showing the Company's state of Year
2000 readiness based on management's assessment:
STATE OF READINESS
Internal IT and Non-IT Systems and Equipment
<TABLE>
<CAPTION>
Percent Estimated
Phase Complete Completion Date
----- -------- ---------------
<S> <C> <C>
Awareness............................................... 100% Complete
Assessment of changes required.......................... 100% Complete
Remediation or replacement.............................. 90% June 1999
Testing................................................. 85% June 1999
Contingency planning.................................... 50% June 1999
</TABLE>
Suppliers, Customers and Third-Party Providers
<TABLE>
<CAPTION>
Percent Estimated
Phase Complete Completion Date
----- -------- ---------------
<S> <C> <C>
Awareness............................................... 100% Complete
Assessment questionnaires............................... 100% Complete
Detail assessment review with third-party providers..... 75% June 1999
Contract review......................................... 75% June 1999
Contingency planning.................................... 50% June 1999
Testing as applicable................................... 85% June 1999
</TABLE>
Costs. During 1998 and 1997, the Company expensed approximately $258,000 and
$108,000, respectively, in labor
6
<PAGE> 8
costs associated with its Year 2000 efforts. In 1999, labor costs related to
Year 2000 efforts are expected to be less than those incurred in 1998 and
comparable to those incurred in 1997. In addition, the Company anticipates
incurring approximately $13,000 for the lease of additional testing hardware in
1999. In 1998, the Company capitalized $48,000 of computer equipment. This
computer equipment was purchased to address the Year 2000 issue, and upon the
completion of Year 2000 testing it is anticipated that such equipment will be
used to support the growth of current systems. The Company does not anticipate
incurring a material amount of additional costs related to the purchase of IT
or non-IT systems hardware for the purpose of addressing the Year 2000 issue.
Cash required to fund these matters is expected to be generated from
operations. To date, no IT development projects have been delayed due to Year
2000 remediation efforts.
Risk/Contingency Plans. Even though the Company is undertaking efforts to
ensure that all its systems and programs are Year 2000 compliant, the Company
has no control over services, functions and data provided by third-party
vendors and others which may result in the inability to provide services. The
Company has contacted and is working with its material customers and vendors to
verify their degree of Year 2000 compliance. The Company has requested
end-to-end testing with those systems that interface with the Company's
systems. However, the Company has no control over Year 2000 compliance for
third parties. To date, the Company has received responses from substantially
all of its material third-party customers and vendors. The extent to which
third-party customers and vendors do not become Year 2000 compliant in a timely
manner may have a material adverse effect on the Company's cash flow and
results of operations.
The Company derives nearly all of its revenues from processing electronic
reservations or consolidating hotel commissions electronically. The inability
or limitation of its ability to process electronic reservations or consolidate
hotel commissions due to Year 2000 problems would have a material impact on the
Company's revenues and cash flow. Due to the electronic medium used by the
Company to conduct the majority of its business, any interruption or outage of
telecommunications, electricity or other basic utility services may also
adversely impact the Company's ability to do business. As discussed above, the
Company has begun its efforts to evaluate the readiness of these critical
suppliers.
The Company services the travel industry and is dependent on the continued
health of the industry. Any general disruption of travel due to Year 2000
issues that adversely affects other travel vendors such as airlines, hotels and
travel agency systems would also have a material adverse effect on the
Company's cash flows and results of operations.
The Company is in the early phase of developing contingency plans and
determining the extent of such plans.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires that
certain costs related to the development or purchase of internal-use software
be capitalized and amortized over the estimated useful life of the software.
SOP 98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Accordingly, the Company will adopt SOP 98-1 in its 1999
annual financial statements. The Company does not believe the adoption of SOP
98-1 will have a material impact on the Company's results of operations or
financial condition.
In June 1998, the Financial Accounting Standards Board 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 is effective for the Company's first
quarter financial statements in fiscal 2000. The Company is not currently
involved in derivative instruments or hedging activities, and therefore, will
measure the impact of this statement as it becomes necessary.
7
<PAGE> 9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Pegasus Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Pegasus Systems, Inc. and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
February 2, 1999
F-1
<PAGE> 10
PEGASUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents ........................................ $ 25,002,185 $ 30,166,793
Restricted cash .................................................. 2,106,676 1,286,032
Short-term investments ........................................... 15,768,400 9,380,050
Accounts receivable, net of allowance for doubtful accounts of
$98,633 and $77,860, respectively ................................ 3,687,518 1,972,135
Other current assets ............................................. 3,689,254 1,232,874
------------ ------------
Total current assets ................................. 50,254,033 44,037,884
Capitalized software, net ........................................ 869,619 1,183,453
Property and equipment, net ...................................... 2,635,068 2,712,091
Goodwill, net of accumulated amortization of $522,018 and
$303,815, respectively ......................................... 4,238,071 1,560,900
Other noncurrent assets .......................................... 2,323,620 428,981
------------ ------------
Total assets ......................................... $ 60,320,411 $ 49,923,309
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ......................... $ 4,715,018 $ 4,048,343
Unearned income .................................................. 258,667 477,688
Current portion of capital lease obligations ..................... 535,072 1,048,179
Customer deposits ................................................ 347,422 66,694
------------ ------------
Total current liabilities .............................. 5,856,179 5,640,904
Capital lease obligations, net of current portion ................ 57,634 661,049
Other noncurrent liabilities ..................................... 142,380 143,612
Commitments and contingencies (Note 11) .......................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
Zero shares issued and outstanding ..................... -- --
Common stock, $.01 par value; 50,000,000 shares authorized,
10,653,371 and 10,297,529 shares issued,
respectively ........................................... 106,533 102,975
Additional paid-in capital ................................. 63,383,905 58,120,337
Unearned compensation ...................................... (615,636) (738,533)
Accumulated deficit ........................................ (8,584,246) (13,980,697)
Less treasury stock (116,484 shares, at cost) .............. (26,338) (26,338)
------------ ------------
Total stockholders' equity ............................. 54,264,218 43,477,744
------------ ------------
Total liabilities and stockholders' equity ............. $ 60,320,411 $ 49,923,309
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 11
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues (Note 1) ................ $ 29,064,467 $ 20,903,416 $ 15,869,012
