SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 00-113959
CPS SYSTEMS, INC.
-----------------
(Exact name of registrant as specified in its charter)
TEXAS 75-1607857
----- ----------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
3400 CARLISLE, SUITE 500
DALLAS, TEXAS 75204
------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 855-5277
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock, $.01 Par Value
Securities registered pursuant to Section 12(g) of the Act:
None
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. [ ]
On February 28, 1999, there were 6,743,902 shares of Common Stock, $.01 par
value, outstanding. The aggregate market value of voting stock held by
non-affiliates of the registrant, computed by reference to the last reported
price at which the stock was sold on February 28, 1999 was $842,959. For
purposes of the above stated only, all directors and executive officers of the
registrant are assumed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE:
See part III hereof regarding incorporation by reference from the registrant's
definitive proxy statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
CPS Systems, Inc. (the "Company") develops, markets, implements and
supports fully integrated software applications designed specifically for public
sector organizations, including counties, townships, city governments and other
municipal agencies. The Company's products address the following functional
areas: (i) property tax appraisal and assessment, (ii) property tax billing and
collection, (iii) city and municipal systems, and (iv) remittance processing
systems. Currently, the Company's public sector software applications are
installed or being implemented in nine states (California, Colorado, Florida,
Georgia, North Carolina, New Mexico, Oklahoma, Tennessee and Texas), serving
more than 250 customers. The majority of its customers are county governments
with taxable parcel counts over 10,000 or cities with populations between 5,000
and 35,000. The Company's potential customers make up approximately 76% of the
total counties and 85% of the total cities in the United States. The Company's
focus on the public sector allows it to design solutions that address the
precise needs of these organizations. The Company also develops, markets,
implements and supports integrated voice response systems.
The Company currently markets 41 applications to public sector
organizations, offering customers the following: (i) compliance with
periodically changing legislation, (ii) simplification of data entry, (iii)
extensive security features, (iv) flexible report configuration, and (v) open
system technology. The Company utilizes proprietary tools that convert client
data into a year 2000 ("Y2K") compliant format that can be run by Company
applications. The Company's application software products are adaptable to meet
a customer's initial needs and respond to a customer's specific system
refinements and ongoing changes. The Company's tiered software architecture
enables the Company to utilize multiple platforms and integrate new technologies
with existing software.
MERGER
On March 30, 1999, the Company executed an Agreement and Plan of Merger
(the "Merger Agreement") with Tyler Corporation ("Tyler") pursuant to which the
Company will merge with and into a wholly-owned subsidiary of Tyler. Under the
terms of the Merger Agreement, each shareholder of the Company will receive one
(1) share of common stock of Tyler for each three (3) shares of common stock of
the Company held by such shareholder. The consummation of the merger is subject
to approval of the shareholders of the Company, the satisfactory completion of
due diligence by Tyler, the receipt of an opinion from an independent financial
adviser that the consideration to be paid by Tyler in the proposed merger is
fair from a financial point of view, and other customary conditions. Management
anticipates that the merger will be consummated in the third quarter of 1999,
subject to satisfaction of all conditions to closing.
INITIAL PUBLIC OFFERING
On March 30, 1998, the Company successfully completed its initial
public offering ("IPO") of its Common Stock. The Company issued 1,900,000 shares
of its Common Stock in connection with its IPO at $4.00 per share, which
resulted in proceeds of approximately $5.8 million net of issuance costs of
approximately $1.8 million. In April 1998, the underwriters exercised their
option to purchase 285,000 additional shares of its Common Stock, reducing the
net to cover over-allotments. Because all of the over-allotment shares were sold
by these selling shareholders, the over-allotment exercise resulted in no
proceeds to the Company. However, the Company incurred additional issuance costs
of $148,000, reducing the net proceeds of the IPO to $5.6 million.
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Simultaneously with the closing of the IPO, all of the Company's
outstanding put warrants were converted by the holders into Common Stock. The
exercise of the put warrants resulted in the issuance of 927,766 shares of
Common Stock and proceeds to the Company of approximately $2,400.
THE INDUSTRY
The public sector marketplace is composed of state, county and city
governments, other municipal agencies and publicly owned utilities. The Company
sells its products in the United States through a direct sales force, employing
a variety of business development and marketing techniques to communicate
directly with current and prospective customers. The Company establishes a local
presence to address the needs of local governments and establish long-term
relationships, with regional offices in Dallas, Texas; Tampa, Florida and
Sacramento, California. The Company also operates customer service and sales
offices in San Antonio, Houston, and Wichita Falls, Texas; and Tulsa, Oklahoma.
The Company maintains sales and software development personnel in San Francisco,
California; Atlanta, Georgia; Wichita Falls, Texas; Cape Coral, Florida; and
Tulsa, Oklahoma.
CPS PRODUCTS
The Company offers fully integrated, Y2K compliant software solutions
designed to automate and integrate the operations of county governments with
taxable parcel counts over 10,000 and cities with populations between 5,000 and
35,000. The Company has designed its products to effectively share information
across an organization. The Company offers applications that run across the most
popular operating systems. Currently, supported systems include UNIX, AIX, and
Microsoft NT. The Company's products are supported on databases including
Oracle, Informix, Microsoft SQL Server, and C-ISAM.
Property Tax Appraisal And Assessment Systems. The Company's
computer-assisted mass appraisal ("CAMA") system, designed and written using
computer-aided software engineering tools, is a fully integrated suite of
programs with applications for mass property tax appraisal, assessment
administration (appeals processing, statistical analysis of property values and
sketching of property and buildings), and integrated imaging and GIS/911
interfacing. The CAMA system adheres to IAAO standards for a variety of property
types, including residential, agricultural, multi-family, commercial,
industrial, business, personal and household goods. The CAMA system incorporates
regression and feedback methodologies to produce direct market values and market
adjusting techniques which are available for costing out location and
depreciation. The system also provides the user with the ability to: (i) specify
which valuation appraisal method (cost, market or income) will be used as the
default valuation for each type of property, (ii) maintain a comprehensive
history file on each parcel, including transactions affecting it, which can be
displayed or printed upon request and (iii) maintain sales data and descriptive
information on each parcel at the time of sale, thereby generating a "snapshot"
vital in market valuation and appraisal analyses.
Property Tax Billing And Collection Systems. The Company's property tax
billing and collection product ("Collection") provides public sector
organizations with integrated property tax billing and collection reporting
system for revenue tracking, processing and payment collection. Collection
provides multiple terminal cash drawer, payment processing and validation
capability and eliminates redundant data entry. The product is designed to
handle a range of services, including posting, recording, universal cashiering,
reconciliation, cash control, auditing, distribution of funds, report generation
and interfacing to various high speed remittance processors. Collection
encompasses the following property tax billing and collection applications: (i)
current ad valorem tax system, (ii) installment processing, (iii) mortgage
processing, (iv) non ad valorem assessments, (v) distribution systems, (vi)
splits and corrections, (vii) advertising, (viii) current tax roll billing, (ix)
personal property system, (x) tax sale (real estate, non ad valorem
assessments), (xi) delinquent tax and assessment system, (xii) tax deed
processing, (xiii) boat licensing system and (xiv) hunting and fishing licensing
systems.
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City and Municipal Systems. The Company's city and municipal systems
products provide operating functions (the "City Manager") and financial
management functions for public city and municipal governments (the "Financial
Manager"). The Company's City Manager and Financial Manager are suites of
software applications which can be integrated with each other. The Company
provides its users with customization capabilities and updated applications
resulting from changes mandated by state and local legislatures. The City
Manager and Financial Manager are integrated with the following applications:
(i) general ledger, (ii) payroll, (iii) purchase order, (iv) inventory
management, (v) accounts payable, (vi) account receivable, (vii) fixed asset
management and (viii) investment management.
Remittance Processing System. The Company also provides remittance
processing hardware and software to regulated utilities and commercial markets
for high speed processing of check payments with applications in such areas as
utility payments, subscription payments, and county property tax collections.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the
enhancement of its existing products and the introduction of new products. The
Company outsources certain product development and enhancement activities to
independent contractors. The Company updates its products for amendments to the
various tax laws and regulations and enhances its applications to suit the
evolving needs of the public sector market. In particular, the Company is
developing additional functionality on existing application modules and creating
new modules. The Company continues to add new products and services through
internal development, as well as leveraging the Company's core technologies and
expertise.
During the year ended December 31, 1998, the Company began developing
new versions of its legacy COBOL products utilizing a client/server
architecture. The architecture consists of a user interface developed using
Microsoft Visual Basic Version 5, business logic objects developed with Visual
Basic and other middleware tools, all connecting to either an Oracle or
Microsoft SQL Version 7 database. The development effort resulted in the
introduction of a new suite of graphical products designed for tax
administration entities in the United States. There were four large efforts
being undertaken simultaneously by the Company's development team: (1)
Collection base product; (2) CAMA base product; (3) Collection with auditor
module for California; and (4) CAMA with auditor interface for California. In
addition to these efforts, there were development teams producing new versions
of software for Colorado and Georgia. The Company uses its own full time
employees in addition to the use of outside contractors to accomplish its
development efforts. The Company is required to capitalize this development over
six years due to the longer than average product life in the field. The
capitalized development costs for 1998 were $3.4 million.
BACKLOG
As of February 28, 1999, the Company has a backlog of eight contracts
representing approximately $4.4 million in initial license fees and $1.1 million
in average annual recurring maintenance revenue. These eight contracts are for
the Company's Collection and CAMA software products.
EMPLOYEES
During December 1998, the Company had an organizational restructuring
to better align its operational resources with anticipated near-term sale
levels. This restructuring decreased the workforce by 15 employees or 13%. As of
February 28, 1999, the Company had 95 full-time and 2 part-time employees. This
total includes 7 people in sales and marketing, 24 in research and development,
51 in customer support and field services and 14 in general administration. None
of the Company's employees is represented by a labor union or is subject to a
collective bargaining agreement. The Company believes its relations with its
employees are good.
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COMPETITION
The Company competes with a large number of competitors that vary in size,
primary computer platforms and overall product scope. Within its traditional
public sector markets, the Company competes from time to time with (i) custom
software and services providers (such as Andersen Consulting, KPMG Peat Marwick
and Oracle Corporation), (ii) companies which focus on selected segments of the
public sector market (including Systems Computer & Technology, Inc., Manatron,
Inc., H.T.E., Inc., American Management Systems, Inc., BRC Holdings, Inc. and
Tyler Corporation) and (iii) a significant number of smaller private companies.
The Company also competes with in-house management information services staff.
Many of the Company's competitors are more established, benefit from greater
name recognition and have substantially greater resources than the Company.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company has no patents and, under existing copyright laws, has only
limited protection. The Company regards certain features of its internal
operations, software and documentation as confidential and proprietary, and
relies on a combination of contract and trade secret laws and other measures to
protect its proprietary intellectual property. Despite these precautions, it may
be possible for unauthorized parties to copy the Company's software or reverse
engineer or otherwise obtain and use information the Company regards as
proprietary. In addition, certain provisions of the license agreements entered
into by the Company, including provisions against unauthorized use, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions.
ITEM 2. PROPERTIES
The Company maintains its headquarters in Dallas, Texas where it leases
an aggregate of approximately 14,250 square feet under a lease expiring in April
2000. General and administrative, marketing, product development and customer
support and service operations are located in this space. The Company leases
approximately 10,350 square feet of office space in Tampa, Florida, where
marketing, product development and customer support and service operations are
housed. The Company also leases various other locations throughout the United
States for sales and service offices, aggregating approximately 7,750 square
feet. These leases typically have terms of one year or less. The Company
believes its facilities are in good condition and adequate for present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently involved in significant litigation. Five
lawsuits have been filed against the Company during the period from December,
1998 through January, 1999 seeking class certification and recovery for, among
other things, violations of federal securities laws associated with the
Company's registration statement and its Form 10-Qs for the first and second
quarter of 1998. These lawsuits were filed following the Company's November 4,
1998 press release announcing that it was restating its first and second quarter
revenues for 1998 in light of AICPA Statement of Position 97-2, for software
revenue recognition requirements. The Company intends to vigorously defend the
lawsuits.
The Company is also a defendant in Continental Pacific Corporation v.
CPS Systems, Inc., et al., pending in the Circuit Court for Lee County, Florida.
This suit alleges that three former employees of the plaintiff joined the
employment of the Company in violation of their non-competition agreement, and
seeks injunctive and monetary relief for the defendants' breaches of their
respective employment agreements and for the Company's role in soliciting their
employment. The three former employees of the plaintiff left the plaintiff and
sought other employment due to financial difficulties facing the plaintiff,
which caused it to discontinue paying salary and employment benefits to the
three individual defendants. Accordingly, the defendants contend that the
non-competition agreements at issue in the case are unenforceable. In a
preliminary injunction hearing held in the case, the Company and the individual
defendants prevailed. The
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Court refused to enjoin the individual defendants from continuing to work for
the Company. The case is presently in discovery, and several key witnesses
remain to be deposed. The Company and the individual defendants have filed a
motion for summary judgment asking the Court to dismiss the case based on the
lack of a genuinely disputed issue of material fact that remains for trial.
Although the motion is presently pending, the Company and the defendants do not
expect a ruling until discovery in the case has been completed.
The Company has also been notified by Peoria County, Illinois of the
county's termination of the contract between the Company and the county and the
county's intention to recover the customer deposit of $340,000 and to receive a
credit of an outstanding receivable of $170,650. The outstanding receivable is
not recognized as current income but is instead booked to deferred revenue. The
Company has reviewed the notice and the contract and determined the county's
termination was not warranted.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. Except as
set forth above, the Company is not a party to any legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
Company's fourth quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the American Stock Exchange
("AMEX") under the symbol "SYS". As of February 28, 1999, the Company had 59
shareholders of record. The Company estimates approximately 45 additional
beneficial holders of its securities hold such shares in nominee or "street
name." The closing price per share of the Common Stock on February 28, 1999 was
$.4375. As of February 28, 1999, there were no shares of the Company's Preferred
Stock issued and outstanding.
The table below sets forth information, for each quarter in 1998 during
which the Company's Common Stock was traded, concerning the high and low sale
prices. Quotations for such periods are as reported by AMEX. The Company's
Common Stock was not publicly traded prior to March 25, 1998. Therefore, there
is no trade data for any quarters ending prior to that date.
STOCK PRICE RANGE
--------------------------
1998 HIGH LOW
-------- -------------
First Quarter $ 6-1/8 $ 4
Second Quarter 7-5/8 4-1/8
Third Quarter 7 2-1/2
Fourth Quarter 3-5/8 5/8
These market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
The transfer agent for the Company's Common Stock is American Securities
Transfer & Trust, Inc. of Denver, Colorado.
From March 25, 1998 through February 28, 1999, the Company applied the
following amounts of its net proceeds from the IPO pursuant to the IPO
Registration Statement:
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment 0
Purchases of real estate 0
Acquisitions of other business(es) 0
Repayment of indebtedness 855,000
Working capital 1,401,000
Temporary investments (as specified below) 0
Other uses of at least $100,000 (as specified below) 3,363,000
None of the uses constituted direct or indirect payments to the Company's
directors, officers or general partners, or associates thereof, persons owning
10% or more of any class of securities or any affiliates of the Company. The
temporary investments consist of money market accounts available on a daily
basis. Other uses of at least $100,000 reflects research and development
expenses.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10K. The following
selected consolidated balance sheets of the Company as of December 31, 1994,
1995, 1996, 1997 and 1998 have been derived from and are qualified by reference
to the Company's Consolidated Financial Statements audited by Grant Thornton
LLP, independent certified public accountants. The following selected
consolidated statements of operations of the Company for the years ended 1995,
1996, 1997 and 1998 have been derived from and are qualified by reference to the
Company's Consolidated Financial Statements audited by Grant Thornton LLP,
independent certified public accountants. The following statement of operations
for the year ended December 31, 1994 has been derived from unaudited
consolidated financial data of the Company.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
For the Year-Ended December 31,
-------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 410 $ 385 $ 592 $ 327 $ 296
Working capital (deficit) 32 173 303 (489) (1,478)
Total assets ............. 6,762 6,025 6,134 6,499 11,775
Long-term debt ........... 3,297 3,041 2,741 2,137 1,023
Total stockholders' equity 1,110 823 524 277 4,173
</TABLE>
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31,
1994 1995 1996 1997 1998
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
License fees .......................... $ 628 $ 424 $ 1,635 $ 2,178 $ 1,167
Recurring maintenance and service fees $ 3,886 $ 3,907 $ 3,851 $ 3,910 $ 4,196
Product sales ......................... $ 1,752 $ 1,594 $ 2,052 $ 3,421 $ 2,534
Other service fees .................... $ 341 $ 328 $ 825 $ 969 $ 1,192
-------------------------------------------------------
$ 6,607 $ 6,253 $ 8,363 $ 10,478 $ 9,089
Cost of Revenue
Product sales ......................... $ 1,027 $ 1,033 $ 1,465 $ 2,529 $ 1,986
Purchased software .................... $ 248 $ 256 $ 391 $ 576 $ 1,075
Distribution .......................... $ 9 $ 11 $ 11 $ 67 $ 23
-------------------------------------------------------
$ 1,284 $ 1,300 $ 1,867 $ 3,172 $ 3,084
-------------------------------------------------------
Gross profit ..................... $ 5,323 $ 4,953 $ 6,496 $ 7,306 $ 6,005
Operating Expenses:
Support and customer service .......... $ 2,554 $ 2,276 $ 2,743 $ 3,278 $ 4,147
Selling and marketing ................. $ 735 $ 601 $ 772 $ 966 $ 2,116
Research and development .............. $ 517 $ 588 $ 866 $ 1,508 $ 299
General and administrative ............ $ 795 $ 871 $ 1,030 $ 1,048 $ 1,915
Amortization of intangible goodwill &
non-compete agreements .............. $ 0 $ 347 $ 347 $ 358 $ 281
-------------------------------------------------------
$ 4,601 $ 4,683 $ 5,758 $ 7,158 $ 8,758
Earnings(loss) from operations ... $ 722 $ 270 $ 738 $ 148 ($ 2,753)
-------------------------------------------------------
Interest and financing costs ..................... $ 81 $ 524 $ 819 $ 420 $ 327
-------------------------------------------------------
Earnings(loss) before income taxes $ 641 ($ 254) ($ 81) ($ 272) ($ 3,080)
Income tax expense(benefit) ...................... $ 261 ($ 24) $ 165 ($ 25) ($ 1,103)
-------------------------------------------------------
Net earnings(loss) ............... $ 380 ($ 230) ($ 246) ($ 247) ($ 1,977)
=======================================================
Net earnings(loss) per common share
Basic ....................................... $ 0.10 ($ 0.06) ($ 0.06) ($ 0.06) ($ 0.32)
Diluted ..................................... $ 0.10 ($ 0.06) ($ 0.06) ($ 0.07) ($ 0.32)
Weighted average shares used in computing net
earnings per common share:
Basic ....................................... 3,905 3,905 3,905 3,905 6,085
Diluted ..................................... 3,905 3,905 3,905 4,833 6,085
<FN>
(1) Prior to the December 30, 1994 leverage transaction (the "1994 Acquistion")
the Company was taxed as a S corporation. The net income for the year ended
December 31, 1994 reflects historical data as adjusted for all income being
taxed as a C corporation.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets, implements and supports fully integrated
software applications designed specifically for public sector organizations,
including counties, townships, city governments and other municipal agencies.
The Company's products address the following functional areas: (i) property tax
appraisal and assessment, (ii) property tax billing and collection, (iii) city
and municipal systems, and (iv) remittance processing systems. Currently, the
Company's public sector software applications are installed in nine states
(California, Colorado, Florida, Georgia, North Carolina, New Mexico, Oklahoma,
Tennessee and Texas), serving more than 250 customers. The majority of its
customers are county governments with taxable parcel counts over 10,000 or
cities with populations between 5,000 and 35,000. The Company has a wholly-owned
subsidiary, CDP Systems, Inc., which develops, markets, implements and supports
integrated voice response systems.
The Company currently markets 41 applications to public sector
organizations, offering customers the following: (i) compliance with
periodically changing legislation, (ii) simplification of data entry, (iii)
extensive security features, (iv) flexible report configuration and (v) open
system technology. The Company utilizes a proprietary tool that converts client
data into a Y2K compliant format that can be run by Company applications. The
Company's application software products are adaptable to meet a customer's
initial needs and are designed to respond to a customer's specific system
refinements and ongoing changes. The Company's tiered software architecture
enables the Company to utilize multiple platforms and effectively integrate new
technologies with existing software.
REVENUE RECOGNITION POLICY
During the third quarter of the fiscal year ended December 31, 1998,
the Company determined that modifications to the scope of systems to be
developed and delays in delivery of those systems required a change in its
revenue recognition policy to conform with AICPA Statement of Position 97-2,
"Software Revenue Recognition", effective for fiscal years beginning after
December 15, 1997 ("SOP 97-2"). The Company's decision resulted in a restatement
of the Company's revenues and earnings for the first two quarters of 1998.
Revenue previously recognized in the first two quarters of 1998 will now be
recognized upon the delivery of the systems pursuant to existing contracts
beginning during the end of the first quarter of 1999. The change in policy had
no effect on any other prior periods because the Company's contracts prior to
the fiscal year ended December 31, 1998 were not within the scope of SOP 97-2.
Consequently, the Company did not restate revenues or earnings for the fiscal
year ended December 31, 1997 or fiscal years ended prior thereto.
As a result of the change in its revenue recognition policy, the
Company restated its total revenues for the first quarter of 1998 from $3.2
million to $2.2 million, and its earnings for that period were restated from net
earnings of $133,000 or $0.03 per share, to a net loss of ($476,000) or ($0.11)
per share on 4.1 million weighted average shares outstanding. The Company also
restated its total revenues for the second quarter of 1998 from $4.4 million to
$2.5 million, and its earnings for that period were restated from net earnings
of $517,000 or $0.08 per share to a net loss of ($377,000) or ($0.06) per share
on 6.7 million weighted average shares outstanding. The Company's Consolidated
Balance Sheet for the fiscal year ended December 31, 1998 reflects Unearned
Revenue totaling $4.0 million.
As of February 28, 1999, the Company has a backlog of eight
contracts representing approximately $4.4 million in initial license fees and
$1.1 million in average annual recurring maintenance revenue. Upon delivery and
installation of the software with only insignificant vendor obligations
remaining the Company will be able to recognize initial license fee revenue in
compliance with SOP 97-2. Once the
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customer's applications are "live" and any warranties have expired, recurring
maintenance revenue will be booked on a monthly basis. These eight contracts are
for the Company's Collection and/or its CAMA software products.
The Company capitalizes software development costs for expenses
associated with product development incurred subsequent to establishing
technological feasibility. This methodology is in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." These costs relate
primarily to the development of new products or major enhancements to existing
products to accommodate new markets or platforms. The capitalized costs are
amortized on a straight-line basis over a 72-month period, commencing when each
product is available to the market. Prior to January 1995, the company amortized
software on a straight-line basis over a period of 72 to 120 months.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenue represented by certain revenue, expense and income.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
-------------------------
<S> <C> <C> <C>
Revenue
License fees ........................... 19.6% 20.8% 12.8%
Recurring maintenance and service fees . 46.0% 37.3% 46.2%
Product sales .......................... 24.5% 32.6% 27.9%
Other service fees ..................... 9.9% 9.3% 13.1%
------------------------
Total Revenue ..................... 100.0% 100.0% 100.0%
------------------------
Cost of Revenue
Product sales .......................... 17.5% 24.1% 21.9%
Purchased software ..................... 4.7% 5.5% 11.8%
Distribution ........................... 0.1% 0.6% 0.3%
------------------------
Total Cost of Sales ............... 22.3% 30.2% 34.0%
------------------------
Gross profit ...................... 77.7% 69.8% 66.0%
Operating Expenses:
Support and customer service ........... 32.8% 31.3% 45.6%
Selling and marketing .................. 9.3% 9.2% 23.3%
Research and development ............... 10.4% 14.4% 3.3%
General and administrative ............. 12.3% 10.0% 21.1%
Amortization of intangible goodwill &
non-compete agreements ............... 4.1% 3.4% 3.1%
------------------------
Total Operating Expense .......... 68.9% 68.3% 96.4%
------------------------
Earnings(loss) from operations ... 8.8% 1.5% -30.4%
Interest and financing costs ...................... 9.8% 4.0% 3.6%
------------------------
Earnings(loss) before income taxes -1.0% -2.5% -34.0%
Income tax expense(benefit) ....................... 2.0% -0.2% -12.1%
------------------------
Net earnings(loss) ............... -3.0% -2.3% -21.9%
========================
</TABLE>
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenue
The Company's total revenue was $9.1 million for the twelve months
ended December 31, 1998 compared to $10.5 million for the twelve months ended
December 31, 1997, a decrease of $1.4 million or 13.3%. This decrease was
primarily due to a deferral of Collection and CAMA license fees into 1999 and to
a lesser extent a decrease in City hardware and software sales.
License Fees. The Company's revenue from license fees was $1.2 million
for the twelve months December 31, 1998 compared to $2.2 million for the twelve
months ended December 31, 1997, a decrease of $1.0 million or 45.5%. This
decrease was primarily due to a deferral of Collection and CAMA license fees
into 1999.
12
<PAGE>
Recurring Maintenance and Service Fees. The Company's revenue from
recurring fees was $4.2 million for the twelve months ended December 31, 1998
compared to $3.9 million for the twelve months ended December 31, 1997, an
increase of $286,000 or 7.3%. The increase was primarily attributable to the
realization of recurring revenue associated with Collection license fee sales of
a prior period and to a lesser extent integrated voice response maintenance
contracts. The recurring revenue attributable to the maintenance and service
contracts are recognized upon the effective date of the maintenance and service
contracts (which could become effective up to 12 months following execution of
the licensing agreement.) During this same period, hardware maintenance declined
due to hardware manufacturers offering longer extended warranties, declining
costs of hardware and the Company's belief that some customers no longer view
hardware maintenance as a mission critical need for all components.
Product Sales. Revenue from product sales was $2.5 million for the
twelve months ended December 31, 1998 compared to $3.4 million for the twelve
months ended December 31, 1997, a decrease of 887,000 or 26.1%. This decrease is
primarily due to a decrease in sales of hardware for Collection and CAMA
systems. This decrease was partially offset to by an increase in RPS hardware
sales.
Other Service Fees. Revenue from other service fees was $1.2 million
for the twelve months ended December 31, 1998 compared to $969,000 for the
twelve months ended December 31, 1997, an increase of $223,000 or 23.7%. This
increase was primarily due to increased RPS installation sales.
Cost of Revenue
The total cost of revenue was $3.1 million for the twelve months ended
December 31, 1998 compared to $3.2 million for the twelve months ended December
31, 1997, a decrease of $88,000 or 2.8%. This yielded a gross profit margin of
66.1% for the twelve months ended December 31, 1998 compared to a gross profit
margin of 69.7% for the twelve months ended December 31, 1997. This decrease in
gross profit margin resulted from an increase in purchased software from 5.5% of
total revenue for the twelve months ended December 31, 1997 to 11.8% of total
revenue for the twelve months ended December 31, 1998.
Product Sales. The cost of product sales was $2.0 million, or
approximately 78.4% of product sales revenue, for the twelve months ended
December 31, 1998 compared to $2.5 million, or approximately 74.0% of product
sales revenue, for the twelve months ended December 31, 1997, a decrease of
$543,000 or 21.7%. This decrease was primarily due to costs associated with a
decrease in sales of hardware for Collection and CAMA systems. This decrease was
partially offset by an increase to costs associated with higher RPS hardware
sales.
Purchased Software. The cost of software was $1.1 million, or
approximately 92.0% of license fees, for the twelve months ended December 31,
1998 compared to $576,000 or approximately 26.5% of license fees, for the twelve
months ended December 31, 1997, an increase of $498,000 or 86.5%. This increase
was due to increase in the installation of RPS third-party software sales. The
Company has incurred additional costs to correct RPS software issues for
existing customers. Amortization of software development cost was $134,000 for
the twelve months ended December 31, 1998 and $142,000 for the twelve months
ended December 31, 1997.
Distribution. The costs associated with distribution were $23,000 for
the twelve months ended December 31, 1998 compared to $67,000 for the twelve
months ended December 31, 1997, a decrease of $44,000 or 65.7%. This decrease
was due primarily to a large Collection and CAMA hardware shipment in June 1997.
