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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number
1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
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Massachusetts 04-1456030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Berkeley St., Boston 02116-3764
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (617) 351-5000
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
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Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant was approximately $816,390,025 as of February
28, 1997.
The registrant had outstanding 14,843,455 shares of common stock (exclusive
of Treasury shares) and 14,843,455 Preferred Stock Purchase Rights as of
February 28, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 1997 Annual Meeting of Stockholders are incorporated into Part
III.
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HOUGHTON MIFFLIN COMPANY
TABLE OF CONTENTS
FORM 10-K
Part I
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Page
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Item 1. Business .................................................................. 1
Item 2. Properties ............................................................... 3
Item 3. Legal Proceedings ......................................................... 3
Item 4. Submission of Matters to a Vote of Securities Holders ..................... 4
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters ... 5
Item 6. Selected Financial Data ................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................... 7
Item 8. Consolidated Financial Statements and Supplementary Data .................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................... 34
Part III
Item 10. Directors and Executive Officers of the Company ........................... 34
Item 11. Executive Compensation ................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 34
Item 13. Certain Relationships and Related Transactions ........................... 34
Part IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K ...... 34
Index to Consolidated Financial Statements and Financial Schedules ...... 34
Financial Statement Schedule ............................................. 34
Signatures ............................................................... 36
Index to Exhibits ......................................................... 37
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This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled " 'Safe Harbor'
Statement under Private Securities Litigation Reform Act of 1995" on page 11 of
this Form 10-K.
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PART I
Item 1. Business
(a) Description of Business
Houghton Mifflin Company (the "Company") was incorporated in 1908 in
Massachusetts as the successor to a partnership formed in 1880. Antecedents of
the partnership date back to 1832. The Company has three significant
subsidiaries: McDougal Littell Inc., Evanston, Illinois, publishes educational
materials for the secondary school market; The Riverside Publishing Company,
Chicago, Illinois, publishes assessment materials for the educational and
clinical testing markets; and Great Source Education Group, Inc., Wilmington,
Massachusetts, publishes supplementary instructional material for the elementary
and secondary school markets. The Company's principal business is publishing,
and its operations are classified into two industry segments: (1) textbooks and
other educational materials and services for the school and college markets; and
(2) general publishing, including fiction, nonfiction, children's books, and
dictionary and reference materials in a variety of formats and media. In this
description of the Company's business, all subsidiaries are treated as part of
the Company.
In October 1995, the D.C. Heath and Company ("Heath") division of Raytheon
Company was acquired in a purchase transaction for net cash consideration of
$460.6 million. Heath is a publisher of textbooks and supplemental materials for
the elementary and secondary school and college markets. Heath's operating
results from the date of acquisition have been included in the educational
publishing segment of the Company's consolidated financial statements.
In March 1994, the Company's former Software Division successfully
completed an initial public offering. The Company retained an equity interest in
the successor company, INSO Corporation ("INSO"), of approximately 40%. In
August 1995, INSO completed a new public offering of 1.2 million shares of
common stock which reduced the Company's ownership interest to approximately
36%. INSO declared a stock split in the form of a 100% stock dividend to be paid
in September 1995. All INSO share references have been restated to reflect the
effects of the stock split. In 1996, the Company sold 770,000 shares of INSO
common stock, reducing the Company's ownership interest to approximately 30%.
(b) Financial Information About the Industry Segments
Financial information about the Company's industry segments is set forth in
Note 14 to the Consolidated Financial Statements (Part II, Item 8) under the
heading "Segment Information" on page 31 herein, and in the schedule "Five-Year
Financial Summary" on page 6 herein.
(c) Narrative Description of Business
For the Company, the business of publishing is the shaping of ideas,
information, and instructional methods into various media that satisfy the
lifelong need for people to learn, gain proficiency, and be entertained. The
Company seeks out, selects, and generates worthwhile concepts and then enhances
their value and accessibility through creative development, design, production
(performed by outside suppliers), marketing, sales, and distribution. While the
Company's works have been published principally in the form of printed
materials, many programs or works are published in other formats including
computer software, laser discs, CD-ROM, and other electronic and multimedia
products.
Textbooks and Other Educational Materials and Services
This industry segment includes textbooks and instructional materials,
materials for measuring achievement and aptitude, clinical/special needs
assessment testing products, computer-assisted as well as computer-
managed instructional programs on all educational levels, computer tools and
operating systems for the college market, and a computer-based career and
college guidance information system in versions for both junior and senior high
school students. The principal markets in this segment are elementary and
secondary schools and two- and four-year colleges. Major regional sales offices
are located in Illinois, Texas, Georgia, Massachusetts, New Jersey, and
California. The Company is required by certain states to use state textbook
depositories for the distribution of educational materials. Textbooks and
materials for the elementary school market are sold by the School Division;
sales for the secondary school market are made by McDougal Littell Inc.
("McDougal"); sales of supplemental instructional material for the elementary
and secondary school markets are made by Great Source Education Group, Inc.
("Great Source"); the educational and clinical testing materials markets are
serviced by The Riverside Publishing Company ("Riverside"); and the two- and
four-year higher education markets are serviced by the College Division. All
operating divisions have their own dedicated sales forces. The distribution
operations for the shipment of product components for the School Division,
McDougal, Great Source, and College Division are from its two distribution
facilities located in Indianapolis, Indiana and Geneva, Illinois.
1
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General Publishing
This industry segment includes trade books of fiction and nonfiction for
adults and children, dictionaries, and other reference works. The principal
markets for trade books and reference works in this segment are retail stores.
The sales volume for trade books and reference works may vary significantly from
year to year based on the success of one or more titles. In 1995 and 1994, book
reprint rights were sold to paperback publishers, book clubs, and publishers in
the U.S. and internationally. Reference and dictionary materials are also sold
to schools, colleges, office supply distributors, and businesses. In 1995, the
Trade & Reference Division ("Trade Division") announced the launch of a new
imprint, "Houghton Mifflin Interactive," whose principal initiative is the
development of CD-ROM titles for sale in the multimedia consumer product
markets. These products are created from new and existing Houghton Mifflin
titles, and include children's, reference and adult hobby titles. The Trade
Division's publications are sold by its own sales force, as well as the
Company's other divisional sales forces, commission agents, and wholesalers.
Major corporate sales and support offices are maintained in Massachusetts and
New York.
Company Business as a Whole
The availability of printing and binding capacity and raw materials
continued at satisfactory levels throughout the year. The Company is not
dependent upon any one supplier. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" set forth on page 7 herein.
The Company's principal businesses are seasonal and consist of sales
predominately to schools and colleges, with approximately 70% of sales normally
occurring in the second and third quarters as purchases are made for the school
year which begins in September. Third-quarter results are material to the
full-year performance of the Company, which realizes more than 40% of its net
sales and a substantial portion of its net income during the third quarter. The
acquisition of Heath has not materially changed the seasonal nature of the
Company's net sales or operating profits. See "Summary of Quarterly Results of
Operations (unaudited)" for the two-year period ended December 31, 1996, set
forth on page 33 herein.
Sales of educational materials are cyclical as a result of purchasing
patterns that are based on both the academic year and the textbook adoption
process. Approximately one-half of the United States school population adopts
new elementary and secondary school textbooks on a statewide basis for a
particular subject every five to seven years. Although 1996 was not a strong
adoption year, it is expected that 1997 will offer greater sales opportunities
due to an increase in the number of states expected to adopt elementary and
secondary school products. The loss of a single customer or a few customers
would not have a materially adverse effect on the business of the Company, but
as discussed above, the timing of adoption opportunities may affect year-to-year
revenue performance.
The Company's products are sold in highly competitive markets due to the
extensive consolidations that have occurred in the publishing industry in recent
years. The major competitive factors in the industry are believed to be quality
of product and customer service. The elementary and secondary school markets are
concentrated in approximately 10 significant publishers; in the college book
market the Company competes with 8 significant publishers. In the diverse trade
and juvenile book markets, approximately 60% of the total industry sales is
shared by 11 major publishers including Houghton Mifflin.
At December 31, 1996, the Company employed approximately 2,420 people.
The Company anticipates no substantial expenditures for compliance with
environmental laws or regulations.
(d) Financial Information About Foreign and Export Sales
Operations in foreign countries were substantially reduced in 1992 with the
sale of the Gollancz publishing and distribution businesses in the United
Kingdom and school publications of the Company's Canadian subsidiary. Export
sales are not at present significant to either of the Company's two business
segments.
2
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Item 2. Properties
The Company's principal executive office is located at 222 Berkeley Street,
Boston, Massachusetts.
The following table describes the approximate building areas and principal
uses of the significant operating properties of the Company and its subsidiaries
at December 31, 1996. The Company believes that its owned and leased properties
are suitable and adequate for its present and anticipated business needs,
satisfactory for the uses to which each is put, and in general fully utilized.
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APPROXIMATE AREA PRINCIPAL USE SEGMENT USED
LOCATION IN SQUARE FEET OF SPACE BY
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Owned Premises
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Geneva, Illinois 486,000 Offices & Textbooks and other educational
warehouse materials; sales office
Palo Alto, California 17,000 Office Textbooks and other educational
materials; sales office
Indianapolis, Indiana 503,000 Offices & Textbooks and other educational
warehouse materials
Leased Premises
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Boston, Massachusetts 301,000 Executive & (1) Textbooks and other
222 Berkeley Street/ business offices educational materials and services,
500 Boylston Street (2) General publishing, and
(3) Corporate headquarters
Batavia, Illinois 120,000 Offices & Textbooks and other educational
warehouse materials and services
Itasca, Illinois 75,000 Offices Textbooks and other educational
materials and services, sales office
Dallas, Texas 70,000 Offices & Textbooks and other educational
warehouse materials and services; sales office
Evanston, Illinois 62,000 Offices Textbooks and other educational
materials; sales office
Wilmington, Massachusetts 41,000 Offices Educational materials and services;
corporate support; sales office
Atlanta, Georgia 31,000 Offices & Textbooks and other educational
warehouse materials; sales office
New York, New York 30,000 Offices General publishing; sales office
St. Charles, Illinois 14,000 Offices Textbooks and other educational
materials; sales office
Somerville, Massachusetts 12,000 Offices General publishing; sales office
Princeton, New Jersey 5,700 Offices Textbooks and other educational
materials; sales office
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The years of expiration on leased premises are as follows:
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Boston, Massachusetts 2007
Batavia, Illinois 2006
Itasca, Illinois 2006
Dallas, Texas 2005
Evanston, Illinois 2004
Wilmington, Massachusetts 2005
Atlanta, Georgia 1999
New York, New York 2004
St. Charles, Illinois 2006
Somerville, Massachusetts 1999
Princeton, New Jersey 1999
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Item 3. Legal Proceedings
None
3
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1996.
Executive Officers of the Company
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Other
Office positions
Age at held with the
Name 2/28/97 Office since Company
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Nader F. Darehshori 60 Chairman, President, and 1991 Director
Chief Executive Officer
Albert Bursma, Jr. 59 Executive Vice President; President, 1995 --
Great Source Education Group, Inc.
Gail Deegan 50 Executive Vice President, Chief 1996 --
Financial Officer, and Treasurer
Margaret M. Doherty 58 Senior Vice President, Human 1994 --
Resources
Elizabeth L. Hacking 55 Senior Vice President, Strategic 1993 --
Development
Michael J. Lindgren 39 Vice President, Controller 1994 --
Julie A. McGee 54 Executive Vice President; President, 1995 --
McDougal Littell Inc.
Mark Mooney 44 Senior Vice President, Chief 1997 --
Technology Officer
John H. Oswald 47 Executive Vice President; President, 1992 --
The Riverside Publishing Company
Conall E. Ryan 39 Senior Vice President; President, 1997 --
Houghton Mifflin Interactive
Corporation
Gary L. Smith 52 Senior Vice President, 1991 --
Administration
June Smith 53 Executive Vice President, College 1994 --
Division
Wendy Strothman 46 Executive Vice President, Trade & 1996 --
Reference Division
Paul D. Weaver 54 Senior Vice President, Clerk, 1989 --
Secretary and General Counsel
William J. Wisneski 50 Executive Vice President, School 1992 --
Division
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Below is a brief account of the business experience of each executive
officer during the past five years. Each executive officer has been employed by
the Company for more than five years with the exception of Mr. Bursma, Ms.
Deegan, Mr. Lindgren, Ms. McGee, Mr. Mooney, Mr. Oswald, Mr. Ryan, Ms. Smith,
and Ms. Strothman.
Nader F. Darehshori
1991--Chairman, President, and Chief Executive Officer
Albert Bursma, Jr.
1995--Executive Vice President; President, Great Source Education Group, Inc.*
1994--Executive Vice President, D.C. Heath and Company; President, School
Division (D.C. Heath and Company was a publisher not affiliated with the
Company prior to its acquisition on October 31, 1995.)