Cost of services ..................... 9,716,854 7,445,271 6,199,058
Research and development ............. 2,673,628 2,504,074 1,961,055
Write-off of purchased in-process
research and development (Note 3) .. 1,480,085 -- 244,600
General and administrative expenses .. 4,442,557 3,715,547 3,799,199
Marketing and promotion expenses ..... 4,823,787 3,998,054 2,824,633
Depreciation and amortization ........ 2,689,867 3,016,619 3,425,678
------------ ------------ ------------
Operating income (loss) .............. 3,237,689 223,851 (2,585,211)
Other income (expense):
Interest income .................... 2,503,265 993,592 114,150
Interest expense ................... (146,879) (600,067) (893,177)
------------ ------------ ------------
Income (loss) before income taxes
and minority interest .............. 5,594,075 617,376 (3,364,238)
Income taxes ......................... 197,624 27,916 15,000
------------ ------------ ------------
Income (loss) before minority interest 5,396,451 589,460 (3,379,238)
Minority interest .................... -- -- (105,563)
------------ ------------ ------------
Net income (loss) .................... $ 5,396,451 $ 589,460 $ (3,484,801)
============ ============ ============
Basic net income (loss) per share:
Basic .............................. $ 0.52 $ 0.08 $ (0.66)
============ ============ ============
Diluted ............................ $ 0.48 $ 0.07 $ (0.66)
============ ============ ============
Weighted average shares outstanding:
Basic .............................. 10,460,947 7,200,382 5,246,800
============ ============ ============
Diluted ............................ 11,196,895 8,676,052 5,246,800
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 12
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
NUMBER OF NUMBER OF PAID-IN UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995 ............... -- $ -- 5,218,000 $ 52,180 $ 8,652,969 $ --
---------- ------- ----------- -------- ----------- --------
Issuance of
preferred
stock to
Information
Associates,
L.P. and
Information
Associates,
C.V. ................ 1,538,463 15,385 -- -- 7,484,620 --
Issuance
of
common
stock for
purchase
of minority
interest ............ -- -- 89,733 897 277,725 --
Purchase of
treasury stock....... -- -- -- -- -- --
Issuance of
compensatory
stock options ....... -- -- -- -- 551,150 (485,937)
Proceeds from
stock
subscription ........ -- -- -- -- 1,900 --
Net loss .............. -- -- -- -- -- --
---------- ------- ----------- -------- ----------- --------
Balance at
December 31,
1996 ................ 1,538,463 15,385 5,307,733 53,077 16,968,364 (485,937)
---------- ------- ----------- -------- ----------- --------
Conversion of
preferred
stock to
common stock ........ (1,538,463) (15,385) 1,538,463 15,385 -- --
Initial
public
offering ............ -- -- 3,450,000 34,500 40,459,000 --
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
NUMBER OF ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
<S> <C> <C> <C> <C>
Balance at
December 31,
1995 ................ -- $ -- $(11,085,356) $ (2,380,207)
--------- ------- ------------ ------------
Issuance of
preferred
stock to
Information
Associates,
L.P. and
Information
Associates,
C.V. ............... -- -- -- 7,500,005
Issuance
of
common
stock for
purchase
of minority
interest ........... -- -- -- 278,622
Purchase of
treasury stock ...... (116,484) (26,338) -- (26,338)
Issuance of
compensatory
stock options ....... -- -- -- 65,213
Proceeds from
stock
subscription ........ -- -- -- 1,900
Net loss .............. -- -- (3,484,801) (3,484,801)
Balance at
December 31,
1996 ................ (116,484) (26,338) (14,570,157) 1,954,394
--------- ------- ------------ ------------
Conversion of
preferred
stock to
common stock ........ -- -- -- --
Initial
public
offering ............ -- -- -- 40,493,500
</TABLE>
F-4
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Warrants issued
for contract........ -- -- -- -- 238,000 --
Issuance of
compensatory
stock options....... -- -- -- -- 450,847 (252,596)
Exercise stock
options............. -- -- 1,333 13 4,126 --
Net income............ -- -- -- -- -- --
----- ----- ---------- ------------ ------------ ------------
Balance at
December 31,
1997.................. -- -- 10,297,529 102,975 58,120,337 (738,533)
----- ----- ---------- ------------ ------------ ------------
Secondary
offering.............. -- -- 280,321 2,803 4,222,493 --
Windfall tax
benefit of
stock options......... -- -- -- -- 403,532 --
Issuance of
compensatory
stock options......... -- -- -- -- 240,928 28,176
Forfeitures of
compensatory
stock options......... -- -- -- -- (94,721) 94,721
Exercise stock
options............... -- -- 63,875 639 330,592 --
Issuance for
stock purchase
plan.................. -- -- 11,646 116 160,744 --
Net income............ -- -- -- -- -- --
----- ----- ---------- ------------ ------------ ------------
Balance at
December 31,
1998.................. -- $ -- 10,653,371 $ 106,533 $ 63,383,905 $ (615,636)
===== ===== ========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Warrants issued
for contract.......... -- -- -- 238,000
Issuance of
compensatory
stock options......... -- -- -- 198,251
Exercise stock
options............... -- -- -- 4,139
Net income.............. -- -- 589,460 589,460
-------- ------------ ------------ ------------
Balance at
December 31,
1997.................. (116,484) (26,338) (13,980,697) 43,477,744
-------- ------------ ------------ ------------
Secondary
offering.............. -- -- -- 4,225,296
Windfall tax
benefit of
stock options......... -- -- -- 403,532
Issuance of
compensatory
stock options......... -- -- -- 269,104
Forfeitures of
compensatory
stock options -- -- -- --
Exercise stock
options............... -- -- -- 331,231
Issuance for
stock purchase
plan.................. -- -- -- 160,860
Net income.............. -- -- 5,396,451 5,396,451
-------- ------------ ------------ ------------
Balance at
December 31,
1998.................. (116,484) $ (26,338) $ (8,584,246) $ 54,264,218
======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 14
PEGASUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 5,396,451 $ 589,460 $ (3,484,801)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Minority interest ............................................. -- -- 105,563
Accrued interest reclassified to notes payable ................ -- 58,049 91,927
Windfall tax benefit from employee exercise of
non-qualified stock options .................................. 403,532 -- --
Write off of in-process research and development costs ........ 1,480,085 -- 244,600
Adjustment for discontinued software projects ................. -- -- 316,698
Loss (gain) on sale of equipment .............................. 4,821 (53) 9,564
Depreciation and amortization ................................. 2,689,867 3,016,619 3,425,678
Deferred income taxes ......................................... (2,084,625) -- --
Decrease goodwill due to release of valuation allowance ....... 1,467,246 -- --
Recognition of stock option compensation ...................... 269,104 198,251 65,213
Other ......................................................... 27,615 3,359 --
Changes in assets and liabilities:
Restricted cash ............................................. (820,644) (595,826) (360,029)
Accounts receivable ......................................... (1,566,348) (292,779) (284,104)
Other current and noncurrent assets ......................... (807,830) (1,203,609) (156,931)
Accounts payable and accrued liabilities .................... 794,456 1,425,801 748,481
Unearned income ............................................. (413,840) (463,488) (431,373)
Other noncurrent liabilities ................................ 9,030 23,904 119,709
------------ ------------ ------------
Net cash provided by operating activities ................. 6,848,920 2,759,688 410,195
------------ ------------ ------------
Cash flows from investing activities:
Purchase of software, property and equipment .................... (1,729,950) (1,594,401) (495,100)
Proceeds from sale of software, property and equipment .......... 29,887 1,075 133,134
Purchase of marketable securities ............................... (33,832,343) (11,486,932) (2,705,076)