13
<PAGE>
Operating Expenses
Support and Customer Service. Expenses related to support and customer
service were $4.2 million for the twelve months ended December 31, 1998 compared
to $3.3 million for the twelve months ended December 31, 1997, an increase of
$869,000 or 26.3%. This increase resulted primarily from an increase in salaries
and hiring to enhance customer service and support future Company growth. In
addition, outsourcing costs rose to accommodate expansion into new markets and
build infrastructure for growth expected from Year 2000 sales.
Selling and Marketing. The Company's selling and marketing expenses
were $2.1 million for the twelve months ended December 31, 1998 compared to
$966,000 for the twelve months ended December 31, 1997, an increase of $1.1
million or 113.9%. This increase was due to an increase in the numbers of sales
personnel and expenses related to covering new markets such as California,
Georgia, Illinois, Nevada, Ohio and Tennessee.
Research and Development. Research and development expenses were
$299,000 for the twelve months ended December 31, 1998 compared to $1.5 million
for the twelve months ended December 31, 1997, a decrease of $1.2 million or
80.0%. These expenses are comprised primarily of salaries as well as amounts
paid to outside consultants to supplement continuing product development
efforts. The decrease resulted from the capitalization of research and
development cost associated with new product development.
General and Administrative. General and administrative expenses were
$1.9 million for the twelve months ended December 31, 1998 compared to $1.1
million for the twelve months ended December 31, 1997, an increase of $869,000
or 79.0%. This increase was primarily due to a increase in legal fees and travel
and insurance activity in connection with the initial public offering, as well
as, expenses associated with additional General and Administrative staffing. To
a lesser extent the increase is associated with increased employee benefits.
Amortization of Goodwill and Non-compete Agreements. The Company
incurred a goodwill and non-compete amortization expense related to the 1994
acquisition of the Company by a private investor group of $281,000 for the
twelve months ended December 31, 1998 compared to $358,000 for the twelve months
ended December 31, 1997, a decrease of approximately $77,000 or 21.5%. The
decrease in amortization is primarily due to the completion in December 1997 of
the non-compete agreement amortization.
Loss from Operations
For the reasons discussed above the Company had a loss of $2.8 million
for the twelve months ended December 31, 1998, compared to earnings from
operations of $148,000 for the twelve months ended December 31, 1997. This
decrease in earnings from operations of $2.9 million was due to a 46.4% decrease
of license fees revenue and a 26.0% decrease in product sales revenue for the
twelve months ended December 31, 1998, compared to the twelve months ended
December 31, 1997. The decrease was also attributed to increased cost of sales
for the RPS division and by increased operating expenses for support and
customer service, selling and marketing and general and administrative
departments. The decrease in earnings was partially offset by decreased
operating expense for the research and development departments due to
capitalization of software development cost.
Non-Operating Expenses
Interest and Financing Costs. The Company's interest expense for its
long term debt was $327,000 for the twelve months ended December 31, 1998
compared to $420,000 for the twelve months ended December 31, 1997, a decrease
of $93,000 or 22.1%. This decrease was primarily due to the
14
<PAGE>
Company's repayment of the senior term loan and interest income on investments
from the remaining proceeds of the initial public offering.
Income Tax Expense. The Company's provision for income taxes was a
benefit of $1.1 million for the twelve months ended December 31, 1998 compared
to $25,000 for the twelve months ended December 31, 1997, an increase of $1.08
million or 431.2%. This increase in the benefit of $1.1 million was attributable
to decreased earnings from operations. The income tax provision is higher than
income taxes determined by applying the applicable statutory rates for the
twelve months ended December 31, 1998 primarily due to non-deductible
amortization of goodwill and non-deductible put warrant adjustments.
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Revenue
The Company's total revenue was $10.5 million for the year ended
December 31, 1997, compared to $8.4 million for the year ended December 31,
1996, an increase of $2.1 million, or 25.0%. This increase was primarily due to
an increase in computer-assisted mass appraisal ("CAMA") installation, RPS
hardware and software sales and $400,000 of revenue related to CDP integrated
voice response systems.
License fees. The Company's revenue from license fees was $2.2 million
for the year ended December 31, 1997, compared to $1.6 million for the year
ended December 31, 1996, an increase of $600,000, or 37.5%. This increase was
primarily due to an increase in new customer CAMA installations and, to a lesser
extent, installations of RPS software and CDP integrated voice response systems.
The Company sold 224 licenses at fees ranging from less than $10,000 to $200,000
per license during year ended December 31, 1997. The Company sold 219 licenses
at fees ranging from less than $10,000 to $500,000 during year ended December
31, 1996. Revenue from each license fee varies depending upon the number of
accounts processed, hardware configuration, number of users and applications
licensed.
Recurring Maintenance and Service Fees. The Company's revenue from
recurring fees was $3.9 million for the year ended December 31, 1997 compared to
$3.9 million for the year ended December 31, 1996. Although there was an
increase in license fees during the period, the recurring revenue attributable
to the maintenance and service contracts remained constant because revenue
associated with such sales is not realized until the effective date of the
maintenance and service contracts (which could become effective up to three to
12 months following execution of the licensing agreement). During this same
period, recurring software and service fees increased while the recurring
revenue associated with hardware maintenance declined due to hardware
manufacturers offering longer extended warranties, declining costs of hardware
and the Company's belief that some customers no longer view hardware maintenance
as a mission critical need for all components.
Product Sales. Revenue from product sales was $3.4 million year for the
year ended December 31, 1997 compared to $2.1 million for the year ended
December 31, 1996, an increase of $1.3 million, or 61.9%. This increase was
primarily due to an increase in RPS sales and, to a lesser extent, installations
of CAMA, sales of hardware for property tax billing and collection systems and
CDP integrated voice response systems.
Other Service Fees. Revenue from other service fees was $1.0 million
for the year ended December 31, 1997 compared to $800,000 for the year ended
December 31, 1996, an increase of $200,000, or 25.0%. This increase was
primarily due to increased RPS software and hardware sales, CAMA installations,
and starting in 1997, cabling installations to improve client site
infrastructure.
15
<PAGE>
Cost of Revenue
The Company's cost of revenue includes the cost of hardware product
sales, the cost of software and distribution costs.
Product Sales. The cost of product sales was $2.5 million, or
approximately 73.5% of product sales, for the year ended December 31, 1997
compared to $1.5 million, or approximately 71.4% of product sales for the year
ended December 31, 1996, an increase of $1.0 million, or 66.7%. This increase
was primarily due to costs associated with an increase in RPS hardware sales
and, to a lesser extent, hardware sales associated with CAMA installations. The
increase in cost as a percentage of product sales was due to RPS hardware
comprising a larger portion of total hardware sales. RPS hardware generally has
a higher cost of sales than other hardware products.
Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$600,000, or approximately 27.3% of license fees, for the year ended December
31, 1997 compared to $400,000, or approximately 25.0% of license fees, for the
year ended December 31, 1996, an increase of $200,000, or 50.0%. This increase
was largely due to the cost of purchased software associated with the Cleveland
County, Oklahoma installation.
Distribution. The costs associated with distribution were $70,000 for
the year ended December 31, 1997 compared to $10,000 for the year ended December
31, 1996, an increase of $60,000, or 600%. This increase was due to increased
sales of RPS and cabling installation work performed as a result of new CAMA
installations.
The total cost of revenue was $3.2 million for the year ended December
31, 1997 compared to $1.9 million for the year ended December 31, 1996, an
increase of $1.3 million, or 68.4%. This yielded a gross profit margin of 69.7%
for the year ended December 31, 1997 compared to a gross profit margin of 77.7%
for the year ended December 31, 1996. This decrease in gross profit margin
resulted from an increase in product sales from 24.5% of total revenue in 1996
to 32.6% of total revenue in 1997. Product sales have a higher cost of revenue
associated with them than the Company's other sources of revenue.
Operating Expenses
Support and Customer Service. Expenses related to support and customer
service were $3.3 million for the year ended December 31, 1997 compared to $2.7
million for the year ended December 31, 1996, an increase of $600,000, or 22.2%.
This increase resulted from an increase in personnel costs related to enhancing
customer service and supporting future growth expected for Y2K sales.
Selling. The Company's selling expenses were $1.0 million for the year
ended December 31, 1997 compared to $800,000 for the year ended December 31,
1996, an increase of $200,000, or 25.0%. This increase was due to an increase in
the number of sales personnel and expenses related to covering new markets such
as California, Nevada and Ohio. In addition, sales commission expenses rose as a
result of increased sales of RPS and CAMA.
Research and Development. Research and development expenses were $1.5
million, or 14.4% of revenue, for the year ended December 31, 1997 compared to
$900,000, or 10.4% of revenue, for the year ended December 31, 1996, an increase
of $600,000, or 66.7%. These expenses are comprised primarily of salaries and a
portion of the Company's overhead as well as amounts paid to outside consultants
to supplement product development efforts. The increase resulted from the
initiation of development for new database technology.
16
<PAGE>
General and Administrative. General and administrative expenses were
$1.0 million for the year ended December 31, 1997 compared to $1.0 million for
the year ended December 31, 1996.
Amortization of Goodwill and Non-Compete Agreements. The Company
incurred a non-cash expense for amortization of goodwill and non-compete
agreements related to the 1994 Acquisition (as defined below) of $350,000 for
the year ended December 31, 1997 compared to $350,000 for the year ended
December 31, 1996.
Earnings From Operations
Earnings from operations were $100,000, or 1.4% of revenue, for the
year ended December 31, 1997 compared to $700,000, or 8.8% of revenue, for the
year ended December 31, 1996. This decline in earnings from operations of
$600,000 was primarily due to the increase in research and development expenses
to 14.4% of revenue for the year ended December 31, 1997 compared to 10.4% of
revenue for the year ended December 31, 1996, and the reduction in the gross
profit margin from 77.7% in 1996 to 69.7% in 1997. In each period, earnings from
operations include non-cash expenses related to amortization of goodwill and
noncompete agreements of $350,000 incurred in connection with the 1994
Acquisition (as defined below,).
Non-Operating Expenses
Interest and Financing Costs. The Company's interest expense on its
long-term debt was $400,000 for the year ended December 31, 1997 compared to
$800,000 for the year ended December 31, 1996, a decrease of $400,000, or 50.0%.
This decrease was primarily attributable to a decrease in the put warrant
adjustment from an expense of $300,000 for the year ended December 31, 1996 to a
benefit of $100,000 for the year ended December 31, 1997. The put warrant
adjustment is primarily based on the operating earnings of the Company for the
previous twelve-month period, which decreased from 1996 to 1997.
Provision for Income Taxes. The Company had an income tax benefit of
$30,000 for the year ended December 31, 19997, compared to an income tax expense
of $200,000 for the year ended December 31, 1996, a decrease of $230,000. The
decrease was primarily attributable to decreased earnings from operations. The
income tax provision is higher than income taxes determined by applying the
applicable statutory rates primarily due to non-deductible amortization of
goodwill and non-deductible put warrant adjustments.
LIQUIDITY AND CAPITAL RESOURCES
The Company was acquired by an international private investor group on
December 30, 1994 for approximately $4.6 million in a leveraged transaction. The
acquisition was financed with a $1.5 million senior term loan due December 1998,
provided by FINOVA Capital Corporation and a $2.0 million senior subordinated
note due in two installments in December 1999 and December 2000, provided by
Hanifen Imhoff Mezzanine Fund, L.P. (the "Hanifen Loan"). The balance of the
funding was provided by certain officers and directors of the Company in the
form of equity capital.
Historically, the Company has funded its business solely with cash
generated from operations. However, on March 30, 1998 the Company successfully
completed an initial public offering of 1.9 million shares of its Common Stock.
Net proceeds of the initial public offering less all issuance costs were
approximately $5.62 million. In April 1998, the Company utilized proceeds from
the initial public offering totaling approximately $761,000 to retire the
outstanding principal of its senior term loan including interest and repayment
penalties.
17
<PAGE>
The Company's cash balances were $296,000 and $327,000 as of December
31, 1998, and December 31, 1997, respectively. The Company's operating
activities used cash of $1.1 million and provided cash of $570,000 during the
twelve months ended December 31, 1998 and December 31, 1997, respectively. Cash
used in investing activities totaled $3.9 million and $538,000 in 1998 and 1997,
respectively. Investing activities include capital expenditures, capitalized
software development costs and costs of acquisitions. The Company's capital
expenditures for 1998 and 1997 were $485,000 and $261,000, respectively,
principally for investments in equipment and related software associated with
increased staffing and upgrading internal systems. The capital expenditures
increase of $224,000 for the twelve months ended December 31, 1998 was primarily
due to the Company making investments in leasehold improvements and furnishings
relating to the 1998 relocation of its Tampa, Florida office facility and
opening of its Sacramento, California office facility. The Company capitalized
software development costs of $3.4 million and $281,000 in fiscal 1998 and 1997,
respectively. The increase of $3.1 million was due to increased software
development efforts for additional products, data bases and platforms.
Net cash provided in financing activities was $4.9 million for the
twelve months ended December 31, 1998, compared to cash used of $296,000 for the
twelve months ended December 31, 1997.
On December 31, 1999, the current portion, $1.1 million, of a $2.1
million senior note payable to Hanifen Imhoff Mezzanine Fund, L.P. under the
Hanifen Loan becomes due. As of December 31, 1998, the Company is in violation
of the note agreement with Hanifen Imhoff Mezzanine Fund, L.P. The violation
pertains to the ratio of cash flow to total contractual debt service. Hanifen
Imhoff Mezzanine Fund, L.P has waived through September 30, 1999 compliance with
this ratio.
On March 30, 1999, the Company executed a Merger Agreement with Tyler
pursuant to which the Company will merge with and into a wholly-owned subsidiary
of Tyler. In addition, on March 30, 1999, Tyler loaned $1.0 million to the
Company, evidenced by a secured promissory note (the "Tyler Loan"). The Tyler
Loan is due on September 30, 1999, and has an interest rate of 2% over the prime
rate. An interest payment is due June 30, 1999, and the entire principal balance
and accrued interest is then due on September 30, 1999. The note is secured by a
lien on the Company's assets subordinate to the Hanifen Loan. The Company
believes that the proceeds of this Tyler Loan, when combined with its cash
balances and cash generated from operations, will satisfy the Company's working
capital, business development and capital expenditure requirements through
September 30, 1999. There can be no assurances, however, that the Company will
have sufficient working capital to satisfy all of the anticipated needs.
Increased costs, delays in receivable collections and opportunities for growth
or expansion may increase the demand for working capital, thereby making an
additional infusion of capital necessary. After September 30, 1999, the Company
will have insufficient resources to satisfy all of its obligations, working
capital, business development and capital expenditure requirements. The Company
will require additional sources of liquidity which may include equity offerings
or debt financing. The Company believes that the merger with Tyler, if
consummated, will permit it to satisfy these obligations, working capital,
business development and capital expenditure requirements.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK (p. 18)
Forward Looking Information. Statements contained in this document
stating the Company's or management's anticipations, beliefs, expectations,
hopes, intentions, predictions and/or strategies which are not purely historical
in fact or which apply prospectively are "forward-looking" statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. All forward
looking statements contained in this document are based on information available
to the Company on the date here of, and the Company assumes no obligation to
update any such forward-looking statements. The Company's actual results could
differ materially from those contained or projected in, or even implied by, such
forward-looking statements. The Company operates in a rapidly changing
environment that involves numerous risks, some of which are beyond the Company's
control. Some of the factors that could cause the actual results to differ
materially are set forth below and elsewhere in this report. Additional
information concerning these or other factors which could cause actual results
to differ materially from those in the forward-looking statements is contained
from time to time in the Company's other SEC filings. Copies of those filings
are available from the Company and/or the Security Exchange Commission.
18
<PAGE>
Year 2000 Compliance. The Company has assessed the impact of Year 2000
issues with regard to its internal reporting systems and operations and
determined that the remaining costs associated with addressing such issues will
not be material. The Company believes that the likelihood of a disruption in
operations related to Year 2000 issues is remote. All of the Company's products
are Y2K compliant.
Liquidity. As a result of significant operation losses, development
costs and costs incurred to restructure operations, the Company has limited cash
resources available to maintain its existing operations. Short-term liquidity
needs will be funded by the proceeds of the Tyler Loan. An interest payment is
due June 30, 1999, and the entire principal balance and accrued interest is then
due on September 30, 1999. In addition, a $1.1 million installment on the
Hanifen Loan is due on December 31, 1999. Sales, customer deposits for the
Company's products and existing cash reserves will fund short-term liquidity
needs of the Company. There is no assurance, however, these sources will provide
the necessary liquidity to permit operations. Further, the Company's capital
requirements and expenditures will vary as a result of the progress and success
of its product development efforts, the expansion of its marketing efforts and
the timing of the increase, if any, of its product sales revenues. Funding to
date has been provided primarily through equity and debt transactions. If the
Company needs to raise additional capital, no assurance can be given that
funding will be available on favorable terms, if at all. The Company has had
limited success in obtaining customer deposits to fund the substantial start-up
costs for manufacture of its products, and there can be no assurance that
funding from customer deposits will continue.
Risks Associated with Public Sector Market. A substantial portion of
the Company's revenue to date has been attributable to sales of software and
services to state, county and city governments and other municipal agencies. The
Company expects that sales to such public sector customers will account for
substantially all of the Company's revenue in the future. Virtually all of these
public sector organizations have existing information processing systems.
Accordingly, in order to continue to increase its sales to this market, the
Company must persuade these organizations to replace or upgrade existing
information processing systems. Change to an organization's information system
is a costly, time consuming and operationally disruptive process for the
customer. Conversion to a new information processing system must typically be
done without any disruption of service and, accordingly, the Company's potential
customers perceive a high degree of risk in connection with the adoption of a
new system. In addition, the purchase of the Company's products involves a
significant commitment of capital, with attendant delays frequently associated
with large capital expenditures by an organization. For these and other reasons,
the sales cycle associated with the purchase of the Company's products is
typically lengthy and subject to a number of significant risks, including
customers' budgetary constraints and internal acceptance reviews, over which the
Company has little or no control. There can be no assurance that potential
customers for the Company's products in the public sector market will continue
to make information processing system replacement decisions at rates necessary
to maintain demand for the Company's products and sustain market growth or that
the Company's products will be accepted by public sector organizations that
consider replacing their current information processing systems. A significant
reduction in demand or acceptance of the Company's products could have a
material adverse effect on the Company's business, financial condition and
operating results.
Uncertainty of Demand for Year 2000 Solutions. The Company has focused
a significant portion of its marketing and sales efforts on products and
solutions addressing the Y2K problem, developing solutions for current and
potential customers based upon modifications to the Company's existing software
product lines. As the Y2K approaches, the Company anticipates market growth in
Y2K solutions will diminish. While the Company believes new markets will evolve
and demand for its products will remain strong, there can be no assurance that
alternative markets will develop to the extent anticipated by the Company. Due
to these factors, development of a market for the Company's Y2K solution is
uncertain and unpredictable. The failure to develop alternative markets could
have a material adverse effect on the Company's business, financial condition
and operating results.
19
<PAGE>
Competition. The market in which the Company competes is highly
fragmented, with a large number of competitors that vary in size, primary
computer platforms and overall product scope. Within its traditional public
sector markets, the Company competes from time to time with (i) custom software
and services providers (such as Andersen Consulting, KPMG Peat Marwick and
Oracle Corporation), (ii) companies which focus on selected segments of the
public sector market (including Systems Computer & Technology, Inc., Manatron,
Inc., H.T.E., Inc., American Management Systems, Inc., BRC Holdings, Inc. and
Tyler Corporation) and (iii) a significant number of smaller private companies.
The Company also competes with in-house management information services staff.
Many of the Company's competitors are more established, benefit from greater
name recognition and have substantially greater resources than the Company.
Moreover, the Company could face additional competition as other established and
emerging companies enter the public sector software application market and new
products and technologies are introduced. Increased competition could result in
price reductions, fewer customer orders, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, financial condition and operating results. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties, thereby increasing the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
current and new competitors may emerge and rapidly gain significant market
share. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, and the failure to do so
would have a material adverse effect upon the Company's business, financial
condition and operating results.
Management of Growth; Ability to Respond to Technological Change. After
a period of significant expansion in the number of its employees, the scope of
its operating and financial systems and the geographic area of its operations,
the Company has consolidated its strategic focus on technological enhancements
in existing geographic markets. The Company's future growth will depend, at
least in part, upon its ability to enhance its current products, develop or
acquire and market new products which keep pace with technological developments,
evolving industry standards and legislative amendments, and respond to changes
in customer needs. Inasmuch as there is significant competition for software
development professionals with the skills and expertise necessary to perform
services offered by the Company, there can be no assurance that the Company will
be able to retain existing management, technical or sales personnel or that any
such retention will not decrease revenue. Moreover, there can be no assurance
that the Company will be successful in developing or acquiring product
enhancements or new products to address changing technologies and customer
requirements, or that its competitors will not develop products that are
superior to the Company's products or achieve greater market acceptance than the
Company's products. Failure by the Company to manage growth or respond to
technological change or the development of superior products by its competitors
could have a material adverse effect on the Company's business, financial
condition and operating results.
Potential Fluctuations of Operating Results; Future Operating Results
Uncertainty. The Company's revenue and operating results are subject to
fluctuations resulting from a variety of factors, including the effect of
budgeting and purchasing practices of its customers, the length of customer
evaluation processes for the Company's solutions, the timing of customer system
conversions, announcements of new products by the Company or its competitors,
and the Company's sales practices. In addition, since a significant portion of
the Company's operating expenses is fixed, the Company may not be able to adjust
or reduce spending in response to sales shortfalls or delays. Many of these
factors are not within the Company's control. These factors can cause
significant variations in operating results from quarter to quarter, which may
also adversely affect and cause volatility in the market price of the Company's
common stock. The Company believes that quarter to quarter comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future quarterly performance.
20
<PAGE>
Dependence on Key Personnel. The Company's continued success will
depend upon the availability and performance of its senior management team,
particularly Paul E. Kana, Chairman and Chief Executive Officer, and James K.
Hoofard, Jr., President and Chief Operating Officer, each of whom possess unique
and extensive industry knowledge and experience. While the Company currently
maintains key-man life insurance policies on Paul E. Kana and James K. Hoofard,
Jr., the loss of either man could have a material adverse effect on the
Company's business, financial condition and operating results.
Proprietary Rights and Risks of Infringement. The Company regards
certain features of its internal operations, software and documentation as
confidential and proprietary, and relies on a combination of contract and trade
secret laws and other measures to protect its proprietary intellectual property.
Despite these precautions, it may be possible for unauthorized parties to copy
the Company's software or reverse engineer or otherwise obtain and use
information the Company regards as proprietary. The Company has no patents and,
under existing copyright laws, has only limited protection. In addition, certain
provisions of the license agreements entered into by the Company, including
provisions against unauthorized use, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions. There can be no assurance
that the steps taken by the Company to protect its proprietary rights will be
adequate to deter misappropriation of its technology or independent development
by others of technologies that are substantially equivalent or superior to the
Company's technology. Any such misappropriation or development could have a
material adverse effect on the Company's business, financial condition and
operating results. As the number of competitors providing similar products
increases, overlapping methodologies used in such products will become more
likely. Although the Company's methodology has never been the subject of an
infringement claim, there can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertion of such
claims will not result in litigation or that the Company would prevail in such
litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Litigation, regardless of its outcome, could result in substantial cost to the
Company and divert resources and management from the Company's operations. Any
infringement claim or litigation against the Company could, have a material
adverse effect on the Company's business, financial condition and operating
results.
Potential Product Liability and Risk of Software Defects. The Company
markets to its customers complex, mission-critical applications. Any failure in
a customer's system could result in a claim for damages, regardless of the
Company's responsibility for such failure. The Company has never been involved
in product liability litigation, and the Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential product liability claims. However, there can be no assurance that
the limitation of liability provisions contained in the Company's license
agreements would be enforceable or would otherwise protect the Company from
liability for damages. The Company currently carries general liability insurance
protecting against product liability claims. There can be no assurance that such
insurance will continue to be available, or available at a cost acceptable to
Company, or that the policy's limits will be sufficient to satisfy any judgment
or claim. The successful assertion of one or more large claims against the
Company that exceed available insurance coverage or changes in the Company's
insurance policies, including premium increases or the imposition of a large
deductible or co-insurance requirements could have a material adverse effect on
the Company's business, financial condition and operating results. Furthermore,
litigation, regardless of its outcome, could result in substantial cost to the
Company and divert management's attention from the Company's operations, which
could have a material adverse effect on the Company's business, financial
condition and operating results.
Software products as complex as those developed by the Company may
contain errors or defects, particularly when first introduced or when new
versions or enhancements are released. Errors, bugs or viruses could result in
loss or delay of market acceptance, a failure in a customer's system or complete
loss of customer data. Although the Company has not experienced material adverse
effects resulting from any such defects or errors to date, there can be no
assurance that defects and errors will not be found after commencement of
product shipments. Any such defects could have a material adverse effect upon
the Company's business, financial condition and operating results.
21
<PAGE>
Dependence on Key Suppliers and Relationships. The Company purchases
certain key components of its products from limited source suppliers.
Establishing relationships with additional or replacement suppliers for any of
the components used in the Company's products, if required, could involve
significant additional costs. The inability of any of the Company's suppliers to
provide functional components on a timely basis, or the inability of the Company
to locate qualified alternative suppliers or coding programmers on acceptable
terms, could have a material adverse effect on the Company's business, financial
condition and operating results. The Company may also need to establish
additional alliances and relationships in order to keep pace with evolutions in
technology and enhance its service offerings, and there can be no assurance such
additional alliances will be established.
No Public Market; Potential Volatility of Stock Price; Risk of
Low-Priced Stock. The Company's Common Stock has traded on the Exchange since
March 25, 1998. The Company's Common Stock is thinly traded, and there can be no
assurance that a more active trading market will develop or be sustained after
this Offering. The market price of the shares of Common Stock has been highly
volatile and may be significantly affected in the future by factors such as
actual or anticipated fluctuations in the Company's operating results,
announcements of technological innovations, new products or new contracts by the
Company or its competitors, developments with respect to patents, copyrights or
proprietary rights, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software
industry, changes in financial estimates by securities analysts, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock.
While the Company's Common Stock is presently listed on the Exchange,
the Company must meet certain financial maintenance criteria to continue to be
listed on the Exchange. The Company does not currently meet these criteria, and
there can be no assurance that the Company will meet the criteria in the
foreseeable future. Failure to meet these maintenance criteria may result in the
delisting of the Common Stock from the Exchange. If delisted, the Common Stock
would be traded on the over-the-counter market, in which case shareholders may
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Common Stock. If the Company's Common Stock was delisted
from the Exchange, and the trading price of the Common Stock were less than
$5.00 per share, the Common Stock might be considered "penny stock" and trading
in the Common Stock might be subject to the requirements of certain rules under
the Securities Exchange Act of 1934. These rules could adversely affect the
ability and willingness of broker-dealers to sell the Common Stock, which could
reduce the liquidity of the Common Stock and have a material adverse effect on
the trading market for the Common Stock.
As of February 28, 1999, the Company has outstanding 6,743,902 shares
of Common Stock, of which at least 2,252,325 shares are freely tradable. The
remaining shares of Common Stock are subject to agreements with the certain
underwriters under which such shares may not be offered, sold or otherwise
disposed of for a period of one year after the commencement of the initial
public offering on March 25, 1998 without the prior written consent of
Cruttenden Roth Incorporated, but will thereafter be eligible for sale pursuant
to Rule 144 of the Securities Act. Sales pursuant to Rule 144 or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the common stock and could impair the
Company's ability to raise capital through a subsequent offering of its equity
securities.
No Cash Dividends. The Company intends to retain any future earnings
for its business and does not anticipate paying any cash dividends in the
foreseeable future.
Effect of Certain Charter and Bylaw Provisions; Antitakeover Effects.