Gail Deegan
1996--Executive Vice President, Chief Financial Officer, and Treasurer
1995--Senior Vice President, Regulatory and Government Affairs, NYNEX
1994--Vice President and Chief Financial Officer, New England Telephone, a
wholly-owned subsidiary of NYNEX
Margaret M. Doherty
1994--Senior Vice President, Human Resources
Elizabeth L. Hacking
1993--Senior Vice President, Strategic Development
1993--Vice President, Strategic Development
1992--Vice President, Higher Education Planning, Research, and Development,
College Division
Michael J. Lindgren
1995--Vice President, Controller
1994--Vice President and Controller
4
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1994--Divisional Vice President and Controller
1993--Director of Planning & Analysis, ITT Sheraton
1992--Director of Accounting and Management Reporting, ITT Sheraton (ITT
Sheraton is a hotel and real estate subsidiary of ITT Corporation,
primarily an insurance and financial services holding company not
affiliated with the Company)
Julie A. McGee
1995--Executive Vice President; President, McDougal Littell Inc.*
1994--Senior Vice President
1994--President, McDougal Littell/Houghton Mifflin Inc.*
1991--President, McDougal, Littell & Company (McDougal, Littell & Company was a
publisher not affiliated with the Company prior to its acquisition on March
1, 1994.)
Mark Mooney
1997--Senior Vice President, Chief Technology Officer
1996--Vice President, Director of Information Technology, The Bureau of National
Affairs
1992--Director of Information Services, The Bureau of National Affairs
John H. Oswald
1993--Executive Vice President; President, The Riverside Publishing Company*
1992--President, The Riverside Publishing Company*
1992--Vice President
1991--Executive Vice President for Sales, Customer Service, and Operations for
The Psychological Corporation of Harcourt Brace Jovanovich, Inc. (a
publisher not affiliated with the Company)
Conall E. Ryan
1997--Senior Vice President; President, Houghton Mifflin Interactive Corporation
1996--President, Houghton Mifflin Interactive Corporation
1995--Corporate Vice President, Houghton Mifflin Interactive
1994--Director, New Media, Trade and Reference Division, and Chairman, On
Technology Corporation; Vice President, Publishing for Knowledge Adventure
(a publisher not affiliated with the Company)
1990--President, Chief Executive Officer, On Technology, Inc. (renamed On
Technology Corporation in 1993)
Gary L. Smith
1991--Senior Vice President, Administration
June Smith
1994--Executive Vice President, College Division
1992--Vice President, Editorial Director, College Division
1991--Editorial Director and Publisher--College Division of McGraw-Hill, Inc. (a
publisher not affiliated with the Company)
Wendy Strothman
1996--Executive Vice President, Trade & Reference Division
1995--Vice President, Publisher, Adult Trade and Reference
1995--Director, Beacon Press (a publisher not affiliated with the Company)
Paul D. Weaver
1989--Senior Vice President, Clerk, Secretary, and General Counsel
William J. Wisneski
1992--Executive Vice President, School Division
1991--Senior Vice President; President, The Riverside Publishing Company*
* A subsidiary of the Company
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's common stock is traded on the New York Stock Exchange. As of
February 28, 1997, the approximate number of holders of common stock of the
Company was 5,140.
5
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Information about stock prices and dividends paid per share is set forth
under the heading "Stock Prices and Dividends Paid Per Share" presented below:
HOUGHTON MIFFLIN COMPANY
Stock Prices and Dividends Paid Per Share (Unaudited)
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1996 1995
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Dividend Dividend
High Low Paid High Low Paid
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First Quarter ...... $45.38 $40.50 $0.240 $47.13 $39.75 $0.225
Second Quarter ...... 49.75 42.38 0.240 54.75 45.88 0.225
Third Quarter ...... 50.50 46.13 0.240 52.88 44.88 0.240
Fourth Quarter ...... 56.63 45.38 0.240 46.75 39.63 0.240
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Year ............... $0.960 $0.930
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Item 6. Selected Financial Data
The response to this item is set forth below under the heading "Five-Year
Financial Summary."
HOUGHTON MIFFLIN COMPANY
Five-Year Financial Summary
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(In thousands of dollars, except per share amounts)
(Unaudited) Years ended December 31, 1996 1995 1994 1993 1992
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OPERATING RESULTS
Net sales $ 717,863 $ 529,022 $483,076 $462,969 $454,706
Operating income (loss) 87,382 (13,095) 53,464 51,370 44,310
Net interest expense 40,875 13,008 6,509 2,347 2,339
Gain on sale of INSO Corporation
common stock 34,261 -- -- -- --
One-time acquisition charges, INSO
Corporation (11,698) (2,200) -- -- --
Gain on equity transactions of INSO
Corporation and sale of interest in
Software Division -- 13,102 36,212 -- --
Loss on disposition of foreign
publishing operations -- -- -- -- (13,527)
Income (loss) before taxes, extra-
ordinary item and accounting change 73,953 (11,444) 85,140 49,023 28,444
Cumulative effect of accounting
changes -- -- -- -- (14,657)
Net income (loss) 43,622 (7,243) 51,191 30,371 4,414
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PER COMMON SHARE
Net income (loss) per share of common stock $ 3.13 $ (0.52) $ 3.70 $ 2.20 $ 0.31
Dividends declared per share 0.96 0.93 0.87 0.83 0.79
Book value 19.40 16.89 17.74 16.15 14.52
Stock price--High 56.63 54.75 53.00 50.38 39.88
Low 40.50 39.63 36.13 36.38 26.63
Close 56.63 43.00 45.38 48.63 39.88
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FINANCIAL DATA
Total assets $1,006,442 $1,046,449 $497,266 $398,086 $371,421
Long-term debt less current portion 500,999 426,148 99,445 26,438 52,608
Additions to book plates and property,
plant, and equipment 74,943 54,278 33,720 36,524 38,186
Dividends paid 13,371 12,845 12,026 11,475 11,037
Average number of shares available for
earnings per share (in thousands) 13,933 13,812 13,822 13,823 14,029
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Net Sales--Classes of Similar Products
Textbooks and other educational
materials and services
School publishing $ 497,709 $ 359,523 $303,370 $267,106 $272,289
College publishing 138,346 82,277 84,057 90,092 81,212
--------- --------- --------- --------- --------
636,055 441,800 387,427 357,198 353,501
General publishing 81,808 87,222 95,649 105,771 101,205
--------- --------- --------- --------- --------
$ 717,863 $ 529,022 $483,076 $462,969 $454,706
========= ========= ========= ========= ========
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6
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In 1996, the Company recorded a gain of $34.3 million ($19.9 million
after-tax), or $1.43 per share, on the sale of 770,000 shares of INSO common
stock. In 1996, the Company recorded a one-time acquisition charge of $11.7
million ($7.2 million after-tax), or $0.52 per share, of special charges
relating to its the investment in INSO, resulting from INSO's acquisition of
ImageMark Software Labs, Inc. and Electronic Book Technologies, Inc. In 1995,
there was a $2.2 million charge, or $0.16 per share, relating to its investment
in INSO resulting from INSO's acquisition of Systems Compatibility Corporation.
In October 1995, the Company completed the acquisition of Heath from
Raytheon Company in a purchase transaction (See Note 2). As a result, certain
charges of $49.3 million ($30.0 million after-tax), or $2.17 per share,
associated with the integration of the Heath business were recorded in 1995.
A gain of $13.1 million ($7.8 million after-tax), or $0.56 per share, was
recognized in 1995 in connection with an additional public offering of 1.2
million shares made by INSO. In 1994, the Company recognized a gain of $36.2
million ($22.8 million after-tax), or $1.65 per share, in connection with the
initial public offering of INSO, the successor company to the former Software
Division.
In March 1994, the Company acquired the assets of McDougal, Littell &
Company in a purchase transaction (See Note 2).
In 1992, the Company adopted the provision of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 109,
"Accounting for Income Taxes."
In 1992, the Company recognized a loss associated with the sale of certain
foreign operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Years Ended December 31, 1996.
The consolidated net income in 1996 was $43.6 million, or $3.13 per share,
compared to a consolidated net loss in 1995 of $7.2 million, or $0.52 per share.
The Company recorded a gain of approximately $34.3 million ($19.9 million
after-tax), or $1.43 per share, in 1996 on the sale of 770,000 shares of INSO
common stock. Included in 1996's results were one-time acquisition charges of
$11.7 million ($7.2 million after-tax), or $0.52 per share, related to INSO's
acquisition of ImageMark Software Labs, Inc. and Electronic Book Technologies,
Inc. Included in 1995's results were special charges of $49.3 million ($30.0
million after-tax), or $2.17 per share, related to the integration of the Heath
operation, $7.0 million ($4.3 million after-tax), or $0.31 per share, related to
the outsourcing of distribution operations, and charges of $2.2 million, or
$0.16 per share, related to INSO's acquisition of Systems Compatibility
Corporation. The 1995 results also include a gain of $13.1 million ($7.8 million
after-tax), or $0.56 per share, for the sale of additional common shares by
INSO, and a gain of $3.8 million ($2.3 million after-tax), or $0.17 per share,
on the sale of the Burlington, Massachusetts distribution facility. Consolidated
net income in 1994 was $51.2 million, or $3.70 per share. Included in 1994
results were a gain of $36.2 million ($22.8 million after-tax), or $1.65 per
share, recognized in connection with the public offering by the former Software
Division, INSO, a special charge of $6.5 million ($4.0 million after-tax), or
$0.29 per share, for restructuring, and an extraordinary item of $1.2 million,
or $0.09 per share, related to the early extinguishment of long-term debt.
Excluding these non-recurring items, net income for 1996 would have been
$30.9 million, or $2.22 per share, compared to net income of $19.2 million, or
$1.39 per share in 1995, and $33.6 million, or $2.43 per share in 1994.
Net sales in 1996 increased $188.9 million, or 36%, to $717.9 million from
1995 net sales of $529.0 million. The educational publishing segment's net sales
of $636.1 million in 1996 increased by $194.3 million, or 44.0%, from 1995 net
sales of $441.8 million. The most significant factor in the net sales increase
was the addition of Heath publications. The general publishing segment net sales
decreased by $5.4 million, or 6.2%, to $81.8 million from 1995 net sales of
$87.2 million. The decrease in net sales is primarily due to lower frontlist
sales.
Net sales in 1995 increased $45.9 million, or 9.5%, to $529.0 million from
1994 net sales of $483.1 million. The educational publishing segment's net sales
increased by $54.4 million, or 14%, in 1995 from net sales of $387.4 million in
1994. The increase in revenues was primarily due to the increased adoption
opportunities in 1995 and $17.8 million in incremental revenue as a result of
the Heath acquisition. The general publishing segment net sales of $87.2 million
in 1995 decreased $8.4 million, or 8.8%, from 1994 net sales of $95.6 million.
The decrease in net sales for 1995 primarily resulted from the absence of sales
from the former Software Division, lower distribution revenues, lower revenues
from weaker frontlist titles, and additional provisions for book returns.
The Company's operating income for 1996 was $87.4 million, an increase of
$100.5 million from an operating loss of $13.1 million in 1995. Included in
1995's operating results were $56.3 million of special charges. During 1996, the
Company experienced a significant improvement in operating results due to the
increase in net sales and operating efficiencies achieved through the
integration of Heath. Cost of sales declined to 46%
7
<PAGE>
of sales in 1996 from 51% in 1995 and selling and administrative, excluding
goodwill amortization of $26.7 million and $10.6 million, declined to 38% from
39% in 1996 and 1995, respectively.
The Company's operating loss for 1995 was $13.1 million compared to
operating income of $53.5 million recorded in 1994. Included in these operating
results were $56.3 million and $6.5 million of special charges for 1995 and
1994, respectively. The decrease in operating results was primarily due to
increased develop-
mental spending, incremental Heath operating losses, and higher distribution
costs.
The 1995 special charges included $49.3 million of charges related to the
integration of the Heath operations and $7.0 million resulting from the decision
to outsource the Company's distribution function. The charges related to Heath
included $32.9 million for inventory and plate adjustments based on strategic
decisions made and actions taken subsequent to the acquisition, $9.3 million for
integration of administrative and sales functions, and $7.1 million for indirect
costs of the acquisition. The distribution-related charges included $3.0 million
for closing costs and the disposal of assets, $2.9 million for severance, and
$1.1 million for consulting and inventory relocation.
The 1994 special charges included $3.5 million for corporate and divisional
staff reductions, $2.0 million for consolidation of Company-owned and leased
facilities, and $1.0 million for disposal of assets.
Net interest expense increased $27.9 million, or 214%, in 1996 mainly due
to a full year of interest on the financing of the Heath acquisition and a full
year of interest on $126.6 million of Stock Appreciation Income-
Linked Securities ("SAILS"). Approximately $22.8 million of the increase related
to the full year of financing for the Heath acquisition, and the balance of the
increase reflected a full year of interest on the SAILS and higher working
capital requirements in 1996. Net interest expense increased $6.5 million in
1995 from $6.5 million reported in 1994 due to the $345 million of commercial
paper and bank financing obtained for the Heath acquisition, the issuance of
SAILS, and a full year of interest on the financing of the McDougal acquisition.