Proceeds from sale of marketable securities ..................... 27,416,378 4,808,599 --
Purchase of Driving Revenue L.L.C. .............................. (5,998,366) -- --
Purchase of equity interest in investees ........................ (1,500,000) -- --
------------ ------------ ------------
Net cash used in investing activities ..................... (15,614,394) (8,271,659) (3,067,042)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock ................................. 4,717,387 40,497,639 7,500,005
Purchase of minority interest ................................... -- -- (2,000,000)
Repayments on notes payable to affiliates ....................... -- (5,447,133) (235,000)
Repayments of capital leases .................................... (1,116,521) (1,171,966) (974,969)
Purchase of treasury stock ...................................... -- -- (26,338)
Proceeds from stock subscription ................................ -- -- 1,900
Proceeds from line of credit .................................... -- -- 175,000
Repayment of line of credit ..................................... -- -- (175,000)
Proceeds from capital leases .................................... -- 3,913 93,729
------------ ------------ ------------
Net cash provided by financing activities ................... 3,600,866 33,882,453 4,359,327
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .............. (5,164,608) 28,370,482 1,702,480
Cash and cash equivalents, beginning year ......................... 30,166,793 1,796,311 93,831
------------ ------------ ------------
Cash and cash equivalents, end of year ............................ $ 25,002,185 $ 30,166,793 $ 1,796,311
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 144,833 $ 601,787 $ 858,017
============ ============ ============
Income taxes paid ............................................... $ 256,288 $ 17,916 $ --
============ ============ ============
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment under capital leases ................... $ -- $ 79,144 $ 1,045,988
============ ============ ============
Issuance of common stock for acquisitions (Notes 3 and 8) ....... $ -- $ -- $ 278,622
============ ============ ============
Common stock warrants issued in exchange for customer
contract asset ............................................... $ -- $ 238,000 $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 15
PEGASUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BACKGROUND
In July 1995, Pegasus Systems, Inc. (Pegasus or the Company) was formed as a
Delaware holding company to combine the operations of two existing companies
operating in the same industry, The Hotel Industry Switch Company (THISCO) and
The Hotel Clearing Corporation (HCC). For accounting purposes, the combination
was recorded as a purchase of HCC.
CONSOLIDATION
The accompanying financial statements include the consolidated accounts of
Pegasus and its wholly owned subsidiaries: THISCO, HCC, Pegasus IQ, Inc.
(Pegasus IQ) and Driving Revenue L.L.C. (Driving Revenue) (collectively, the
Company or Pegasus) THISCO is consolidated with its wholly owned subsidiary,
TravelWeb, Inc. (TravelWeb), and HCC is consolidated with its wholly owned
subsidiary, Pegasus Systems Inc. (UK) Limited (Pegasus UK). All significant
intercompany balances have been eliminated in consolidation.
THISCO was formed in September 1988 as a Delaware corporation. The Company's
THISCO service provides an electronic interface from hotel central reservation
systems to travel agencies through Global Distribution Systems (GDSs), which
are electronic travel information and reservation systems such as SABRE.
HCC, acquired by the Company in July 1995, was formed in July 1991 as a
Delaware corporation. The Company's HCC service consolidates commissions paid
by participating hotels to a participating travel agency into a single monthly
payment and provides participants with comprehensive transaction reports. Hotel
properties and travel agencies worldwide utilize the HCC service to increase
efficiency and reduce costs associated with preparing, paying and reconciling
hotel room reservation commissions.
Pegasus UK, a wholly-owned subsidiary of HCC, was formed in September 1993 in
England to market and provide services for travel agents and hotel chains
operating in Europe, Africa and Asia.
TravelWeb was formed in October 1995 as a Delaware corporation. The Company's
TravelWeb service provides individual travelers direct access to online hotel
information and the ability to make reservations electronically at hotel
properties. In addition, through its NetBooker service, the Company offers
TravelWeb's comprehensive hotel database and Internet hotel reservation
capabilities to third-party Web sites.
Pegasus IQ was formed in November 1997 as a Delaware corporation. Pegasus IQ is
expected to provide a wide array of hotel industry data, research and reporting
services for benchmark analysis and strategic planning purposes.
Driving Revenue, acquired by the Company in August 1998 (Note 3), is a hotel
database marketing and consulting firm.
MANAGEMENT ESTIMATES
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results may differ from those estimates.
F-7
<PAGE> 16
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 which have not cleared the Company's
processing bank after certain time periods are returned to the Company. Any
amounts which are not remitted to travel agents will be escheated to the
appropriate state, as required.
INVESTMENTS IN DEBT SECURITIES
Marketable securities held by the Company at December 31, 1998 and 1997 are
classified as held-to-maturity and consist of corporate debt securities that
mature in less than one year. At December 31, 1998 and 1997 the amortized cost
of corporate debt securities was $15,768,400 and $9,380,050, respectively. As
of December 31, 1998 and 1997, the aggregate fair market value of the
held-to-maturity securities was not materially different from their carrying
values. The gross unrealized gains and losses by type of security were not
material.
CAPITALIZED SOFTWARE
All costs incurred in the internal development of computer software used in
delivery of the Company's services are expensed until a product design and a
working model of the software have been tested and completed. Thereafter, any
further development or production costs are capitalized until the software is
placed into service. Maintenance and customer support costs are expensed when
incurred. 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 products. In the event unamortized software
costs exceed the net realizable value of the software, the excess is recognized
in the period the excess is determined. Additionally, capitalized software
includes software purchased from third parties used in the operations of the
Company.
Prior to 1996, capitalized costs were being amortized over three to five years
using the straightline method. However, in 1996 the Company changed the
estimated life of all capitalized software costs to three years. The effect of
this change in 1998 and 1997 was to increase net income by approximately
$144,000 and $142,000 and basic and diluted income per share by $0.01 and
$0.02, respectively. The effect of this change in 1996 was to increase net loss
by approximately $292,000 and basic or diluted loss per share by $0.06. During
1996, the Company recorded a charge of approximately $317,000 resulting from
discontinued software development projects. During 1998, 1997 and 1996, the
Company capitalized software costs of approximately $646,000, $505,000, and
$470,000, respectively. For all periods presented capitalized software
additions consist of software purchased from third parties. During 1998, 1997
and 1996, amortization expense related to capitalized software was
approximately $959,000, $1,435,000 and $2,125,000, respectively. Accumulated
amortization of capitalized software was approximately $9,134,000 and
$8,174,000 at December 31, 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives, ranging from three to seven years. Leasehold
improvements are amortized over the life of the lease using the straight-line
method. 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.