Certain provisions of the Company's Articles of Incorporation, as amended (the
"Restated Articles"), may deter or frustrate a takeover attempt of the Company
that a shareholder might consider in his best interest. The Company's Restated
Articles or Bylaws, among other things, provide that (i) any action required or
permitted to be taken by the shareholders of the Company may be effected only at
an annual or special meeting of shareholders, and not by written consent of the
shareholders, (ii) the annual meeting of shareholders shall be held on such date
and at
22
<PAGE>
such time fixed from time to time by the Board of Directors, provided that there
shall be an annual meeting held every calendar year, (iii) any special meeting
of the shareholders may be called only by the Chairman of the Board, President
or upon the affirmative vote of at least a majority of the members of the Board
of Directors, or upon the written demand of the holders of not less than 50% of
the votes entitled to be cast at a special meeting, (iv) an advance notice
procedure must be followed for nomination of directors and for other shareholder
proposals to be considered at annual shareholders' meetings and (v) the
Company's Board of Directors be divided into three classes, each of which serves
for different two-year periods, and for which shareholders have no cumulative
voting rights. In addition, the Company will be authorized to issue additional
shares of Common Stock, up to 10 million shares of the Preferred Stock in one or
more series, having terms fixed by the Board of Directors without shareholder
approval, including voting, dividend or liquidation rights that could be greater
than or senior to the rights of holders of Common Stock. Shareholders will have
no preemptive rights with respect to any additional Common Stock or Preferred
Stock. Issuance of additional shares of Common Stock or new shares of Preferred
Stock could also be used as an anti-takeover device. Except as set forth herein,
the Company has no current intentions or plans to issue additional Common Stock
or issue additional Preferred Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Submitted as a separate section of this Form10-K. See response to Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company as of February 28,
1999 are as follows:
NAME AGE POSITION
- -------- ------ ----------
Paul E. Kana 65 Chairman of the Board, Chief Executive Officer.
James K. Hoofard, Jr. 39 President, Chief Operations Officer
Sidney H. Cordier 54 Director
Brian R. Wilson 47 Director
G. Dean Booth 59 Director
R. Harris Turner 56 Director
Mike P. Brown 49 Executive Vice President
Kevin L. Figge 41 Vice President and Chief Financial Officer
John C. Thomas 52 Vice President - Sales and Marketing
Lisa D. Hargiss 38 Vice President - Long Term Client Care
Bobby C. Dow 39 Vice President - Development
Randy E. Sellers 36 Vice President - Implementation
Paul E. Kana has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since December 1994. From 1988 to 1994, Mr.
Kana served as President, Chief Executive Officer and a member of the Board of
Directors of Delaware-based MR Data Management, Inc., ("MR"), a wholly-owned
subsidiary of MR Data Management Group PLC ("MR Data Management"), which engages
in data transcription and document image-processing. In 1988, MR acquired
Computer Microfilm Corporation ("CMC"), a publicly-held company founded by Mr.
Kana in 1968. CMC engages in digital image processing, conversion of computer
output to microfilm and CD-ROM, computer processing, high volume laser printing
services and micro-publishing. He is a graduate of Columbia University of New
York with a Bachelor of Science in Engineering.
James K. Hoofard, Jr. has served as a Director, President and Chief Operating
Officer of CPS since December 1994. From 1991 to 1994, Mr. Hoofard served as
Vice President of Marketing and Sales, and was responsible for the Property Tax
Billing and Collection group. He joined the Company as a Programmer/Analyst in
May 1982 and moved into the marketing and sales area in September 1987, focusing
on developing the Florida market. From 1982 to 1987, he served as a Revenue
Analyst, Software Product Manager, and as a Product Manager for the Florida Tax
Manager product. Mr. Hoofard is a graduate of the University of Texas at
Arlington with a Bachelor of Business Administration in Systems Analysis.
24
<PAGE>
Sidney H. Cordier has served as a Director of the Company since December 1994.
From January 1994 to present, Mr. Cordier has served as Chairman of the Board of
Directors of Cedardata PLC, a publicly-held U.K. company listed on the London
Stock Exchange, specializing in commercial and financial accounting systems
software ("Cedardata"). From 1984 to 1993, Mr. Cordier was Chief Executive
Officer of MR Data Management.
Brian R. Wilson has served as a Director of CPS since 1994. From 1993 to the
present, Mr. Wilson has been a management consultant, advising companies on
restructuring and serving as a manager of a private investment trust, and in May
1996, was appointed a director of Cedardata. From 1987 to 1993 Mr. Wilson served
as Finance Director and a member of the Board of Directors of MR Data Management
where his responsibilities included mergers and acquisitions, cash management,
pensions, insurance, certain legal matters and investor relations. Prior to
joining MR Data Management in 1987, Mr. Wilson was the chief financial officer
for European Properties with the Pension Fund Property Unit Trust in the United
Kingdom.
G. Dean Booth, Jr. has served as a Director and the Secretary of CPS since
December 1994. Mr. Booth is a partner at the law firm of Schreeder, Wheeler &
Flint, LLP of Atlanta, Georgia. Prior to joining Schreeder, Wheeler & Flint in
March 1996, he was the founder and managing partner of Booth, Wade and Campbell
from 1990. He currently serves as Honorary Chairman and Member of the Executive
Council for the International Bar Association, Trustee and Secretary for the
Institute for Political Economy, and Chairman of the Bar Council, United States
District Court, Northern District of Georgia.
R. Harris Turner has served as a Director of the Company since May 1998. From
1984 to 1992, Mr. Turner was the President and Chief Executive Officer of
Fidelity Title and Guaranty Company of Orlando, Florida. Since 1992, Mr. Turner
has been an independent investor. Mr. Turner has a Bachelor of Arts in Economics
and Business from the University of the South in Chattanooga, Tennessee. Mr.
Turner has a Juris Doctor from the University of Tennessee School of Law in
Knoxville, Tennessee. He presently resides in Longwood, Florida.
Michael P. Brown has served as Executive Vice President since June 1998. From
October 1996 to May 1998, Mr. Brown was responsible for product development.
From June 1995 to October 1996, Mr. Brown was responsible for the Property Tax
Appraisal and Assessment. He served as Vice President of Special Projects from
1993 to 1995 with responsibility for the development of Property Tax Billing and
Collection. Prior thereto Mr. Brown was the Vice President of the City and
Municipal group primarily in Florida. Mr. Brown joined CPS in November 1980. He
is a graduate of Louisiana Tech University with a Bachelor of Science degree in
Computer Science.
Kevin L. Figge has served as Chief Financial Officer since October 1997. Mr.
Figge's responsibilities since December 1994 have been encompassed within the
Administrative Services group which is comprised of the Accounting and Finance
Department, as well as the Personnel and Corporate Services Department. He
joined the Company in July 1992 as Controller and was made an officer of the
Company in December 1994. Prior to joining CPS, Mr. Figge served as Controller
of Aarberg Printing Inks, Inc. and was an Accounting Manager with the Army and
Air Force Exchange Service. Mr. Figge graduated with a Bachelor of Science
degree in Business Administration from the University of Maryland and also
obtained a Bachelor of Science degree in Accounting from the same university.
Mr. Figge is a certified public accountant.
John C. Thomas has served as Vice President of Sales and Marketing January 1998.
Mr. Thomas was previously employed by Clearwater, Kb Systems, Inc., a developer
of property tax appraisal assessment software ("Kb Systems"), where he served in
various corporate management and marketing positions, focusing on the areas of
administration, CAMA and Property Tax Billing and Collection software. Prior to
joining Kb Systems in 1989, Mr. Thomas authored the Thomas Sales Prospecting and
Territory Management Directory, which was published by the American Management
Association. Prior thereto, he served as Vice President of Sales of Citicorp
Information Services, a division of Citibank, N.A. and as Regional Sales Manager
of Interactive Data Corporation, a wholly-owned subsidiary of Chase Manhattan
Corporation. Mr. Thomas earned a Bachelor of Science degree in Industrial
Management from Wayne State University.
25
<PAGE>
Lisa D. Hargiss has served as Vice President of Long Term Client Care since
January 1998. She joined the Company in August 1987 as a Client Support
Representative, becoming an integral part of the design team for the Florida
Property Tax Billing and Collection product and the Computer Assisted Mass
Appraisal product. Ms. Hargiss obtained a Bachelor of Science degree in Computer
Science from Texas A&M University at Commerce.
Bobby C. Dow has served as Vice President of Product Development since January
1998. Mr. Dow was responsible for the Municipal group for one year prior to
joining the Product Development group. Mr. Dow, who joined the Company in 1983
as a programmer/analyst, has been part of the original development team that
designed and produced the City group product 1and has also devoted considerable
developmental efforts to the Tax Collection product. Mr. Dow is a graduate of
Southeastern Oklahoma State University with a Bachelor of Science degree in
Computer Science.
Randy A. Sellers has served as Vice President of Implementation since January
1998. Prior to joining CPS in March 1994, Mr. Sellers served two years as MIS
director and four years in technical support with DacEasy, Inc., a provider of
accounting software. Mr. Sellers received a Bachelor of Science degree in
Management Science and Computer Systems from Oklahoma State University.
The Company's Board of Directors is divided into three classes, with two classes
composed of two directors and one class with one director. The classes serve
staggered two-year terms. G. Dean Booth, Jr.'s and Harris Turner's terms as
Director shall expire as of the 1998 annual meeting, Brian P. Wilson's and
Sidney H. Cordier's terms shall expire as of the 1999 annual meeting, and James
K. Hoofard, Jr.'s and Paul E. Kana's terms shall expire at the 2000 annual
meeting. The Company's executive officers are appointed by and serve at the
discretion of the Board of Directors. No family relationships exists between any
directors or executive officers of CPS.
Committees Of The Board Of Directors
The Board maintains an Audit Committee and Compensation Committee.
The Audit Committee is responsible for reviewing the results and scope of audits
and other services provided by the Company's independent auditors. The Audit
Committee is comprised of Messrs. Booth, Turner and Wilson. The Compensation
Committee is comprised of Messrs. Booth, Cordier and Kana. The Compensation
Committee makes recommendations concerning the salaries and incentive
compensation of employees and consultants to the Company, and will oversee and
administer the Company's stock option plans.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
its Chief Executive Officer and the four next most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers") for
services rendered during the fiscal year ended December 31, 1998, with
comparative 1997 compensation figures.
26
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
- ---------------------------
NAME AND POSITION FISCAL YEAR SALARY BONUS(1) OTHER COMPENSATION
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
<S> <C> <C> <C> <C> <C> <C>
James K. Hoofard,Jr.
President and Chief 12/31/98 $150,000 $ 0 $ 7,380 (2)
Operating Officer 12/31/97 $125,000 $ 0 $ 1,500
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
Paul E. Kana
Chairman and Chief 12/31/98 $110,000 $ 0 $ 3,031 (3)
Executive Officer 12/31/97 $110,000 $ 0 $ 0
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
Mike P. Brown
Executive Vice 12/31/98 $110,327 $ 23,749 $ 0
President 12/31/97 $ 84,000 $ 7,625 $ 0
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
John C. Thomas $ 43,712
Vice President 12/31/98 $ 84,000 $ 7,000 $ 454 (4)
Sales and Marketing 12/31/97 $ 52,823(5) $ 0
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
Bobby C. Dow
Vice President 12/31/98 $ 89,773 $ 18,833 $ 792 (4)
Development 12/31/97 $ 72,000 $ 15,000 $ 0
- --------------------------------- --- -------------- -- ---------------- -- ------------- --- ------------------------
<FN>
(1) The Company has adopted bonus programs for employees, including
executive officers, whereby bonus payments are made based on achievement of
individual performance and consolidated corporate operating results. Business
unit performance also will be a factor in determining compensation awards with
respect to key employees who are not executive officers. The specified
qualitative and quantitative criteria employed by the Board of Directors of the
Company in determining bonus awards will vary for each individual and from year
to year.
(2) Mr. Hoofard's other compensation in 1998 consisted of personal use of a
company vehicle ($2,000), 401k matching contribution ($1,125), free
medical/dental and disability coverage ($4,255).
(3) Mr. Kana's other compensation in 1998 consisted of 410k matching
contribution of ($1,402) and free medical and dental coverage($1,989).
(4) Matching 401(k) contribution.
(5) Mr. Thomas's employment with CPS Systems, Inc. began on May 15, 1997.
</FN>
</TABLE>
Stock Options Granted in 1998
- -----------------------------
The following table sets forth certain information concerning grants of options
made during the fiscal 1998 to the Named Executive Officers.
<TABLE>
<CAPTION>
PERCENTAGE POTENTIAL REALIZABLE
NUMBER OF OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS/SAR EXERCISE ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO OR BASE EXPIRA- PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES IN PRICE TION FOR OPTION TERM (1)
NAME GRANTED (#) 1998 ($/SH) (2) DATE ---------------------
5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------- ----------------- ------------------ -------------- ------------ ---------------- -------------
James K. Hoofard,Jr. 115,000 21.0% $4.00 03/25/08 $ 289,800 $ 733,125
- ------------------------- ----------------- ------------------ -------------- ------------ ---------------- -------------
50,000 9.1% 4.00 03/25/08 $ 126,000 $ 318,750
Paul E. Kana (50,000) (3) (9.1)% 4.00 11/23/08 $(126,000) $(318,750)
- ------------------------- ----------------- ------------------ -------------- ------------ ---------------- -------------
17,500 3.2% 4.00 03/25/08 $ 44,100 $ 111,562
Mike P. Brown 50,000 9.1% 0.938 12/12/08 $ 126,000 $ 318,750
- ------------------------- ----------------- ------------------ -------------- ------------ ---------------- -------------
10,000 1.8% 4.00 03/25/08 $ 25,200 $ 63,750
John C. Thomas 30,000 5.5% 0.938 12/12/08 $ 75,600 $ 191,250
- ------------------------- ----------------- ------------------ -------------- ------------ ---------------- -------------
17,500 3.2 % 4.00 03/25/08 $ 44,100 $ 111,562
Bobby C. Dow 30,000 5.5% 0.938 12/12/08 $ 75,600 $ 191,250
- ------------------------- ----------------- ------------------ -------------- ------------ ---------------- -------------
<FN>
27
<PAGE>
(1) The dollar amounts set forth in these columns are the result of
calculations at the five percent and ten percent rates set by the SEC, and
therefore are not intended to forecast possible future appreciation, if any, of
the market price of Common Stock.
(2) Fair market value as of the date of grant.
(3) Mr. Paul Kana on November 23, 1998 disclaimed options for no
consideration.
</FN>
</TABLE>
Aggregate Stock Option Exercises and Year-End Option Value Table
The following table sets forth certain information concerning option
exercises in fiscal 1998, the number of stock options held by the Named
Executive Officers as of December 31, 1998 and the value of (based on the fair
market value of a share as of fiscal year end) of in-the-money options
outstanding as of such date.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS/SARS HELD IN-THE-MONEY OPTION/
SHARES AT FISCAL YEAR END SARS AT FISCAL
ACQUIRED VALUE (#) YEAR END (1)
ON EXERCISE REALIZED ----------------- ---------------------
NAME (#) ($) EXERCISED UNEXERCISED EXERCISED UNEXERCISED
<S> <C> <C> <C> <C> <C> <C>
- ------------------------- --------------- ------------- ---------------- ------------- --------------- -------------
James K. Hoofard,Jr. 0 0 0 115,000 $ 0 $ 0
- ------------------------- --------------- ------------- ---------------- ------------- --------------- -------------
Paul E. Kana 0 0 0 0 $ 0 $ 0
- ------------------------- --------------- ------------- ---------------- ------------- --------------- -------------
Mike P. Brown 0 0 0 67,500 $ 0 $ 0
- ------------------------- --------------- ------------- ---------------- ------------- --------------- -------------
John C. Thomas 0 0 0 40,000 $ 0 $ 0
- ------------------------- --------------- ------------- ---------------- ------------- --------------- -------------
Bobby C. Dow 0 0 0 47,500 $ 0 $ 0
- ------------------------- --------------- ------------- ---------------- ------------- --------------- -------------
<FN>
(1) The closing sale price for the Company's Common Stock as reported by the
American Stock Exchange on December 31, 1998 was $0.8125. Values were calculated
by multiplying the difference between option price and $0.8125 by the number of
shares of Common Stock underlying the option.
</FN>
</TABLE>
Compensation of Directors
- --------------------------
All directors are reimbursed for their usual and customary expenses
incurred in attending all Board and committee meetings. CPS currently pays
directors who are not also employees (Messrs. Cordier, Wilson, Booth and Turner)
$650 per day of service as it relates to attending such meetings. Directors who
are also employees of the Company receive no remuneration for serving as
directors.
Employment Agreements and Change in Control Agreements
- ------------------------------------------------------
Effective January 1, 1998, the Company entered into a two-year
employment agreement with James K. Hoofard, Jr., the Company's President and
Chief Operations Officer, and Paul E. Kana, the Company's Chairman of the Board
and Chief Executive Officer. These agreements with Mr. Hoofard and Mr. Kana
provided for base salaries of $150,000 and $110,000, respectively, subject to
review at the end of each fiscal year consistent with the standard practices of
the Company. Unless terminated by the Executive or Company prior to January 01,
2000, this agreement shall automatically renew for a two-year period. In
addition the executives shall be entitled to participate in or receive health,
welfare, life insurance, long-term disability insurance, at no expense to the
executives. The agreement also provides upon termination due to death, cause or
voluntary, the Company shall pay the executive his base salary payable and any
accrued bonus payable through the date of termination. If the executive
employment is terminated by reason of disability, then the executive will
receive his base salary payable and any accrued bonus payable up to the date of
termination and for 180 days thereafter. If the company terminates the executive
`s employment without cause or if the executive shall terminate for "Good
Cause", then the Company shall pay the executive his then current base salary at
the date of termination for a period of two years from the date of termination.
Effective June 1, 1998, the Company entered into an agreement with
Michael P. Brown, Executive Vice President. This agreement provided for a base
salary of $110,000 until termination of the agreement effective December 31,
1998. It was agreed and understood that while Mr. Brown maintains his permanent
residence in Claremore, Oklahoma, he would conduct his duties as Executive Vice
President in the Dallas office as if he were a full time residence of the Dallas
area. Upon his stays in Dallas the company will provide a corporate apartment
and vehicle at the company expense. In addition Mr. Brown will receive a
28
<PAGE>
bonus plan for the 1998 fiscal year that equates to .75% of booked Company's
Initial License Fee (ILF) revenue, payable on the month end following the
accounting close of the quarter in which the ILF was booked. The agreement also
stated that the bonus plan will be for fiscal year 1998, any bonus plan for 1999
and beyond will be based off of company performance on a net income model.
Employee Equity Plans
1997 Equity Participation Plan. The Company has established an equity
participation plan (the "1997 Equity Participation Plan") to enable executive
officers, other key employees, independent directors and consultants of CPS to
participate in the ownership of the Company. The 1997 Equity Participation Plan
is designed to attract and retain executive officers, other key employees,
independent directors and consultants of the Company and to provide incentives
to such persons to maximize the Company's performance. The 1997 Equity
Participation Plan provides for the award to executive officers, other key
employees, independent directors and consultants of the Company of a broad
variety of stock-based compensation alternatives such as nonqualified stock
options, incentive stock options, restricted stock and performance awards and
provides for the grant to executive officers, other key employees, independent
directors and consultants of nonqualified stock options. Awards under the 1997
Equity Participation Plan may provide participants with rights to acquire shares
of Common Stock.
The 1997 Equity Participation Plan is administered by the Compensation
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to be
subject thereto and the terms and conditions thereof. The members of the
Compensation Committee who are not affiliated with the Company will select from
among the eligible participants the individuals to whom nonqualified stock
options are to be granted, except as set forth below, and will determine the
number of shares to be subject thereto and the terms and conditions thereof. The
Compensation Committee is also authorized to adopt, amend and rescind rules
relating to the administration of the 1997 Equity Participation Plan.
Nonqualified stock options will provide for the right to purchase
Common Stock at a specified price which may be less than fair market value on
the date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options may
be granted for any reasonable term.
Incentive stock options will be designed to comply with the provisions
of the Code and will be subject to restrictions contained in the Code, including
exercise prices equal to at least 100% of fair market value of Common Stock on
the grant date and a ten year restriction on their term, but may be subsequently
modified to disqualify them from treatment as an incentive stock option.
Restricted stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and will
receive dividends prior to the time when the restrictions lapse.
Performance awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may provide for payments based upon
increases in the price of the Common Stock over a predetermined period.
Performance awards may also include bonuses which may be granted by the
Compensation Committee on an individual or group basis and which may be payable
in cash or in Common Stock or in a combination of cash and Common Stock.
There are 600,000 shares of Common Stock reserved for issuance pursuant
to the 1997 Equity Participation Plan, of which options to purchase 556,600
shares have been granted to certain directors, officers and employees as of
February 28, 1999.
29
<PAGE>
Employee Stock Purchase Plan. The Company has established the CPS
Systems, Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
to assist employees of the Company in acquiring a stock ownership interest in
CPS and to encourage them to remain in the employment of the Company. The
Employee Stock Purchase Plan permits employees to purchase shares of Common
Stock through payroll deductions at a price equal to 85% of fair market value. A
total of 100,000 shares of Common Stock are reserved for issuance pursuant to
the Employee Stock Purchase Plan. Each employee is limited to purchasing Common
Stock having an aggregate market value of $25,000 in any calendar year. As of
February 28, 1999 employees have purchased 11,400 shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1999, certain
information regarding the beneficial ownership of the Company's Common Stock by
(i) each shareholder known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; (ii) each director; (iii) each executive
officer named in the Summary Compensation Table; and (iv) all current executive
officers and directors as a group.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER (1)(2) OWNED (3) SHARES OWNED
<S> <C> <C>
Sidney H. Cordier
Weybourne, 10 Wray Park Rd.
Reigate Surrey RH2 ODD U.K. 1,053,742 15.63%
Brian R. Wilson
Drymen House, Horn Lane
East Hendren, Near Wantage
Oxon OX128LD U.K. 1,053,742 15.63%
Paul E. Kana 1,072,007 15.90%
Hanifen Imhoff Mezzanine Fund
1125 17th Street
Suite 1600
Denver, CO 80202 661,247 9.81%
Bricoleur Capital Management, LLC
8910 University Center Lane, Suite 570
San Diego, Ca 92122 512,500 7.60%
James K. Hoofard, Jr. 233,465(4) 3.46%
G. Dean Booth
127 Peachtree Street, N.E.
Atlanta, Georgia 30303 224,977 3.33%
R. Harris Turner
129 Laurel Oak Dr
Longwood, FL 32779 1,000 *
Michael P. Brown 0 *
Bobby C. Dow 1,659(5) *
John C. Thomas 2,200 *
All executives officers and directors as
a group (12 persons) 3,643,392 54.02%
- ----------------------------------
* Less than one percent
<FN>
(1) Except as otherwise noted, and subject to community property laws where
applicable, each person named in the table has sole voting and investment power
with respect to all securities owned by such person.
30
<PAGE>
(2) Unless otherwise noted, the address of each person or entity listed is
CPS Systems, Inc., 3400 Carlisle, Suite 500, Dallas, TX 75204.
(3) A person is deemed to be the beneficial owner of securities that can be
acquired by such person with 60 days from the date hereof either from the
exercise of options or from the conversion of a security.
(4) This figure includes 48,316 shares transferred into a trust fund for
Mr. Hoofard's children.
(5) This figure contains 904 shares purchased by Mr. Dow's wife through the
Employee Stock Purchase Plan.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
G. Dean Booth, Jr., a director of the Company, is a partner in the law
firm of Schreeder, Wheeler & Flint, LLP of Atlanta, Georgia. Schreeder, Wheeler
& Flint, LLP has acted as counsel to the Company in connection with various
litigation and securities matters. During the years ended December 31, 1997 and
December 31, 1998, the firm (Schreeder, Wheeler & Flint, LLP) invoiced the
Company a total of $161,915 and $681,199, respectively, in legal fees.
In May 1997, the Company's shareholders formed Thor Concepts, Inc., a
Georgia corporation ("Thor"), for the sole purpose of acquiring CDP Systems,
Inc., a Florida corporation ("CDP"), for nominal consideration. In addition, the
Company's shareholders advanced approximately $123,000 to CDP to cover CDP
expenses (the "CDP Loans"). Effective July 1997, the Company purchased the
shares of CDP from Thor in exchange for nominal consideration and assumption of
the CDP Loans. As of October 31, 1997, there was approximately $128,000 in
principal and accrued interest outstanding under the CDP Loans. On April 08,
1998 the CDP loans were paid off with proceeds from the IPO.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS THE FOLLOWING FINANCIAL STATEMENTS ARE FILED AS A
PART OF THIS REPORT:
Report of Independent Certified Public Accountants ..........................F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1998 and 1997 ........F-2
ConsolidatedStatements of Operations for the year ended
December 31, 1998, 1997 and 1996 ...................................F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the
year ended December 31, 1998, 1997 and 1996 ........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ...................................F-6
Notes to Consolidated Financial Statements ........................F-8
(A) 2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
(B) REPORTS ON FORM 8-K
There were no Form 8-K filings for the year ended December 31, 1998.
31
<PAGE>
C) EXHIBIT INDEX
NO. DESCRIPTION
3.1 Restated Articles of Incorporation and all amendments thereto *
3.2 Bylaws *
4.1 Form of Common Stock Certificate *
4.2 See Exhibits 3.1 and 3.2 for provisions in the Certificate of
Incorporation and Amended and Restated Bylaws of the Company defining
the rights of the holders of Common Stock *
10.1 401(k) Retirement Plan *
10.2 1997 Equity Participation Plan *
10.3 CPS Systems, Inc. Employee Stock Purchase Plan *
10.4 Standard Office Building Lease Agreement between CMD Realty Investment
Fund II, L.P. and CPS Systems,
Inc., dated March 8, 1998.
10.5 Standard Office Building Lease Agreement between Aetna Life Insurance
Company and CPS Business Systems, Inc., dated February 13, 1990, as
amended by Amendment No. 1 between Dallas Metro Real Estate Fund I,
Aetna Life Insurance Company and CPS Systems, Inc. dated January 31,
1995 *
10.6 Term Loan Agreement dated as of December 29, 1994 between CPS
Acquisition Corp. and Greyhound Financial Corporation *
10.7 Term Loan Promissory Note dated December 29, 1994 in the amount
of $1,500,000 *
10.8 Guaranty and Subordination Agreement (Term Loan) dated December 29,
1994 between CPS Systems, Inc. and
Greyhound Financial Corporation *
10.9 Form of Stock Pledge and Security Agreement (with Irrevocable Proxy)
dated December 29, 1994 between each of the Company's Shareholders and
Greyhound Financial Corporation *
10.10 Assignment of contract dated December 29, 1994 between CPS Acquisition
Corp, and Greyhound Financial
Corporation *
10.11 Stock Pledge and Security Agreement (with Irrevocable Proxy) dated
December 29, 1994 between CPS
Acquisition Corp. and Greyhound Financial Corporation *
10.12 Assumption Agreement dated December 29, 1994 between CPS Systems, Inc.
and Greyhound Financial
Corporation *
10.13 Revolver Loan and Security Agreement dated December 29, 1994 between
CPS Systems, Inc. and Greyhound
Financial Corporation *
10.14 Revolver Loan Promissory Note dated December 29, 1994 in the amount of
$1,000,000 *
10.15 Assignment of Contracts, Intangibles, Licenses and Permits dated
December 29, 1994 between CPS Systems, Inc. and Greyhound Financial
Corporation *
10.16 Guaranty and Subordination Agreement (Revolver Loan) dated December 29,
1994 by CPS Acquisition Corp. in
favor of Greyhound Financial Corporation *
10.17 Subordination and Intercreditor Agreement dated December 29, 1994 among
Greyhound Financial Corporation,
Hanifen Imhoff Mezzanine Fund, L.P., CPS Acquisition Corp,. and
CPS Systems, Inc. *
10.18 CPS Acquisition Corp. and CPS Systems, Inc. Note Agreement dated as of
December 29, 1994 for $2,100,000
12% Senior Subordinated Secured Note Due December 31, 2000 *
10.19 Security Agreement (general) dated December 29, 1994 between
CPS Systems, Inc. and Hanifen Imhoff
Mezzanine Fund, L.P. *
10.20 Security Agreement (Stock) dated December 29, 1994 from Paul E. Kana to
and for the benefit of Hanifen
Imhoff Mezzanine Fund, L.P. *
10.21 Agreement for Ongoing Maintenance & Enhancement of Software Products
entered between CPS Systems, Inc.
and Majesco Software, Inc. dated January 1997 *
10.22 Value Added Reseller Agreement by and between CPS Systems, Inc. and
NCR Corporation dated June 13, 1996 * 10.23 Industry Remarketer
Affiliate Document of Understanding by and between IBM Corporation
and CPS Systems,
Inc. dated September 12, 1996 *
10.24 Form of Lock-Up Agreement *
10.25 Employment Agreement for James K. Hoofard *
10.26 Employment Agreement for Paul E. Kana *
21.1 List of Subsidiaries *
27.1 Financial Data Schedules
- --------------------------------------------------------------------------------
* Incorporated by reference to Form SB-2 filed with the Securities and Exchange
Commission (Reg. No. 333-39173) effective March 25, 1998.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CPS SYSTEMS, INC.