The provision for taxes in 1996 increased $34.5 million over 1995. The
increase is primarily due to higher operating income and a higher effective tax
rate. The effective tax rate increased to 41% in 1996 from 37% in 1995. The
increase reflects the spread of certain fixed non-deductible tax costs over
significantly higher 1996 taxable income. The provision for taxes in 1995
decreased $36.9 million over 1994. The decrease was primarily due to lower
operating income and a lower effective tax rate. The effective tax rate
decreased to 37% in 1995 from 38% in 1994.
Textbooks and Other Educational Materials
The educational publishing segment's net sales of $636.1 million in 1996
were $194.3 million higher than the $441.8 million in 1995, an increase of
44.0%. In elementary and secondary school publishing, the School Division and
McDougal contributed an increase of $118.9 million, reflecting the addition of
Heath publications and new programs. McDougal's language arts programs The
Language of Literature (C) 1997 and The Writer's Craft (C) 1995 led the market
in new business, as did the School Division's reading program Houghton Mifflin
Reading: Invitations to Literacy (C) 1996. Great Source, the supplemental
publishing division created as a result of the Heath acquisition, reported
substantially increased net sales primarily driven by its flagship product
family, Write Source. Riverside reported a sales increase of 4.8% over 1995,
winning a number of large state-wide testing contracts. The College Division
reported net sales of $138.3 million, a 47.3% increase over 1995. The
acquisition of Heath and a strong frontlist contributed to the revenue growth.
The educational publishing segment's net sales of $441.8 million in 1995
were $54.4 million higher than the $387.4 million in 1994, an increase of 14.0%.
In elementary and secondary school publishing, the School Division and McDougal
contributed an increase of $35.8 million, reflecting the increase in adoption
opportunities as well as the expected leverage from a dedicated secondary school
sales force. Net sales of $17.8 million from Heath, acquired on October 31,
1995, also contributed to the increase. Riverside reported a sales increase of
4.7% over 1994. The College Division, in 1995, reported a 2.1% decrease in net
sales from 1994.
Operating income for the educational publishing segment increased $49.6
million, or 77.7%, to $113.4 million in 1996 from the $63.8 million reported in
1995. The resulting operating margin for 1996 increased to 17.8% from 14.4% in
1995. The increase in the operating margin is primarily due to the increase in
net sales and operating efficiencies achieved through the integration of Heath.
As a percent of sales, every category of operating expense except for plate and
goodwill amortization and selling costs decreased from 1995, with the largest
savings from editorial expense. Plate amortization increased, as expected, due
to the development of elementary and secondary school programs to meet the
adoption opportunities over the next three years. The increase in goodwill
amortization expense is due to the acquisition of Heath. In 1996, the sales
force was increased to ensure adequate market exposure of the expanded product
lines due to the acquisition of Heath. In preparation for the greater number of
statewide adoption opportunities in 1997, the Company's sampling expense
increased year over year. Distribution expenses also declined as a percent of
sales with economies of scale offsetting some additional costs incurred to
improve customer service.
8
<PAGE>
Operating income for the educational publishing segment decreased $4.4
million in 1995, or 6.5%, to $63.8 million from the $68.2 million reported in
1994. The resulting operating margin for 1995 decreased to 14.4% from 17.6% in
1994. The decrease in the operating margin was primarily due to increased
development spending, the incremental Heath operating losses, and higher
distribution costs. Development spending for School and McDougal increased $15.4
million, or approximately 60%, reflecting the investment in new programs for
adoption opportunities in 1997 through 1999. Programs under development included
Houghton Mifflin Reading: Invitations to Literacy (C) 1996, Houghton Mifflin
Social Studies (C) 1997, and McDougal's The Language of Literature (C) 1997.
Selling and administrative costs increased approximately 9.5%, reflecting the
incremental Heath costs and a full year of McDougal costs, including the
intangible asset amortization. Additionally, outsourcing of distribution at the
Geneva, Illinois, facility posed problems for the Company in 1995. Distribution
costs increased $6.5 million in 1995 and service to the Company's customers was
not acceptable. In February 1996, the Company announced that it was re-assuming
control over the distribution function maintained at its Geneva, Illinois,
facility.
General Publishing
The general publishing segment reported 1996 revenue of $81.8 million, a
6.2% decline from the $87.2 million reported in 1995. The Trade Division's lower
frontlist sales were the principal cause of the decline. In 1995, the Company
reduced the number of titles to be published, which resulted in a smaller list
of new titles in 1996. The Trade Division has implemented changes in its
strategy in 1996, as a result of which some revenue streams will be curtailed,
but new sources will be generated. The new strategy will not contribute
significantly to this segment's results before 1998. Included in the results of
this segment is Houghton Mifflin Interactive, which reported net sales of
approximately $4 million. The general publishing segment's operating loss was
$5.1 million in 1996 compared to an operating loss of $8.5 million in 1995. The
1995 results included a $7.5 million non-cash charge to increase reserves. In
1996, declining revenues, as well as an increase in bad debt expense contributed
to the greater operating loss before one-time charges, year over year.
The general publishing segment's net sales in 1995 decreased $6.6 million,
or 7.0%, to $87.2 million when compared with 1994's net sales from ongoing
operations, adjusted for the sale of the former Software Division. The revenue
decrease was primarily due to a decline in revenue contribution from the adult
book list and lower distribution revenues. The general publishing segment's loss
from ongoing operations was $8.5 million, compared to income of $7.3 million in
1994. There was a $7.5 million non-cash charge to increase reserves for author
advances, inventory obsolescence, and book returns. In addition to these
charges, the division reported an operating loss from its new imprint, Houghton
Mifflin Interactive. Distribution costs increased by $1.6 million for actions
required during the transition to outsourced distribution. That transition is
now complete and the Burlington, Massachusetts, distribution facility formerly
used for general publishing distribution has been sold.
Liquidity and Capital Resources
The Company's principal businesses are seasonal, with approximately 70% of
net sales normally reported in the second and third quarters. The first and
fourth quarters historically have contributed approximately 10% and 20%,
respectively, of the Company's annual net sales. The acquisitions of Heath and
McDougal have not materially changed the seasonal nature of the Company's net
sales.
The revenue seasonality also affects the Company's operating cash flow. A
net cash deficit from all the Company's activities is normally incurred through
the middle of the third quarter. This deficit is funded through the draw-down of
cash and marketable securities, supplemented by short-term borrowings,
principally commercial paper.
Net cash provided by operating activities was $102.7 million, $13.0
million, and $67.3 million in 1996, 1995, and 1994, respectively. In 1996, cash
provided by operating activities increased $89.7 million. Net income, excluding
the gain on the sale of INSO stock and equity transactions of INSO, increased
$29.7 million. Depreciation and amortization expense increased $31.9 million
primarily due to increases in goodwill and plate amortization, as discussed
above. Changes in operating assets and liabilities provided $19.7 million more
of cash flow in 1996 over 1995, primarily due to improved working capital
management.
In 1995, cash provided by operating activities decreased by $54.2 million
from 1994. Net income decreased $35.3 million, excluding the gain on equity
transactions of INSO and the sale of interest in the Software Division. Changes
in operating assets and liabilities required $28.9 million of cash flow in 1995
over 1994, primarily as a result of increases in inventory, deferred taxes, and
royalty advances, offset some-what by an increase in other liabilities.
Management anticipates cash provided by operating activities in 1997 to
increase primarily as a result of growth in earnings and continued emphasis on
working capital management.
Net cash required for investing activities was $66.3 million, $486.3
million, and $130.3 million in 1996, 1995, and 1994, respectively. Book plate
expenditures in 1996 of $62.1 million, an increase of $15.4 million over
9
<PAGE>
1995, were incurred for new products to meet the significant adoption
opportunities over the next three years. During 1996, the Company also spent
$15.5 million for publishing assets, a decrease of $437.4 million from 1995.
Included in 1996 was the final settlement for Heath and other products
purchased, while 1995 included the Heath acquisition. In 1996, the Company
received $24.2 million in proceeds, net of tax, from the sale of 770,000 shares
of INSO common stock.
In 1995, net cash required for investing activities, excluding the proceeds
from marketable securities, increased by $371.3 million from 1994. This increase
primarily resulted from the $452.9 million acquisition of Heath.
Total debt decreased approximately $30 million from $570.8 million at the
end of 1995, to $541.0 million as of December 31, 1996. The Company's percentage
of debt to total capitalization (debt plus stockholders' equity) was 66.7% at
the end of 1996 as compared to 71.0% at the end of 1995, primarily as a result
of paying down $30 million outstanding under the five year credit facility using
cash available at year end.
During 1996, commercial paper and a portion of the five year credit
facility were repaid through the issuance of long and medium term notes. The
Company issued $125 million in non-callable unsecured long-term notes and $100
million of non-callable unsecured medium-term notes.
In 1995 and 1994, financing activities contributed $459.6 million and $26.2
million, respectively. The increase in financing sources in 1995 was a result of
the incremental borrowings of $345 million used to finance the Heath acquisition
and the $126.6 million SAILS issuance. Financing activity outflows in 1995 was
$12.0 million less than 1994 due to a reduction in stock repurchases.
In 1996, the Company's average short-term borrowing was $71.0 million, an
increase of $57.4 million from 1995. The increase was primarily due to the
increase in seasonal borrowing needs as a result of the incremental impact of
funding Heath operations for a full year, and due to funds required for book
plate expenditures to meet the significant adoption opportunities over the next
three years. The Company repaid all short-term borrowing requirements by the end
of 1996.
In 1995, the average short-term borrowing of $13.6 million increased by
$4.7 million from 1994. Average short-term borrowings increased in 1995
primarily due to $145 million in commercial paper financing for the Heath
acquisition, the increase in seasonal borrowing needs as a result of including a
full year of operations for McDougal, and the incremental impact of funding
Heath operations for the final two months of 1995.
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes Due in 1999 at a principal amount of $34 per SAILS. At maturity, the
principal amount of each SAILS will be mandatorily exchanged for a number of
shares of INSO common stock, or at the Company's option, cash with an equal
value. The number of shares which could be issued in exchange will be dependent
on INSO's market share price at the time of the redemption. The Company will
record as additional non-cash interest expense, over the life of the SAILS, the
excess of the current INSO stock price over the maximum redemption price at
maturity. The additional non-cash interest expense to be recorded through August
1999, based upon INSO's December 31, 1996 stock price, is $1.0 million. If the
Company chooses to redeem the SAILS with shares of INSO common stock, it would
record a gain representing the excess of the redemption amount over the book
value of the Company's investment in INSO. The Company's ownership percentage of
INSO after this redemption would be substantially less than 20%. The INSO shares
may be sold by the Company, subject to certain restrictions, as market
conditions and events warrant.
The Company currently expects that cash flow from operations for the full
year 1997 will be sufficient to cover investment activities and dividend
payments as well as to repay by year end a portion of the debt outstanding at
the beginning of 1997. The periodic use of the short-term debt market, primarily
commercial paper, for seasonal liquidity needs, will continue.
Impact of Inflation and Changing Prices
Although inflation is currently well below that of prior years, which has
benefited recent Company results, particularly in the area of manufacturing
costs, there are offsetting costs. The Company's ability to adjust selling
prices always has been limited by competitive factors and long-term contractual
arrangements which either prohibit price increases or limit the amount by which
prices may be increased. If there were to be a weak domestic economy at a time
of low inflation, there could be lower tax receipts at the state and local
level, and the funding and buying patterns for textbooks and other educational
materials could be adversely affected.
In 1994, the Company started to experience higher prices for paper goods
which continued into 1995. However, this trend did not continue in 1996, as the
Company experienced a moderation in prices for paper products.
The most significant Company investments affected by inflation include book
plates, other property, plant, and equipment and inventories. The last-in,
first-out (LIFO) method is used to value substantially all inventory
10
<PAGE>
and, therefore, the cost of inventory charged against income approximates
replacement value. The incremental replacement cost expense amounted to $10.9
million in 1996 as compared with $5.2 million in 1995.
The Company's publishing business does not require a high level of
investment in property, plant, and equipment. Such net assets represented 3.5%
of consolidated assets at December 31, 1996. The Company's net investment at the
end of 1996 in capitalized book plates for educational and reference works
represented approximately 8.0% of total assets. The Company continues to commit
funds to new publishing areas through both acquisitions and internal growth.