F-8
<PAGE> 17
The Company evaluates long-lived assets 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. An
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. Based
on its most recent analysis, the Company believes that no impairment of
property and equipment existed at December 31, 1998 or 1997.
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 ten to fifteen years. Unamortized goodwill at December 31, 1998 and
1997, was $4,238,071 and $1,560,900, 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. Based
on its most recent analysis, the Company believes that no impairment of
goodwill existed at December 31, 1998 or 1997. Amortization of goodwill was
approximately $218,000, $125,000 and $121,000 in 1998, 1997 and 1996,
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. Customer Analytics,
Inc. is a new database marketing applications and solutions provider
specializing in the area of customer relationship marketing. The investment is
accounted for based on the lower of cost or fair value.
In September 1998, the Company purchased 225,225 shares of Series B Convertible
Preferred Stock of Intermezzo Systems, Inc. for $1,000,000. Intermezzo Systems,
Inc. is a developer of hotel reservation and property management systems and
software. The investment is accounted for based on the lower of cost or fair
value.
REVENUES
Pegasus primarily derives its revenues from transaction fees and commissions
charged to participating hotels and travel agencies. The Company's revenues are
predominantly transaction-based.
Pegasus derives its revenues from its THISCO service by charging its hotel
participants a fee based on the number of reservations made, less the number
cancelled ("net reservations"), and a fee for "status messages" processed
through the THISCO service. Status messages are electronic messages sent by
hotels to GDSs 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. This process of recognizing revenues creates a deferred revenue
balance during early periods of the year, which is reflected in interim balance
sheets. The deferred revenue balance created during the early periods of the
year is fully utilized and eliminated by the end of each year. Additionally,
Pegasus generally charges new participants in the THISCO service a one-time
set-up fee for work associated with the implementation of the interface with
the THISCO service. Revenue for these one-time set-up fees is recognized on a
percentage of completion basis as the services are performed over the set-up
period, which generally ranges from two to six months. The Company also charges
certain GDSs a fee based on the number of net reservations to compensate for
the management and consolidation of multiple interfaces.
Pegasus derives its revenues from its HCC service by charging a participating
travel agency a fee based on a percentage of commissions paid to that agency
through the HCC service. The Company also generally charges a participating
hotel
F-9
<PAGE> 18
a fee based on the number of commissionable transactions arising from that
hotel. Revenues from HCC 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 HCC
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, 1998, 1997 and 1996, HCC revenues
from hotels are presented net of commission payments to travel agencies of
approximately $255,000,000, $165,000,000, and $105,000,000, respectively. HCC
revenues also include amortization of a $2.0 million payment received by the
Company in June 1993 in exchange for a five-year non-cancelable data processing
contract. This payment was initially recorded as unearned income and is being
recognized as revenue over the life of the contract (Note 11).
Pegasus derives its TravelWeb revenues by charging participating hotels
subscription fees based on the number of their properties included in the
database and a combination of transaction fees or commissions. Transaction fees
are based on the number of net reservations made at participating properties
through the TravelWeb service, and commissions are based on the value of the
guest stay for reservations booked through the TravelWeb service. Pegasus
realizes revenues from NetBooker, the Company's hotel room reservation service
provided to third-party Web sites, by charging third-party Web sites an initial
development and licensing fee and by charging hotels a fee based on the number
of net reservations made through the NetBooker service.
Pegasus derives its Business Intelligence revenues by charging hotels fees for
the development and maintenance of hotel databases and for consulting services.
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 rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for a portion or all of the
deferred tax assets when there is sufficient uncertainty regarding the
Company's ability to recognize the benefits of the assets in future years.
ADVERTISING COSTS
Advertising and promotion-related expenses are charged to operations when
incurred. Advertising expense for 1998, 1997 and 1996 was approximately
$1,105,000, $609,000 and $613,000, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments reflected in the
consolidated balance sheets at December 31, 1998 and 1997 approximate their
respective fair values.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments exposed to concentrations of credit risk
consist primarily of cash and receivables. Cash balances, exceeding the
federally insured limits, are maintained in financial institutions; however,
management believes the institutions are of high credit quality. The majority
of receivables are due from companies which are well-established entities in
the travel industry. Therefore, management considers any exposure from
concentrations of credit risks to be limited.
F-10
<PAGE> 19
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 (loss) based on the
provisions of FAS 123 is presented in Note 9. 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.
STOCK SPLITS
A one hundred-for-one stock split was effected in June 1996. All references in
the consolidated financial statements to shares, share prices, per share
amounts and stock plans have been adjusted retroactively for the one
hundred-for-one stock split. Additional information is presented in Note 8.
In May 1997, the Board of Directors approved the declaration of a
four-for-three stock split of the outstanding common and preferred stock
effected in the form of a dividend to stockholders of record on the effective
date of the Registration Statement on Form S-1 with respect to the Company's
initial public offering (IPO) (Note 8). All references in the consolidated
financial statements to shares, share prices, per share amounts and stock plans
have been adjusted retroactively for the four-for-three stock split.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency for the Company's foreign
operations. Gains and losses on the translation into U.S. dollars of amounts
denominated in foreign currencies are included in net income (loss).
NET INCOME (LOSS) PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (FAS 128). FAS 128 replaces primary and fully
dilutive earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of potential common shares. Basic net income per share is based on the
weighted average outstanding common shares. Diluted net income per share is
based on the weighted average outstanding shares reduced by the effect of
potential common shares. Net income (loss) for prior periods presented in the
accompanying consolidated financial statements have been restated to comply
with FAS 128 (Note 15).
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income". This statement requires separate
financial statement disclosure of comprehensive income, which encompasses
changes in net asset values derived from activity from both owner and non-owner
sources. There were no items that qualified for treatment as components of
other comprehensive income for the periods presented.
SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (FAS
131). FAS 131 supercedes Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. FAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of FAS 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information (Note 16).
F-11
<PAGE> 20
2. REORGANIZATION
In July 1995, the Company issued 4,934,667 shares of its common stock in
exchange for all of the outstanding capital stock of THISCO and 83.3% of the
outstanding capital stock of HCC (the Reorganization). Lodging Network, Inc.
(LNI) retained 210 shares of HCC preferred stock, representing a 16.7% minority
interest in HCC. The Reorganization brought THISCO and HCC together under the
control of Pegasus and was initiated to integrate and expand the existing
businesses of THISCO and HCC. Pegasus was formed immediately prior to the
transaction for the purpose of combining the two operations into a single
entity. For accounting purposes, the combination was recorded as a purchase of
HCC.