By: /s/ PAUL E. KANA
------------------------------
Paul E. Kana
Chief Executive Officer
[Principal Executive Officer]
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature and Title Date
- ------------------- ----
/s/ PAUL E. KANA April 14, 1999
- ----------------
Paul E. Kana
Chairman of the Board, Chief Executive
Officer, Secretary and Director (Principal
Executive Officer)
/s/ KEVIN L. FIGGE April 14, 1999
- ------------------
Kevin L. Figge
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JAMES K. HOOFARD, JR. April 14, 1999
- -------------------------
James K. Hoofard, Jr.
Chief Operating Officer and Director
/s/ G. DEAN BOOTH, JR. April 14, 1999
- ----------------------
G. Dean Booth, Jr.
Director
/s/ SIDNEY H. CORDIER April 14, 1999
- ---------------------
Sidney H. Cordier
Director
/s/ BRIAN R. WILSON April 14, 1999
- -------------------
Brian R. Wilson
Director
/s/ R. HARRIS TURNER April 14, 1999
- --------------------
R. Harris Turner
Director
33
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
CPS Systems, Inc.
We have audited the accompanying consolidated balance sheet of CPS Systems, Inc.
and Subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CPS Systems, Inc.
and Subsidiary as of December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Dallas, Texas
February 26, 1999, except for Note M as to
which the date is March 30, 1999
F-1
<PAGE>
CPS Systems, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
December 31,
1998 1997
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash .............................................. $ 296,286 $ 327,375
Accounts receivable, less allowance for doubtful
accounts of $107,468 in 1998 and $62,000 in 1997 2,851,613 1,719,246
Deferred income taxes ............................. 907,017 160,000
Inventories ....................................... 201,355 160,582
Refundable income taxes ........................... 266,669 74,673
Prepaid expenses and other current assets ......... 564,125 134,321
Deferred offering costs ........................... -- 366,515
----------- -----------
Total current assets ................ 5,087,065 2,942,712
PROPERTY AND EQUIPMENT ................................ 790,327 536,163
SOFTWARE DEVELOPMENT COSTS ............................ 4,167,187 937,847
OTHER ASSETS
Costs in excess of net assets acquired ............ 1,622,841 1,904,592
Debt issue costs .................................. 78,505 160,132
Other assets ...................................... 29,285 17,948
----------- -----------
1,730,631 2,082,672
----------- -----------
$11,775,210 $ 6,499,394
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
CPS Systems, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET - CONTINUED
December 31, 1997
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt .................... $ 1,050,000 $ 730,736
Accounts payable ..................................... 1,065,507 683,107
Other accrued expenses ............................... 436,593 485,592
Unearned revenue, current portion .................... 4,013,380 1,532,611
------------ ------------
Total current liabilities .............. 6,565,480 3,432,046
OTHER LIABILITIES
Long-term debt ....................................... 1,023,420 2,014,000
Deferred income taxes ................................ -- 317,000
Notes payable - shareholders ......................... -- 122,996
Unearned revenue ..................................... 13,600 47,325
Other liabilities .................................... -- 47,025
------------ ------------
1,037,020 2,548,346
------------ ------------
Total liabilities ...................... 7,602,500 5,980,392
PUT WARRANTS ............................................. -- 241,746
COMMITMENTS AND CONTINGENCIES ............................ -- --
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 10,000,000
shares, none issued and outstanding ............... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 6,734,928 shares issued in 1998 and
3,904,736 shares issued in 1997 ................... 67,350 39,047
Additional paid-in capital ........................... 6,805,107 960,953
Accumulated deficit .................................. (2,699,747) (722,744)
------------ ------------
Total shareholders' equity ............. 4,172,710 277,256
------------ ------------
$ 11,775,210 $ 6,499,394
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CPS Systems, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue
License fees ................................ $ 1,166,770 $ 2,178,237 $ 1,634,835
Recurring maintenance and service fees ...... 4,196,067 3,909,869 3,851,308
Product sales ............................... 2,534,235 3,420,413 2,052,148
Other service fees .......................... 1,191,787 969,043 824,486
------------ ------------ ------------
9,088,859 10,477,562 8,362,777
Cost of revenue
Product sales ............................... 1,985,949 2,528,823 1,464,664
Software .................................... 1,074,557 575,815 390,830
Distribution ................................ 22,823 67,186 11,115
------------ ------------ ------------
3,083,329 3,171,824 1,866,609
------------ ------------ ------------
Gross profit .................. 6,005,530 7,305,738 6,496,168
Operating expenses
Support and customer service ................ 4,147,270 3,277,581 2,743,217
Selling ..................................... 2,116,255 965,996 771,470
Research and development .................... 298,935 1,508,026 866,366
General and administrative .................. 1,914,431 1,048,181 1,030,277
Amortization of goodwill and
non-compete agreements ................... 281,751 358,266 346,586
------------ ------------ ------------
8,758,642 7,158,050 5,757,916
------------ ------------ ------------
Earnings (loss) from operations (2,753,112) 147,688 738,252
Interest expense ................................ 326,591 419,219 819,125
------------ ------------ ------------
Loss before income taxes ...... (3,079,703) (271,531) (80,873)
Income tax expense (benefit) .................... (1,102,700) (25,000) 165,200
------------ ------------ ------------
NET LOSS ...................... $ (1,977,003) $ (246,531) $ (246,073)
============ ============ ============
Basic net loss per common share ................. $ (0.32) $ (.06) $ (.06)
============ ============ ============
Diluted net loss per common share ............... $ (0.32) $ (.07) $ (.06)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
CPS Systems, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional
Number Par paid-in Accumulated
of shares value capital deficit Total
--------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ......... 3,904,736 $ 39,047 $ 960,953 $ (230,140) $ 769,860
Net loss for the year .............. -- -- -- (246,073) (246,073)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 ......... 3,904,736 39,047 960,953 (476,213) 523,787
Net loss for the year .............. -- -- -- (246,531) (246,531)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ......... 3,904,736 39,047 960,953 (722,744) 277,256
Warrant conversion ................. 927,766 9,278 227,045 -- 236,323
Issuance of common stock,
net of offering costs of
$984,055 1,902,426 19,025 5,617,109 -- 5,636,134
Net loss for the year .............. -- -- -- (1,977,003) (1,977,003)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ......... 6,734,928 $ 67,350 $ 6,805,107 $(2,699,747) $ 4,172,710
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CPS Systems, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss .............................................. $(1,977,003) $ (246,531) $ (246,073)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Deferred income tax (benefit) expense ........... (1,064,017) 19,000 (16,000)
Depreciation and amortization ................... 784,878 753,085 702,318
Adjustment to put warrants ...................... (5,423) (83,055) 271,632
Other ........................................... 2,573 -- 820
Change in assets and liabilities, net
of business acquired:
Accounts receivable ..................... (1,132,367) (180,560) (612,648)
Refundable income taxes ................. (191,996) (74,673) 118,134
Inventories ............................. (40,773) (44,406) (58,552)
Prepaid expenses and other current assets (429,804) (30,136) 9,480
Other assets ............................ (11,337) 3,000 963
Accounts payable ........................ 382,400 152,940 70,476
Accrued expenses ........................ (48,999) 36,810 116,488
Unearned revenue ........................ 2,447,044 448,977 (8,210)
Income taxes payable .................... -- (176,904) 176,904
Other liabilities ....................... (47,025) (7,685) 27,354
----------- ----------- -----------
Net cash provided by (used in) operating
activities .......................... (1,331,849) 569,862 553,086
Cash flows from investing activities:
Purchase of property and equipment .................... (485,236) (260,823) (209,450)
Software development costs ............................ (3,362,921) (280,548) (41,016)
Cash acquired in CDP acquisition ...................... -- 3,547 --
Proceeds from sale of property and equipment .......... -- -- 1,299
----------- ----------- -----------
Net cash used in investing activities ... (3,848,157) (537,824) (249,167)
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
CPS Systems, Inc. and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on long-term debt ....... $ (730,736) $ (296,309) $ (262,644)
Proceeds from notes payable - shareholders . -- 122,996 --
Offering costs paid ........................ -- (123,048) --
Other receivable ........................... -- -- 165,000
Payments on note payable to shareholders ... (122,996) -- --
Net proceeds from issuance of common stock . 6,002,649 -- --
----------- ----------- -----------
Net cash provided by (used in)
financing activities ..... 5,148,917 (296,361) (97,644)
----------- ----------- -----------
Net increase (decrease) in cash ................ (31,089) (264,323) 206,275
Cash at beginning of period .................... 327,375 591,698 385,423
----------- ----------- -----------
Cash at end of period .......................... $ 296,286 $ 327,375 $ 591,698
=========== =========== ===========
Supplementary cash flow disclosure:
Interest paid .............................. $ 362,000 $ 393,000 $ 432,048
Income taxes (refunded) paid, net .......... $ 170,940 $ 208,000 $ (113,839)
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
--------
CPS Systems, Inc. and its wholly-owned Subsidiary, CDP Systems, Inc. (the
Company), engage primarily in developing, marketing, licensing and
supporting proprietary software and selling hardware and related products to
appraisal/assessment districts, tax collection agencies, municipalities and
law enforcement agencies located primarily in California, Texas, Oklahoma
and Florida.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of CPS Systems,
Inc. and its wholly-owned subsidiary, CDP Systems, Inc. All significant
intercompany transactions and balances have been eliminated.
Revenue Recognition
-------------------
The Company licenses its software products. Revenue from software license
fees is recognized when an agreement has been executed, software has been
delivered and installed, all significant contractual obligations have been
met and collection of the related receivable is probable. Post contract
customer support revenue, consisting of continuing maintenance and service
fees, including that bundled with initial license fees, is deferred and
recognized ratably over the contractual periods the services are provided.
Product sales, consisting primarily of computer hardware, are recognized
upon delivery of the product.
Other fees are recognized as the services are provided and consist primarily
of training, conversion, customization and installation.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Accelerated methods are utilized for income tax purposes.
F-8
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Software Development Costs
--------------------------
In accordance with SFAS No. 86, all software development costs are charged
to expense as incurred until technological feasibility has been established
for the product. Software development costs incurred after technological
feasibility has been established are capitalized and amortized, commencing
with product
release, on a straight line basis over a period of six to ten years.
Amortization of software development costs was approximately $133,000,
$142,000 and $116,000 during the years ended December 31, 1998, 1997 and
1996, respectively, and is included in software cost of revenue in the
accompanying consolidated statements of operations. Software development
costs are stated net of accumulated amortization of approximately $495,000
and $362,000 at December 31, 1998 and 1997, respectively
Costs in Excess of Net Assets Acquired
--------------------------------------
The excess acquisition cost over the fair value of net assets acquired
(goodwill) of CPS Systems, Inc. is amortized on a straight line basis over a
ten year period. Goodwill arising from the acquisition of CDP Systems is
amortized on a straight-line basis over a three year period. Accumulated
amortization of goodwill was approximately $1,087,000 and $805,000 at
December 31, 1998 and 1997, respectively. Amortization of costs in excess of
net assets acquired charged to operations was approximately $282,000,
$275,000 and $265,000 in 1998, 1997 and 1996, respectively.
The remaining balance of goodwill at December 31, 1998 consists of
$1,589,758 and $33,083 attributable to CPS and CDP, respectively.
Debt Issue Costs
----------------
Costs incurred in connection with obtaining financing have been capitalized
and are amortized on a straight-line basis over the term of the loan
agreements, which range from four to six years. Debt issue costs are stated
net of accumulated amortization of approximately $327,000 and $245,000 at
December 31, 1998 and 1997, respectively. Amortization of debt issue costs
charged to operations was approximately $82,000 annually in 1998 and 1997
and is included in interest and financing costs in the accompanying
consolidated statements of operations.
F-9
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
------------
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for
the 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 applied to taxable income. 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 deferred tax assets when it is more likely than not that the
asset will not be realized.
Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------
In preparing financial statements in conformity with General Accepted
Accounting Principles, management is required to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
-----------------
Management periodically evaluates the realizability of its property and
equipment, software development costs and intangible assets in light of
current technology, as it may relate to the Company's products, and the
current environment of its industry and markets. Management believes that no
impairment of property and equipment, software development costs and
intangible assets exists at December 31, 1998.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments include cash, cash equivalents and
long-term debt. The carrying value of cash and cash equivalents approximates
fair value due to the relatively short period to maturity of the
instruments. The carrying value of the Company's long-term obligations
approximates fair value based upon borrowing rates currently available to
the Company for borrowings with comparable maturities.
Stock-Based Compensation
------------------------
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation, encourages, but does not require companies to
record compensation cost for stock-based compensation at fair value. The
Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and to apply SFAS 123 on a
disclosure basis only.
F-10
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings (Loss) Per Share
-------------------------
Basic net earnings (loss) per common share is based upon the weighted
average number of common shares outstanding. Diluted net earnings (loss) per
common share is based upon the weighted average number of common shares
outstanding plus dilutive potential common shares, including warrants
outstanding during the period.
NOTE B - ACQUISITION OF CDP SYSTEMS, INC.
On July 1, 1997, the Company acquired all the outstanding common stock of
CDP Systems, Inc. from Thor Concepts, Inc. (Thor) for $10 cash and the
assumption of approximately $138,000 of liabilities. Thor, which is owned by
the identical shareholders as CPS, acquired the common stock of CDP in June
1997 from the former CDP shareholders under substantially identical terms
and amounts. CDP develops automated voice response software.
The acquisition of CDP has been accounted for as a purchase. Accordingly,
the purchase price was allocated to assets and liabilities based on their
estimated fair value, at the date of acquisition. Results of operations of
CDP have been included in the consolidated financial statements from the
date of acquisition. The excess purchase price over the fair value of the
net assets acquired of approximately $60,000 is being amortized on a
straight-line basis over three years. The results of operations of CDP prior
to July 1, 1997 were not material.
F-11
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consisted of the following at December 31:
Estimated
1998 1997 service lives
------ ------ -------------
<S> <C> <C> <C>
Computer equipment and purchased software $ 950,052 $747,233 5 years
Furniture and fixtures 330,724 186,008 5-7 years
Vehicles 13,279 43,000 3 years
Leasehold improvements 32,148 17,194 4 years
------- -------
1,326,203 993,435
Accumulated depreciation 535,876 457,272
-------- -------
$ 790,327 $536,163
======== =======
</TABLE>
Depreciation of property and equipment charged to operations was $228,000
and $171,000 for the years ended December 31, 1998 and 1997, respectively.
NOTE D - LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
<TABLE>
<CAPTION>
Long-term Debt
--------------
Long-term debt consisted of the following at December 31, 1998 and 1997:
1998 1997
------ ------
<S> <C> <C>
Senior term loan paid in full in 1998. $ -- $ 730,736
Subordinated note. Interest at 12% per annum payable quarterly,
principal payable in two installments in December 1999 and
December 2000. 2,073,420 2,014,000
---------- -----------
2,073,420 2,744,736
Less current portion 1,050,000 730,736
---------- ----------
$1,023,420 $2,014,000
========== ==========
</TABLE>
F-12
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG-TERM DEBT AND REVOLVING LINE OF CREDIT - Continued
The subordinated loan agreement contains covenants which, among other
things, restrict the payment of dividends and the level of capital
expenditures, and require the Company to maintain certain minimum financial
ratios. The Company was not in compliance with these covenants at December
31, 1998. The lender has waived the aforementioned covenant violations at
December 31, 1998 and as of and through the nine months ended September 30,
1999.
In connection with the issuance of the subordinated note, CPS issued a put
warrant to purchase 724,719 shares of the Company's common stock for
approximately $.0026 per share to the note holder. Interest on this note is
payable at a stated rate of 12%. Giving effect to the issuance of the
warrants, and the put feature adjustment attributable to the warrants (see
Note G), the imputed interest rate on this note was 12%, 10.0% and 23.8% in
1998, 1997 and 1996, respectively.
Maturities of long-term debt are as follows:
Year ending
December 31,
1999 $1,050,000
2000 1,023,420
---------
$2,073,420
==========
NOTE E - INCOME TAXES
The income tax provision consisted of the following:
Year ended December 31,
1998 1997 1996
---- ---- ----
Current expense (benefit) $ (38,683) $(44,000) $181,200
Deferred expense (benefit) (1,064,017) 19,000 (16,000)
---------- ------ -------
$(1,102,700) $(25,000) $165,200
========== ======== =======
F-13
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - INCOME TAXES - Continued
At December 31, 1998 and 1997 the Company's temporary differences result in
a deferred income tax liability, summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............. $2,303,000 $ --
Unearned revenue ............................. 107,000 121,000
Amortization of intangible assets ............ 70,000 75,000
Accruals and allowances ...................... 49,017 39,000
---------- ----------
2,529,017 235,000
Deferred tax liabilities:
Capitalized software costs ................... 1,584,000 356,000
Depreciation ................................. 38,000 36,000
---------- ----------
Gross deferred tax liability ................. 1,622,000 392,000
---------- ----------
Net deferred tax asset (liability) ....... $ 907,017 $ (157,000)
========== ==========
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable federal rates due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Tax benefit at applicable federal rate of 34% $(1,047,099) $ (92,300) $ (27,500)
State tax expense (benefit), net ............. (108,540) (2,000) 14,500
Non deductible amortization of goodwill ...... 95,795 104,500 90,100
Non deductible (non taxable) warrant accretion -- (31,500) 92,400
Other non deductible items ................... 24,611 13,300 15,200
Tax credits and other ........................ (67,467) (17,000) (19,500)
----------- ----------- -----------
$(1,102,700) $ (25,000) $ 165,200
=========== =========== ===========
</TABLE>
F-14
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into noncancelable operating lease agreements for
office space which expire at various dates through May 2003. Approximate
minimum future payments under noncancelable leases with initial or remaining
terms in excess of one year at December 31, 1998 are due as follows:
Year ending
December 31,
1999 $ 470,791
2000 327,950
2001 221,732
2002 200,296
2003 67,456
-------
$1,288,225
==========
Rental expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $440,000, $300,000 and $260,000, respectively.
Contingencies
-------------
The Company and certain of its officers and directors have been named as
defendants in five class action suits alleging violations of the federal
securities law. These suits are pending and are expected to be consolidated
into one case. The Company does not believe it has violated the federal
securities law and intends to vigorously defend itself in each case. The
Company is unable to assess the outcome at this time as these cases are in
the early stages of litigation.
In the normal course of business, the Company has been named as a defendant
in various legal actions. In the opinion of management, the ultimate
liability, if any, resulting from the disposition of these lawsuits will not
have a material adverse effect on the Company's financial position or
results of operations.
NOTE G - WARRANTS
The Company issued warrants for the purchase of 724,719 shares of common
stock in connection with the subordinated note. Additionally, warrants for
the purchase of 203,047 shares of common stock were issued in connection
with costs of obtaining financing. In March 1998, the aforementioned
warrants were exercised.
F-15
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share, basic, and earnings per common share,
assuming dilution, were computed as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998
-----------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net loss ................................. $(1,977,003)
===========
Basic net loss per common share ........ $(1,977,003) 6,085,000 $ (0.32)
=========== --------
Effect of dilutive securities .......... -- --
----------- -----------
Diluted net loss per common share ...... $(1,977,003) 6,085,000 $ (0.32)
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1997
-----------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net loss .................................. $(246,531)
=========
Basic net loss per common share ......... $(246,531) 3,904,736 $ (0.06)
========
Effect of dilutive securities
Put warrants ............................ (83,055) 927,766
--------- ---------
Diluted net loss per common share ....... $(329,586) 4,832,502 $ (0.07)
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
-----------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Net loss .................................. $(246,073)
=========
Basic net loss per common share ......... $(246,073) 3,904,736 $ (0.06)
========
Effect of dilutive securities ........... -- --
--------- ---------
Diluted net loss per common share ....... $(246,073) 3,904,736 $ (0.06)
========= ========= ========
</TABLE>
F-16
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - RETIREMENT PLAN
The Company has a retirement savings plan (the "401(k) Plan") covering
substantially all of its employees. All employees over the age of 21 who
have completed one year of service with the Company are eligible to
participate in the 401(k) Plan. Eligible employees may contribute up to 15%
of their salary to an annual maximum established under the Internal Revenue
Code. The Company matches employee contributions at a rate determined
annually by the Board of Directors. The company contributed approximately
$20,000 for the year ended December 31, 1998. No Company contributions were
made for the years ended December 31, 1997 and 1996.
NOTE J - EMPLOYEE BENEFIT PLANS
In October 1997, the Company adopted the 1997 Equity Participation Plan
which provides for the issuance of stock options and other performance
awards as may be approved by the Board of Director's Stock options granted
prior to the Company's initial public offering have an exercise price equal
to the offering price and all subsequent options are granted at the quoted
market price of the Company's stock at the date of grant. Stock options
become exercisable over periods of up to three years and expire ten years
from the date of grant. At December 31, 1998, 53,200 shares of common stock
were reserved for future grants.
The Company has adopted only the disclosure provisions of SFAS 123 for
employee stock options and continues to apply APB 25 for recording stock
options granted. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date, consistent with the
methodology presented by SFAS 123, net loss and loss per share would have
been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1998
------------
<S> <C>
Net loss - as reported $(1,977,003)
Net loss - pro forma $(2,159,355)
Loss per share - as reported
Basic $(0.32)
Diluted $(0.32)
Loss per share - pro forma
Basic $(0.35)
Diluted $(0.35)
</TABLE>
F-17
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - EMPLOYEE BENEFIT PLANS - Continued
The fair value of these options was estimated at the date of grant using the
Black - Scholes option pricing model with the following weighted average
assumptions; no dividend yield, volatility at 120% risk free interest rate
of 5.5% and expected lives of five years. The weighted fair value of options
granted was $2.06 in 1998. No options were granted prior to 1998.
Option activity for the period from January 1, 1998 to December 31, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Number of shares Weighted average
underlying options exercise price
------------------ --------------
<S> <C> <C>
Outstanding at January 1, 1998 ................. -- $ --
Granted ..................................... 626,800 2.44
Exercised ................................... -- --
Canceled/Forfeited .......................... (80,000) 4.00
-------- --------
Outstanding at December 31, 1998 ............... 546,800 $ 2.21
======== ========
Exercisable at December 31, 1998 ............... 12,300 $ 0.94
</TABLE>
Further information regarding options outstanding and options exercisable at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Range of ------------------------------------------------------ -------------------------------
Exercise Number Weighted average Weighted average Number of Weighted average
prices Of shares remaining life Exercise price shares exercise price
------ --------- -------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ .94 319,300 10.0 years ........... $ .94 12,300 $ .94
$ 4.00 227,500 9.2 years ............ $ 4.00 -- --
</TABLE>
NOTE K - RELATED PARTIES
Legal fees incurred to a law firm in which a director and shareholder of the
Company is a partner were approximately $450,000 and $289,000 in 1998 and
1997, respectively.
NOTE L - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1998, the Company recorded an adjustment to
decrease interest expense by approximately $236,000, to correct interest
expense recorded on the put warrant in the first quarter of 1998.
F-18
<PAGE>
CPS Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - SUBSEQUENT EVENT
On March 30, 1999, the Company executed an Agreement and Plan of Merger
(Merger Agreement) with Tyler Corporation (Tyler) pursuant to which the
Company will merge with and into a wholly-owned subsidiary of Tyler. Under
the terms of the Merger Agreement, each shareholder of the Company will
receive one share of common stock of Tyler for each three shares of common
stock of the Company. The consummation of the merger is subject to approval
of the shareholders of the Company, the satisfactory completion of due
diligence of Tyler and other customary conditions. Management anticipates
that the merger will be consummated in the third quarter of 1999.
F-19
EXHIBIT INDEX 10.4
<PAGE>
OFFICE LEASE
CMD REALTY INVESTMENT FUND II, L.P.,
an Illinois limited partnership,
as Landlord,
and
CPS SYSTEMS, INC.,
a Texas corporation,
as Tenant.
1
<PAGE>
OFFICE LEASE
This Office Lease ("Lease"), dated as of the __ day of May, 1998, is
made by and between "Landlord" and "Tenant" as those terms are defined in
Article 1 below.
ARTICLE 1
DEFINITIONS
As used in this Lease, the following terms shall have the meanings
hereinafter set forth:
1.1 "Landlord" shall mean CMD Realty Investment Fund II, L.P., an Illinois
limited partnership.
1.2 "Address of Landlord" shall mean 227 West Monroe Street, Suite 3900,
Chicago, IL 60606, Attn: General Counsel, with a copy to CMD Realty Investors,
Inc., 5130 Eisenhower Boulevard, Suite 208, Tampa, FL 33634, Attn: Property
Manager, with a copy to CMD Realty Investors, Inc., 227 West Monroe Street,
Suite 3900, Chicago, IL 60606, Attn: Asset Manager.
1.3 "Tenant" shall mean CPS SYSTEMS, INC., a Texas corporation.
1.4 "Address of Tenant" shall mean 4902 Eisenhower Boulevard, Suite 350,
Tampa, FL 33634.
1.5 "Premises" shall mean the premises depicted and identified as
"Premises" on Exhibit A hereto, located on the 3rd floor of the Building and
known as Suite 350. Landlord and Tenant hereby stipulate that the Premises shall
contain 10,354 rentable square feet.
1.6 "Building" shall mean the building commonly known as One President's
Plaza, located at 4902 Eisenhower Boulevard, Tampa, FL 33634
1.7 "Lease Commencement Date" shall mean May 15, 1998, subject to Articles
3 and 33.
1.8 "Lease Expiration Date" shall mean May 14, 2003, subject to Articles 3
and 33. ---------------------
1.9 "Base Rent" shall mean the amounts shown as follows:
2
<PAGE>
Period Monthly Base Rent
------ -----------------
Lease Commencement Date through 5/14/99
$14,668.17
5/15/99 through 5/14/00
$15,185.87
5/15/00 through 5/14/01
$15,703.57
5/15/01 through 5/14/02
$16,221.27
5/15/02 through Lease Expiration Date
$16,738.97
1.10 "Direct Expense Stop" shall mean $675.935.
1.11 "Tenant's Share" shall mean 10.65%.
1.12 "Security Deposit" shall mean $5,000.00.
1.13 "Brokers" shall mean Cawley International.
1.14 "Permitted Use" shall mean general office use.
1.15 "Payment Address" shall mean Landlord, c/o The First National Bank of
Chicago, P.O. Box 73313, Chicago, Illinois 60673-7313.
1.16 "Lease Year" shall mean the consecutive twelve (12) month period
during the Lease Term commencing on the Lease Commencement Date and each
consecutive twelve (12) month period thereafter during the Lease Term.
1.17 "Building Hours" shall mean 8:00 A.M. to 6:00 P.M. except for Sundays
and New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day and any other nationally and locally recognized holidays
(collectively, "Holidays") and except that on Saturdays, "Building Hours" shall
mean 9:00 A.M. to 1:00 P.M.
1.18 The following exhibits and schedules attached hereto are made a
part of this Lease:
Exhibit APremises
Exhibit A-1Real Property
Exhibit BRules and Regulations
Exhibit CForm of Tenant's Estoppel Certificate
Exhibit DPremises Improvements Exhibit EOption to Extend
ARTICLE 2
REAL PROPERTY, BUILDING AND PREMISES
Commencing on the Lease Commencement Date, Landlord leases to Tenant,
and Tenant leases from Landlord, the Premises. The outline of the Premises is
set forth in Exhibit A attached hereto. The term "Real Property" shall mean the
Building, and any common areas or facilities, easements, corridors, lobbies,
sidewalks, loading areas, driveways, landscaped areas, air rights, development
rights, parking rights, skywalks, parking garages and lots, and any and all
other rights, structures or facilities operated or maintained in connection with
or for the benefit of the Building, and all parcels or tracts of land on which
all or any portion of the Building or any of the other foregoing items are
located, and any fixtures, machinery, apparatus, systems and equipment located
thereon or therein and used in connection therewith. The Real Property as of the
date hereof is depicted on Exhibit A-1 attached hereto. Landlord reserves the
right to add land, buildings, easements or other interests to, or sell or
eliminate the same from, the Real Property and grant interests and rights in the
Real Property to other parties. If the Building shall now or hereafter be part
of a development, complex or group of two or more buildings or structures
collectively owned or managed by Landlord or its affiliates or collectively
managed by Landlord's managing agent, the Real Property shall, at Landlord's
option also be deemed to include such other of those buildings or structures as
Landlord shall from time to time designate, and shall initially include such
buildings and structures (and related facilities and parcels on which the same
are located) as Landlord shall have used in determining Tenant's Share in
Article 1. Concurrently with Tenant's lease of the Premises, Landlord grants to
Tenant the right to the non-exclusive use of the common corridors and hallways,
stairwells, elevators, restrooms and other public or common areas located on the
Real Property; provided, however, that the use thereof shall be subject to the
rules, regulations and restrictions attached hereto as Exhibit B ("Rules and
Regulations").