Management believes that by valuing its inventory using the LIFO method,
continuing to emphasize technological improvements, and quality control, the
Company can continue to moderate the impact of inflation on its operating
results and financial position.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of
1995: Statements in this report that are not historical facts may be
forward-looking statements that are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made by the Company. These factors include, but are not limited to,
(i) the seasonal and cyclical nature of the Company's educational sales; (ii)
variable funding in school systems throughout the nation, which may result in
both cancellation of planned purchases of educational materials and shifts in
timing of purchases; (iii) changes in purchasing patterns in elementary,
secondary, and college markets; (iv) regulatory changes which would affect the
purchase of educational materials and services; (v) strength of the retail
market for general-interest publications and market acceptance of frontlist
titles and new electronic products; and (vi) other factors detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
11
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
------
<S> <C>
Management's Responsibility for Financial Statements ................................. 13
Report of Independent Auditors ...................................................... 13
Consolidated Balance Sheets at December 31, 1996 and 1995 ........................... 14
Consolidated Statements of Operations for the three years ended December 31, 1996 ... 16
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 ... 17
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 18
1996
Notes to Consolidated Financial Statements .......................................... 20
</TABLE>
Supplementary Data
Summary of Quarterly Results of Operations (unaudited) is presented on page 33.
12
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Houghton Mifflin Company is responsible for all
information and representations contained in the financial statements and other
sections of this annual report. Management is also responsible for the internal
consistency of such information and representations. In preparing the financial
statements it is necessary for management to make informed judgments and
estimates and to select accounting principles which it believes are in
accordance with generally accepted accounting principles appropriate in the
circumstances.
In meeting its responsibility for the reliability of the financial
statements, management relies on the Company's internal control systems and
procedures. In designing such control procedures, management recognizes that
errors or irregularities may nevertheless occur and that estimates and judgments
are needed to assess and balance the relative costs and expected benefits of
controls. However, management believes that the Company's accounting controls do
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with corporate policy and
management's authorization. As a further safeguard, the Company has a program of
internal audits and appropriate follow-up by management.
The financial statements have been audited by the Company's independent
auditors, Ernst & Young LLP, in accordance with generally accepted auditing
standards. In connection with its audit, Ernst & Young LLP develops and
maintains an understanding of the Company's accounting and financial controls,
and conducts such tests and related procedures as it deems necessary to render
its opinion on the financial statements. The adequacy of the Company's internal
financial controls and the accounting principles employed in financial reporting
are under the general surveillance of the Audit Committee of the Board of
Directors, consisting of five outside directors. The independent auditors and
internal auditors have free and direct access to the Audit Committee and meet
with the committee periodically to discuss accounting, auditing, and financial
reporting matters.
The Company has distributed to its employees a statement regarding, among
other things, potentially conflicting outside business interests of employees,
and proper conduct of domestic and international business activities. It has
developed and instituted additional internal controls and audit procedures
designed to prevent or detect violations of these policies. Management believes
this provides reasonable assurance that its operations meet a high standard of
business conduct.
<TABLE>
<S> <C>
Nader F. Darehshori Gail Deegan
Chairman, President, Executive Vice President, Chief
and Chief Executive Officer Financial Officer, and Treasurer
</TABLE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Houghton Mifflin Company
We have audited the accompanying consolidated balance sheets of Houghton
Mifflin Company as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a) 2. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Houghton Mifflin Company at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
January 27, 1997
13
<PAGE>
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------------
(In thousands of dollars, except share amounts) 1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .................................... $ 11,534 $ 16,701
Marketable securities and time deposits available-for-sale,
at fair value ............................................. 612 604
Accounts receivable .......................................... 189,978 204,542
Less: allowance for book returns ........................... 25,166 21,698
---------- ----------
164,812 182,844
Inventories ................................................ 138,547 139,927
Deferred income taxes ....................................... 20,551 23,728
Prepaid expenses ............................................. 1,913 7,396
---------- ----------
Total current assets ....................................... 337,969 371,200
Property, plant, and equipment, net ........................... 35,430 32,879
Book plates, less accumulated amortization of $91,628
in 1996 and $70,032 in 1995 ................................. 81,017 90,221
Other Assets
Royalty advances to authors, less allowance of $20,975 in 1996
and $21,848 in 1995 .......................................... 24,761 23,988
Intangible assets, net ....................................... 485,766 474,751
Deferred income taxes ....................................... 12,514 15,688
Other investments and long-term receivables .................. 28,985 37,722
---------- ----------
Total other assets .......................................... 552,026 552,149
---------- ----------
$1,006,442 $1,046,449
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
HOUGHTON MIFFLIN COMPANY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------
(In thousands of dollars, except share amounts) 1996 1995
------------ -----------
<S> <C> <C>
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................ $ 57,585 $ 94,556
Commercial paper ................................................ -- 144,612
Royalties ...................................................... 38,154 40,140
Salaries, wages, and commissions .............................. 19,408 18,751
Other ......................................................... 30,783 44,324
Current portion of long-term debt .............................. 40,000 --
--------- ---------
Total current liabilities .................................... 185,930 342,383
Long-term debt ................................................... 500,999 426,148
Accrued royalties payable ....................................... 1,899 2,497
Other liabilities ................................................ 19,666 15,192
Accrued post retirement benefits ................................. 27,655 26,884
Commitments and contingencies (Note 10) ........................
Stockholders' equity:
Preferred stock, $1 par value, 500,000 shares authorized,
none issued ................................................... -- --
Common stock, $1 par value, 70,000,000 shares authorized,
14,780,926 shares issued in 1996 and 14,758,726 shares
issued in 1995 ................................................ 14,781 14,759
Capital in excess of par value ................................. 43,476 29,973
Retained earnings ............................................. 258,779 228,528
--------- ---------
317,036 273,260
Less:
Notes receivable from stock purchase agreements ............... (5,916) (5,821)
Unearned compensation related to restricted stock outstanding . (1,563) (349)
Common shares held in treasury, at cost, 115,390 shares in 1996,
and 273,681 shares in 1995 .................................... (2,448) (5,795)
Benefits trust assets, at market .............................. (36,816) (27,950)
--------- ---------
Total stockholders' equity .................................... 270,293 233,345
--------- ---------
$1,006,442 $1,046,449
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Years Ended December 31, 1996
(In thousands of dollars, except per share amounts) 1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Net sales ............................................. $717,863 $529,022 $483,076
Costs and expenses ....................................
Cost of sales .......................................... 329,686 271,036 230,674
Selling and administrative ........................... 300,795 214,818 192,425
Special charges ....................................... -- 56,263 6,513
-------- -------- --------
630,481 542,117 429,612
-------- -------- --------
Operating income (loss) ................................. 87,382 (13,095) 53,464
Other income (expense)
Gain on equity transactions of INSO Corporation and
on sale of interest in Software Division ............ -- 13,102 36,212
Gain on sale of INSO Corporation common stock ......... 34,261 -- --
Net interest expense ................................. (40,875) (13,008) (6,509)
Equity in earnings (losses) of INSO Corporation ...... (6,815) 1,557 1,973
-------- -------- --------
(13,429) 1,651 31,676
-------- -------- --------
Income (loss) before taxes and extraordinary item ...... 73,953 (11,444) 85,140
Income tax (benefit) provision ........................ 30,331 (4,201) 32,710
-------- -------- --------
Income (loss) before extraordinary item ............... 43,622 (7,243) 52,430
Extraordinary item, net of taxes
Loss on early extinguishment of debt .................. -- -- (1,239)
-------- -------- --------
Net income (loss) ....................................... $ 43,622 $ (7,243) $ 51,191
======== ======== ========
Per share:
Income (loss) before extraordinary item ............... $ 3.13 $ (0.52) $ 3.79
Loss on early extinguishment of debt .................. -- -- (0.09)
-------- -------- --------
Net income (loss) .................................... $ 3.13 $ (0.52) $ 3.70
======== ======== ========
Average number of common shares outstanding ............ 13,933 13,812 13,822
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Years Ended December 31, 1996
(In thousands of dollars) 1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) ............................................. $ 43,622 $ (7,243) $ 51,191
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization expense ........................ 84,335 52,426 44,416
Gain on equity transactions of INSO Corporation and gain on
sale of interest in Software Division ..................... -- (13,102) (36,212)
Equity in (earnings) losses of INSO Corporation ............ 6,815 (1,557) (1,973)
Early extinguishment of debt cost, net of taxes ............ -- -- 1,239
Gain on sale of INSO Corporation stock ..................... (34,261) -- --
Changes in operating assets and liablities:
Accounts receivable, net .................................... 18,031 (4,366) (26,751)
Inventories ................................................ 1,380 (25,388) 17,606
Accounts payable ............................................. (36,969) (5,981) 3,448
Royalties, net ............................................. (3,307) (11,698) 6,705
Deferred and income taxes payable ........................... 25,485 (23,882) 5,949
Other, net ................................................... (2,443) 53,813 1,634
--------- --------- ---------
Net cash provided by operating activities .................. 102,688 13,022 67,252
Cash flows provided by (used in) investing activities:
Book plate expenditures .................................... (62,080) (46,740) (25,242)
Acquisition of publishing assets, net of cash acquired ...... (15,501) (452,888) (130,342)
Property, plant, and equipment expenditures .................. (12,863) (7,538) (8,478)
Proceeds from the sales of INSO Corporation stock ............ 24,186 -- --
Purchase of marketable securities ........................... (8) (4) (16,221)
Sale of marketable securities .............................. -- 16,221 17,114
Sale of building and equipment .............................. -- 4,628 --
Dividend received from INSO Corporation ..................... -- -- 32,860
--------- --------- ---------
Net cash used in investing activities ..................... (66,266) (486,321) (130,309)
Cash flows provided by (used in) financing activities:
Dividends paid on common stock .............................. (13,371) (12,845) (12,026)
Issuance (repayment) of commercial paper ..................... (144,612) 144,612 (24,605)
Proceeds from the issuance of long-term financing ............ 224,785 200,000 99,415
Repayment of long-term financing ........................... (109,955) -- --
Proceeds from the issuance of SAILS ........................ -- 126,643 --
Senior note redemption ....................................... -- -- (26,960)
Purchase of common stock .................................... -- (957) (12,913)
Exercise of stock options .................................... 1,897 2,175 1,442
Other ...................................................... (333) -- 1,834
--------- --------- ---------
Net cash provided by (used in) financing activities ......... (41,589) 459,628 26,187
--------- --------- ---------
Decrease in cash and cash equivalents ........................ (5,167) (13,671) (36,870)
Cash and cash equivalents at beginning of year ............... 16,701 30,372 67,242
--------- --------- ---------
Cash and cash equivalents at end of year ..................... $ 11,534 $ 16,701 $ 30,372
========= ========= =========
Supplementary disclosure of cash flow information:
Income taxes paid .......................................... $ 17,409 $ 18,194 $ 25,819
Interest paid ................................................ $ 38,931 $ 10,941 $ 6,323
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
HOUGHTON MIFFLIN COMPANY
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Capital
For the Three Years Ended December 31, 1996 stock in excess Retained
(In thousands of dollars, except share amounts) $1 par value of par value earnings
--------------- --------------- -----------
<S> <C> <C> <C>
Balance at January 1, 1994 .................................... $14,759 $30,612 $211,222
Net income ...................................................... -- -- 51,191
Common stock dividends, $0.87 per share ........................ -- -- (12,026)
Stock options exercised ....................................... -- (233) --
Notes receivable from stock purchase agreements ............... -- 443 --
Issuance of restricted stock .................................... -- 73 --
Share repurchases ............................................. -- -- --
Other equity transactions, net ................................. -- 1,133 --
Benefits trust asset remeasurement .............................. -- (2,112) --
Valuation allowance on noncurrent marketable securities ......... -- -- (1,559)
Stock repurchase commitment .................................... -- (7,600) --
-------- ------- --------
Balance at December 31, 1994 .................................... 14,759 22,316 248,828
======== ======= ========
Net loss ...................................................... -- -- (7,243)
Common stock dividends, $0.93 per share ........................ -- -- (12,845)
Stock options exercised ....................................... -- 776 --
Issuance of restricted stock .................................... -- 252 --
Share repurchases ............................................. -- -- --
Executive stock repurchases .................................... -- -- --
Other equity transactions, net ................................. -- 573 --
Benefits trust asset remeasurement .............................. -- (1,544) --
Valuation allowance on noncurrent marketable securities ......... -- -- (212)
Stock repurchase commitment .................................... -- 7,600 --
Amortization of unearned compensation on restricted stock ...... -- -- --
-------- ------- --------
Balance at December 31, 1995 .................................... 14,759 29,973 228,528
======== ======= ========
Net income ...................................................... -- -- 43,622
Common stock dividends, $0.96 per share ........................ -- -- (13,371)
Stock options exercised ....................................... 22 1,249 --
Issuance of restricted stock .................................... -- 1,009 --
Executive stock repurchases .................................... -- -- --
Other equity transactions, net ................................. -- 505 --
Issuance of stock for contribution to the retirement
savings plan ................................................... -- 1,884 --
Benefits trust asset remeasurement .............................. -- 8,856 --
Amortization of unearned compensation on restricted stock ...... -- -- --
-------- ------- --------
Balance at December 31, 1996 .................................... $14,781 $43,476 $258,779
======== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
Unearned
Notes receivable compensation Treasury stock
from stock related to --------------------------- Benefits
purchase agreements restricted stock Shares Amount trust Total
- --------------------- ------------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
$ -- $ -- (232,459) $ (1,367) $ (31,144) $224,082
-- -- -- -- -- 51,191
-- -- -- -- -- (12,026)
-- -- 50,203 1,675 -- 1,442
(5,893) -- 138,272 5,450 -- --
-- -- 1,789 14 -- 87
-- -- (318,900) (12,913) -- (12,913)
52 -- 32,410 1,050 (466) 1,769
-- -- -- -- 2,112 --
-- -- -- -- -- (1,559)
-- -- -- -- -- (7,600)
------- ------- ---------- -------- --------- --------
(5,841) -- (328,685) (6,091) (29,498) 244,473
======= ======= ========== ======== ========= ========
-- -- -- -- -- (7,243)
-- -- -- -- -- (12,845)
-- -- 70,698 1,399 -- 2,175
-- (465) 10,766 213 -- --
-- -- (24,000) (957) -- (957)
344 -- (7,742) (403) -- (59)
(324) -- 5,282 44 4 297
-- -- -- -- 1,544 --
-- -- -- -- -- (212)
-- -- -- -- -- 7,600
-- 116 -- -- -- 116
------- ------- ---------- -------- --------- --------
(5,821) (349) (273,681) (5,795) (27,950) 233,345
======= ======= ========== ======== ========= ========
-- -- -- -- -- 43,622
-- -- -- -- -- (13,371)
-- -- 29,544 626 -- 1,897
-- (1,909) 42,414 900 -- --
209 -- -- -- -- 209
(304) -- 12,176 248 (10) 439
- -- -- 74,157 1,573 -- 3,457
-- -- -- -- (8,856) --
-- 695 -- -- -- 695
------- ------- ---------- -------- --------- --------
$(5,916) $(1,563) (115,390) $ (2,448) $ (36,816) $270,293
======= ======= ========== ======== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
HOUGHTON MIFFLIN COMPANY
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of Houghton
Mifflin Company ("the Com- pany") and its wholly-owned subsidiaries. All
material intercompany accounts and transactions are eliminated in consolidation.