3. ACQUISITIONS
In June 1996, the Company purchased 210 shares of HCC preferred stock from LNI
for $2,000,000 cash and 89,733 shares of Pegasus common stock. The 210 HCC
preferred shares purchased represented a 16.7% minority ownership of HCC. After
the purchase, Pegasus owned 100% of the outstanding shares of HCC. The
transaction was accounted for as a purchase. The amount paid in excess of the
minority interest value of $1,445,245 on the date of purchase was approximately
$833,000 and was accounted for as $119,000 of goodwill to be amortized ratably
over a 15 year period, $245,000 of in-process research and development costs
and $469,000 of step-up in the fair value of capitalized software costs. Such
amount of in-process research and development was charged to expense at the
date of acquisition. The fair value of the Company's common stock given as
consideration was determined using an independent valuation.
In August 1998, the Company acquired all of the equity interest in Driving
Revenue for approximately $6 million plus estimated expenses of less than
$100,000 (Acquisition). Driving Revenue provides hotel database marketing and
consulting services.
The Acquisition was recorded under the purchase method of accounting, and
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:
<TABLE>
<CAPTION>
<S> <C>
Current assets (including approximately $2,000 cash). $ 176,000
Software............................................. $ 344,000
Property and equipment............................... $ 42,000
Goodwill............................................. $ 4,296,000
Current liabilities.................................. $ 338,000
</TABLE>
Approximately $1,480,000, based on a valuation performed by a third party, 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. Factors considered in determining the amount of the
purchase price allocated to in-process research and development 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 in-process research
and development was charged to expense at the date of acquisition. The balance
of the purchase price, approximately $4,296,000, was recorded as the excess of
cost over the fair value of net assets acquired (goodwill) and is being
amortized on a straight-line basis over a ten year period ending August 2008.
F-12
<PAGE> 21
4. ACCOUNTS RECEIVABLE
The Company collects travel agents' commissions from hotel chains and, after
retaining a portion of these commissions as a fee for services, remits the net
commissions to the travel agents. At December 31, 1998 and 1997, trade accounts
receivable were stated net of commissions of approximately $21,505,000 and
$14,309,000, respectively.
Net accounts receivable from affiliates of approximately $772,000 was included
in the accompanying consolidated balance sheet at December 31, 1997. Net
accounts receivable from affiliates for 1997 primarily consisted of amounts due
from certain stockholder hotel chains. Disclosing the amounts due from
stockholder hotel chains was not considered necessary in 1998 since their
ownership percentage was reduced due to the Company's IPO in August 1997, the
secondary offering in February 1998 and subsequent open market sales of their
shares. The ownership percentage of the stockholder hotel chains was an
aggregate of less than 10% of the Company's common shares outstanding at
December 31, 1998; therefore, the stockholder hotel chains were not considered
affiliates as of and for the year ended December 31, 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Computer equipment ............... $ 5,817,100 $ 4,985,455
Furniture and equipment .......... 890,334 677,183
Office equipment ................. 1,320,239 974,851
Leasehold improvements ........... 93,313 97,379
----------- -----------
8,120,986 6,734,868
Less: accumulated depreciation ... (5,485,918) (4,022,777)
----------- -----------
Property and equipment, net ...... $ 2,635,068 $ 2,712,091
=========== ===========
</TABLE>
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 1998 and 1997 were approximately $3,436,000 and $3,747,000,
respectively, net of accumulated amortization of $3,054,000 and $2,531,000,
respectively. Amortization of assets under capital leases is included in
depreciation and amortization expense.
F-13
<PAGE> 22
Future minimum lease payments and related interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<C> <C>
1999............................................ $ 602,041
2000............................................ 60,170
---------
Aggregate minimum lease payments................ 662,211
Less: amount representing interest and taxes.... (69,505)
---------
592,706
Less: current portion........................... (535,072)
---------
$ 57,634
=========
</TABLE>
Interest rates on capital leases range from approximately 7% to 15%. Interest
expense on capital leases for the years ended December 31, 1998, 1997 and 1996
was approximately $144,000, $277,000 and $351,000, respectively.
7. NOTES PAYABLE
In August 1997, the Company repaid all outstanding principal and accrued
interest on notes payable from the proceeds of the Company's IPO (Note 8).
Total principal and interest paid during 1997 was approximately $5,254,000 and
$457,000, respectively. During 1996, the Company paid interest totaling
$478,000. Interest expense related to these notes was approximately $322,000
and $539,000 during the years ended December 31, 1997 and 1996, respectively.
8. STOCKHOLDERS' EQUITY
In conjunction with the Reorganization, the Company issued 283,333 shares of
restricted common stock to certain members of management in connection with the
termination of a bonus plan for HCC's management (Note 2). During 1996, the
Company repurchased 25,467 shares from a terminated employee. The restrictions
on these shares expired when the Company completed its IPO in August 1997.
As a result of the Reorganization, certain stockholders exchanged shares of
THISCO for shares of Pegasus. Additionally, in order to effect the purchase of
HCC, the Company issued Pegasus shares to HCC stockholders in exchange for
83.3% of the outstanding capital stock of HCC. Some of the Pegasus shares
exchanged for HCC shares were subject to repurchase. The repurchase was based
upon an agreement by the HCC stockholders that some value for the HCC shares
exchanged should be assigned based upon the number of transactions that an HCC
stockholder committed to process through HCC in 1996. If a stockholder did not
fulfill its commitment by processing the agreed number of transactions through
HCC in 1996, the Company had the option to repurchase such shares for $0.01 per
share. The total number of shares repurchased from each stockholder is based
upon the percentage of their transaction commitment actually processed by HCC
during 1996. Effective December 31, 1996, the Company repurchased 91,017 shares
of the 477,733 shares subject to repurchase.
In June 1996, Information Associates, L.P. and Information Associates, C.V.
purchased 1,538,462 shares of the Company's series A preferred stock for $4.88
per share or $7,500,005. Total shares outstanding increased from 5,191,249
(including the 89,733 issued to LNI as part of the purchase of minority
interest in HCC) to 6,729,712 shares, with the Information Associates, L.P. and
Information Associates, C.V. ownership.
In June 1996, the Company issued 89,733 shares of Pegasus common stock in
conjunction with the acquisition of the minority ownership interest of HCC
(Note 3).
F-14
<PAGE> 23
In June 1996, the Company declared a one hundred-for-one stock split effected
in the form of a stock dividend to stockholders of record on that date (Note
1). The number of common shares the Company is authorized to issue was also
increased from 100,000 to 20 million and the number of authorized preferred
shares was increased from 10,000 to 2 million.
In August 1997, the stockholders amended the Company's certificate of
incorporation to increase the number of authorized shares of common stock from
20 million to 100 million.