4
<PAGE>
ARTICLE 3
TERM AND COMMENCEMENT
3.1 Term and Confirmation. The term ("Lease Term") of this Lease shall
commence on the Lease Commencement Date and end on the Expiration Date set forth
in Article 1, unless sooner terminated as provided herein, subject to adjustment
as provided below and the other provisions hereof. If the Lease Commencement
Date is advanced or postponed as provided below, the Expiration Date set forth
in Article 1 shall not be changed, unless Landlord so elects by notice to
Tenant. In addition, if the Lease Commencement Date, as so advanced or postponed
herein, occurs other than on the first day of a calendar month, Landlord may
further elect by notice to Tenant to: (i) extend the Lease Term such that the
Lease Expiration Date is the last day of the calendar month in which it would
otherwise occur, and/or (ii) adjust the dates for any fixed increases in the
Base Rent such that they occur on the first day of the calendar month in which
they would otherwise occur. Tenant shall execute a confirmation of the Lease
Commencement Date, Lease Expiration Date and other dates as adjusted herein in
such form as Landlord may reasonably request within ten (10) days after
requested; any failure to respond within such time shall be deemed an acceptance
of the matters as set forth in Landlord's confirmation. If Tenant disagrees with
Landlord's adjustment of the Lease Commencement Date, Lease Expiration Date or
other dates as adjusted herein, Tenant shall pay Rent and perform all other
obligations commencing and ending on the date or dates determined by Landlord,
subject to refund or credit when the matter is resolved.
3.2 Early Commencement. The Lease Commencement Date, Rent and Tenant's
other obligations shall be advanced to such earlier date as: (i) Landlord
substantially completes any improvements to the Premises required under this
Lease to an extent that Tenant is able to occupy the Premises, and Landlord
delivers possession thereof, or (ii) Tenant, with Landlord's written permission,
otherwise commences occupying substantially all of the Premises. If either such
events occurs with respect to a portion of the Premises, the Lease Commencement
Date, Rent and Tenant's other obligations shall be so advanced with respect to
such portion (and fairly prorated based on the rentable square footage
involved). During any period that Tenant shall be permitted to enter the
Premises prior to the Lease Commencement Date other than to occupy the same
(e.g., to perform alterations or improvements), Tenant shall comply with all
terms and provisions of this Lease, except those provisions requiring the
payment of Rent. Landlord shall permit early entry, so long as the Premises are
legally available, Landlord has completed any work required under this Lease,
and Tenant is in compliance with the other provisions of this Lease, including
the insurance requirements under Article 11.
3.3 Commencement Delays. Subject to Article 33, the Lease Commencement
Date, Rent and Tenant's other obligations shall be postponed to the extent
Tenant is unable to reasonably occupy the Premises because Landlord fails: (i)
to substantially complete any improvements to the Premises required to be
performed by Landlord under this Lease, or (ii) to deliver possession of the
Premises for any other reason, including holding over by prior occupants, except
to the extent that Tenant, its space planners, architects, contractors, agents
or employees in any way contribute to either such failures. If either such event
occurs with respect to a portion of the Premises, the Lease Commencement Date,
Rent and Tenant's other obligations shall be so postponed with respect to such
5
<PAGE>
portion (and fairly prorated based on the rentable square footage involved). Any
such delay in the Lease Commencement Date shall not subject Landlord to
liability for loss or damage resulting therefrom, and Tenant's sole recourse
with respect thereto shall be the postponement of Rent and other obligations
described herein.
ARTICLE 4
BASE RENT
Tenant shall pay in legal tender of the United States of America, without
notice or demand, to Landlord at the Payment Address, or at such other place as
Landlord may from time to time designate in writing, Base Rent as set forth in
Section 1.9, payable in equal monthly installments in advance on or before the
first day of each and every calendar month during the Lease Term commencing on
the Lease Commencement Date, without any setoff or deduction whatsoever, except
that Tenant shall pay the first such monthly installment upon the execution
hereof and such amount shall be credited against the first full monthly
installment of Base Rent. Tenant shall also deliver to Landlord the Security
Deposit set forth in Section 1.12 (if any) upon Tenant's execution and delivery
of this Lease. If the Lease Commencement Date falls on a day of a calendar month
other than the first day of such calendar month or if any Rent (as hereinafter
defined) is for a period which is shorter than one calendar month, the Rent for
any such fractional calendar month shall accrue on a daily basis for the period
from the date such payment is due to the end of such calendar month or to the
end of the Lease Term at a rate per day which is equal to 1/360 of the Rent. All
other payments or adjustments required to be made under the terms of this Lease
that require proration on a time basis shall be prorated on the same basis.
Tenant shall also pay to Landlord as additional rent, in the same manner as the
payment of Base Rent, any and all rental income tax assessed by any governmental
body relating to this Lease.
ARTICLE 5
ADDITIONAL RENT
5.1 Additional Rent. In addition to paying the Base Rent, Tenant shall pay
as additional rent Tenant's Share (as set forth in Section 1.11 hereof) of the
annual Direct Expenses (as hereinafter defined) which are in excess of the
Direct Expense Stop set forth in Section 1.10. Such additional rent, together
with any and all other amounts payable by Tenant to Landlord, as additional rent
or otherwise, pursuant to the terms of this Lease, shall be hereinafter
collectively referred to as the "Additional Rent." The Base Rent and Additional
Rent are herein collectively referred to as the "Rent." All amounts due under
this Article 5 as Additional Rent shall be payable in the same manner, time and
place as the Base Rent. The obligations of Tenant to pay the Additional Rent
provided for in this Article 5 shall survive the expiration or earlier
termination of the Lease Term.
5.2 Definitions. As used in this Article 5, the following terms shall have
the meanings hereinafter set forth:
6
<PAGE>
5.2.1 "Direct Expenses" shall mean the sum of "Operating Expenses" and
"Tax Expenses."
5.2.2 "Expense Year" shall mean each calendar year in which any
portion of the Lease Term falls.
5.2.3 "Operating Expenses" shall mean the dollar amount of all
expenses, costs and amounts of every kind and nature which Landlord shall
pay or incur during any Expense Year because of or in connection with the
ownership, management, maintenance, repair, replacement, restoration or
operation of the Real Property, excluding all Excluded Costs (as defined in
Section 5.2.5 hereof), but including, without limitation, any amounts paid
or incurred for (i) the cost of supplying all utilities, the cost of
operating, maintaining, repairing, replacing, renovating and managing the
utility systems, mechanical systems, sanitary and storm drainage systems,
communication systems, and escalator and elevator systems, and the cost of
supplies, tools, and equipment and maintenance and service contracts in
connection therewith; (ii) the cost of licenses, certificates, permits and
inspections and the cost of contesting the validity or applicability of any
governmental enactments which may affect Operating Expenses; (iii) the cost
of insurance carried by or on behalf of Landlord, in such amounts as
Landlord may reasonably determine; (iv) fees, charges and other costs,
including management fees (or amounts in lieu thereof), consulting fees
(including but not limited to any consulting fees incurred in connection
with the procurement of insurance), legal fees and accounting fees, of all
persons engaged by Landlord or otherwise reasonably incurred by Landlord in
connection with the management, operation, administration, maintenance and
repair of the Real Property; (v) the cost of parking area repair,
restoration, and maintenance, including, but not limited to, resurfacing,
repainting, restriping, and cleaning; (vi) compensation and benefits of all
persons engaged in the operation, maintenance or security of the Real
Property, and employer's Social Security taxes, unemployment taxes or
insurance, and any other taxes which may be levied on such wages, salaries,
compensation and benefits; provided, that if any employees of Landlord or
Landlord's agents provide services for more than one building, then a
prorated portion of such employees' wages, benefits and taxes shall be
included in Operating Expenses based on the portion of their working time
devoted to the Real Property, and provided further, that no portion of any
employee's wages, benefits, or taxes allocable to time spent on the
development or marketing of the Real Property shall be included in
Operating Expenses; (vii) payments under any easement, license, operating
agreement, declaration, restrictive covenant, or instrument pertaining to
the sharing of costs by the Building, including the Real Property's
allocable share of any owners' association assessments; (viii) the cost of
Landlord's office and office operation for the Building and the Real
Property and all supplies and materials used in connection therewith;
provided, that if any office of Landlord or Landlord's agents provides
services for more than one building, then a prorated portion of the cost of
such office shall be included in Operating Expenses; and (ix) capital
expenditures made: (a) primarily to reduce Operating Expenses or reduce the
expected increase therein, (b) to comply with any governmental law or
regulation or insurance requirement
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then in effect, or (c) for repairs or replacements (as opposed to additions
or new improvements) of roofs, parking areas, and other nonstructural items
located in the common areas of the Real Property required to keep such
areas in good condition; provided, any such permitted capital expenditure
shall be amortized for purposes of this Lease over the shorter of: (x) the
period during which the reasonably estimated savings in Operating Expenses
equals the expenditure, (y) the shortest period over which Landlord may
depreciate such item under the Federal Tax Code then in effect, or (z) the
useful life of the item, but in no event more than ten (10) years;
provided, Landlord may elect any longer period in Landlord's discretion. In
each such case, Landlord may include interest on the unamortized amount at
the prevailing loan rate available to Landlord when the cost was incurred,
as determined in Landlord's reasonable discretion. Operating Expenses shall
include any such remaining amortization of such permitted capital
expenditures made prior to the date of this Lease. The foregoing provision
is for definitional purposes only and shall not be construed to impose any
obligation upon Landlord to incur such expenses. Landlord may retain
independent contractors (or affiliated contractors at market rates) to
provide any services or perform any work, in which case the costs thereof
shall be deemed Operating Expenses.
5.2.4 "Tax Expenses" shall mean the dollar amount of (i) all real estate
taxes, assessments (special or otherwise), sewer and water rents, rates and
charges and any other governmental levies, impositions or charges of a
similar or dissimilar nature, whether general, special, ordinary,
extraordinary, foreseen or unforeseen, which may be assessed, levied or
imposed upon all or any part of the Real Property, whether or not the same
constitute one or more tax lots, and (ii) any expenses (including
attorneys' fees and disbursements and experts' and other witness' fees)
incurred by Landlord in contesting any of the foregoing or the assessed
valuation of all or any part of the Real Property; provided, however, that
if the Real Property is not fully assessed during any Expense Year, either
by virtue of the fact that the Building was not then fully completed or
that there was then some tax abatement or credit in effect, the Direct
Expenses for any such Expense Year shall be adjusted, in Landlord's
reasonable discretion, to account for any such partial assessment. If at
any time after the date hereof the methods of taxation prevailing at the
date hereof shall be altered so that in lieu of or as an addition to or as
a substitute for the whole or any part of taxes, assessments, rents, rates,
charges, levies or impositions now assessed, levied or imposed upon all or
any part of the Real Property, there shall be assessed, levied or imposed
(a) a tax, assessment, levy, imposition or charge based on the income or
rents received therefrom whether or not wholly or partially as a capital
levy or otherwise, or (b) a tax, assessment, levy, imposition or charge
measured by or based in whole or in part upon all or any part of the Real
Property and imposed upon Landlord, or (c) a license fee measured by the
rents, or (d) any other tax, assessment, levy, imposition, charge or
license fee however described or imposed, then all such taxes, assessments,
levies, impositions, charges or license fees or the part thereof so
measured or based shall be deemed to be Tax Expenses; provided that any tax
assessment, levy or imposition or charge imposed on income from the Real
Property shall be calculated as if the Real Property is the only asset of
Landlord. Any reasonable expenses incurred by Landlord in attempting to
protest, reduce or minimize Tax Expenses shall be included in Direct
Expenses in the Expense Year such expenses are paid. Tax refunds shall be
deducted from Tax Expenses in the Expense Year they are received by
Landlord.
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5.2.5 "Excluded Costs" shall mean (i) depreciation, interest and
amortization on any mortgages and other debt costs or ground lease payments
(except interest on the cost of capital expenditures to the extent
permitted under Section 5.2.3 (ix), and ground lease payments for Taxes and
Expenses), (ii) legal fees in connection with leasing, tenant disputes or
enforcement of leases, (iii) real estate brokers' leasing commissions, (iv)
improvements or alterations to tenant spaces, (v) salaries and other
compensation and fringe benefits paid to all persons above the level of
property manager, (vi) the cost of providing any service directly to, and
paid directly by, any tenant, (vii) costs of any items to the extent
Landlord receives reimbursement from insurance proceeds or from a third
party (excluding payments by tenants for Direct Expenses), (viii) costs
incurred by Landlord to the extent that Landlord is reimbursed by insurance
proceeds or otherwise, (ix) Landlord's general corporate overhead and
corporate general and administrative expenses, (x), costs, including
permit, license and inspection costs, incurred with respect to the
installation of tenants' or other occupants' improvements made for tenants
or other occupants in the Building or incurred in renovating or otherwise
improving, decorating, painting or redecorating space for tenants or other
occupants of the Building, (xi) costs associated with the operation of the
business of the partnership or entity which constitutes Landlord as the
same are distinguished from the costs of operation of the Building,
including partnership accounting and legal matters, costs of defending any
lawsuits with any mortgagee (except as the actions of Tenant may be in
issue), costs of selling, syndicating, financing, mortgaging or
hypothecating any of Landlord's interest in the Building, (vxii) costs
(including in connection therewith all attorney's fees and costs of
settlement judgments and payments in lieu thereof) arising from claims,
disputes or potential disputes in connection with potential or actual
claims, litigation or arbitrations pertaining to Landlord and/or the
Building, (xiii) costs of services, utilities, or other benefits which are
not offered to Tenant or for which Tenant is charged for directly but which
are provided to another tenant or occupant of the Building, including, but
not limited to, above Building standard heating, ventilation and
air-conditioning and janitorial services, (xiv) costs incurred by Landlord
due to the violation by Landlord or any tenant of the terms and conditions
of any lease of space in the Building, (xv) tax penalties incurred as a
result of Landlord's negligence, inability (so long as there is no uncured
monetary default on the part of Tenant hereunder) or unwillingness to make
payments and/or file any income tax or informational returns when due, and
(xvi) reserves of any kind, including but not limited to replacement
reserves, and reserves for bad debts or lost rent or any similar charge not
involving the payment of money to third parties.
5.3 Calculation and Payment of Additional Rent.
5.3.1 Calculation of Excess. If for any Expense Year, Tenant's Share
of Direct Expenses for such Expense Year exceeds Tenant's Share of the
Direct Expense Stop, then Tenant shall pay to Landlord, in the manner set
forth in Section 5.3.2, below, and as Additional Rent, an amount equal to
the excess ("Excess").
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5.3.2 Statement of Actual Direct Expenses and Payment by Tenant.
Following the end of each Expense Year, Landlord shall give to Tenant a
statement ("Statement"), which shall state the Direct Expenses for such
preceding Expense Year, and which shall indicate the amount, if any, of the
Excess. Landlord shall endeavor to give such Statement within ninety (90)
days after the end of each Expense Year. Unless Tenant shall take written
exception to any item within seventy-five (75) days after the furnishing of
a Statement, such Statement shall be considered as final and accepted by
Tenant. Upon receipt of the Statement for each Expense Year ending during
the Lease Term, if an Excess is present, Tenant shall pay, with its next
installment of Base Rent due, but in no event longer than thirty (30) days
after receipt of such Statement, the full amount of the Excess for such
Expense Year, less the amounts, if any, paid during such Expense Year as
"Estimated Excess," as that term is defined in Section 5.3.3, below. If the
Estimated Excess paid during such Expense Year is more than the Excess for
such Expense Year, Landlord shall credit Tenant with such difference
against the next accruing obligations of Tenant under this Section 5.3. The
failure of Landlord to timely furnish the Statement for any Expense Year
shall not prejudice Landlord from enforcing its rights under this Article
5. Even though the Lease Term has expired or been terminated and Tenant has
vacated the Premises, when the final determination is made of Tenant's
Share of the Direct Expenses for the Expense Year in which this Lease
expires or terminates, taking into consideration that the Lease Expiration
Date may have occurred prior to the final day of the applicable Expense
Year (a) if an Excess is present, Tenant shall immediately pay to Landlord
an amount as calculated pursuant to the provisions of Section 5.3.1 of this
Lease and (b) if the Estimated Excess paid by Tenant for such Expense Year
is more than the Excess therefor, Landlord shall immediately pay Tenant the
difference. The provisions of this Section 5.3.2 shall survive the
expiration or earlier termination of the Lease Term.
5.3.3 Statement of Estimated Direct Expenses. In addition, Landlord
shall give Tenant a yearly expense estimate statement ("Estimate
Statement") which shall set forth Landlord's reasonable estimate
("Estimate") of the total amount of Direct Expenses for the then-current
Expense Year and the estimated excess ("Estimated Excess") as calculated by
comparing Direct Expenses, which shall be based upon the Estimate, to the
amount of the Direct Expense Stop, which Estimate Statement may be revised
and reissued by Landlord from time to time. The failure of Landlord to
timely furnish the Estimate Statement for any Expense Year shall not
preclude Landlord from enforcing itsrights to collect any Estimated Excess
under this Article 5. If pursuant to the Estimate Statement (or a revision
thereof) an Estimated Excess is calculated for the then-current Expense
Year, Tenant shall pay, with its next installment of Base Rent due, but in
no event longer than thirty (30) days after receipt of such Estimate
Statement, a fraction of the Estimated Excess (or the increase in the
Estimated Excess if pursuant to a revised Estimate Statement) for the
then-current Expense Year (reduced by any amounts paid pursuant to the last
sentence of this Section 5.3.3). Such fraction shall have as its numerator
the number of months which have elapsed in such current Expense Year to the
month of such payment, both months inclusive, and shall have twelve (12) as
its denominator. Until a new Estimate Statement is furnished, Tenant shall
pay monthly, with the monthly Base Rent installments, an amount equal to
one-twelfth (1/12) of the total Estimated Excess set forth in the previous
Estimate Statement delivered by Landlord to Tenant.
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5.3.4 Landlord's Books and Records. Tenant or an independent certified
public accountant mutually selected by Landlord and Tenant, at Tenant's
expense, shall have the right to examine Landlord's books and records with
respect to a Statement during normal business hours at any time within
thirty (30) days following the furnishing by Landlord to Tenant of such
Statement. Any amount due to Landlord as shown on any Statement, whether or
not written exception is taken thereto within the time period described in
Section 5.3.2, nonetheless shall be paid by Tenant as aforesaid, provided,
however that in the event such examination determines, based on generally
accepted accounting principles (i) that the Direct Expenses shown therein
were overstated, Landlord shall promptly reimburse Tenant for any
over-payment (and if the Direct Expenses shown in such Statement exceeds
those determined by such examination by more than 7%, Landlord shall
promptly reimburse Tenant for Tenant's reasonable out of pocket expenses
incurred in performing such examination, which in no event shall exceed
$2,000.00), or (ii) that the Direct Expenses shown therein were
understated, Tenant shall promptly pay to Landlord any under payment.
5.4 Grossing Up. If the Real Property is not fully occupied during all or a
portion of any calendar year (including the year in which the Direct Expense
Stop was determined), Landlord will, in accordance with sound accounting and
management practices consistently applied, determine the amount of variable
Direct Expenses (i.e. those items which vary according to occupancy levels) that
would have been paid had the Real Property been fully occupied, and the amount
so determined shall be deemed to have been the amount of Direct Expenses for
such year. If Landlord is not furnishing all or any particular utility or
service (the cost of which, if performed by Landlord, would be included in
Direct Expenses) to a tenant during any period, Landlord may for such period:
(i) adjust Direct Expenses to reflect the additional amount that would have been
incurred during such period had Landlord furnished such utilities orservices to
such tenant, or (ii) exclude the rentable area of such tenant from the rentable
area of the Real Property in computing Tenant's Share of the component of Direct
Expenses for such utilities or services.
5.5 Direct Expense Allocations and Tenant's Share Adjustments. If the Real
Property shall now or hereafter be part of or shall include a development,
complex or group of two or more buildings or structures collectively owned or
managed by Landlord or its affiliates or collectively managed by Landlord's
managing agent, Landlord may reasonably allocate Direct Expenses (or components
thereof) within such complex, development or group, and between such buildings
and structures and the parcels on which they are located, in accordance with
sound accounting and management practices. In the alternative, Landlord shall
have the right to determine, in accordance with sound accounting and management
practices, Tenant's Share of Direct Expenses (or components thereof) based on
such items for all or any such buildings and structures, and any common areas or
facilities, easements, corridors, lobbies, sidewalks, loading areas, driveways,
landscaped areas, air rights, development rights, parking rights, skywalks,
parking garages and lots, and any and all other rights, structures or facilities
operated or maintained in connection therewith or for the benefit thereof, and
all parcels or tracts of land on which all or any portion of any of the other
foregoing items are located, and any fixtures, machinery, apparatus, systems and
equipment located thereon or therein
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and used in connection therewith; in such event, Landlord may adjust Tenant's
Share to be based on the ratio of the rentable area of the Premises to the
rentable area of such buildings as to which such Direct Expenses (or components
thereof) are included. If the Real Property or any development of which it is a
part, shall contain non-office uses during any period, Landlord shall also have
the right to determine, in accordance with sound accounting and management
practices, Tenant's Share of Direct Expenses for only the office portion of the
Real Property or of such development; in such event, Landlord may adjust
Tenant's Share to be based on the ratio of the rentable area of the Premises to
the rentable area of such office portion for such period. Tenant's Share shall
be subject to such other adjustments for such periods as may be applicable
pursuant to Section 5.4 above.
ARTICLE 6
USE OF PREMISES
Tenant shall use the Premises solely for the "Permitted Use" as defined
in Section 1.14, and Tenant shall not use or permit the Premises to be used for
any other purpose or purposes whatsoever without the prior written consent of
Landlord, which may be withheld in Landlord's sole discretion. Tenant further
covenants and agrees that it shall not use, or suffer or permit any person or
persons to use, the Premises or any part thereof for any use or purpose contrary
to the Rules and Regulations, or in violation of the laws of the United States
of America, the state in which the Premises is located, or the ordinances,
regulation or requirements of the local municipal or county governing body or
other lawful authorities having jurisdiction over the Building. Tenant shall
faithfully observe and comply with the Rules and Regulations. Landlord shall not
be responsible to Tenant for the nonperformance of any such Rules and
Regulations by or otherwise with respect to the acts or omissions of any other
tenants or occupants of the Building. Without limiting the generality of the
foregoing provisions of this Article 6, Tenant shall not use the Premises or any
portion thereof for any walk-in retail use, or any use that is in violation of
any applicable laws, rules or regulations affecting the Building or the Real
Property, the current certificate of occupancy (or other use permit) for the
Building, or any recorded covenants, conditions or restrictions of record
affecting the Real Property or the Building.
ARTICLE 7
SERVICES AND UTILITIES
7.1 Standard Tenant Services. Landlord shall provide the following services
during Building Hours as set forth in Section 1.17, unless otherwise stated
below.
7.1.1 Subject to all governmental rules, regulations and guidelines
applicable thereto, Landlord shall provide heating and air conditioning
when necessary for normal comfort for normal office use in the Premises
during Building Hours comparable to that provided in similar office
buildings within the vicinity.
7.1.2 Landlord shall provide adequate electrical power for normal
general office use,
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as reasonably determined by Landlord. Tenant shall bear the cost of replacement
of lamps, starters and ballasts for lighting fixtures within the Premises.
7.1.3 Landlord shall provide water from the regular Building outlets
for drinking, lavatory and toilet purposes.
7.1.4 Landlord shall provide janitorial services on Monday through
Friday except the date of observation of the Holidays, in and about the
Premises. Landlord's cleaning service shall include vacuuming of the
Premises, emptying of normal office trash cans and disposing of their
contents. Tenant shall dispose of all other refuse, boxes, cans, books,
abandoned furniture and all other large, unusual or heavy items at Tenant's
sole cost and expense and shall not permit the accumulation thereof in the
Premises or elsewhere in the Building.
7.1.5 Landlord shall provide non-exclusive automatic elevator service
at all times.
7.2 Overstandard Tenant Use. Tenant shall not, without Landlord's prior
written consent, use heat-generating equipment, equipment other than normal
fractional horsepower office machines, or equipment or lighting other than
building standard lights in the Premises, which may affect the temperature
otherwise maintained by the air conditioning system or increase the water
normally furnished for the Premises by Landlord pursuant to the terms of Section
7.1 of this Lease. If Tenant uses water, electricity, heat or air conditioning
in excess of that supplied by Landlord pursuant to Section 7.1 of this Lease,
Tenant shall pay to Landlord, upon billing, the cost of such excess consumption,
the cost of the installation, operation, and maintenance of equipment which is
installed in order to supply such excess consumption, and the cost of the
increased wear and tear on existing equipment caused by such excess consumption;
and Landlord may install devices to separately meter any increased use and in
such event Tenant shall pay the increased cost directly to Landlord, on demand,
including the cost of such additional metering devices. If Tenant desires to use
heat, ventilation or air conditioning during hours other than those for which
Landlord is obligated to supply such utilities pursuant to the terms of Section
7.1 of this Lease, Tenant shall give Landlord such prior notice of Tenant's
desired use as Landlord shall from time to time reasonably establish as
appropriate (but not less than 24 hours advance notice) and Landlord shall
supply such utilities to Tenant at such hourly cost to Tenant as Landlord shall
from time to time establish, (currently at $20.00 per hour) which shall be
treated as Additional Rent.
7.3 Interruption of Use. Tenant agrees that Landlord shall not be liable
for damages, by abatement of Rent or otherwise except as provided in Section 7.4
below, for failure to furnish or delay in furnishing any service (including
telephone and telecommunication services), or for any diminution in the quality
or quantity thereof and such failures or delays or diminution shall never be
deemed to constitute an eviction or disturbance of Tenant's use and possession
of the Premises or relieve Tenant from paying Rent or performing any of its
obligations under this Lease. Furthermore, Landlord shall not be liable under
any circumstances for a loss of, or injury to, property or for injury to, or
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interference with, Tenant's business, including, without limitation, loss of
profits, however occurring, through or in connection with or incidental to a
failure to furnish any of the services or utilities as set forth in this Article
7. Landlord may comply with voluntary controls or guidelines promulgated by any
governmental entity relating to the use or conservation of energy, water, gas,
light or electricity or the reduction of automobile or other emissions without
creating any liability of Landlord to Tenant under this Lease, provided that the
Premises are not thereby rendered untenantable.
7.4 Abatement of Rent. Notwithstanding the foregoing, in the event that
Tenant is prevented from using, and does not use, the Premises as a result of
any failure to furnish any of the services or utilities as set forth in this
Article 7 and such failure is caused by Landlord's negligence or misconduct (and
not caused by Tenant, its agents or contractors), then Tenant shall give
Landlord notice of such event and if such failure continues for thirty (30) or
more consecutive business days after Landlord's receipt of said notice, then
Rent shall be abated for each day after such thirty (30) business day period
that Tenant remains prevented from using, and does not use, the Premises due to
such failure.
ARTICLE 8
REPAIRS
Tenant shall at Tenant's own expense and pursuant to the terms of this
Lease, including without limitation Article 9 hereof, keep the Premises,
including all improvements, fixtures and furnishings therein in good order,
repair and condition at all times during the Lease Term. In addition, Tenant
shall, at Tenant's own expense but under the supervision and subject to the
prior approval of Landlord, and within any reasonable period of time specified
by Landlord, pursuant to the terms of this Lease, including without limitation
Article 9 hereof, promptly and adequately repair all damage to the Premises and
replace or repair all damaged or broken fixtures and appurtenances; provided
however, that, at Landlord's option, or if Tenant fails to make such repairs
within 10 days (or, if such repairs cannot be made within said 10 day period
despite Tenant's diligent and continuous efforts, said 10 day period shall be
extended for so long as Tenant is diligently and continuously pursuing same but
in no event longer than an additional 20 days), Landlord may, but need not, make
such repairs and replacements, and Tenant shall pay Landlord the cost thereof,
including a percentage of the cost thereof (to be uniformly established for the
Building) sufficient to reimburse Landlord for all overhead, general conditions,
fees and other costs or expenses arising from Landlord's involvement with such
repairs and replacements forthwith upon being billed for same. Landlord may, but
shall not be required to, enter the Premises at all reasonable times to make
such repairs, alterations, improvements and additions to the Premises or to the
Building or to any equipment located in the Building as Landlord shall desire or
deem necessary or as Landlord may be required to do by the terms of this Lease
or by governmental or quasi-governmental authority or court order or decree, and
any such entry shall not be deemed to be or shall be construed as an eviction of
Tenant.