Investment in 20% to 50% owned entities are accounted for on the equity
method. The Company uses the income statement method to account for the issuance
of common stock by a subsidiary or equity investee. Under this method gains and
losses on issuance of stock by a subsidiary or equity investee are recognized in
the income statement.
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
Cash and cash equivalents:
Cash and cash equivalents consist primarily of cash in banks and highly
liquid investment securities that have maturities of three months or less when
purchased. The carrying amount approximates fair value due to the short-term
maturity of these instruments.
Marketable securities and time deposits available-for-sale:
Marketable securities included in current assets consist of instruments
with original maturities of three months or greater. The securities held consist
primarily of tax-exempt municipal certificates, government agency obligations,
and time deposits and are stated at fair value, which approximates cost due to
the short maturity of the instruments. The fair values are estimated based on
quoted market prices.
Marketable securities included in other assets are classified as "Other
investments and long-term receivables" for consolidated financial statement
purposes. These investments, which consist of equity securities, are carried at
market value. Unrealized holding gains and losses are recognized as a reduction
in stockholders' equity. Investments in companies in which the Company has a 20%
to 50% interest are carried at cost and adjusted for the Company's proportionate
share of their undistributed earnings and losses, and for gains and losses
associated with the issuance of additional stock, as discussed above.
Book returns:
A provision for estimated future book returns is made at time of sale, and
consists of the sales value less related inventory value and royalty costs.
Inventories:
Inventory balances at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
- ------------------------ ------------ -----------
<S> <C> <C>
Finished goods ...... $ 124,263 $ 120,120
Work in process ...... 9,162 8,733
Raw materials ......... 5,122 11,074
---------- ----------
$ 138,547 $ 139,927
========== ==========
</TABLE>
Inventories are stated at the lower of cost or market (replacement cost for
raw materials, net realizable value for other inventories). The last-in,
first-out (LIFO) method is used to determine the cost of inventory. If the cost
of all inventories had been determined by the first-in, first-out method (FIFO),
which approximates replacement cost, inventory values at December 31, 1996 and
1995, would have been higher by $19.8 million and $23.1 million, respectively.
During 1994, inventory quantities were reduced, excluding the impact of the
McDougal acquisition. These reductions resulted in the liquidation of certain
LIFO layers carried at costs which were lower than the cost of current
purchases. The effect of the reductions was to lower cost of goods sold by $2.4
million and to increase net earnings for 1994 by $1.5 million, or $0.11 per
share.
20
<PAGE>
Property, plant, and equipment:
Property, plant, and equipment are carried on the basis of cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives as follows:
<TABLE>
<CAPTION>
Estimated Useful Life
-------------------------------------
<S> <C>
Building and building equipment ...... 10 years
Machinery and equipment ............... 3 to 10 years
Leasehold improvements ............... lesser of useful life or lease term
</TABLE>
Balances of major classes of assets and allowances for depreciation and
amortization at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
In thousands 1996 1995
- ----------------------------------------------------------- ------------ ------------
<S> <C> <C>
Land and land improvements .............................. $ 1,976 $ 2,046
Building and building equipment ........................ 20,884 19,169
Machinery and equipment ................................. 54,850 57,444
Leasehold improvements ................................. 10,740 8,079
-------- --------
Total ................................................... 88,450 86,738
Less: allowances for depreciation and amortization ...... (53,020) (53,859)
-------- --------
Property, plant, and equipment, net ..................... $ 35,430 $ 32,879
======== ========
</TABLE>
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
capitalized. Depreciation expense was approximately $7.3 million in 1996; $8.8
million in 1995; and $8.6 million in 1994.
Book plates:
The Company's investment in book plate costs is capitalized and depreciated
on an accelerated basis over three years, except for trade and some reference
publication costs, which are expensed when incurred. Amortization expense was
approximately $50.3 million in 1996; $32.9 million in 1995; and $29.1 million in
1994.
Income taxes:
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Deferred income taxes are recorded to reflect the tax benefit and
consequences of future years differences between the tax bases of assets and
liabilities and their financial reporting amounts.
Intangible assets:
Intangible assets at December 31, 1996 and 1995, consist of the following:
<TABLE>
<CAPTION>
In thousands 1996 1995
- --------------------------------------- ------------ -----------
<S> <C> <C>
Goodwill ........................... $510,500 $473,786
Publishing rights .................. 16,787 18,523
Other .............................. 4,000 5,891
-------- --------
Total .............................. 531,287 498,200
Less: accumulated amortization ...... (45,521) (23,449)
-------- --------
Intangibles, net ..................... $ 485,766 $ 474,751
======== ========
</TABLE>
Purchased editorial publishing rights are amortized on a straight-line
basis over the estimated economic life of the titles or contracts, but do not
exceed 15 years. The excess of cost over net assets acquired, or goodwill, is
amortized on a straight-line basis over periods ranging from 20 to 25 years.
Amortization expense on intangible assets, principally goodwill, was
approximately $26.7 million in 1996; $10.7 million in 1995; and $6.7 million in
1994.
Impairment evaluation:
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards
for the evaluation and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill. There was no material effect on the
financial statements from the adoption of SFAS 121 because the Company's prior
impairment recognition practice was generally consistent with SFAS 121. Under
provisions of SFAS 121, impairment is indicated when expected future cash flows
are less than the related assets' carrying value. Accordingly, when indicators
of impairment are present, the Company evaluates the carrying value of the
related asset, including goodwill, in relation to the fair value and the
carrying value of the underlying assets is adjusted if the fair value is lower.
Benefits Trust:
The Trust assets consist primarily of 650,000 shares of the Company's
common stock purchased from the Company's treasury shares at quoted market price
in 1992. The Trust is available to fund certain compensation
21
<PAGE>
and benefit plan obligations. The common stock is carried at market value with
changes in share price from prior reporting periods reflected as an adjustment
to capital in excess of par value.
Stock based compensation:
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to the fair market value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and accordingly recognizes no compensation expense
for the stock option grants. The Company also grants restricted stock awards to
key employees, including officers. For restricted stock awards, the Company
measures compensation cost equal to the fair value of the shares at the date of
grant. Compensation expense for these awards is then recognized over the period
of the restriction by a charge to earnings. In 1996, the Company has adopted the
disclosure-only provision of Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation" (See Note 7).
Earnings per share:
Earnings per share are based on the weighted average number of common
shares deemed outstanding. Shares of common stock held in the Benefits Trust and
common stock equivalents, such as employee stock options, are evaluated for
inclusion in the earnings per share calculation under the treasury stock method
and have had no dilutive effect.
Risks and uncertainties:
Organization:
The Company's business is publishing and it operates primarily in the
domestic market in two industry segments. Based on sales, the Company's largest
segment is textbooks and other educational materials and services for the school
and college markets. The other segment is general publishing in a wide variety
of topics, formats, and media. The principal markets for textbooks and other
educational materials and services are elementary and secondary schools and two-
and four-year colleges. The principal market for trade books and reference works
in the general publishing segment is retail stores.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
significant estimates that affect the financial statements include, but are not
limited to, book returns, recoverability of advances to authors, inventory
valuation and amortization periods, and recoverability of long-term assets such
as book plates, intangibles, and goodwill.
Note 2. Acquisitions
The Company acquired D.C. Heath and Company ("Heath"), a leading publisher
of high school, elementary, and college textbooks, from Raytheon Company
("Raytheon") on October 31, 1995 for approximately $460.6 million, including
additional purchase price amounts paid in 1996. The acquisition was financed
through operating cash and $345.0 million in indebtedness. The acquisition was
accounted for as a purchase and the net assets and results of operations have
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated on the basis of the estimated
fair market value of the assets acquired and the liabilities assumed, and
included revisions to the preliminary allocation based on further analysis. The
cost of purchased editorial rights and the excess of the net assets acquired, or
goodwill, are being amortized on a straight-line basis over a period that
averages twenty years.
During the second quarter of 1996, the Company acquired all of the
outstanding shares of D.C. Heath, Canada, Limited ("Heath Canada") from Raytheon
following receipt of Canadian regulatory approval. ITP Nelson ("ITP"), a
division of Thomson Canada Limited, subsequently acquired the assets of Heath
Canada from the Company and entered into a series of agreements which expanded
an existing exclusive distribution agreement for the school and college markets.
Cash and licensing fees for these arrangements were approximately $5.0 million,
of which approximately $4.7 million has been paid.
In conjunction with the Heath acquisition, certain charges were recorded in
the fourth quarter of 1995 for indirect costs incurred as a result of the
acquisition ($7.1 million), costs related to the integration of the
administrative and sales functions ($9.3 million), and provisions to adjust the
carrying values of certain inventory and book plates based on strategic
decisions made subsequent to the acquisition ($32.9 million). The integration
costs include the costs to consolidate certain administrative and sales
functions of the combined businesses as well as training and other similar
costs. After completion of the transaction, the Company evaluated its publishing
programs and direction and concluded that assets relating to certain overlapping
or duplicative programs should be adjusted based upon the estimated future
revenues of the combined companies.
22
<PAGE>
In 1994, the Company acquired McDougal, Littell & Company ("McDougal") for
$130.3 million. The acquisition was accounted for as a purchase.
The following unaudited summary pro forma information combines the
consolidated results of operations as if Heath, Heath Canada, and McDougal had
been acquired as of January 1, 1994. The pro forma financial information is not
necessarily indicative of the operating results that would have occurred had the
Heath, Heath Canada, and McDougal acquisition been consummated as of the assumed
date, nor are they necessarily indicative of future results of operations.
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
- ---------------------------------------------------- ----------------- ---------
In millions, except per share amounts
<S> <C> <C>
Net sales ....................................... $ 705.5 $ 664.9
Net income (loss) before extraordinary item ...... (14.9) 29.8
Net income (loss) ................................. (14.9) 28.6
Net income (loss) per share ..................... $ (1.08) $ 2.06
</TABLE>
Note 3. Taxes on Income
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax assets are shown in the following table:
<TABLE>
<CAPTION>
In thousands 1996 1995
- --------------------------------------------- ----------- ----------
<S> <C> <C>
Tax asset-related:
Pension and postretirement benefits ...... $ 15,741 $ 16,300
Publishing expense ........................ 14,827 22,840
Allowance for book returns ............... 3,033 1,084
Deferred compensation ..................... 1,883 1,700
Other, net .............................. 1,629 2,936
-------- --------
37,113 44,860
Tax liability-related:
Depreciation expense ..................... (3,248) (4,655)
Deferred income ........................... (800) (789)
-------- --------
(4,048) (5,444)
-------- --------
Net deferred tax asset ..................... $ 33,065 $ 39,416
======== ========
</TABLE>
At December 31, 1996, net deferred tax assets represented approximately 3%
of total consolidated assets. The net deferred tax asset balance is stated at
prevailing statutory income tax rates. The Company currently does not anticipate
any change in valuation methodology applied to the determination of net deferred
tax assets.