The Company completed an IPO in August 1997. The Company's Registration
Statement on Form S-1 (File No. 333-28595) with respect to the IPO was declared
effective on August 6, 1997, and the Company's stock began trading on the
Nasdaq National Market under the symbol PEGS on August 7, 1997. The Company
sold 3,450,000 shares of common stock at a per share price of $13.00. Net
proceeds to the Company, after deduction of the underwriting discount and
estimated IPO expenses, were approximately $40.5 million. Selling stockholders
also sold 659,000 shares at a per share price of $13.00. Net proceeds to the
stockholders after deduction of the underwriting discount were approximately
$8.0 million. The Company did not receive any proceeds from the sale of shares
by the selling stockholders. Concurrent with the completion of the Company's
IPO, a four-for-three split of the Company's outstanding common and series A
preferred stock was effected (Note 1), and all outstanding shares of series A
preferred stock were converted into shares of common stock.
Effective February 11, 1998, the Company completed a secondary offering. The
Company sold 280,321 shares of common stock at $17.50 per share. Net proceeds,
after deducting the underwriting discount and estimated offering expenses, were
approximately $4.2 million. Selling stockholders also sold 2,134,679 shares at
$17.50 per share. The Company did not receive any proceeds from the sales of
shares by the selling stockholders.
In May 1998, stockholders amended the Company's certificate of incorporation to
reduce the number of authorized shares of common stock from 100 million to 50
million. The financial statements have been retroactively adjusted to reflect
the reduction in authorized shares.
In September 1998, the Board of Directors authorized the repurchase of up to $6
million in aggregate of the Company's common stock from time to time. No shares
have been acquired as of December 31, 1998.
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 rights will be
exercisable only if a person or group of affiliated or associated persons
acquires, or has announced the intent to acquire, 20% or more of the Company's
common stock.
9. STOCK-BASED COMPENSATION
In accordance with the Company's 1996 stock option plan (1996 Plan), amended
and approved in March 1997, options to purchase 866,667 shares of Company
common stock may be granted to Company employees. Options granted under the
1996 Plan expire in December 2005. In accordance with the Company's 1997 stock
option plan (1997 Plan), approved in March 1997 and amended in May 1998,
options to purchase 600,000 shares of Company common stock may be granted to
Company employees and non-employee directors and contractors. Options granted
under the 1997 Plan expire in December 2006. Options granted under both the
1996 Plan and the 1997 Plan (collectively, Plans) may be in the form of
incentive stock options or nonqualified stock options. The Stock Option
Committee of the Board of Directors (Committee) administers the Plans and
determines grant prices. Options granted to Company employees generally become
exercisable in installments of 25% per year commencing one year from the date
of grant while options granted to non-employee directors and contractors become
exercisable over a vesting period determined by the Committee. The Company's
authorized but unissued or reacquired common stock is used as stock options are
exercised.
F-15
<PAGE> 24
In accordance with APB 25, the Company recorded unearned compensation of
approximately $241,000, $451,000 and $551,000 in 1998, 1997 and 1996,
respectively, related to options. Unearned compensation is being recognized
ratably over the vesting period for stock option grants with exercise prices
which are less than fair market value of the stock at the date of grant.
Compensation expense of approximately $269,000, $198,000 and $65,000 was
charged to operations in 1998, 1997 and 1996, 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 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:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss)-- as reported ................ $ 5,396,451 $ 589,460 $ (3,484,801)
Net income (loss) -- pro forma ................. $ 4,859,692 $ 334,589 $ (3,511,531)
Net income (loss) per share -- as reported:
Basic ........................................ $ 0.52 $ 0.08 $ (0.66)
Diluted ...................................... $ 0.48 $ 0.07 $ (0.66)
Net income (loss) per share -- pro forma:
Basic ........................................ $ 0.46 $ 0.05 $ (0.67)
Diluted ...................................... $ 0.43 $ 0.04 $ (0.67)
</TABLE>
The pro forma disclosures provided are not likely to be representative of the
effects on reported net income 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 $6.81 in 1998 and $0.82 in 1996.
There were no options granted in 1997 with exercise prices equal to the market
price of stock at the grant date. The weighted average fair value for options
with exercise prices below the market price of stock at the grant date was
$13.49 in 1998, $8.51 in 1997 and $1.66 in 1996. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend yield...................... -- -- --
Expected volatility:
Pre-IPO grants................... -- 0.0% 0.0%
Post-IPO grants.................. 72.8% 65.0% --
Risk-free rate of return............ 4.6% 6.1% 6.5%
Expected life....................... 4.0 years 4.9 years 4.0 years
</TABLE>
The following table summarizes activity under the Company's stock option plans
during the years ended December 31:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE
NUMBER OF COMPANY OPTIONS PRICE PER SHARE
------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year.......... 1,082,278 771,740 -- $ 5.75 $ 2.39 $ --
Granted ..................... 397,166 331,666 771,740 12.44 13.49 2.39
Exercised ................... 66,987 1,333 -- 5.60 3.11 --
Canceled .................... 78,496 19,795 -- 12.20 4.34 --
--------- --------- ------- --------- --------- ---------
Options outstanding at end
of year ................... 1,333,961 1,082,278 771,740 $ 7.37 $ 5.75 $ 2.39
========= ========= ======= ========= ========= =========
Options exercisable at end
of year .................. 490,523 263,434 -- $ 4.27 $ 2.33 --
========= ========= ======= ========= ========= =========
</TABLE>
F-16
<PAGE> 25
The following table summarizes information for stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------
NUMBER OF WEIGHTED AVERAGE WEIGHTED NUMBER OF WEIGHTED
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE PRICES CONTRACTUAL LIFE EXERCISE PRICE EXERCISE PRICE
- -------------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.01 496,333 7.0 years $ 2.01 304,249 $ 2.01
$ 3.11 186,170 6.8 years 3.11 95,033 3.11
$ 5.25 53,333 7.0 years 5.25 19,999 5.25
$ 9.50 - $ 13.39 323,949 7.9 years 10.73 1,116 11.05
$ 15.30 - $ 22.74 271,176 7.3 years 16.31 70,126 15.30
$ 25.38 3,000 8.0 years 25.38 -- --
- ----------------------------------------------------------------------------------------------
1,333,961 7.3 years $ 7.37 490,523 $ 4.27
==============================================================================================
</TABLE>
10. INCOME TAXES
Pretax income (loss) from continuing operations for the years ended December 31
was taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Domestic. $5,495,808 $ 519,459 $(3,528,503)
Foreign.. 98,267 97,917 58,702
---------- ----------- -----------
$5,594,075 $ 617,376 $(3,469,801)
========== =========== ===========
</TABLE>
Deferred taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward....... $ 2,162,922 $ 4,214,785
Bad debt reserves..................... 36,396 26,473
Stock option compensation expense..... 181,545 81,873
Rent expense.......................... 52,540 82,552
Various expense accruals.............. 50,660 42,160
Charitable contributions.............. 22,495 --
Other................................. 24,160 10,801
----------- -----------
Total gross deferred tax
assets..................... 2,530,718 4,458,644
Valuation allowance................... (270,000) (4,312,266)
Deferred tax liability:
Software amortization................. (109,190) (79,850)
Depreciation and amortization........ (66,903) (66,528)
----------- -----------
Net deferred tax assets................. $ 2,084,625 $ --
=========== ===========
</TABLE>
In 1997 and 1996, 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 believes it is
more likely than not that the net deferred tax asset will be realized. The
remaining valuation allowance at December 31, 1998 relates to state net
operating loss carryforwards. A portion of the deferred tax asset was related
to net operating loss carryforwards of 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 reduced the remaining goodwill related to
the purchase of HCC. At December 31, 1998, 1997 and 1996, the Company had
federal net operating loss carryforwards of approximately $5,567,000,
$12,252,000 and $14,635,000, respectively. The 1998 net operating loss
carryforwards that existed at December 31, 1998 will begin to expire in 2007.