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ARTICLE 9
ADDITIONS AND ALTERATIONS
9.1 Landlord's Consent to Alterations. Tenant may not make any
improvements, alterations, additions or changes to the Premises (collectively,
"Alterations") without first procuring the prior written consent of Landlord to
such Alterations, which consent shall not be unreasonably withheld or delayed by
Landlord. If Landlord shall have conditioned its consent to any Alteration upon
Tenant's agreement to remove same upon the expiration or earlier termination of
this Lease as provided in Section 9.2, then upon the termination or expiration
of this Lease, Tenant shall restore the Premises to their condition prior to the
making of any Alterations by Tenant, reasonable wear and tear and damage by
insured casualty excepted. Before proceeding with any Alterations, Tenant shall
submit to Landlord detailed plans and specifications therefor, for Landlord's
prior written consent. Tenant shall reimburse Landlord for all reasonable
expenses incurred by Landlord in connection with (A) its decision as to whether
to approve the proposed Alterations and (B) inspecting the Alterations to
determine whether the same are being or have been performed in accordance with
the approved plans and specifications therefor and in accordance with all legal
requirements and insurance requirements, including the fees and expenses of any
architect or engineer employed for such purpose. Any Alterations for which
consent has been received shall be performed strictly in accordance with the
approved plans and specifications therefor, and no amendments or additions
thereto shall be made without the prior consent of Landlord. Tenant shall not
use the elevators during business hours on business days for haulage or removal
of materials or debris.
9.2 Manner of Construction. Landlord may impose, as a condition of its
consent to all Alterations or repairs of the Premises or about the Premises,
such requirements as Landlord in its reasonable discretion may deem desirable,
including, but not limited to, the requirement that Tenant, at Tenant's expense,
remove such Alterations upon the expiration or earlier termination of the Lease
Term, and/or the requirement that Tenant utilize for such purposes only
contractors, materials, mechanics and materialmen selected by Landlord, provided
only that contractors, mechanics and materialmen selected by Landlord shall be
reasonably competitive in price with any reputable and qualified contractor,
mechanic or materialman selected by Tenant except that Tenant shall be permitted
the selection of a reputable, licensed and insured general contractor with
reasonable approval of the Landlord. Tenant shall construct such Alterations and
perform such repairs in conformance with any and all applicable rules and
regulations of any federal, state, county or municipal code or ordinance and
pursuant to a valid building permit, issued by the appropriate municipal agency
or department, or other governmental agency thereof, in conformance with
Landlord's construction rules and regulations. In performing the work of any
such Alterations, Tenant shall have the work performed in such manner as not to
obstruct access to the Building or the common areas for any other tenant of the
Building, and as not to obstruct the business of Landlord or other tenants in
the Building, or interfere with the labor force working in the Building. Upon
completion of any Alterations, Tenant shall deliver to Landlord a reproducible
copy of the "as built" drawings of said Alterations and a certificate of
occupancy issued by the city in which the Premises is located. Tenant agrees
that it will not at any time prior to or during the Lease Term, either directly
or indirectly, employ or permit the employment
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of any contractor, mechanic or laborer, or permit any materials in the Premises,
if the use of such contractor, mechanic or laborer or such materials would, in
Landlord's reasonable opinion, create any difficulty, strike or jurisdictional
dispute with other contractors, mechanics or laborers.
9.3 Payment for Improvements. In the event Tenant and Landlord mutually
agree that Landlord shall perform or cause to be performed any Alteration or
repair work hereunder (of which Tenant is responsible), the charges for such
work shall be deemed Additional Rent under this Lease, payable upon billing
therefor. Upon completion of such work, Tenant shall deliver to Landlord, if
payment is made directly to contractors, evidence of payment, contractors'
affidavits and full and final waivers of all liens for labor, services or
materials. Tenant shall reimburse Landlord for Landlord's reasonable
out-of-pocket costs and expenses reasonably incurred in connection with
Landlord's review of the plans and specifications with respect to such work and
the supervision thereof.
9.4 Construction Insurance. In the event that Tenant makes any Alterations,
Tenant agrees to carry "Builder's All Risk" insurance in an amount approved by
Landlord covering the construction of such Alterations, and such other insurance
as Landlord may require, it being understood and agreed that all of such
Alterations shall be insured by Tenant pursuant to Article 11 of this Lease
immediately upon completion thereof.
9.5 Landlord's Property. All Alterations, improvements, fixtures and/or
equipment which may be installed or placed in or about the Premises, and all
signs installed in, on or about the Premises, from time to time, shall be at the
sole cost of Tenant and shall be and become the property of Landlord, except as
otherwise specified herein. Furthermore, if Landlord, as a condition to
Landlord's consent to any Alteration, requires that Tenant remove any Alteration
upon the expiration or early termination of the Lease Term, Tenant shall, at
Tenant's expense, remove such Alterations and repair any damage to the Premises
and the Building caused by such removal. If Tenant fails to complete such
removal and/or to repair any damage caused by the removal of any Alterations,
Landlord may do so and may charge the cost thereof to Tenant. Tenant's
obligations under this Section 9.5 shall survive the expiration or earlier
termination of the Lease Term.
ARTICLE 10
COVENANT AGAINST LIENS
Tenant has no authority or power to cause or permit any lien or
encumbrance of any kind whatsoever, whether created by act of Tenant, operation
of law or otherwise, to attach to or be placed upon the Real Property, Building
or Premises, and any and all liens and encumbrances created by Tenant shall
attach to Tenant's interest only. Landlord shall have the right at all times to
post and keep posted on the Premises any notice which it deems necessary for
protection from such liens. Tenant covenants and agrees not to suffer or permit
any lien of mechanics or materialmen or others to be placed against the Real
Property, the Building or the Premises with respect to work or services claimed
to have been performed for or materials claimed to have been furnished to Tenant
or the Premises, and, in case of any such lien attaching or notice of any lien,
Tenant covenants and agrees
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to cause it to be immediately released and removed of record. Notwithstanding
anything to the contrary set forth in this Lease, in the event that such lien is
not released and removed on or before the date occurring twenty (20) days after
notice of such lien is delivered by Landlord to Tenant, Landlord, as its sole
option, may immediately take all action necessary to release and remove such
lien, without any duty to investigate the validity thereof, and all sums, costs
and expenses, including reasonable attorneys' fees and costs, incurred by
Landlord in connection with such lien shall be deemed Additional Rent under this
Lease and shall immediately be due and payable by Tenant.
ARTICLE 11
INSURANCE
11.1 Indemnification and Waiver. To the extent not prohibited by law,
Tenant releases Landlord, its direct and indirect partners and principals and
their respective officers, directors, shareholders, beneficiaries, agents,
servants, employees, and independent contractors (collectively, "Landlord
Parties") from, and waives all claims for, any damage either to person or
property or resulting from the loss of use thereof, which damage is sustained by
Tenant or by other persons claiming through Tenant. Tenant shall indemnify,
defend, protect, and hold harmless Landlord Parties from any and all loss, cost,
damage, expense and liability (including without limitation court costs and
reasonable attorneys' fees) incurred in connection with, or arising from, any
cause in, on or about the Premises or any acts, omissions or negligence of
Tenant or of any person claiming by, through or under Tenant, its partners, and
their respective officers, agents, servants, employees, and independent
contractors (collectively, "Tenant Parties"). Should Landlord be named as a
defendant in any suit brought against Tenant in connection with, or arising out
of, an event covered by the foregoing indemnity, Tenant shall pay to Landlord
its costs and expenses incurred in such suit, including without limitation, its
actual professional fees such as appraisers', accountants' and attorneys' fees.
Further, Tenant's agreement to indemnify Landlord pursuant to this Section 11.1
is not intended and shall not relieve any insurance carrier of its obligations
under policies required to be carried by Tenant pursuant to the provision of
this Lease, to the extent such policies cover the matters subject to Tenant's
indemnification obligations; nor shall they supersede any inconsistent agreement
of the parties set forth in any other provision of this Lease. The provisions of
this Section 11.1 shall survive the expiration or sooner termination of this
Lease with respect to any claims or liability occurring prior to such expiration
or termination.
11.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance.
Tenant shall, at Tenant's expense, comply with all insurance company
requirements pertaining to the use of the Premises. If Tenant's conduct or use
of the Premises causes any increase in the premium for any insurance policies
carried by Landlord, then Tenant shall reimburse Landlord for any such increase.
11.3 Tenant's Insurance. Tenant shall maintain the following coverages in
the following amounts.
11.3.1 Commercial General Liability Insurance covering the insured
against claims
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of bodily injury, personal injury and property damage arising out of
Tenant's operations, assumed liabilities or use of the Premises, including
a Commercial General Liability endorsement covering the insuring provisions
of this Lease and the performance by Tenant of the indemnity agreements set
forth in Section 11.1 of this Lease, for limits of liability not less than:
(i) Bodily Injury and Property Damage Liability - $2,000,000 each
occurrence and $2,000,000 annual aggregate, and (ii) Personal Injury
Liability - $2,000,000 each occurrence and $2,000,000 annual aggregate.
11.3.2 Physical Damage Insurance covering (i) all office furniture,
trade fixtures, office equipment, merchandise and all other items of
Tenant's property on the Premises installed by, for, or at the expense of
Tenant, (ii) Alterations, and (iii) all other improvements, alterations and
additions to the Premises. Such insurance shall be written on all "all
risks" of physical loss or damage basis, for the full replacement cost
value new without deduction for depreciation of the covered items and in
amounts that meet any co-insurance clauses of the policies of insurance and
shall include a vandalism and malicious mischief endorsement, sprinkler
leakage coverage and earthquake sprinkler leakage coverage.
11.3.3 Forms of Policies. The minimum limits of policies of insurance
required of Tenant under this Lease shall in no event limit the liability
of Tenant under this Lease. Such insurance shall (i) name Landlord, and any
other party it so specifies, as an additional insured; (ii) specifically
cover the liability assumed by Tenant under this Lease, including, but not
limited to, Tenant's obligations under Section 11.1 of this Lease; (iii) be
issued by an insurance company having a rating of not less than A-XII in
Best's Insurance Guide or which is otherwise reasonably acceptable to
Landlord and licensed to do business in the state in which the Premises is
located; (iv) be primary insurance as to all claims thereunder and provide
that any insurance carried by Landlord is excess and is non-contributing
with any insurance requirement of Tenant; (v) provide that said insurance
shall not be canceled or coverage changed unless thirty (30) days' prior
written notice shall have been given to landlord and any mortgagee of
Landlord; and (vi) contain a cross-liability endorsement or severability of
interest clause reasonably acceptable to Landlord. Tenant shall deliver
said policy or policies or certificates thereof to Landlord on or before
the Lease Commencement Date and at least thirty (30) days before the
expiration dates thereof. All such certificates shall expressly state that
they can be relied upon by Landlord, as the holder thereof.
11.4 Subrogation. Landlord and Tenant agree to have their respective
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the case
may be, so long as the insurance carried by Landlord and Tenant, respectively,
is not invalidated thereby. As long as such waivers of subrogation are contained
in their respective insurance policies, Landlord and Tenant hereby waive any
right that either may have against the other on account of any loss or damage to
their respective property to the extent such loss or damage is insurable under
policies of insurance for fire and all risk coverage, theft, or other similar
insurance. If Tenant fails to carry the amounts and types of insurance required
to be carried by it pursuant to this Article 11, in addition to any remedies
Landlord may have under this Lease, such failure shall be deemed to be a
covenant and agreement by Tenant to self-insure with respect to
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the type and amount of insurance which Tenant has so failed to carry, with full
waiver of subrogation with respect thereto.
ARTICLE 12
DAMAGE AND DESTRUCTION
12.1 Repair of Damage to Premises by Landlord. Tenant shall promptly notify
Landlord of any damage to the Premises resulting from fire or any other
casualty. If the Premises or any common areas of the Building serving or
providing access to the Premises shall be damaged by fire or other casualty,
Landlord shall promptly and diligently, subject to reasonable delays for
insurance adjustment or other matters beyond Landlord's reasonable control, and
subject to all other terms of this Article 12, restore the Premises, excluding
Alterations, and such common areas to substantially the same condition as
existed prior to the casualty, except for modifications required by zoning and
building codes and other laws or by the holder of a mortgage on the Building or
any other modifications to the common areas deemed desirable by Landlord,
provided access to the Premises and any common restrooms serving the Premises
shall not be materially affected. Landlord shall not be liable for any
inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's
business resulting in any way from such damage or the repair thereof; provided
however, that Landlord shall allow Tenant a proportionate abatement of Rent,
during the time and to the extent the Premises are being restored as set forth
below, and not occupied by Tenant solely as a result thereof.
12.2 Landlord's Option to Repair. Within sixty (60) days following the date
of any substantial damage to the Building, Landlord shall notify Tenant of
Landlord's good faith estimate of the time required to repair such damage
("Landlord's Repair Notice"). Notwithstanding the terms of Section 12.1 of this
Lease, Landlord may elect not to rebuild and/or restore the Premises and/or
Building and instead terminate this Lease by notifying Tenant in writing of such
termination within sixty (60) days after the date of damage, such notice to
include a termination date giving Tenant ninety (90) days to vacate the
Premises, but Landlord may so elect only if the Building shall be damaged by
fire or other casualty or cause, whether or not the Premises are affected, and
one or more of the following conditions is present: (i) repairs cannot
reasonably be completed within one hundred eighty (180) days of the date of
damage (when such repairs are made without the payment of overtime or other
premiums); (ii) the holder of any mortgage on the building or ground lessor with
respect to the Real Property shall require that the insurance proceeds or any
portion thereof be used to retire the mortgage debt, or shall terminate the
ground lease, as the case may be; (iii) the damage is not fully covered, except
for deductible amounts, by Landlord's insurance policies; or (iv) the damage
occurs during the last eighteen (18) months of the Lease Term. Notwithstanding
anything contained herein to the contrary, if Landlord has not terminated this
Lease pursuant to the terms of this Article 12, and if either (A) pursuant to
Landlord's Repair Notice, such repairs are not estimated to be completed within
one hundred eighty (180) days of the date of damage, or (B) such repairs are not
actually completed within two hundred ten (210) days of the date of damage
subject to reasonable delays beyond Landlord's reasonable control, Tenant shall
have the right to terminate this Lease within ten
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(10) days after, in the cause of clause (A), receipt of Landlord's Repair Notice
or, in the case of clause (B), the expiration of such 210 day period (subject to
such reasonable delays), by written notice to Landlord in each case, effective
as of a date set forth in such notice, which date shall not be more than 30 days
after the date of delivery of such notice to Landlord.
ARTICLE 13
NONWAIVER
No waiver of any provision of this Lease shall be implied by any failure of
Landlord to enforce any remedy on account of the violation of such provision,
even if such violation shall continue or be repeated subsequently, any waiver by
Landlord of any provision of this Lease may only be in writing, and no express
waiver shall affect any provision other than the one specified in such waiver
and that one only for the time and in the manner specifically stated.
Forbearance by Landlord in enforcement of one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to constitute
a waiver of such default. The acceptance of any Rent hereunder by Landlord
following the occurrence of any default, whether or not known to Landlord, shall
not be deemed a waiver of any such default, except only a default in the payment
of the Rent so accepted.
ARTICLE 14
CONDEMNATION
If ten percent (10%) or more of the Premises or Building shall be taken by
power of eminent domain or condemned by any competent authority for any public
or quasi-public use or purpose, or if Landlord shall grant a deed or other
instrument in lieu of such taking by eminent domain or condemnation, Landlord
shall have the option to terminate this Lease upon ninety (90) days' notice,
provided such notice is given no later than one hundred eighty (180) days after
the date of such taking, condemnation, reconfiguration, vacation, deed or other
instrument. If more than ten percent (10%) of the rentable square feet of the
Premises is taken, or if access to the Premises is substantially impaired,
Tenant shall have the option to terminate this Lease upon ninety (90) days'
notice, provided such notice is given no later than one hundred eighty (180)
days after the date of such taking. Landlord shall be entitled to receive the
entire award or payment in connection therewith, except that Tenant shall have
the right to file any separate claim available to Tenant for any taking of
Tenant's personal property and fixtures belonging to Tenant and removable by
Tenant upon expiration of the Lease Term pursuant to the terms of this Lease,
and for moving expenses, so long as such claim does not diminish the award
available to Landlord, its ground lessor with respect to the Real Property or
its mortgagee, and such claim is payable separately to Tenant. All Rent shall be
apportioned as of the date of such termination, or the date of such taking,
whichever shall first occur. If any part of the Premises shall be taken, and
this Lease shall not be so terminated, the Rent shall be proportionately abated.
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ARTICLE 15
ASSIGNMENT AND SUBLETTING
15.1 Transfers. Tenant shall not, without the prior written consent of
Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to
attach to, otherwise transfer, this Lease or any interest hereunder, permit any
assignment or other such foregoing transfer of this Lease or any interest
hereunder by operation of law, sublet the Premises or any part thereof, or
permit the use of the Premises by any persons other than Tenant and its
employees (all of the foregoing are hereinafter sometimes referred to
collectively as "Transfers" and any person to whom any Transfer is made or
sought to be made is hereinafter sometimes referred to as a "Transferee"). If
Tenant shall desire Landlord's consent to any Transfer, Tenant shall notify
Landlord in writing, which notice ("Transfer Notice") shall include (i) the
proposed effective date of Transfer, which shall not be less than thirty (30)
days nor more than one hundred eighty (180) days after the date of delivery of
the Transfer Notice, (ii) a description of the portion of the Premises to be
transferred ("Subject Space"), (iii) all of the terms of the proposed Transfer
and the consideration therefor, including a calculation of the "Transfer
Premium," as that term is defined in Section 15.3 below, in connection with such
Transfer, the name and address of the proposed Transferee, and a copy of all
existing and/or proposed documentation pertaining to the proposed Transfer,
including all existing operative documents to be executed to evidence such
Transfer or the agreements incidental or related to such Transfer, (iv) current
financial statements of the proposed Transferee certified by an officer, partner
or owner thereof, and any other information required by Landlord, which will
enable Landlord to determine the financial responsibility, character, and
reputation of the proposed Transferee and the nature of such Transferee's
business and proposed use of the Subject Space, (v) an executed estoppel
certificate from Tenant in the form attached hereto as Exhibit C, and (vi) such
other information as Landlord may reasonably require. Any Transfer made without
Landlord's prior written consent shall, at Landlord's option, be null, void and
of no effect, and shall, at Landlord's option, constitute a default by Tenant
under Section 20.1.2 of this Lease. Whether or not Landlord shall grant consent,
Tenant shall pay Landlord's review and processing fees (not to exceed $500.00
per Transfer Request), as well as any reasonable legal fees incurred by
Landlord, within thirty (30) days after written request by Landlord.
15.2 Landlord's Consent. Landlord shall not unreasonably withhold its
consent to any proposed Transfer of the Subject Space to the Transferee on the
terms specified in the Transfer Notice. The parties hereby agree that it shall
be deemed to be reasonable under this Lease and under any applicable law for
Landlord to withhold consent to any proposed Transfer where one or more of the
following apply, without limitation as to other reasonable ground for
withholding consent:
15.2.1 Transferee is of a character or reputation or engaged in a
business which is not consistent with the quality of the Building;
15.2.2 Transferee is either a governmental agency or instrumentality
thereof;
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15.2.3 Transferee's intended use of the Premises is not for a
Permitted Use;
15.2.4 Transferee is not a party of reasonable financial worth and/or
financial stability in light of the responsibilities involved under the
Lease on the date consent is requested;
15.2.5 The proposed Transfer would cause Landlord to be in violation
of another lease or agreement to which Landlord is a party, or would give
an occupant of the Building a right to cancel its lease; or
15.2.6 Either Transferee, or any person or entity which directly or
indirectly, controls, is controlled by, or is under common control with,
the Transferee, (i) occupies space in the Building at the time of the
request for consent, (ii) is negotiating with Landlord to lease space in
the Building at such time, or (iii) has negotiated with Landlord during the
twelve (12)-month period immediately preceding the Transfer Notice,
provided, however, the foregoing provisions of this Section 15.2.6 shall
not apply to a proposed subletting to any such Transferee referred to in
this Section 15.2.6 if, at the time that Landlord's consent to such
proposed subletting is requested, Landlord does not then have available
space within the Building sufficient for such Transferee and will not,
during the term of the proposed sublease to such proposed Transferee, have
available space within the Building sufficient for such Transferee.
Notwithstanding anything to the contrary in this Lease, if Tenant or any
proposed Transferee claims that Landlord has unreasonably withheld or delayed
its consent under Section 15.2 or otherwise has breached or acted unreasonably
under this Article 15, their sole remedies shall be declaratory judgment and an
injunction for the relief sought without any monetary damages, and Tenant hereby
waives all other remedies, including without limitation, any right at law or
equity to terminate this Lease, on its own behalf and, to the extent permitted
under all applicable laws, on behalf of the proposed Transferee. Tenant shall
indemnify, defend and hold harmless Landlord from any and all liability, losses,
claims, damages, costs, expenses (including reasonable attorneys' fees and
litigation expenses), causes of action and proceedings involving any third party
or parties (including without limitation Tenant's proposed subtenant or
assignee) who claim they were damaged by Landlord's wrongly withholding or
conditioning of Landlord's consent. If Landlord consents to any Transfer
pursuant to the terms of this Section 15.2 (and does not exercise any recapture
rights Landlord may have under Section 15.4 of this Lease), Tenant may within
six (6) months after Landlord's consent, but not later than the expiration of
said six-month period, enter into such Transfer of the Premises or portion
thereof, upon substantially the same terms and conditions as are set forth in
the Transfer Notice furnished by Tenant to Landlord pursuant to Section 15.1 of
this Lease, provided that if there are any changes in the terms and conditions
from those specified in the Transfer Notice (i) such that Landlord would
initially have been entitled to refuse its consent to such Transfer under this
Section 15.2, or (ii) which would cause the proposed Transfer to be more
favorable to Transferee than the terms set forth in Tenant's original Transfer
Notice, Tenant shall again submit the transfer to Landlord for its approval and
other action under this Article 15 (including Landlord's right of recapture, if
any, under Section 15.4 of this Lease).
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15.3 Transfer Premium. If Landlord consents to a Transfer, as a condition
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord any "Transfer Premium," as that term is defined in this Section 15.3,
received by Tenant from such Transferee. "Transfer Premium" shall mean all rent,
additional rent or other consideration payable by such Transferee in excess of
the Rent and Additional Rent payable by Tenant under this Lease, on a per
rentable square foot basis if less than all of the Premises is transferred.
"Transfer Premium" shall also include, but not be limited to, key money and
bonus money paid by Transferee to Tenant in connection with such Transfer, and
any payment in excess of fair market value for services rendered by Tenant to
Transferee or for assets, fixtures, inventory, equipment, or furniture
transferred by Tenant to Transferee in connection with such Transfer excluding
reasonable and customary brokerage commissions, attorney's fees and tenant
improvement costs actually incurred by Tenant as a direct result of such
Transfer. In the calculations of the Rent (as it relates to the Transfer Premium
calculated under this Section 15.3), the Rent paid during each annual period for
the Subject Space shall be computed after adjusting such rent to the actual
effective rent to be paid, taking into consideration any and all leasehold
concessions granted in connection therewith, including, but not limited to, any
rent credit and tenant improvement allowance. For purposes of calculating any
such effective rent, all such concessions shall be amortized on a straight-line
basis over the relevant term.
15.4 Landlord's Option as to Subject Space. Notwithstanding anything to the
contrary contained in this Article 15, Landlord shall have the option, by giving
written notice to Tenant within thirty (30) days after receipt of any Transfer
Notice, to (i) recapture the Subject Space, or (ii) take an assignment or
sublease of the Subject Space from Tenant. Such recapture, or sublease or
assignment notice shall cancel and terminate this Lease, or create a sublease or
assignment, as the case may be, with respect to the Subject Space as of the date
stated in the Transfer Notice as the effective date of the proposed Transfer
until the last day of the term of the Transfer as set forth in the Transfer
Notice. In the event of a recapture by Landlord, if this Lease shall be canceled
with respect to less than the entire Premises, the Rent reserved herein shall be
prorated on the basis of the number of rentable square feet retained by Tenant
in proportion to the number of rentable square feet contained in the Premises,
and this Lease as so amended shall continue thereafter in full force and effect,
and upon request of either party, the parties shall execute written confirmation
of the same. If Landlord declines, or fails to elect in a timely manner to
recapture, sublease or take an assignment of the Subject Space under this
Section 15.4, then, provided Landlord has consented to the proposed Transfer,
Tenant shall be entitled to proceed to transfer the Subject Space to the
proposed Transferee, subject to provisions of the last paragraph of Section 15.2
of this Lease.
15.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the terms
and conditions of this Lease shall in no way be deemed to have been waived or
modified, (ii) such consent shall not be deemed consent to any further Transfer
by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord,
promptly after execution, an original executed copy of all documentation
pertaining to the Transfer in form reasonably acceptable to Landlord, (iv)
Tenant shall furnish upon Landlord's request a complete statement, certified by
an independent certified public accountant, or Tenant's chief
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financial officer, setting forth in detail the computation of any Transfer
Premium Tenant has derived and shall derive from such Transfer, and (v) no
Transfer relating to this Lease or agreement entered into with respect thereto,
whether with or without Landlord's consent, shall relieve Tenant or any
guarantor of the Lease from liability under this Lease. Landlord or its
authorized representatives shall have the right at all reasonable times to audit
the books, records and papers of Tenant relating to any Transfer, and shall have
the right to make copies thereof. If the Transfer Premium respecting any
Transfer shall be found understated, Tenant shall, within thirty (30) days after
demand, pay the deficiency and Landlord's costs of such audit, and if
understated by more than ten percent (10%), Landlord shall have the right to
cancel this Lease upon thirty (30) days' notice to Tenant.
ARTICLE 16
SURRENDER OF PREMISES; REMOVAL OF TRADE FIXTURES
16.1 Surrender of Premises. No act or thing done by Landlord or any agent
or employee of Landlord during the Lease Term shall be deemed to constitute an
acceptance by Landlord of a surrender of the Premises unless such intent is
specifically acknowledged in a writing signed by Landlord. The delivery of keys
to Premises to Landlord or any agent or employee of Landlord shall not
constitute a surrender of the Premises or effect a termination of this Lease,
whether or not the keys are thereafter retained by Landlord, and notwithstanding
such delivery Tenant shall be entitled to the return of the keys at any
reasonable time upon request until this Lease shall have been terminated.
16.2 Removal of Tenant Property by Tenant. Upon expiration of the Lease
Term, or upon any earlier termination of this Lease, Tenant shall, subject to
the provisions of this Article 16, quit and surrender possession of the Premises
to Landlord in as good order and condition as when Tenant took possession and as
thereafter improved by Landlord and/or Tenant, reasonable wear and tear
excepted. Upon such expiration or termination, Tenant shall, without expense to
Landlord, remove or cause to be removed from the Premises all debris and
rubbish, and such items of furniture, equipment, free-standing cabinet work, and
other articles or personal property owned by Tenant or installed or placed by
Tenant at its expense in the Premises (including all signage installed pursuant
to the terms of Section 24.1), and such similar articles of any other persons
claiming under Tenant, and Tenant shall repair at its own expense all damage to
the Premises and Building resulting from such removal.
ARTICLE 17
HOLDING OVER
If Tenant holds over after the expiration or earlier termination of the
Lease Term without the express written consent of Landlord, Tenant shall be
deemed to be a tenant at sufferance, and in such case Rent shall be payable at a
monthly rate equal to one hundred fifty percent (150%) for the first thirty (30)
days, and then thereafter two hundred percent (200%), of the Rent applicable
during the last rental period of the Lease Term under this Lease for each month
or part thereof that such hold over continues. Such tenancy shall be subject to
every other term, covenant and agreement contained
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herein. Nothing contained in this Article 17 shall be construed as consent by
Landlord to any holding over by Tenant, and Landlord expressly reserves the
right to require Tenant to surrender possession of the Premises to Landlord as
provided in this Lease upon the expiration or other termination of this Lease.
The provisions of this Article 17 shall not be deemed to limit or constitute a
waiver of any other rights or remedies of Landlord provided herein or at law.