Significant components of the provision (benefit) for income taxes
attributable to income before taxes and extraordinary items consist of the
following:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- ------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal ............... $ 20,573 $ 13,201 $ 23,711
State and other ...... 3,407 2,669 5,719
--------- -------- ---------
Total current ...... 23,980 15,870 29,430
Deferred
Federal ............... 5,154 (16,246) 2,653
State and other ...... 1,197 (3,825) 627
--------- -------- ---------
Total deferred ...... 6,351 (20,071) 3,280
--------- -------- ---------
$ 30,331 $ (4,201) $ 32,710
========= ======== =========
</TABLE>
The reconciliation of the income tax rate computed at the U.S. federal
statutory tax rate to reported income tax expense (benefit) attributable to
income before taxes and extraordinary items is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Federal statutory rate ........................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ...... 4.6 4.6 4.6
Non-deductible goodwill amortization ............ 3.0 (19.8) 2.2
Tax-exempt income .............................. (1.3) 10.2 (0.7)
Non-deductible meals and entertainment ......... 0.9 (4.9) 0.7
Life insurance ................................. (1.0) 5.2 (0.5)
Other .......................................... (0.2) 6.4 (2.9)
------ ------ ------
Effective tax rate .............................. 41.0% 36.7% 38.4%
====== ====== ======
</TABLE>
23
<PAGE>
As a result of the Stock Appreciation Income-Linked Securities ("SAILS")
transaction, the Company is likely to record a gain on the redemption of these
debt securities. Accordingly, in 1996 and 1995, the Company is providing
deferred taxes on the undistributed earnings of INSO Corporation ("INSO"), the
Company's former wholly-owned Software Division (See Note 11). Accumulated
undistributed earnings of INSO on which taxes have not been provided were
approximately $2.0 million at December 31, 1996 and 1995.
Note 4. Debt and Borrowing Agreements
The Company had $300 million and $400 million in unsecured credit
facilities available at December 31, 1996 and 1995, respectively, which were
supported by commitment fees. Borrowings under the $300 million facility are
outstanding under a five-year revolving commitment which expires in October
2000. The most restrictive provisions of this credit facility are as follows:
1. The Company shall maintain specified net worth levels as defined in the
Credit Agreement.
2. The Company shall maintain a consolidated fixed-charge coverage ratio, as
defined, calculated at the end of each quarter based on the preceding four
quarters. The required ratio levels adjust each quarter through the year
2000.
3. The Company shall maintain a consolidated debt-to-equity ratio, as
defined, calculated at the end of each quarter. The required ratio levels
adjust during each quarter of each year through the year 2000 reflecting
the Company's anticipated seasonal working capital borrowings.
There was $90 million outstanding under this facility at December 31, 1996, at a
weighted average borrowing rate of 5.983%. At December 31, 1995, there was $200
million outstanding under this facility at a weighted average borrowing rate of
6.19%.
<TABLE>
<CAPTION>
In thousands 1996 1995
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
6% Exchangeable Notes, due August 1999, Stock
Appreciation Income-Linked Securities (SAILS) ...... $ 126,643 $ 126,643
7.00% Notes due March 1, 2006, interest payable semi-
annually .......................................... 124,791 --
7.125% Notes due April 1, 2004, interest payable semi-
annually .......................................... 99,565 99,505
Borrowings from financial institutions, unsecured,
under committed 5 year credit facility, due January
10, 2000 .......................................... 90,000 200,000
Commercial paper, with a weighted average interest
rate of 6.17% ....................................... -- 144,612
5.83% Notes due December 1, 1997, interest payable
semi-annually ....................................... 40,000 --
6.07% Notes due December 1, 1998, interest payable
semi-annually ....................................... 40,000 --
6.29% Notes due December 1, 1999, interest payable
semi-annually ....................................... 20,000 --
---------- ----------
540,999 570,760
Less: portion included in current liabilities ...... 40,000 144,612
---------- ----------
Total long-term debt ................................. $ 500,999 $ 426,148
========== ==========
</TABLE>
Long-term debt due in each of the next five years is as follows:
<TABLE>
<CAPTION>
Years In thousands
- -------- --------------
<S> <C>
1997 $40,000
1998 40,000
1999 146,643
2000 90,000
2001 --
</TABLE>
On December 11, 1995, the Company filed a registration statement with the
Securities and Exchange Commission for the offering of $300 million in debt
securities. In March 1996, the Company issued $125 million of non-
callable unsecured notes under this offering. The notes mature on March 1, 2006
and were priced at 99.8 to yield an effective rate of 7.02%. In addition, the
Company issued a total of $100 million of non-callable, unsecured medium term
notes under this offering; $40 million with a coupon of 5.83% maturing on
December 1, 1997; $40 million with a coupon of 6.07% maturing on December 1,
1998; and $20 million with a coupon of 6.29% maturing on December 1, 1999. The
proceeds from these issuances were used to pay down part of the commercial paper
and credit facility which were used as short-term bridge financing for the Heath
acquisition.
On October 31, 1995, $345 million in credit facilities were drawn upon to
fund the purchase of Heath. These borrowings were subsequently paid off with
$200 million in proceeds from a $300 million five-year credit facility and the
issuance of $145 million in commercial paper.
24
<PAGE>
In August 1995, the Company completed a public offering of 6% Exchangeable
Notes due in 1999 at a principal amount of $34 per SAILS at issue. Net proceeds
of approximately $126.6 million were used for general corporate purposes,
including the repayment of seasonal borrowings and the partial funding of the
acquisition of Heath (See Note 2). At maturity, the SAILS will be exchangeable
for shares of INSO common stock, or at the Company's option, cash in lieu of
shares. If the SAILS are redeemed with shares of INSO common stock, a gain
representing the excess of the redemption amount over the book value of the
Company's investment in INSO would be recorded. The number of INSO shares that
would be exchanged for the SAILS depends, in part, on the fair market value of
the INSO stock price on the redemption date. If the fair market value is $34 per
share, 3.8 million shares of INSO would be exchanged. As the price of INSO
common stock increases, the Company is obligated to exchange fewer INSO shares
to redeem the SAILS. If the price of INSO common stock is $39.44 or higher at
the redemption date, the Company would redeem the SAILS with 3.3 million shares
of INSO common stock. The Company will record as non-cash interest expense over
the remaining term of the SAILS the excess of the market value of the current
INSO common stock price over the maximum redemption price of $39.44 per INSO
share. The additional non-cash interest expense to be recorded through August
1999, based upon INSO's December 31, 1996 stock price, is $1.0 million.
In April 1994, the Company issued $100 million of 7.125% medium term notes
through a public debt offering. The medium term notes mature on April 1, 2004
and were priced at 99.4 to yield an effective rate of 7.21%. The proceeds from
the issuance were applied to repay the $100 million short-term credit facilities
used as bridge financing in the March 1994 acquisition of McDougal.
In March 1994, the Company completed an early redemption of $25 million of
8.78% senior notes scheduled to mature in March 1997. The extraordinary
refinancing cost of $1.2 million, or $0.09 per share, was net of an income tax
benefit of $0.8 million. The Company financed the early redemption of the senior
notes with operating cash and a portion of the dividend received from INSO.
The Company enters into transactions involving financial instruments for
purposes of managing its exposure to interest rate risks and funding costs.
Through the use of interest rate products, such as interest rate swap agreements
and interest rate-locks, the Company can achieve a predetermined mix of fixed
and floating rate debt. In connection with the Company's issuance of debt
securities through the draw-down of the $300 million shelf registration in 1995,
a forward interest rate-lock agreement was entered into with a counterparty for
the notional principal amount of $100 million at 5.995%. This rate-lock
agreement was settled in 1996, resulting in a net gain of approximately $0.6
million, which is being amortized over the approximate term of the related
borrowings.
Note 5. Retirement Plans
The Company has a noncontributory, qualified defined benefit pension plan
that covers substantially all employees. Plan benefits were previously
determined by years of service, the highest five consecutive years of
compensation and age. On January 1, 1997, the pension plan was changed to a cash
balance plan. Under the new plan provisions, the accrued benefits of
participants were converted to notional balances that receive credits based on
pay and interest in future years. This plan change is not expected to
significantly change 1997 expense from the expense that would apply under the
prior plan provisions. The funded status as of September 30, 1996 reflects this
plan change.
The funding policy is to contribute amounts subject to minimum funding
standards set forth by the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code. The plan's assets consist principally of common
stocks, fixed income securities, investments in registered investment companies,
and cash and cash equivalents. The Company also has a nonqualified defined
benefit plan that covers a select group of management employees.
Net periodic pension cost for 1996, 1995, and 1994 included the following
components:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- ------------------------------------------------------- ------------ ------------ -----------
<S> <C> <C> <C>
Service cost (benefits earned during the year) ...... $ 3,557 $ 2,602 $ 3,275
Interest cost on projected benefit obligation ...... 6,541 5,456 5,045
Actual return on plan assets ........................ (10,882) (13,588) (1,165)
Net amortization and deferral ........................ 2,984 7,722 (4,432)
-------- -------- -------
Net pension expense ................................. $ 2,200 $ 2,192 $ 2,723
======== ======== =======
Significant actuarial assumptions:
Discount rate ....................................... 7.75% 8.00% 7.50%
Increase in future compensation ..................... 5.25% 6.00% 6.00%
Expected long-term rate of return on assets ......... 9.00% 8.50% 8.50%
</TABLE>
25
<PAGE>
The Company uses a September 30 measurement date and adjusts for any
contributions made after the measurement date to disclose December 31 accrued
pension liability. The following table sets forth the Plan's funded status at
December 31:
<TABLE>
<CAPTION>
In thousands 1996 1995
- -------------------------------------------------------- ------------ ----------
<S> <C> <C>
Plan assets at fair value at September 30 ............ $ 102,883 $ 80,959
Projected benefit obligation (PBO) .................. 101,312 72,815
--------- --------
Excess of plan assets over projected benefit obligation
at September 30 .................................... 1,571 8,144
Unrecognized items:
Net gain ............................................. (13,252) (14,687)
Prior service cost ................................. 574 (1,027)
Net transition asset ................................. (1,058) (1,241)
--------- --------
Accrued pension liability included in other long-term
liabilities .......................................... $ (12,165) $ (8,811)
========= ========
Actuarial present value of accumulated benefits at
September 30 (ABO) ................................. $ 94,464 $ 62,212
Accumulated benefit obligation related to vested
benefits at September 30 ........................... $ 92,730 $ 58,318
Significant actuarial assumptions:
Discount rate ....................................... 7.75% 7.75%
Increase in future compensation ..................... 5.25% 5.25%
</TABLE>
The 1996 information above reflects the assets that were transferred from
Raytheon's pension plans and the assumed obligations for the former Heath
employees. This transfer of assets and the corresponding obligation is the
principal factor in the significant increase in the assets and PBO from 1995 to
1996. With the new cash balance plan, there is a smaller difference between the
ABO and the PBO formula than in the prior years because future salary increases
have a less significant impact under cash balance than under the prior final
average pay formula.
In addition, the Company maintains a defined contribution benefit plan, the
Retirement Savings Plan, which conforms to Section 401(k) of the Internal
Revenue Code, and covers substantially all of the Company's employees.
Participants may elect to contribute up to 15% of their compensation subject to
an annual limit of $9,500 in 1996 to ten funds: seven equity funds, two fixed
income funds, and a fund invested solely in the Company's common stock.
In 1996, the Company matched employees contribution to the Retirement
Savings Plan in amounts up to 3% of employee compensation. Effective January 1,
1997, the plan was renamed Houghton Mifflin 401(k) Saving Plan, and provides a
company match in amounts up to 41/2% of employee compensation. The contribution
expense, which is invested solely in shares of the Company's common stock,
amounted to approximately $2.1 million in 1996; $1.8 million in 1995; and $1.8
million in 1994.
Note 6. Postretirement Benefits
The Company provides postretirement medical benefits to retired full-time,
non-union employees hired before April 1, 1992, who have provided a minimum of
10 years of service and attained age 55. Additionally, employees of Heath as of
October 31, 1995 who became Houghton Mifflin employees with the acquisition of
Heath are covered subject to the same age and service requirements.
Under the terms of the Benefits Trust agreement formed in 1992, proceeds
from the periodic sale of assets by the trustee, cash dividends received, and
other trust earnings may be used to pay designated compensation and benefit plan
obligations, including retiree health care benefit costs. The assets in the
Benefits Trust consist principally of the Company's common stock. The fair value
of the Benefits Trust net assets was $36.8 million and $27.9 million at December
31, 1996, and 1995, respectively.