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.
F-17
<PAGE> 26
The components of the income tax provision for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal .................. $ 381,025 $ 51,525 $ --
State .................... 462,413 -- --
Foreign .................. 38,100 27,916 15,000
--------- --------- ---------
$ 881,538 $ 79,441 $ 15,000
========= ========= =========
Deferred benefit:
Federal .................. $(641,069) $(51,525) $ --
State .................... (42,845) -- --
--------- --------- ---------
Provision for income taxes . $ 197,624 $ 27,916 $ 15,000
========= ========= =========
</TABLE>
A reconciliation of taxes based on the federal statutory rate of 34.0% and the
provision for income taxes is summarized as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Expected income tax provision 34.0% 34.0% (34.0%)
(benefit) ...................
Valuation allowance ......... (46.7%) (38.4%) 29.4%
Permanent differences ....... 10.9% 9.8% 5.1%
State income taxes .......... 5.0% -- --
Other, net .................. 0.3% (0.9%) (0.5%)
---- ---- ----
Provision for income taxes .. 3.5% 4.5% 0.0%
==== ==== ====
</TABLE>
11. 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 $731,000, $720,000 and $697,000 in 1998, 1997 and 1996,
respectively.
Approximate future minimum lease payments at December 31, 1998, under
non-cancelable operating leases with original terms exceeding one year,
including the Pegasus UK operating lease translated at the rate in effect at
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -------------
<S> <C>
1999 ....... $ 998,000
2000 ....... 1,024,000
2001 ....... 1,024,000
2002 ....... 1,012,000
2003 ....... 63,000
Thereafter..... 137,000
----------
$4,258,000
</TABLE>
In June 1993, the Company received $2,000,000 from its processing bank in
exchange for a five-year non-cancelable data processing contract and recorded
the amount as deferred income. The non-cancelable contract requires the
Company's processing bank to process transactions and generate various reports
in exchange for a processing fee. The contract requires Pegasus to maintain an
annual minimum volume of transactions. If the annual minimum volume is not
attained, Pegasus is required to pay its processing bank an additional
processing fee for each transaction under the minimum volume. As of the date
HCC was acquired by the Company, there was approximately $1,583,000 of deferred
income to be amortized over the remaining life of the contract according to the
volume of guaranteed transactions, as defined by the contract. During 1998,
1997 and 1996, the Company recognized approximately $471,000, $471,000 and
$431,000, respectively, of the deferred income. In 1998, 1997 and 1996, the
Company exceeded the annual minimum volume requirement. The deferred income was
fully amortized as of December 31, 1998.
F-18
<PAGE> 27
In May 1997, the Company issued a warrant to a customer for the purchase of
345,723 shares of the Company's common stock as part of a five year contract
involving a wide range of the Company's services. The warrant is exercisable
during the two year period ended May 12, 1999 at an exercise price of $7.20 per
share. The Company used the Black-Scholes option pricing model to value the
warrant. A contract asset of $238,000 was recorded in May 1997, which will be
amortized ratably over the associated five year contract period.
As of December 31, 1998, the Company had a commitment to pay an affiliate
$125,000 in 1999 for software development and modification.
12. EMPLOYEE BENEFIT PLAN
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 fifteen 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 up to five percent of
employees' annual contributions. The Company's matching contributions vest on a
pro rata basis over five years. During 1998, 1997 and 1996, the Company
contributed approximately $292,000, $217,000 and $160,000, respectively, to the
401(k) Plan.
13. STOCK PURCHASE PLAN
In May 1998, the Company's stockholders approved the Pegasus Systems, Inc. 1997
Employee Stock Purchase Plan (Stock Plan). The Company has reserved 500,000
shares of its common stock for purchase by its 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% 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% 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.
14. RELATED PARTIES
Prior to the IPO, the Company derived a substantial portion of its revenue from
certain stockholders and stockholder-owned companies. For the years ended
December 31, 1997 and 1996, revenue generated by stockholders and
stockholder-owned companies was approximately $15.7 million, or 75.3%, and
$12.0 million, or 75.4%, respectively. Disclosing revenues generated by
stockholders was not considered necessary for the year ended December 31, 1998
since the ownership percentage of these stockholders was reduced by the
Company's IPO in August 1997, the secondary offering in February 1998 and
subsequent open market sales of their shares. The ownership percentage of these
stockholders was an aggregate of less than 10% of the Company's common shares
outstanding at December 31, 1998; therefore, these stockholders were not
considered affiliates as of and for the year ended December 31,1998.
A stockholder provides services to the Company, including facility management,
consulting and software development. During 1998, 1997 and 1996, the Company
recognized expense in the amount of approximately $461,000, $488,000 and
$774,000, respectively, for those services.
F-19
<PAGE> 28
Persons related to an officer of the Company have provided printing, design and
procurement services to the Company. During 1998, 1997 and 1996, the Company
paid approximately $3,000, $6,000 and $143,000, respectively, related to these
services, the majority of which related to capitalized furniture purchases.
15. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share for the years ended December 31, 1998, 1997
and 1996 has been computed in accordance with FAS 128 using the weighted
average number of common shares outstanding after giving retroactive effect to
stock splits (Notes 1 and 8).
Diluted net income (loss) per share for the years ended December 31, 1998, 1997
and 1996 gives effect to all dilutive potential common shares that were
outstanding during the 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, 1998 and 1997 were included in the diluted
earnings per share (EPS) calculations for the respective periods. None of the
options outstanding at December 31, 1996 were included in the diluted EPS
calculation for the year ended December 31, 1996 because the Company had a net
loss. In 1998, all outstanding options and warrants were included in the
diluted EPS calculation for the six months ended June 30, 1998. Options for
54,000 shares of the Company's common stock at strike prices from $19.44 to
$22.74 were excluded for the diluted EPS calculation for the three months ended
September 30, 1998 because they were anti-dilutive. Options for 57,000 shares
of the Company's common stock at strike prices from $19.44 to $25.38 were
excluded from the diluted EPS calculation for the three months ended December
31, 1998 because they were anti-dilutive. The options excluded in 1998 expire
from December 2005 to December 2006. In 1997, all outstanding options and
warrants were included in the calculation of diluted EPS. In 1996, 1,538,462
shares of Series A preferred stock and options for 771,733 shares of the
Company's common stock at strike prices from $2.01 to $3.11 were excluded from
the diluted EPS calculation because they were anti-dilutive. The options
excluded in 1996 expire December 2005.