Tenant acknowledges that if Tenant holds over without Landlord's consent, such
holding over may compromise or otherwise affect Landlord's ability to enter into
new leases with prospective tenants regarding the Premises. Therefore, if Tenant
fails to surrender the Premises upon the termination or expiration of this
Lease, in addition to any other liabilities to Landlord accruing therefrom,
Tenant shall protect, defend, indemnify and hold Landlord harmless from all
loss, costs (including reasonable attorneys' fees) and liability resulting from
such failure, including, without limiting the generality of the foregoing, any
claims made by any succeeding tenant founded upon such failure to surrender, and
any losses suffered by Landlord, including lost profits, resulting from such
failure to surrender.
ARTICLE 18
ESTOPPEL CERTIFICATES
Within ten (10) days following a request in writing by Landlord, Tenant
shall execute and deliver to Landlord an estoppel certificate, which shall be
substantially in the form of Exhibit C, attached hereto (or such other form as
may be required by any prospective mortgagee or purchaser of the Building, or
any portion thereof), indicating therein any exceptions thereto that may exist
at that time, and shall also contain any other information reasonably requested
by Landlord or Landlord's mortgagee or prospective mortgagee or purchasers.
Tenant shall execute and deliver whatever other instruments may be reasonably
required for such purposes. Tenant's failure to deliver any such certificate or
instrument, in addition to being a default under this Lease, shall be deemed to
establish conclusively that this Lease is in full force and effect except as
declared by Landlord, that Landlord is not in default of any of its obligations
under this Lease, and that Landlord has not received more than one (1) month's
rent in advance.
ARTICLE 19
SUBORDINATION
This Lease is subject and subordinate to all present and future ground
or underlying leases of the Real Property and to the lien of any mortgages or
deeds of trust, now or hereafter in force against the Real Property and the
Building, if any, and to all renewals, extensions, modifications, consolidations
and replacements thereof, and to all advances made or hereafter to be made upon
the security of such mortgages or trust deeds, unless the holders of such
mortgages or deeds of trust, or the lessors under such ground lease or
underlying leases, require in writing that this Lease be superior thereto.
Tenant covenants and agrees in the event any proceedings are brought for the
foreclosure of any such mortgage, to attorn, without any deductions or set-offs
whatsoever, to the purchaser upon any such foreclosure sale if so requested to
do so by such purchaser, and to recognize such purchaser as the lessor under
this Lease. Tenant shall, within twenty (20) days of request by Landlord,
execute
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such further instruments or assurances as Landlord may reasonably deem necessary
to evidence or confirm the subordination or superiority of this Lease to any
such mortgages, trust deeds, ground leases or underlying leases. Tenant hereby
irrevocably appoints Landlord as its attorney in fact to execute any such
further instruments or assurances as required above in the event Tenant fails to
so execute and return any such instruments or assurances .
ARTICLE 20
DEFAULTS; REMEDIES
20.1 Defaults. The occurrence of any of the following shall constitute a
default of this Lease by Tenant:
20.1.1 Any failure by Tenant to pay Rent or any other charge required
to be paid under this Lease, or any part thereof, within five (5) business
days of the date the same is due; or
20.1.2 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed
by Tenant where such failure continues for thirty (30) days after written
notice thereof from Landlord to Tenant; provided however, that any such
notice shall be in lieu of, and not in addition to, any notice required
under any applicable law; and further provided that if such failure cannot
be cured within said 30 day period despite Tenant's diligent and continuous
efforts to do so, said 30 day period shall be extended for so long as
Tenant is diligently and continuously pursuing the cure of such failure but
in no event longer than an additional 15 days.
20.2 Remedies Under Default. Upon occurrence of a default by Tenant,
Landlord shall have, in addition to any other remedies available to Landlord at
law or in equity, the option to pursue any one or more of the following
remedies, each and all of which shall be cumulative and non-exclusive, without
any notice or demand whatsoever.
20.2.1 Landlord may, without prejudice to any other remedy which it
may have for possession or arrearages in rent, enter upon and take
possession of the Premises, by picking or changing locks if necessary, and
lock out, expel or remove Tenant and any other person who may be occupying
all or any part of the Premises without being liable for any claim for
damages, and either terminate this Lease and Tenant's rights to possession
of the Premises or, without terminating this Lease, terminate Tenant's
right to possession of the Premises, and in either event Tenant shall
immediately surrender the Premises to Landlord, and Landlord may recover
from Tenant the following:
(i) The worth at the time of award of any unpaid rent which has
been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the
unpaid rent which
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would have been earned after termination until the time of award
exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the
unpaid rent for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease, specifically including but not limited
to, brokerage commissions and advertising expenses incurred, expenses
of remodeling the Premises or any portion thereof for a new tenant,
whether for the same or a different use, and any special concessions
made to obtain a new tenant; and
(v) At Landlord's election, such other amounts in addition to or
in lieu of the foregoing as may be permitted from time to time by
applicable law.
The term "rent" as used in this Section 20.2 shall be deemed to be and to
mean all sums of every nature required to be paid by Tenant pursuant to the
terms of this Lease, whether to Landlord or to others. As used in Sections
20.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by
allowing interest at the rate equal to 5 percentage points added to the prime
interest rate as published by The Wall Street Journal, as it varies from time to
time, from the date due until paid (in the event that The Wall Street Journal
ceases either to exist or announce a prime interest rate, the aforementioned
interest shall be calculated by adding 5 percentage points to the prime interest
rate of the lending institution in metropolitan area in which the Premises is
located that, at the time such calculation is made, has the greatest asset
value), but in no case greater than the maximum amount of such interest
permitted by law ("Interest Rate"). As used in Section 20.2.1 (iii) above, the
"worth at the time of award" shall be computed by discounting such amount at the
discount rate of five percent (5%).
20.2.2 Landlord shall have the right to continue this Lease in effect
after Tenant's breach and abandonment and recover Rent as it becomes due.
Accordingly, if Landlord does not elect to terminate this Lease on account
of any default by Tenant, Landlord may, from time to time, without
terminating this Lease, enforce all of its rights and remedies under this
Lease, including the right to recover all rent as it becomes due.
20.3 Subleases of Tenant. In the event that Landlord elects to terminate
this Lease on account of any default by Tenant, as set forth in this Article 20,
Landlord shall have the right to terminate any and all subleases, licenses,
concessions or other consensual arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed
to Tenant's interest in such subleases, licenses, concessions or arrangements.
In the event of Landlord's election to succeed to Tenant's interest in such
subleases, licenses, concessions or arrangements, Tenant shall, as of the date
of notice by Landlord of such election, have no further right to or interest in
the rent or other consideration receivable thereunder.
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20.4 Specific Performance and Collection of Rent. Landlord shall at all
times have the right without prior demand or notice except as required by
applicable law to: (i) seek any declaratory, injunctive or other equitable
relief, and specifically enforce this Lease or restrain or enjoin a violation of
any provision hereof, and Tenant hereby waives any right to require that
Landlord post a bond or other security in connection therewith, and (ii) sue for
and collect any unpaid Rent which has accrued.
ARTICLE 21
ATTORNEYS' FEES
If either party commences litigation against the other for the specific
performance of this Lease, for damages for the breach hereof or otherwise for
enforcement of any remedy hereunder, the parties hereto agree to and hereby do
waive any right to a jury trial and, in the event of any such commencement of
litigation, the prevailing party shall be entitled to recover from the other
party such costs and reasonable attorneys' fees as may have been incurred.
ARTICLE 22
QUIET ENJOYMENT
If and for so long as no default occurs by Tenant under this Lease beyond
the expiration of any applicable notice and grace period, Tenant may peaceably
and quietly enjoy the Premises without any disturbance from Landlord or from any
other person claiming by, through or under Landlord, subject, nevertheless, to
the terms and conditions of this Lease, including, without limitation, the terms
and conditions of Article 19.
ARTICLE 23
BROKERS
Tenant hereby warrants to Landlord that Tenant has had no dealings with
any real estate broker or agent in connection with the negotiation of this
Lease, excepting only the Brokers (if any), and that Tenant knows of no other
real estate broker or agent who is entitled to a commission in connection with
this Lease. Tenant agrees to indemnify and defend Landlord against and hold
Landlord harmless from any and all claims, demands, losses, liabilities,
lawsuits, judgments, and costs and expenses (including without limitation
reasonable attorneys' fees) with respect to any leasing commission or equivalent
compensation alleged to be owing on account of Tenant's dealings with any real
estate broker or agent other than the Brokers. The terms of this Article 23
shall survive the expiration or earlier termination of the Lease Term.
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ARTICLE 24
SIGNS
24.1 Full Floor Tenants. Subject to Landlord's prior written approval, in
its sole discretion, and provided all signs are in keeping with the quality,
design and style of the Building, Tenant, if the Premises comprise an entire
floor of the Building, at its sole cost and expense, may install identification
signage anywhere in the Premises including in the elevator lobby of the
Premises, provided that such signs must not be visible from the exterior of the
Building. Landlord shall provide to Tenant listings in the Building Directory in
the lobby of the Building consistent with Landlord's existing practice in
respect of other tenants of the Building.
24.2 Multi-Tenant Floor Tenants. If Tenant occupies less than the entire
floor on which the Premises is located, Tenant's identifying signage shall be
provided by Landlord, at Tenant's cost, and such signage shall be comparable to
that used by Landlord for other similar floors in the Building and shall comply
with Landlord's Building standards signage program.
24.3 Prohibited Signage and Other Items. Any signs, notices, logos,
pictures, names or advertisements which are installed and that have not been
individually approved by Landlord may be removed without notice by Landlord at
the sole expense of Tenant. Tenant may not install any signs on the exterior or
roof of the Building or the common areas of the Building or the Real Property.
Any signs, window coverings, or blinds (even if the same are located behind the
Landlord approved window coverings for the Building), or other items visible
from the exterior of the Premises, the Building or any common areas of the
Building are subject to the prior written approval of Landlord, in its sole
discretion.
ARTICLE 25
COMPLIANCE WITH LAW
Tenant shall not do anything or suffer anything to be done in or about the
Premises which will in any way conflict with any law, statute, ordinance or
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated. Should any standard or regulation now or
hereafter be imposed on Landlord or Tenant by a state, federal or local
governmental body charged with the establishment, regulation and enforcement of
occupational, health or safety standards for employers, employees, landlords or
tenants, then Tenant agrees, at its sole cost and expense, to comply promptly
with such standards or regulations applicable to Tenant's business, the Premises
or Tenant's use thereof (and not applicable to building owners or landlords
generally). Tenant shall be responsible, at its sole cost and expense, to make
all alterations to the Premises as are required to comply with the governmental
rules, regulations, requirements or standards described in this Article 25,
provided, however, Tenant shall not be under any obligation to comply with any
such law, statute, ordinance or other governmental rule, regulation or
requirement requiring any structural alteration of the Premises solely by reason
of the use thereof for general office use unless said alteration (a) is
necessitated by a condition which has otherwise been created by, or at the
instance of, Tenant, including, without limitation, any Alteration made by or at
the request of Tenant, (b) is attributable to the use or manner of use to which
Tenant puts the Premises (other than general office use), (c) is required by
reason of a breach of Tenant's obligations hereunder, or (d) is
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occasioned in whole or in part by any act, omission or negligence of Tenant or
any person claiming through or under Tenant or any of their employees, agents,
contractors, invitees, or licensees. Tenant shall promptly reimburse Landlord
for all reasonable costs and expenses incurred by Landlord in connection with
any alterations required to be made to the common areas of the Building if said
alteration meets either of the criteria described in (a) or (b) above. The
judgment of any court of competent jurisdiction or the admission of Tenant in
any judicial action, regardless of whether Landlord is a party thereto, that
Tenant has violated any of said governmental measures, shall be conclusive of
that fact as between Landlord and Tenant.
ARTICLE 26
LATE CHARGES
If any installment of Rent or any other sum due from Tenant shall not be
received by Landlord or Landlord's designee within five (5) business days after
the date due, then Tenant shall pay to Landlord a late charge equal to three
percent (3%) of the overdue amount (except that Landlord agrees to waive the
first such late charge in any calendar year), plus any attorneys' fees incurred
by Landlord by reason of Tenant's failure to pay Rent and/or other charges when
due hereunder. Additionally, unpaid Rent shall bear interest at the Interest
Rate from the date due until paid. The late charge and interest on unpaid Rent
shall be deemed Additional Rent and the right to require it shall be in addition
to all of Landlord's other rights and remedies hereunder or at law and shall not
be construed as liquidated damages or as limiting Landlord's remedies in any
manner.
ARTICLE 27
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
27.1 Landlord's Cure. All covenants and agreements to be kept or performed
by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost
and expense and without any reduction of Rent. If Tenant shall fail to perform
any of its obligations under this Lease, within a reasonable time after such
performance is required by the terms of this Lease, Landlord may, but shall not
be obligated to, after reasonable prior notice to Tenant, make any such payment
or perform any such act on Tenant's part without waiving its right based upon
any default of Tenant and without releasing Tenant from any obligations
hereunder.
27.2 Tenant's Reimbursement. Except as may be specifically provided to the
contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15) days
after delivery by Landlord to Tenant of statements therefor: (i) sums equal to
expenditures reasonably made and obligations incurred by Landlord in connection
with the remedying by Landlord of Tenant's defaults pursuant to the provisions
of Section 27.1; (ii) sums equal to all losses, costs, liabilities, damages and
expenses referred to in Article 11 of this Lease; and (iii) sums equal to all
expenditures made and obligations incurred by Landlord in collecting or
attempting to collect the Rent or in enforcing or attempting to enforce any
rights of Landlord under this Lease or pursuant to law, including, without
limitation, all legal fees and other amounts so expended. Tenant's obligations
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under this Section 27.2 shall survive the expiration or sooner termination of
the Lease Term.
ARTICLE 28
ENTRY BY LANDLORD
Landlord reserves the right at all reasonable times and upon reasonable
notice to the Tenant to enter the Premises to (i) inspect them; (ii) show the
Premises to prospective purchasers, mortgagees or ground or underlying lessors,
or during the last twelve (12) months of the Lease Term, prospective tenants;
(iii) post notices of nonresponsibility; or (iv) alter, improve or repair the
Premises or the Building if necessary to comply with current building codes or
other applicable laws, or for alterations, repairs or improvements to the
Building. Notwithstanding anything to the contrary contained in this Article 28,
Landlord may enter the Premises at any time to (A) perform services required of
Landlord; (B) take possession due to any breach of this Lease in the manner
provided herein; and (C) perform any covenants of Tenant which Tenant fails to
perform. Landlord may make any such entries without the abatement of Rent and
may take such steps as required to accomplish the stated purposes; provided,
however, that any such entry shall be accomplished as expeditiously as
reasonably possible and in a manner so as to cause as little interference to
Tenant as reasonably possible. Tenant waives any claim for damages or for any
injuries or inconvenience to or interference with Tenant's business, lost
profits, any loss of occupancy or quiet enjoyment of the Premises, and any other
loss occasioned thereby. For each of the above purposes, Landlord shall at all
times have a key with which to unlock all the doors in the Premises, excluding
Tenant's vaults, safes and special security areas designated in advance by
Tenant. In an emergency, Landlord shall have the right to use any means that
Landlord may deem proper to open the doors in and to the Premises. Any entry
into the Premises by Landlord in the manner hereinbefore described shall not be
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or an actual or constructive eviction of Tenant from any portion of the
Premises.
ARTICLE 29
DISABILITIES ACTS
The parties acknowledge that the Americans With Disabilities Act of 1990
(42 U.S.C. ss.12101 et seq.) and regulations and guidelines promulgated
thereunder ("ADA"), and any similarly motivated state and local laws ("Local
Barriers Acts"), as the same may be amended and supplemented from time to time
(collectively referred to herein as the "Disabilities Acts") establish
requirements for business operations, accessibility and barrier removal, and
that such requirements may or may not apply to the Premises and Real Property
depending on, among other things: (i) whether Tenant's business is deemed a
"public accommodation" or "commercial facility", (ii) whether such requirements
are "readily achievable", and (iii) whether a given alteration affects a
"primary function area" or triggers "path of travel" requirements. The parties
hereby agree that: (a) Landlord shall perform any required ADA Title III and
related Local Barriers Acts compliance in the common areas, the cost of which
shall be included in Operating Expenses under Article 5 of this Lease (except
that any items constituting capital expenditures shall be amortized as required
therein),
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except as provided below, (b) Tenant shall perform any required ADA Title III
and related Local Barriers Acts compliance in the Premises, at Tenant's expense,
and (c) Landlord may perform, or require that Tenant perform, and Tenant shall
be responsible for the cost of, ADA Title III and related Local Barriers Acts
"path of travel" and other requirements triggered by any public accommodation or
other use of, or alterations in, the Premises. Tenant shall be responsible for
ADA Title I and related Local Barriers Acts requirements relating to Tenant's
employees, and Landlord shall be responsible for ADA Title I and related Local
Barriers Acts requirements relating to Landlord's employees.
ARTICLE 30
MISCELLANEOUS PROVISIONS
30.1 Binding Effect. Each of the provisions of this Lease shall extend to
and shall, as the case may require, bind or inure the benefit not only of
Landlord and of Tenant, but also of their respective successors or assigns,
provided this clause shall not permit any assignment by Tenant contrary to the
provisions of Article 15 of this Lease.
30.2 No Air or Roof Rights. Tenant shall have no rights: (i) to install any
radio or television antennas or any other device or item on the roof, exterior
walls, windows or window sills of the Building, (ii) to any view or to light or
air over any property, whether belonging to Landlord or any other person.
30.3 Modification of Lease. Should any current or prospective mortgagee or
ground lessor for the Building require a modification or modifications of this
Lease, which modification will not cause an increased cost or expense to Tenant
or in any other way adversely change the rights and obligations of Tenant
hereunder, 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 twenty (20) days following the request
therefor.
30.4 Transfer of Landlord's Interest. Tenant acknowledges that Landlord has
the right to transfer all or any portion of its interest in the Real Property
and Building and in this Lease, and Tenant agrees that in the event of any such
transfer, Landlord shall automatically be released from all liability under this
Lease and Tenant agrees to look solely to such transferee for the performance of
Landlord's obligations hereunder. Tenant further acknowledges that Landlord may
assign its interest in this Lease to a mortgage lender as additional security
and agrees that such an assignment shall not release Landlord from its
obligations hereunder and that Tenant shall continue to look to Landlord for the
performance of its obligations hereunder.
30.5 Captions. The captions of Articles and Sections are for convenience
only and shall not be deemed to limit, construe, affect or alter the meaning of
such Articles and Sections.
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30.6 Relationship of Parties. Nothing contained in this Lease shall be
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant.
30.7 Time of Essence. Time is of the essence of this Lease and each of its
provisions.
30.8 Partial Invalidity. If any term, provision or condition contained in
this Lease shall, to any extent, be invalid or unenforceable, the remainder of
this Lease, or the application of such term, provision or condition to persons
or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
30.9 Landlord Exculpation. It is expressly understood and agreed that
notwithstanding anything in this Lease, as may be amended from time to time, to
the contrary, and notwithstanding any applicable law to the contrary, the
liability of Landlord and the Landlord Parties hereunder or thereunder
(including any successor landlord) and any recourse by Tenant against Landlord
or the Landlord Parties shall be limited solely and exclusively to the interest
of Landlord in the Real Property, and neither Landlord, nor any of the Landlord
Parties shall have any personal liability therefor, and Tenant hereby expressly
waives and releases such personal liability on behalf of itself and all persons
claiming by, through or under Tenant. Landlord and Tenant agree that in no event
shall Landlord be liable to Tenant for any consequential or incidental damages.
30.10 Entire Agreement. This Lease, including the Exhibits listed in
Article 1 (WHICH COLLECTIVELY ARE HEREBY INCORPORATED WHERE REFERRED TO HEREIN
AND MADE A PART HEREOF AS THOUGH FULLY SET FORTH), contains all the terms and
provisions between Landlord and Tenant relating to the matters set forth herein.
It is understood and acknowledged that there are no oral agreements between the
parties hereto affecting this Lease and this Lease constitutes the parties'
entire agreement with respect to the leasing of the Premises and supersedes and
cancels any and all previous negotiations, arrangements, brochures, agreements
and understandings, if any, between the parties hereto or displayed by Landlord
to Tenant with respect to the subject matter thereof, and none thereof shall be
used to interpret or construe this Lease. TENANT HAS RELIED ON TENANT'S
INSPECTIONS AND DUE DILIGENCE IN ENTERING THIS LEASE, AND NOT ON ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE HABITABILITY,
CONDITION OR SUITABILITY OF THE PREMISES OR PROPERTY FOR ANY PARTICULAR PURPOSE
OR ANY OTHER MATTER NOT EXPRESSLY CONTAINED HEREIN. None of the terms,
covenants, conditions or provisions of this Lease can be modified, deleted or
added to except in writing signed by the parties hereto.
30.11 Right to Lease. Landlord reserves the absolute right to effect such
other tenancies in the Building as Landlord in the exercise of its sole business
judgment shall determine to best promote the interests of the Building. Tenant
does not rely on the fact, nor does Landlord represent, that any
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specific tenant or type or number of tenants shall, during the Lease Term,
occupy any space in the Building.
30.12 Force Majeure. Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God, inability to obtain services, labor, or
materials or reasonable substitutes therefor, governmental actions, civil
commotions, fire or other casualty, and other causes beyond the reasonable
control of Landlord (collectively, "Force Majeure"), shall excuse the
performance of Landlord for a period equal to any such prevention, delay or
stoppage and, therefore, if this Lease specifies a time period for performance
of an obligation by Landlord, that time period shall be extended by the period
of any delay in Landlord's performance caused by a Force Majeure.
30.13 Notices. All notices, demands, approvals or communications
(collectively, "Notices") given or required to be given by either party to the
other hereunder shall be in writing, shall be sent by United States certified or
registered mail, postage prepaid, return receipt requested, or delivered by a
nationally-recognized overnight delivery service (i) to Tenant at the
appropriate address set forth in Section 1.4, or to such other place as Tenant
may from time to time designate in a Notice to Landlord; or (ii) to Landlord at
the addresses set forth in Section 1.2, or to such other firm or to such other
place as Landlord may from time to time designate in a Notice to Tenant. Any
Notice will be deemed given on the date it is mailed as provided in this Section
30.13 or upon the date personal delivery is made or attempted to be made. If
Tenant is notified of the identity and address of Landlord's mortgagee or ground
or underlying lessor, Tenant shall give to such mortgagee or ground or
underlying lessor written notice of any default by Landlord under the terms of
this Lease by registered or certified mail,and such mortgagee or ground or
underlying lessor shall be given a reasonably opportunity to cure such default
prior to Tenant's exercising any remedy available to Tenant.
30.14 Joint and Several Tenants; Partnership Tenant. If there is more than
one Tenant, the obligations imposed upon Tenant under this Lease shall be joint
and several. If Tenant is a partnership, all current and new general partners
shall be jointly and severally liable for all obligations of Tenant hereunder
and as this Lease may hereafter be modified, whether such obligations accrue
before or after admission of future partners or after any partners die or leave
the partnership. Tenant shall cause each new partner to sign and deliver to
Landlord written confirmation of such liability, in form and content
satisfactory to Landlord, but failure to do so shall not avoid such liability.
30.15 Authority. If Tenant is any form of corporation, partnership, limited
liability company or partnership, association or other organization, Tenant and
all Persons signing for Tenant below hereby represent that this Lease has been
fully authorized and no further approvals are required, and Tenant is duly
organized, in good standing and legally qualified to do business in the Premises
(and has any required certificates, licenses, permits and other such items).
30.16 Governing Law. This Lease shall be construed and enforced in
accordance with the laws of the state in which the Premises is located.
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30.17 Independent Covenants. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent and not dependent
and Tenant hereby expressly waives the benefit of any statute to the contrary
and agrees that if Landlord fails to perform its obligations set forth herein,
Tenant shall not be entitled to make any repairs or perform any acts hereunder
at Landlord's expense or to any setoff of the Rent or other amounts owing
hereunder against Landlord.
30.18 Building Name and Signage. Landlord shall have the right at any time
to change the name of the Building and to install, affix and maintain any and
all signs on the exterior and on the interior of the Building as Landlord may,
in Landlord's sole discretion, desire. Tenant shall not use the name of the
Building or use pictures or illustrations of the Building in advertising or
other publicity, without prior written consent of Landlord.
30.19 Rentable Area. Tenant acknowledges that the term "rentable area"
includes the so-called usable area, without deduction for columns or
projections, multiplied by one or more load or conversion factors, to reflect a
share of certain areas, which may include ground floor and elevator lobbies,
corridors, mechanical, utility, janitorial, boiler and service rooms and
closets, restrooms, and other common, public and service areas.
30.20 Successors. Except as otherwise expressly provided herein, the
obligations of this Lease shall bind and benefit the successors and assigns of
the parties hereto; provided, however, that no assignment, sublease or other
transfer in violation of the provisions of Article 15 shall operate to vest any
rights in any putative assignee, subtenant or transferee of Tenant.
30.21 Landlord Renovations. Tenant's taking possession of the Premises
shall be conclusive evidence as against Tenant that the Premises, the Building
and the Real Property were in good order and satisfactory condition when Tenant
took possession and that Landlord has fully complied with all of its obligations
with respect to any work to be performed in the Premises, the Building or the
Real Property. However, Tenant acknowledges that Landlord may during the Lease
Term renovate, improve, alter, or modify (collectively, "Renovations") the
Building, Premises, and/or Real Property, including without limitation the
parking structure, common areas, systems and equipment, roof, and structural
portions of the same. Tenant hereby agrees that such Renovations and Landlord's
actions in connection with such Renovations shall in no way constitute a
constructive eviction of Tenant nor entitle Tenant to any abatement of Rent.
Landlord shall have no responsibility or for any reason be liable to Tenant for
any direct or indirect injury to or interference with Tenant's business arising
from the Renovations, nor shall Tenant be entitled to any compensation or
damages from Landlord for loss of the use of the whole or any part of the
Premises or of Tenant's personal property or improvements resulting from the
Renovations or Landlord's actions in connection with such Renovations, or for
any inconvenience or annoyance occasioned by such Renovations or Landlord's
actions in connection with such Renovations, provided, however, in connection
with any such Renovations, Landlord shall make reasonable efforts to minimize
any adverse effect upon Tenant's business.
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30.22 Radon Gas. Radon Gas is a naturally occurring radioactive gas that,
when it has accumulated in a building in sufficient quantities, may present
health risks to persons who are exposed to it over time. Levels of radon that
exceed federal and state guidelines have been found in buildings in Florida.
Additional information regarding radon and radon testing may be obtained from
your county public health unit.
ARTICLE 31
RELOCATION OF TENANT
INTENTIONALLY OMITTED.
ARTICLE 32
SECURITY DEPOSIT
The Security Deposit set forth in Section 1.12 (if any) shall be held by
Landlord for the performance of Tenant's covenants and obligations under this
Lease, it being expressly understood that the Security Deposit shall not be
considered an advance payment of rental or a measure of Landlord's damage in
case of default hereunder by Tenant, and shall be held by Landlord without
payment of any interest thereon. Upon the occurrence of any event of default by
Tenant under this Lease, Landlord may, from time to time, without prejudice to
any other remedy, use the Security Deposit to the extent necessary to make good
any arrears of rent, or to repair any damage or injury, or pay any expense or
liability incurred by Landlord as a result of the event of default or breach of
covenant, and any remaining balance of the Security Deposit shall be returned by
Landlord to Tenant upon the termination of this Lease and the performance of all
of Tenant's obligations contained in this Lease. If any portion of the Security
Deposit is so used or applied, Tenant shall upon ten (10) days written notice
from Landlord, deposit with Landlord by cash or certified check an amount
sufficient to restore the Security Deposit to its original amount. The Security
Deposit may be assigned and transferred by Landlord to the successor in interest
of Landlord and Landlord shall thereby be discharged of any further obligation
relating thereto.