The following table presents the postretirement benefit liability
recognized in the consolidated balance sheet at December 31:
<TABLE>
<CAPTION>
In thousands 1996 1995
- ------------------------------------------------- ----------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees .................................... $ 18,590 $ 19,318
Fully eligible active plan participants ...... 2,484 3,243
Other active participants ..................... 3,827 3,562
-------- --------
24,901 26,123
Unrecognized net gain ........................ 2,739 745
Unrecognized prior service cost ............... 15 16
-------- --------
Accrued postretirement benefit liability ...... $ 27,655 $ 26,884
======== ========
Significant actuarial assumptions:
Weighted average discount rate ............... 7.75% 7.75%
Ultimate medical inflation rate ............... 4.25% 4.25%
</TABLE>
26
<PAGE>
Net periodic postretirement benefit cost includes the following components
for the twelve months ended December 31:
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- -------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost (benefits earned during the year) ...... $ 529 $ 349 $ 354
Interest cost on projected benefit obligation ......... 1,801 1,676 1,786
Amortization of unrecognized prior service cost ...... (1) (68) (67)
------ ------ ------
Net periodic postretirement benefit expense ......... $ 2,329 $ 1,957 $ 2,073
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Significant actuarial assumptions:
Weighted average discount rate ...... 7.25% 7.90% 7.80%
Medical inflation trend rate ......... 6.25% 8.00% 9.00%
</TABLE>
The change in the medical inflation trend rate reflects the recent
moderation of health care cost increases. As of December 31, 1996, the medical
inflation rate was assumed to decline 1% per annum to a projected ultimate rate
of 4.25% in 1998 and thereafter.
An increase of 1% in the assumed medical inflation rate would increase the
combination interest and service cost components of 1996 net periodic
postretirement benefit cost by approximately $0.1 million, and increase the
accumulated postretirement benefit obligation as of December 31, 1996 by $2.0
million. The Company expects the discount rate to remain unchanged and the
medical inflation trend rate to reduce to 5.25% for 1997.
Note 7. Stock Compensation Plans
At December 31, 1996, the Company had two stock-based compensation plans
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. The Company has adopted the
disclosure-only provision of SFAS 123. Accordingly, no compensation cost has
been recognized for its fixed stock compensation plans. In 1994, the Company
charged to income $0.6 million related to the performance-based plan. Had
compensation cost for the Company's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
In millions, except per share amounts 1996 1995
- --------------------------------------- --------- ----------
<S> <C> <C> <C>
Net income ........................... As reported ...... $ 43.6 $ (7.2)
Pro forma ......... $ 42.4 $ (7.9)
Earning per share .................. As reported ...... $ 3.13 $ (0.52)
Pro forma ......... $ 3.04 $ (0.57)
</TABLE>
The effects on pro forma net income and earnings per share of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on reported net income for future years due to such factors as the
vesting period of the stock options and the potential for issuance of additional
stock options in future years. Additionally, the disclosure requirements of SFAS
123 are presently applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1999 or 2000.
Fixed stock compensation plans
The Company maintains two fixed stock compensation plans, the 1992 Stock
Compensation Plan and the 1995 Stock Compensation Plan. Options outstanding
include some granted under the 1992 Stock Compensa-
tion Plan, under which no further options may be granted. The Company has
authorized 700,000 common shares and 900,000 common shares under the 1992 Stock
Compensation Plan and the 1995 Stock Compensation Plan, respectively, for the
granting of incentive and non-qualified stock options, awards of restricted or
bonus stock, or other performance awards to eligible employees and non-employee
members of the Board of Directors and shares issued to Directors as part of
their compensation. Recipients of restricted stock awards may not sell or
transfer the shares until the restricted period lapses, provided that shares
have not been forfeited due to termination of employment. During the restriction
period, the recipient is entitled to the right to vote and receive dividends. In
1996, grants of 42,414 shares of restricted stock were made; at December 31,
1996, there was a total of 48,235 restricted shares unvested. The Plans provide
that the option price shall not be less than the fair market value of the shares
on the date of grant. Options granted under all plans become exercisable at such
times as the Compensation & Nominating Committee has determined, but not later
than ten years from the date of the grant.
27
<PAGE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Dividend yield 1.89% 1.89%
Range of expected lives (years) 3 - 4.8 3 - 4.8
Expected volatility 24.90% 27.00%
Risk-free interest rate 6.21% 5.38%
</TABLE>
A summary of the status of the Company's two fixed stock compensation plans
as of December 31, 1996 and 1995 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
- ----------------------------------------- --------- ------------ --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ...... 802 $ 44 622 $ 43 395 $ 33
Granted .............................. 208 46 308 44 493 45
Exercised .............................. (57) 38 (72) 31 (224) 30
Forfeited .............................. (75) 44 (56) 45 (42) 46
----- ----- ----- ----- ----- -----
Outstanding at end of year ............ 878 45 802 44 622 43
===== ===== ===== ===== ===== =====
Options exercisable at year-end ...... 461 339 234
Weighted-average fair value of options
granted during the year ............... $11.50 $11.11
</TABLE>
The following table summarizes information about fixed stock options at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Outstanding Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- ------------ -------------- -------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
$35 to $42 93,727 3.2 years $ 41 35,435 $ 40
43 to 44 203,500 3.8 43 89,569 43
45 to 46 434,540 2.5 45 304,733 45
48 to 53 146,000 4.4 48 31,736 49
-------- --------
877,767 3.2 45 461,473 45
======== ========
</TABLE>
Executive Stock Purchase Plan
In August 1994, pursuant to the 1994 Executive Stock Purchase Plan
("Executive Stock Purchase Plan"), whose purpose was to increase stock ownership
of the Company's Executive Officers, the Company granted 124,272 options under
the 1992 Stock Compensation Plan to certain corporate officers for exercise at
the then market price of $42.625. These options were exercisable only on the
date granted and stock was issued from treasury shares. A note was obtained from
the officers and collateralized by the stock. In addition, each participant has
entered into a risk sharing agreement which, among other things, limits the
gains and losses associated with the stock in the event of a future sale (See
Note 13).
Note 8. Special and Restructuring Charges
In 1995, the Company incurred special charges to outsource existing
warehousing and distribution operations. In 1994, the Company substantially
completed the reorganization of certain administrative and corporate functions
begun in 1991. These actions, as well as other measures taken over the past four
years, are expected to hold down operating costs and increase efficiency. A
summary of the principal actions taken in 1995 and 1994, and the related costs,
is set forth in the table below:
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994
- --------------------------------------------------- ---------- ---------
In thousands, except per share amounts
<S> <C> <C>
Severance ....................................... $ 2,850 $ 3,560
Facilities sale and consolidation ............... 2,788 1,982
Inventory relocation ........................... 315 --
Disposal of tangible and intangible assets ...... 250 971
Consulting ....................................... 830 --
-------- --------
7,033 6,513
Income tax benefit .............................. 2,743 2,475
-------- --------
Net charge to operations ........................ $ 4,290 $ 4,038
======== ========
Per share cost ................................. $ 0.31 $ 0.29
======== ========
</TABLE>
28
<PAGE>
The Company eliminated approximately 191 positions as a result of these
actions. As of December 31, 1996, approximately $6.4 million had been paid to
employees in the form of salary continuance and other benefits related to these
restructurings. Also, the liabilities related to above noted charges have been
materially settled at the end of 1996. There were no material differences
between the amounts accrued above and the payments against the liabilities
recognized.
In addition to the charges noted above and in connection with the
acquisition of Heath, a non-recurring charge of $49.3 million ($30.0 after-tax),
or $2.17 per share, was recognized in 1995. This charge is principally comprised
of integration costs, indirect costs of the acquisition, and adjustments to
reflect strategic decisions made and actions taken subsequent to the acquisition
to state certain inventories and book plates at estimated net realizable values
(See Note 2).
Note 9. Preferred Stock Purchase Plan
In December 1988, the Company adopted a Stockholders' Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
common stock. The Rights are attached to the common stock and do not have voting
or dividend rights, and until they become exercisable, can have no dilutive
effect on Company earnings. Each Right, when exercisable, entitles the holder to
purchase at an exercise price of $125 on one- thousandth of a share of Series A
Junior Participating Preferred Stock. The Rights will become exercisable after a
person or group has acquired ownership of 20% or more of the outstanding common
stock, or the commencement of a tender or exchange offer that would result in a
person or group owning 30% or more of the common stock, or the determination by
the Continuing Directors that a person or group which has acquired a substantial
amount (at least 15%) of the outstanding common stock is an Adverse Person (as
defined in the Rights Agreement). Any declaration by the Continuing Directors
that a person is an Adverse Person, any acquisition of 30% or more of the
outstanding common stock (except pursuant to an offer the Outside Directors have
determined is fair to, and in the best interest of, the Company and its
stockholders), and certain mergers, sales of assets, or other "self-dealing"
transactions with a holder of 20% or more of the outstanding common stock, may
entitle each Right holder, other than the potential acquirer, to receive upon
exercise of each Right an amount of common stock, or common stock of the
acquirer in the case of certain mergers or sales of assets, having a market
value equal to twice the exercise price of the Right. In general, the Company
may redeem the Rights in whole at a price of $0.05 per Right at any time prior
to the tenth day after a person or group acquires 20% or more of the outstanding
common stock. The Company may not redeem the Rights if the Continuing Directors
have declared someone to be an Adverse Person. The Rights will expire in
December 1998.
Note 10. Commitments and Contingencies
Operating lease obligations
The Company has leases for various real property, office facilities, and
warehouse equipment which expire at various dates. Certain leases contain
renewal and escalation clauses for a proportionate share of operating expenses.
The future minimum rental commitments under all noncancelable leases for
real estate and equipment are payable as follows:
<TABLE>
<CAPTION>
Years In thousands
- ------------------------------- --------------
<S> <C>
1997 $ 14,125
1998 13,675
1999 12,488
2000 11,764
2001 11,658
Thereafter 53,660
---------
Total minimum lease payments $ 117,370
=========
</TABLE>
Rent expense, net of sublease income, was approximately $16.7 million in
1996; $13.0 million in 1995; and $11.6 million in 1994.
Contingencies
The Company is involved in ordinary and routine litigation incidental to
its business. There are no such matters pending that the Company expects to be
material in relation to its financial condition or results of operations.
Note 11. Software Division Public Offering
In March 1994, the Company's former wholly-owned Software Division, a
developer of software tools for proofreading, reference, and information
management, completed an initial public offering of 6.9 million shares at an
offering price of $7.50 per share for total consideration of $51.8 million. In
connection with the public offering, the Company received a cash dividend of
$32.9 million from the newly-formed successor com
29
<PAGE>
pany, INSO. An after-tax gain of $22.8 million, or $1.65 per share, was
recognized in connection with the public offering. Deferred taxes were
recognized on the transaction. Upon completion, the assets, businesses, and
employees of the Software Division were transferred to INSO. The Company
retained an ownership interest of approximately 40% in the successor company
subsequent to the transfer. In addition, the Company and INSO had entered into a
service agreement whereby certain general administrative services were provided
by the Company and reimbursed by INSO. A portion of the facilities leased by the
Company were placed under a subleasing agreement which was terminated in May
1995.
During 1995, the Company's Trade & Reference Division sold to INSO certain
properties and rights relating to the Information Please[RegTM] almanac product
line for $3.3 million. At the time of the sale, the Company held a 40% equity
stake in INSO, and accordingly, $1.3 million of the gain was deferred, and is
being recognized as income by the Company over a period of three years.
In August 1995, INSO completed an additional public offering of 1.2 million
shares of common stock at a net offering price of $32.74 for total consideration
of $39.3 million. As a result, the Company's equity ownership reduced to
approximately 36%. A gain of $13.1 million, $7.8 million after-tax, or $0.56 per
share, was recorded representing the Company's portion of the increase in INSO's
net assets. On September 1, 1995, INSO effected a two-for-one common stock split
in the form of a 100% stock dividend. All INSO share references have been
restated to reflect the effects of the stock split.
In 1996, the Company received $38.6 million in proceeds from the sale of
770,000 shares of INSO common stock. As a result of the sales, the Company
recorded a gain of approximately $34.3 million ($19.9 million after-tax), or
$1.43 per share. The Company's equity ownership in INSO, after the sale of
common stock, is approximately 30%.
The Company records its pro-rata share of income and losses and the impact
of INSO's equity activities, if any, on a quarterly basis, in arrears. In the
fourth quarter of 1996, INSO sold additional shares in a public offering. In the
first quarter of 1997, the Company will record an estimated gain of $15 million
associated with these sales.
Note 12. Disclosures about Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- ------------------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, cash equivalents, and marketable
securities ........................... $ 12,146 $ 12,146 $ 17,305 $ 17,305
Investments:
INSO .............................. 13,861 152,909 24,558 186,200
Cassell PLC ........................ 2,389 2,389 2,389 2,389
Financial liabilities:
SAILS .............................. (126,643) (144,000) (126,643) (136,900)
7.00% notes ........................ (124,791) (121,650) -- --
7.125% notes ........................ (99,565) (99,410) (99,505) (104,950)
Credit facility ..................... (90,000) (90,000) (200,000) (200,000)
5.83% notes ........................ (40,000) (39,940) -- --
6.07% notes ........................ (40,000) (39,772) -- --
6.29% notes ........................ (20,000) (19,860) -- --
Commercial paper ..................... -- -- (144,612) (144,612)
Off-balance-sheet instruments losses:
Interest rate-lock .................. -- -- -- (2,957)
</TABLE>
The fair values of financial instruments are estimates based upon market
conditions and perceived risks at December 31, 1996 and 1995, and require
varying degrees of management judgment. The fair values of the financial
instruments presented may not be indicative of their future values. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Cash, cash equivalents, marketable securities, and commercial paper
The carrying amount approximates fair value due to the short-term maturity
of the instruments.