The following table sets forth the basic and diluted net income (loss) per
share computation for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) ................................. $ 5,396,451 $ 589,460 $(3,484,801)
=========== =========== ===========
Basic:
Weighted average number of shares outstanding .... 10,460,947 7,200,382 5,246,800
----------- ----------- -----------
Net income (loss) per share ...................... $ 0.52 $ 0.08 $ (0.66)
=========== =========== ===========
Diluted:
Weighted average number of shares outstanding .... 10,460,947 7,200,382 5,246,800
Additional weighted average shares from assumed
conversion of dilutive convertible preferred
stock to common stock, net of shares to be
repurchased with exercise proceeds .............. -- 921,355 --
Additional weighted average shares from assumed
exercise of dilutive stock options and warrants,
net of shares to be repurchased with exercise
proceeds ........................................ 735,948 554,315 --
----------- ----------- -----------
Weighted average number of shares outstanding used
in the diluted net income (loss) per share
calculation ..................................... 11,196,895 8,676,052 5,246,800
----------- ----------- -----------
Net income (loss) per share ...................... $ 0.48 $ 0.07 $ (0.66)
=========== =========== ===========
</TABLE>
F-20
<PAGE> 29
16. SEGMENT INFORMATION
In 1998, the Company adopted FAS 131. The prior years' segment information has
been restated to present the Company's three reportable segments:
o Electronic Distribution--provides services that enable travel agents and
individual travelers to electronically access hotel room inventory
information and conduct reservation transactions;
o Commission Processing--provides commission payment processing services to
the hotel industry and travel agencies; and
o Business Intelligence--provides data mining and reporting services for
benchmark analysis and strategic planning for the hotel industry.
The accounting policies of the segments are the same as those described in
Note 1. Segment data includes a charge allocating all corporate costs to the
operating segments. The Company evaluates the performance of its segments based
on pretax income.
The Company is organized primarily on the basis of products and services. The
Company's segments are strategic business units that offer different products
and services. Two of the Company's strategic business units have been
aggregated into the Electronic Distribution segment: THISCO and TravelWeb. The
Commission Processing segment consists of the Company's HCC service. Pegasus IQ
and Driving Revenue have been aggregated into the Business Intelligence
segment.
The following table presents information about reported segments for the years
ended December 31:
<TABLE>
<CAPTION>
ELECTRONIC COMMISSION BUSINESS RECONCILING
DISTRIBUTION PROCESSING INTELLIGENCE ITEMS TOTAL
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1998
Net revenues ....................... $ 12,310,046 $ 15,851,557 $ 902,864 $ -- $ 29,064,467
Interest income .................... $ 14,358 $ 151,243 $ 12 $ 2,337,652 $ 2,503,265
Interest expense ................... $ 112,988 $ 33,788 $ 103 $ -- $ 146,879
Depreciation and amortization ...... $ 1,258,152 $ 1,175,451 $ 256,264 $ -- $ 2,689,867
Write-off purchased in-process R&D.. $ -- $ -- $ 1,480,085 $ -- $ 1,480,085
Income(loss) before taxes .......... $ 506,036 $ 5,527,910 $ (2,777,523) $ 2,337,652 $ 5,594,075
1997
Net revenues ....................... $ 9,864,738 $ 11,038,678 $ -- $ -- $ 20,903,416
Interest income .................... $ 7,820 $ 105,437 $ -- $ 880,335 $ 993,592
Interest expense ................... $ 516,631 $ 83,265 $ 171 $ -- $ 600,067
Depreciation and amortization ...... $ 1,074,780 $ 1,929,588 $ 12,251 $ -- $ 3,016,619
Income(loss) before taxes .......... $ (1,815,218) $ 2,122,436 $ (570,177) $ 880,335 $ 617,376
1996
Net revenues ....................... $ 8,139,259 $ 7,729,753 $ -- $ -- $ 15,869,012
Interest income .................... $ -- $ 4,839 $ -- $ 109,311 $ 114,150
Interest expense ................... $ 768,730 $ 124,447 $ -- $ -- $ 893,177
Depreciation and amortization ...... $ 1,742,691 $ 1,682,987 $ -- $ -- $ 3,425,678
Write-off purchased in-process R&D.. $ -- $ 244,600 $ -- $ -- $ 244,600
Loss before taxes and minority
interest ........................... $ (3,289,159) $ (184,390) $ -- $ 109,311 $ (3,364,238)
</TABLE>
Reconciling items represent interest income earned as a result of short-term
investment of operating cash balances and a portion of proceeds from the
Company's IPO and secondary public offering of common stock.
The Company's business is conducted principally in the United States. The
Company does not utilize or measure revenues by geographic location to evaluate
the Electronic Distribution and Business Intelligence segments. However, the
Company does track the geographic source of travel agency and hotel
transactions that give rise to Commission Processing revenues. For 1998, 1997
and 1996, approximately $2,922,000, $2,037,000 and $1,246,000 of Commission
Processing revenues were derived from customers based outside the United
States.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The Hotel Industry Switch Company Delaware
The Hotel Clearing Corporation Delaware
Pegasus IQ, Inc. Delaware
TravelWeb, Inc. Delaware
Driving Revenue, L.L.C. Maryland
Pegasus Systems, Inc. (UK) Limited UK
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT OF ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-40039, 333-40033, and 333-40035) of Pegasus
Systems, Inc. of our report dated February 2, 1999 appearing in Pegasus Systems
Inc.'s 1998 Annual Report to Stockholders which is incorporated by reference
into Pegasus Systems, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1998. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page S-1 of such
Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Company's
for 10-K for the 12 months ended December 31, 1998 filed March 30, 1999 with
Securities and Exchange Commission and is qualified in its entirety by reference
to such 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,109
<SECURITIES> 15,768
<RECEIVABLES> 3,786
<ALLOWANCES> (99)
<INVENTORY> 0
<CURRENT-ASSETS> 50,254
<PP&E> 18,124
<DEPRECIATION> (14,620)
<TOTAL-ASSETS> 60,320
<CURRENT-LIABILITIES> 5,856
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 54,157
<TOTAL-LIABILITY-AND-EQUITY> 60,320
<SALES> 0
<TOTAL-REVENUES> 29,064
<CGS> 0
<TOTAL-COSTS> 9,717
<OTHER-EXPENSES> 2,674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 5,594
<INCOME-TAX> 198
<INCOME-CONTINUING> 5,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,396
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.48
</TABLE>