ARTICLE 33
CONDITION OF PREMISES
Tenant has inspected the Premises (and portions of the Building, Real
Property, systems and equipment providing access to or serving the Premises) or
has had an opportunity to do so, and agrees to accept the same "AS IS" without
any agreements, representations, understandings or obligations on the part of
Landlord to perform any alterations, repairs or improvements, or regarding any
other matter, unless expressly provided under this Lease. If Landlord has
expressly agreed to perform any improvements to the Premises under this Lease:
(a) such improvements shall consist of Landlord's building standard materials
and finishes unless otherwise expressly provided, and (b) notwithstanding
anything contained herein to the contrary, all furniture and equipment, if any,
whether or not shown
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on any Exhibit hereto, shall be provided by Tenant at Tenant's sole cost and
expense. If Landlord has expressly agreed to perform any improvements to the
Premises under this Lease, Landlord agrees to use diligent, good faith efforts
to substantially complete any such improvements to an extent that Tenant can
reasonably occupy the Premises by the Lease Commencement Date set forth in
Article 1, subject to Article 3 and the other provisions of this Lease. In such
event, Tenant also agrees to use diligent, good faith efforts to cooperate, and
to cause its space planners, architects, contractors, agents and employees to
cooperate diligently and in good faith, with Landlord and any space planners,
architects, contractors or other parties designated by Landlord, such that any
such improvements to the Premises can be planned, permits can be obtained, and
the work can be substantially completed by the Lease Commencement Date set forth
in Article 1. In the event of any dispute as to whether any such improvements
have been substantially completed, Landlord may refer the matter to Landlord's
independent architect, whose decision shall be final and binding on the parties.
Notwithstanding the foregoing or Article 3 or any other provision of this Lease
to the contrary, if Tenant is currently occupying the Premises, whether pursuant
to a prior lease or otherwise, and Landlord is required to perform any
improvements to the Premises under this Lease, the parties hereby agree that:
(i) Landlord shall use commercially reasonable efforts to minimize any
disruption to Tenant's occupancy of the Premises in connection therewith, (ii)
Landlord shall seek to substantially complete the same by the Commencement Date
set forth in Article 1, or within a reasonable time thereafter, but shall not be
required to incur overtime or pay premiums to perform such work before or after
the Building Hours, and may require that Tenant cooperate in scheduling and
staging the work within the Premises (including cooperation in moving personnel,
furniture and equipment or permitting Landlord to do so), and (iii) there shall
be no postponement of the Lease Commencement Date or abatement of Rent as a
result of any such improvements, or delays in substantially completing the same,
under any circumstances (Tenant hereby acknowledging that it could have arranged
for such improvements through an independent contractor, subject to Landlord's
approval, the other provisions of this Lease and such other documentation as
Landlord may have required).
ARTICLE 34
LIEN
34.1 Landlord's Lien. As security for payment of Rent, damages and all
other payments required to be made by this Lease, Tenant hereby grants to
Landlord a lien upon and security interest in all property of Tenant now or
subsequently located upon the Premises. If Tenant is in default of any provision
of this Lease, Landlord may enter upon the Premises, by picking or changing
locks if necessary, and take possession of all or any part of such property, and
may sell all or any part of such property at a public or private sale, in one or
successive sales, with or without notice, to the highest bidder for cash, and,
on behalf of Tenant, sell and convey all or part of such property to the highest
bidder, delivering to the highest bidder all of Tenant's title and interest in
the property sold. The proceeds of the sale of such property shall be applied by
Landlord toward the reasonable costs and expenses of the sale, including
attorneys' fees, and then toward the payment of all sums then due by
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Tenant to Landlord under the terms of this Lease. Any excess remaining shall be
paid to Tenant or any other person entitled thereto by law.
34.2 Uniform Commercial Code. This Lease is intended as and constitutes a
security agreement within the meaning of the Uniform Commercial Code of the
state in which the Premises are situated. Landlord, in addition to the rights
prescribed in this Lease, shall have all of the rights, titles, liens and
interests in and to Tenant's property, now or hereafter located upon the
Premises, which may be granted a secured party (as that term is defined under
such Uniform Commercial Code) under this Lease. Tenant will on request execute
and deliver to Landlord a financing statement (or continuation statement) for
the purpose of perfecting Landlord's security interest under this Lease or
Landlord may file this Lease, a carbon, photographic or other reproduction of
this Lease, or a memorandum of this Lease as a financing statement.
ARTICLE 35
CONFIDENTIALITY
Tenant shall keep the content and all copies of this Lease, related
documents or amendments now or hereafter entered, and all proposals, materials,
information and matters relating thereto strictly confidential, and shall not
disclose, disseminate or distribute any of the same, or permit the same to
occur, except to the extent reasonably required for proper business purposes by
Tenant's employees, attorneys, insurers, auditors, lenders, purchasers and
Transferees (and Tenant shall obligate any such parties to whom disclosure is
permitted to honor the confidentiality provisions hereof), and except as may be
required by law or court proceedings.
ARTICLE 36
OFFER
The submission and negotiation of this Lease shall not be deemed an offer
to enter the same by Landlord (nor an option or reservation for the Premises),
but the solicitation of such an offer by Tenant. Tenant agrees that its
execution of this Lease constitutes a firm offer to enter the same which may not
be withdrawn for a period of thirty (30) days after delivery to Landlord. During
such period and in reliance on the foregoing, Landlord may, at Landlord's
option, deposit any Security Deposit and Rent, proceed with any plans,
specifications, alterations or improvements, and permit Tenant to enter the
Premises, but such acts shall not be deemed an acceptance of Tenant's offer to
enter this Lease, and such acceptance shall be evidenced only by Landlord
signing and delivering this Lease to Tenant.
38
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized
representatives to execute this Lease as of the day and date first above
written.
LANDLORD:
CMD REALTY INVESTMENT FUND II, L.P.,
an Illinois limited partnership
By: CMD/Fund II GP Investments, L.P.,
an Illinois limited partnership,
its general partner
By: CMD REIM II, Inc.,
an Illinois corporation,
its general partner
___________________________
Witness By: ___________________________________
___________________________ Name: Allen Aldridge
Witness Its: Vice President
TENANT:
CPS SYSTEMS, INC.,
a Texas Corporation
___________________________
Witness By: _____________________________
___________________________ Name: _____________________________
Witness Its: _____________________________
39
<PAGE>
EXHIBIT A
---------
OUTLINE OF PREMISES
-------------------
3rd Floor
Suite 350
One President's Plaza
4902 Eisenhower Boulevard
40
<PAGE>
EXHIBIT A-1
-----------
REAL PROPERTY
-------------
41
<PAGE>
EXHIBIT B
---------
RULES AND REGULATIONS
---------------------
Tenant shall faithfully observe and comply with the following Rules and
Regulations. Landlord shall not be responsible to Tenant for the nonperformance
of any of said Rules and Regulations by or otherwise with respect to the acts or
omissions of any other tenants or occupants of the Real Property.
1. Tenant shall not alter any lock or install any new or additional
locks or bolts on any doors or windows of the Premises without obtaining
Landlord's prior written consent. Tenant shall bear the cost of any lock
changes or repairs required by Tenant except Landlord will, pursuant to
Exhibit D, re-key existing suite door entry lockset. Landlord will provide
Tenant a total of forty (40) keys without charge. Any additional keys will
be paid for by Tenant.. Two keys will be furnished by Landlord for the
Premises, and any additional keys required by Tenant must be obtained from
Landlord at a reasonable cost to be established by Landlord or, at Tenant's
option, obtained by Tenant at Tenant's expense. Landlord will provide to
Tenant, 40 after-hours access cards at no charge. Any additional cards will
be paid for by Tenant.
2. All doors opening to public corridors shall be kept closed at all
times except for normal ingress and egress to the Premises. The foregoing
sentence shall not be applicable to floors of the Building that are
entirely contained within the Premises.
3. Landlord reserves the right to close and keep locked all entrance
and exit doors of the Building during such hours as are customary for
comparable buildings. Tenant, its employees and agents must be sure that
the doors to the Building are securely closed and locked when leaving the
Premises if it is after the normal hours of business for the Building. Any
tenant, its employees, agents or any other persons entering or leaving the
Building at any time when it is so locked, or any time when it is
considered to be after normal business hours for the Building, may be
required to sign the Building register. Access to the Building may be
refused unless the person seeking access has proper identification or has a
previously arranged pass for access to the Building. Landlord and his
agents shall in no case be liable for damages for any error with regard to
the admission to or exclusion from the Building of any person. In case of
invasion, mob, riot, public excitement, or other commotion, Landlord
reserves the right to prevent access to the Building or the Real Property
during the continuance thereof by any means it deems appropriate for the
safety and protection of life and property.
42
<PAGE>
4. All moving activity into or out of the Building and all
construction activity shall be scheduled with Landlord and done only at
such time and in such manner as Landlord designates. Landlord shall have
the right to prescribe the weight, size and position of all safes and other
heavy property brought into the Building and also the times and manner of
moving the same in and out of the Building. Safes and other heavy objects
shall, if considered necessary by Landlord, stand on supports of such
thickness as is necessary to properly distribute the weight. Landlord will
not be responsible for loss of or damage to any such safe or property in
any case. Any damage to any part of the Building, its contents, occupants
or visitors by moving or maintaining any such safe or other property shall
be the sole responsibility and expense of Tenant.
5. No furniture, packages, supplies, equipment or merchandise will be
received in the Building or carried up or down in the elevators, except
between such hours and in such specific elevator as shall be designated by
Landlord.
6. The requirements of Tenant will be attended to only upon
application at the management office for the Real Property or at such
office location designated by Landlord. Employees of Landlord shall not
perform any work or do anything outside their regular duties unless under
special instructions from Landlord.
7. Tenant shall not disturb, solicit, or canvass any occupant of the
Real Property and shall cooperate with Landlord and its agents of Landlord
to prevent the same.
8. The toilet rooms, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed,
and no foreign substance of any kind whatsoever shall be thrown therein.
The expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees
or agents, shall have caused it.
9. Tenant shall not overload the floor of the Premises, nor mark,
drive nails or screws, or drill into the partitions, woodwork or plaster or
in any way deface the Premises or any part thereof with out Landlord's
prior written consent. Hanging of artwork, shelving, bulletin boards and
plaques are permitted.
10. Except for one vending machine intended for the sole use of
Tenant's employees and invitees, no vending machine or machines other than
fractional horsepower office machines shall be installed, maintained or
operated upon the Premises without the written consent of Landlord.
11. Tenant shall not use or keep in or on the Premises, the Building,
or the Real Property any kerosene, gasoline or other inflammable or
combustible fluid or material. Tenant shall not bring, or permit any of its
employees or agents to bring, any hazardous or toxic materials, firearms,
ammunition or other weapons, or any other materials or substances that
might pose a health or safety risk, upon the Premises, the Building or the
Real Property. Tenant shall be allowed to store normal
43
<PAGE>
quantities of office supplies including copier toner and cleaning supplies
on the Premises.
12. Tenant shall not without the prior written consent of Landlord use
any method of heating or air conditioning other than that supplied by
Landlord.
13. Tenant shall not use, keep or permit to be used or kept, any foul
or noxious gas or substance in or on the Premises, or permit or allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Real Property by reason of noise, odors,
or vibrations, or interfere in any way with other tenants or those having
business therein. Landlord shall have the right to prohibit the smoking of
any tobacco products in the Building, including the Premises, and may,
without any obligation to do so, designate exclusive areas for the smoking
of tobacco products.
14. Tenant shall not bring into or keep within the Real Property, the
Building or the Premises any animals, birds, bicycles or other vehicles,
other than seeing-eye dogs assisting the visually-impaired.
15. No cooking shall be done or permitted on the Premises, nor shall
the Premises be used for the storage of merchandise, for lodging or for any
improper, objectionable or immoral purposes. Notwithstanding the foregoing,
Underwriters' Laboratory-approved equipment and microwave ovens may be used
in the Premises for heating food and brewing coffee, tea, hot chocolate and
similar beverages for employees and visitors, provided that such use in
accordance with all applicable federal, state and city laws, codes,
ordinances, rules and regulations.
16. Landlord will approve where and how telephone and
telecommunication wiring and cabling are to be introduced to the Premises.
No boring or cutting for wires shall be allowed without the consent of
Landlord. The location of telephone, call boxes and other office equipment
affixed to the Premises shall be subject to the approval of Landlord.
17. Landlord reserves the right to exclude or expel from the Real
Property any person who, in the judgment of Landlord, is intoxicated or
under the influence of liquor or drugs, or who shall in any manner do any
act in violation of any of these Rules and Regulations.
18. Tenant, its employees and agents shall not loiter in or on the
entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or
any common areas of the Building for the purpose of smoking tobacco
products (excepting the designated smoking area for the Building) or for
any other purpose, nor in any way obstruct such areas, and shall use them
only as a means of ingress and egress for the Premises.
19. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to ensure the most effective
operation of the Building's heating and air conditioning system, and shall
refrain from attempting to adjust any controls.
44
<PAGE>
20. Tenant shall store all its trash and garbage within the interior
of the Premises. No material shall be placed in the trash boxes or
receptacles if such material is of such nature that it may not be disposed
of in the ordinary and customary manner of removing and disposing of trash
in the vicinity of the Building without violation of any law or ordinance
governing such disposal. All trash, garbage and refuse disposal shall be
made only through entry-ways and elevators provided for such purposes at
such times as Landlord shall designate. If the Premises is or becomes
infested with vermin as a result of the use or any misuse or neglect of the
Premises by Tenant, its agents, servants, employees, contractors, visitors
or licensees, Tenant shall forthwith, at Tenant's expense, cause the
Premises to be exterminated from time to time to the satisfaction of
Landlord and shall employ such licensed exterminators as shall be approved
in writing in advance by Landlord.
21. Tenant shall comply with all safety, fire protection and
evacuation procedures and regulations established by Landlord or any
governmental agency.
22. Tenant shall assume any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors
locked and other means of entry to the Premises closed.
23. No awnings or other projection shall be attached to the outside
walls of the Building without the prior written consent of Landlord. No
curtains, blinds, shades or screens shall be attached to or hung in, or
used in connection with, any window or door of the Premises without the
prior written consent of Landlord. All electrical ceiling fixtures hung in
offices or spaces along the perimeter of the Building must be fluorescent
and/or of a quality, type, design and bulb color approved by Landlord.
Tenant shall abide by landlord's regulations concerning the opening and
closing of window coverings which are attached to the windows in the
Premises, if any, which have a view of any interior portion of the Building
or the common areas of the Building.
24. The sashes, sash doors, skylights, windows, and doors that reflect
or admit light and air into the halls, passageways or other public places
in the Building shall not be covered or obstructed by Tenant, nor shall any
bottles, parcels or other articles be placed on the window sills.
25. Tenant must comply with requests by Landlord concerning the
informing of their employees of items of importance to Landlord.
26. Tenant shall not use in any space or in the public halls of the
Building any hand trucks except those equipped with rubber tires and side
guards or such other material-handling equipment as Landlord may approve.
Tenant shall not bring any other vehicles of any kind into the Building.
27. Without the written consent of Landlord, Tenant shall not use the
name or a likeness of the Building in connection with or in promoting or
advertising the business of Tenant except as Tenant's address.
45
<PAGE>
28. If the Real Property now or hereafter contains, or Landlord has
obtained the right to use for the Real Property, a parking garage,
structure, facility or area, the following Rules shall apply therein:
(i) Parking shall be available in areas designated by Landlord
from time to time. Parking for Tenant and its employees and visitors
shall be on a "first come, first served," unassigned basis, in common
with Landlord and other tenants at the Real Property, and their
employees and visitors, and other Persons to whom Landlord shall grant
the right or who shall otherwise have the right to use the same.
However, in no event shall Tenant and Tenant's employees and visitors
use more spaces than the number derived by applying Tenant's Share (as
defined in the Lease) to the total number of unassigned spaces in the
area or areas designated by Landlord from time to time to serve the
Premises. In addition, Landlord reserves the right to: (x) adopt
additional requirements or procedures pertaining to parking, including
systems with charges favoring carpooling, and validation systems, (y)
assign specific spaces, and reserve spaces for small and other size
cars, disabled persons, and other tenants, customers of tenants or
other parties, and (z) restrict or prohibit full size vans and other
large vehicles.
(ii) In case of any violation of these rules, Landlord may also
refuse to permit the violator to park, and may remove the vehicle
owned or driven by the violator from the Real Property without
liability whatsoever, at such violator's risk and expense. Landlord
reserves the right to close all or a portion of the parking areas or
facilities in order to make repairs or perform maintenance services,
or to alter, modify, re-stripe or renovate the same, or if required by
casualty, strike, condemnation, act of God, law or governmental
requirement or guideline, termination or modification of any lease or
other agreement by which Landlord obtained parking rights, or any
other reason beyond Landlord's reasonable control. In the event access
is denied for any reason, any monthly parking charges shall be abated
to the extent access is denied, as Tenant's sole recourse.
(iii) Hours shall be reasonably established by Landlord or its
parking operator from time to time; cars must be parked entirely
within the stall lines, and only small or other qualifying cars may be
parked in areas reserved for such cars; all directional signs, arrows
and speed limits must be observed; spaces reserved for disabled
persons must be used only by vehicles properly designated; washing,
waxing, cleaning or servicing of any vehicle is prohibited; every
parker is required to park and lock his own car, except to the extent
that Landlord adopts a valet parking system; parking is prohibited in
areas: (a) not striped or designated for parking, (b) aisles, (c)
where "no parking" signs are posted, (d) on ramps, and (e) loading
areas and other specially designated areas. Delivery trucks and
vehicles shall use only those areas designated therefor.
(iv) Parking stickers, key cards or any other devices or forms of
identification or entry shall remain the property of Landlord. Such
devices must be displayed as requested and may not be mutilated in any
manner. The serial number of the parking identification device may not
be
46
<PAGE>
obliterated. Devices are not transferable and any device in the
possession of an unauthorized holder will be void. Loss or theft of
parking identification, key cards or other such devices must be
reported to Landlord or any garage manager immediately. Any parking
devices reported lost or stolen which are found on any unauthorized
car will be confiscated and the illegal holder will be subject to
prosecution. Lost or stolen devices found by Tenant or its employees
must be reported to Landlord or the office of the garage immediately.
Notwithstanding anything expressly to the contrary contained in clause (i)
of Paragraph 28 of these Rules, Landlord agrees to provide to Tenant the right,
throughout the Lease Term, to free non-exclusive use of not fewer than 41
parking spaces in the parking facilities on the Real Property, in areas
designated by Landlord from time to time.
Landlord reserves the right at any time to change or rescind any one or
more of these Rules and Regulations, or to make such other and further
reasonable Rules and Regulations as in Landlord's judgment may from time to time
be necessary for the management, safety, care and cleanliness of the Premises,
Building, and the Real Property, and for the preservation of good order therein,
as well as for the convenience of other occupants and tenants therein. Landlord
may waive any one or more of these Rules and Regulations for the benefit of any
particular tenants, but no such waiver by Landlord shall be construed as a
waiver of such Rules and Regulations in favor of any other tenant, nor prevent
Landlord from thereafter enforcing any such Rules or Regulations against any or
all tenants of the Real Property. Tenant shall be deemed to have read these
Rules and Regulations and to have agreed to abide by them as a condition of its
occupancy of the Premises.
47
<PAGE>
EXHIBIT C
ESTOPPEL CERTIFICATE
To: ________________________
________________________
________________________
________________________
Attn:____________________
___________________________________ ("Tenant") hereby certifies as follows:
1. The undersigned is the Tenant under that certain Office Lease dated
_____________, 19___ (the "Lease"), executed by ________________________________
("Landlord") as Landlord and the undersigned as Tenant, covering a portion of
the property located at _____________________ (the "Property").
2. Pursuant to the Lease, Tenant has leased space commonly known as Suite
___ (the "Premises") at the Property and has paid to Landlord a security deposit
of $_______. The term of the Lease commenced on _______________, 19____ and the
expiration date of the Lease is ________________________, _____. Tenant has paid
rent through _____________, 19___. The next rental payment in the amount of
$____________ is due on _____________, 19____. Tenant is required to pay ____
percent (____%) of all annual operating expenses for the Property in excess of
_____________.
3. The Lease provides for ____ option(s) to extend the Lease Term for
_______ years (each). The rental rate for such extension term(s) is as follows:
________________________________________________________________________________
Except as expressly provided in the Lease, and other documents attached hereto,
Tenant does not have any right or option to renew or extend the term of the
Lease, to lease other space at the Property, nor any preferential right to
purchase all or any part of the Premises or the Property.
4. Tenant has no right of refusal, option to expand, option to terminate,
option to purchase, or exclusive business rights, except as follows: .
5. True, correct and complete copies of the Lease and all amendments,
modifications and supplements thereto are attached hereto and the Lease, as so
amended, modified and supplemented, is in full force and effect, and represents
the entire agreement between Tenant and Landlord with
48
<PAGE>
respect to the Premises and the Property. There are no amendments, modifications
or supplements to the Lease, whether oral or written, except as follows (include
the date of such amendment, modification or supplement): _______________________
________________________________________________________________________________
________________________________________________________________________________
6. All space and improvements leased by Tenant have been completed and
furnished in accordance with the provisions of the Lease, and Tenant has
accepted and taken possession of the Premises.
7. Landlord is not in any respect in default in the performance of the
terms and provisions of the Lease. Tenant is not in any respect in default under
the Lease and has not assigned, transferred or hypothecated the Lease or any
interest therein or subleased all or any portion of the Premises.
8. There are not offsets or credits against rentals payable under the Lease
and no free periods or rental concessions have been granted to Tenant, except as
follows:
________________________________________________________________________________
9. Tenant has no actual or constructive knowledge of any processing, use,
storage, disposal, release or treatment of any explosive, corrosive, hazardous
or toxic materials or substances, or materials capable of emitting toxic fumes,
on the Premises or the Real Property except as follows (if none, state "none"):
________________________________________________________________________________
This Certificate is given to _____________________________________ with
the understanding that ______________ will rely hereon in connection with the
financing [conveyance] of the Real Property of which the Premises constitutes a
part. Following any such financing [conveyance], Tenant agrees that the Lease
shall remain in full force and effect [and shall bind and inure to the benefit
of the ___________ and its successor in interest as if no purchase had
occurred].
DATED:__________________, 19___ "TENANT"
_____________________________
_____________________________
(ATTACH LEASE AND AMENDMENTS TO THIS CERTIFICATE)
49
<PAGE>
EXHIBIT D
---------
PREMISES IMPROVEMENTS
---------------------
Landlord will build the Premises pursuant to architectural plans prepared by
Anthony J. Polito, Jr., Architect dated May 3, 1998 and approved by Lisa Hargis
of CPS Systems, Inc. on May 5, 1998, Tenant hereby accepts the Premises "as-is"
other than the items specified below which will be completed in compliance with
local building code requirements.
1. Landlord will remove 991 sq. yds of existing floor covering/carpeting.
2. Landlord will remove approximately 540 s.f. of existing wallcovering
within the interior office area.
3. Landlord will remove 13 l.f. of existing drywall within the Premises.
4. Landlord will remove framing and drywall for a new door opening adjacent
the existing breakroom.
5. Landlord will remove 1,612 l.f. of existing vinyl cove base.
6. Landlord will construct 78 l.f. of building standard interior drywall
walls in order to create four (4) offices.
7. Landlord will patch and prepare existing drywall for paint.
8. Landlord will supply and install five (5) building standard doors and
frames.
9. Landlord will install five (5) sets of building standard matching
hardware for new doors within the Premises.
10. Landlord will install and provide four (4) building standard glass
sidelights adjacent to the four (4) newly constructed offices. Sidelights will
have building standard mini blinds.
11. Landlord will provide four (4) building standard switches within the
newly constructed offices (4 new offices).
12. Landlord will provide twelve (12) building standard receptacles within
the newly constructed offices pursuant to the plan.
50
<PAGE>
13. Landlord will re-locate five (5) existing 2' x 4' lay-in fixtures.
14. Landlord will provide five (5) new lay-in building standard fixtures.
15. Landlord will provide four (4) data poles within the 4 newly
constructed offices.
16. Tenant will be responsible for running the necessary
cabling/telecommunications within newly constructed offices.
17. Landlord will provide five (5) building standard power poles and
powered to customer supplied work stations.
18. Landlord will re-locate two (2) existing emergency and exit lights
within the Premises.
19. Landlord will test and balance HVAC system.
20. Landlord will re-locate four (4) existing HVAC supply grills within the
Premises.
21. Re-locate five (5) existing return air grills within the Premises.
22. Landlord will re-locate three (3) fire sprinkler heads within the
Premises.
23. Landlord will supply and install four (4) new building standard fire
extinguishers within the Premises.
24. Landlord will paint 15,082 s.f. of wall area, building standard paint,
one color flat latex throughout, two (2) coats of paint.
25. Landlord will paint thirty (30) existing door frames, building
standard, one color.
26. Landlord will stain and seal five (5) new building standard doors
within the Premises.
27. Landlord will supply and install 991 sq. yds. of 30 oz. cut pile,
building standard carpeting throughout the Premises, one color throughout.
28. Landlord will install 206 l.f. of carpet border within the Premises,
building standard carpet.
29. Landlord will supply and install 1,900 l.f. of building standard vinyl
base on new and existing walls within the Premises.
51
<PAGE>
30. Landlord will sand and stain all new and existing interior doors within
the Premises.
31. Landlord will install building standard floor receptacle in conference
room within the Premises.
32. Landlord will re-key front entry suite door to building master system
on or before Lease Commencement Date. Landlord will provide Tenant initially
with 40 suite door keys and after hours access cards at no charge. Any
additional keys/access cards will be an additional cost/charge.
52
<PAGE>
EXHIBIT E
---------
OPTION TO EXTEND
----------------
1. Provided that this Lease is in full force and effect and Tenant is not
in default under any terms and conditions of this Lease as of the date of the
Extension Option Notice (as hereinafter defined) and as of the Extension Term
Commencement Date (as hereinafter defined) and subject to the terms of this
Exhibit, Tenant shall have the right ("Extension Option") to extend the Lease
Term for the period ("Extension Term") commencing on and including the Extension
Term Commencement Date and ending at 11:59 P.M. (local time at the Premises) on
the Extension Term Expiration Date (as hereinafter defined). Tenant shall
exercise the Extension Option, if at all, by delivering written notice of such
exercise ("Extension Option Notice") on or before the 365th day immediately
preceding the Lease Expiration Date. If Tenant fails to deliver the Extension
Option Notice to Landlord on or before such date, Tenant shall be deemed to have
forever waived any and all rights to extend the Lease Term pursuant to this
Exhibit.
(a) The phrase "Extension Term Commencement Date" means the May 15,
2003.
(b) The phrase "Extension Term Expiration Date" means May 14, 2008.
2. Commencing on the Extension Term Commencement Date, Tenant shall pay to
Landlord Base Rent equal to the Extension Market Rent (as hereinafter defined),
but in no event less than the Base Rent then in effect on the day immediately
preceding the Extension Term Commencement Date. Within 30 days after Landlord's
receipt of the Extension Option Notice, Landlord shall deliver to Tenant a
written notice which sets forth the rent for which Landlord is willing to lease
the Premises during the Extension Term ("Extension Market Rent"). If Tenant
approves the Extension Market Rent, Tenant shall deliver to Landlord a written
notice which approves the Extension Market Rent within 15 days after its receipt
of the Extension Market Rent. If Tenant objects to the Extension Market Rent,
then Tenant shall, within the aforesaid 15 day period, deliver to Landlord a
written notice which objects to the Extension Market Rent ("Objection Notice").
If Tenant delivers the Objection Notice pursuant to the terms hereof or fails to
deliver a written notice to Landlord which approves or objects to the Extension
Market Rent within said 15 day period, then Tenant shall be deemed to have
waived any and all rights to extend the Lease Term pursuant to this Exhibit.
3. The rights of Tenant under this Exhibit are for the sole benefit of CPS
Systems, Inc. and shall automatically terminate upon any assignment of this
Lease, sublease of the Premises, or other transfer of this Lease and/or the
rights of Tenant.
4. Except to the extent set forth otherwise herein, all of the terms of
this Lease shall apply during the Extension Term.
53
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 296
<SECURITIES> 0
<RECEIVABLES> 2,959
<ALLOWANCES> 107
<INVENTORY> 201
<CURRENT-ASSETS> 5,087
<PP&E> 2,378
<DEPRECIATION> 1,588
<TOTAL-ASSETS> 11,775
<CURRENT-LIABILITIES> 6,565
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 4,105
<TOTAL-LIABILITY-AND-EQUITY> 11,775
<SALES> 0
<TOTAL-REVENUES> 9,089
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<TOTAL-COSTS> 11,842
<OTHER-EXPENSES> 84
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242
<INCOME-PRETAX> (3,080)
<INCOME-TAX> (1,103)
<INCOME-CONTINUING> (1,977)
<DISCONTINUED> 0
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<NET-INCOME> (1,977)
<EPS-PRIMARY> (.32)
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