Investments
The fair value of the Company's investments is estimated based on the
quoted market prices for these securities at December 31, 1996 and 1995. The
fair value of the 3.3 million shares of the investment in INSO has been reduced
to $39.44 per share to reflect the threshold appreciation price. This is the
maximum amount
30
<PAGE>
the Company can realize upon redemption of the SAILS (See Note 4). Included in
the book and fair value of Cassell PLC is approximately $1.9 million of deferred
tax benefit.
Long-term debt
The fair value of the SAILS and notes is estimated based upon quoted market
prices. The carrying amount of the credit facility approximates fair value
because of the renewing feature of the facility.
Off-balance-sheet financial instruments gains (losses)
The fair value of interest rate swap and interest rate-lock agreements
(used for purposes other than trading) is the estimated amount that the Company
would pay to terminate the agreement, taking into account interest rates and the
credit-worthiness of the swap counterparty. There were no interest rate swap
agreements outstanding at December 31, 1996 and 1995. There were no interest
rate-lock agreements outstanding at December 31, 1996. The Company does not
enter into speculative or leveraged derivative transactions.
Note 13. Related Parties
The Company presently holds notes receivable for a total of $5.9 million
from certain corporate officers and members of the Board of Directors. The
Company provided financing in 1994 to effect the purchase of an aggregate of
138,272 shares of the Company's common stock pursuant to the 1994 Executive
Stock Purchase Plan and the 1994 Non-Employee Director Stock Purchase Plan at
the fair market value on August 27, 1994, of $42.625 per share. The loans bear
an interest rate of 8% and are due in the fourth quarter of 1999. Loans made to
officers are collateralized by the shares of common stock purchased and
supported by a risk-sharing agreement which provides, among other things, for
the Company to share in 50% of the gain on any shares sold before the third
anniversary, and to share in 50% of the loss on any shares sold after the third
anniversary. Loans provided to members of the Board of Directors are unsecured.
A director who sells shares purchased with Company financing is responsible for
100% of any resulting loss. The notes receivable are shown as a reduction in
stockholders' equity in the consolidated financial statements. In 1996, the
Company recognized approximately $0.4 million in interest income in connection
with the outstanding loans.
Note 14. Segment Information
The Company's principal business is publishing and is divided into two
segments: (a) textbooks and other educational materials and services for the
school and college markets; and (b) general publishing, including fiction,
nonfiction, software, children's books, and reference materials.
A comparative summary of segment information for the years 1996, 1995, and
1994 appears below. Net corporate expenses include certain corporate officer
compensation costs, certain corporate development costs, certain occupancy
costs, stockholder reporting expenses, legal costs, and consulting fees.
Corporate assets are principally cash and cash equivalents, marketable
securities, and deferred income taxes.
<TABLE>
<CAPTION>
Textbooks and
other educational
materials and General
In thousands services publishing Corporate Consolidated
- -------------------------------------------- ------------------- ------------------- ------------ --------------
<S> <C> <C> <C> <C>
1996
Net sales ................................. $ 636,055 $ 81,808 $ -- $ 717,863
--------- ---- -------- ---------
Segment income (loss) ..................... 113,371 (5,138) -- 108,233
--------- ---- -------- ---------
Net corporate expenses .................. -- -- (20,851) (20,851)
Gain on sale of INSO common stock ......... -- 34,261 -- 34,261
Interest expense, net ..................... -- -- (40,875) (40,875)
Equity in losses of INSO .................. -- (6,815) -- (6,815)
--------- ---- -------- ---------
Income (loss) before taxes ............... 113,371 22,308 (61,726) 73,953
--------- ---- -------- ---------
Identifiable assets ..................... 816,609 90,906 83,426 990,941
Acquired assets ........................... 15,501 -- -- 15,501
--------- ---- -------- ---------
Total assets .............................. 832,110 90,906 83,426 1,006,442
--------- ---- -------- ---------
Depreciation and amortization ............ 79,529 1,403 3,403 84,335
Purchase of property, plant, and equipment,
including book plates .................. 67,651 1,139 6,153 74,943
========= ==== ======== =========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Textbooks and
other educational
materials and General
In thousands services publishing Corporate Consolidated
- ------------------------------------------------------ ------------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
1995
Net sales .......................................... $ 441,800 $87,222 $ -- $ 529,022
-------- ------- -------- ---------
Segment income (loss) .............................. 63,817 (8,520) -- 55,297
-------- ------- -------- ---------
Net corporate expenses .............................. -- -- (16,018) (16,018)
Special charges related to the acquisition of
Heath ............................................. (49,230) -- -- (49,230)
Special charges .................................... (3,825) (2,700) (508) (7,033)
Gain on sale of warehouse ........................... -- 3,889 -- 3,889
Gain on equity transactions of INSO ............... -- 13,102 -- 13,102
Interest expense, net .............................. -- -- (13,008) (13,008)
Equity in earnings of INSO ........................ -- 1,557 -- 1,557
-------- ------- -------- ---------
Income (loss) before taxes ........................ 10,762 7,328 (29,534) (11,444)
-------- ------- -------- ---------
Identifiable assets ................................. 366,816 114,169 112,576 593,561
Acquired assets .................................... 452,888 -- -- 452,888
-------- ------- -------- ---------
Total assets ....................................... 819,704 114,169 112,576 1,046,449
-------- ------- -------- ---------
Depreciation and amortization ..................... 47,393 1,655 3,378 52,426
Purchase of property, plant, and equipment,
including book plates .............................. 50,566 932 2,780 54,278
======== ======= ======== =========
1994
Net sales from ongoing operations .................. $ 387,427 $ 93,811 $ -- $ 481,238
Net sales from former Software Division ............ -- 1,838 -- 1,838
-------- ------- -------- ---------
Net sales .......................................... 387,427 95,649 -- 483,076
-------- ------- -------- ---------
Income from ongoing operations ..................... 68,216 7,275 -- 75,491
Income from former Software Division ............... -- 117 -- 117
-------- ------- -------- ---------
Segment income .................................... 68,216 7,392 -- 75,608
-------- ------- -------- ---------
Net corporate expenses .............................. -- -- (15,631) (15,631)
Special charges .................................... (4,575) (502) (1,436) (6,513)
Gain on sale of interest in Software Division ...... -- 36,212 -- 36,212
Interest expense, net .............................. -- -- (6,509) (6,509)
Equity in earnings of INSO ........................ -- 1,973 -- 1,973
-------- ------- -------- ---------
Income (loss) before taxes and extraordinary
items ............................................. 63,641 45,075 (23,576) 85,140
-------- ------- -------- ---------
Identifiable assets ................................. 172,799 99,121 95,004 366,924
Acquired assets .................................... 130,342 -- -- 130,342
-------- ------- -------- ---------
Total assets ....................................... 303,141 99,121 95,004 497,266
-------- ------- -------- ---------
Depreciation and amortization ..................... 39,439 1,692 3,285 44,416
Purchase of property, plant, and equipment,
including book plates .............................. 30,410 1,277 2,033 33,720
======== ======= ======== =========
</TABLE>
32
<PAGE>
S U M M A R Y O F Q U A R T E R L Y R E S U L T S O F O P E R A T I O N S
(Unaudited, in thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Year
----------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales ....................................... $ 62,835 $178,214 $356,669 $ 120,145 $717,863
Gross profit (net sales less cost of sales) ...... 12,740 93,873 219,827 61,737 388,177
Net income (loss) ................................. $(22,130) $ 9,514 $ 76,047 $ (19,809) $ 43,622
======== ======== ========= ========= ========
Per share:
Net income (loss) ................................. $ (1.60) $ 0.68 $ 5.45 $ (1.42) $ 3.13
======== ======== ========= ========= ========
1995
Net sales ....................................... $ 50,505 $104,655 $ 267,893 $ 105,969 $529,022
Gross profit (net sales less cost of sales) ...... 10,624 48,840 165,964 32,558 257,986
Net income (loss) ................................. $(18,532) $ (5,104) $ 68,070 $ (51,677) $ (7,243)
======== ======== ========= ========= ========
Per share:
Net income (loss) ................................. $ (1.34) $ (0.37) $ 4.93 $ (3.74) $ (0.52)
======== ======== ========= ========= ========
</TABLE>
The above quarterly information indicates the seasonal fluctuations of the
Company's educational publishing business.
The improved quarterly results for 1996 are primarily due to the
acquisition of Heath. Net sales increased due to the significant expansion of
the product lines from the addition of Heath publications and also from the
development of new programs. Improvement in gross profit and net income is
directly related to operating efficiencies achieved through the Heath
acquisition.
During 1996, the Company recorded a gain relating to the sales of INSO
shares. A gain of $14.2 million ($8.2 million after-tax), or $0.60 per share,
was recognized in the first quarter on the sale of 343,000 shares; in the second
quarter a gain of $8.7 million ($5.1 million after-tax), or $0.36 per share, was
recognized on the sale of 194,500 shares; during the third quarter a $9.6
million gain ($5.6 million after-tax), or $0.40 per share, was recognized on the
sale of 200,000 shares; and in the fourth quarter a $1.8 million gain ($1.1
million after-tax), or $0.08 per share, was recognized on the sales of 32,500
shares.
The second quarter of 1996 included a one-time acquisition charge of $1.4
million ($0.8 million after-tax), or $0.06 per share, relating to the Company's
investment in INSO resulting from INSO's acquisition of ImageMark Software Labs,
Inc. During the fourth quarter, a one-time acquisition charge of $10.3 million
($6.4 million after-tax), or $0.46 per share, was recognized relating to INSO's
acquisition of Electronic Book Technologies, Inc.
The second quarter of 1995 included a charge related to the Company's
corporate and domestic publishing operations which are of an unusual nature.
Note 8 to the consolidated financial statements describes the trans- actions and
related financial statement impact. Also included in the second quarter is a
one-time acquisition charge of $2.2 million, or $0.16 per share, relating to its
investment in INSO resulting from INSO's acquisition of Systems Compatibility
Corporation.
The fourth quarter of 1995 included an after-tax charge of $30.0 million
related to the Heath acquisition. Note 2 describes this transaction.
The third quarter of 1995 included an estimated after-tax gain of $8.9
million, or $0.64 per share, due to an additional public offering of 1.2 million
shares of INSO common stock. The fourth quarter of 1995 includes an after-tax
loss of $1.1 million, or $0.08 per share, as an adjustment to the previously
recorded estimated gain. Note 11 to the consolidated financial statements
describes these transactions.
33
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
Information with respect to directors is incorporated herein by reference
to the Proxy Statement for the 1997 Annual Meeting of Stockholders ("1997 Proxy
Statement"), and information with respect to Executive Officers is set forth
following Part I, Item 4 of this report under the heading "Executive Officers of
the Company" on pages 4 through 5 herein.
Item 11. Executive Compensation
Incorporated herein by reference to the 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the 1997 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statements and Schedule, and Reports on Form 8-K
(a) 1. Consolidated Financial Statements are listed in the accompanying Index to
Consolidated Financial Statements on page 12.
2. Financial Statement Schedule for the three years ended December 31, 1996:
II--Consolidated Valuation and Qualifying Accounts Page 35
All other Schedules have been omitted because the required information is
included in the consolidated financial statements or notes thereto or
they are not required submissions.
3. The Exhibits listed in the accompanying Index to Exhibits set forth on
page 37 herein are filed as part of this Report and are included only on
the Form 10-K filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K filed in the fourth quarter of 1996
None.
34
<PAGE>
HOUGHTON MIFFLIN COMPANY
SCHEDULE II--CONSOLIDATED VALUATION ACCOUNTS
Years ended December 31, 1996, 1995, and 1994
(In thousands of dollars)
<TABLE>
<CAPTION>
Additions
Balance at charged Balance
beginning (credited) Acquired at end
of year to income (retirements) of year
------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
1996
Allowance for book returns ............ $ 21,698 $ (3,369) $6,837 (1) $ 25,166
Allowance for authors' advances ...... 21,848 2,793 (3,666)(2) 20,975
1995
Allowance for book returns ............ $ 12,836 $ 2,340 $6,522 $ 21,698
Allowance for authors' advances ...... 11,079 9,557 1,212 21,848
1994
Allowance for book returns ............ $ 12,325 $ 511 $ -- $ 12,836
Allowance for authors' advances ...... 11,866 2,593 (3,380) 11,079
</TABLE>
(1) This amount represents the estimated book returns for products published by
DK Publishing, Inc. and distributed by the Company. These book returns will
reduce future payments to DK Publishing, Inc.
(2) Approximately $2.1 million represents the final purchase adjustments for the
allowance for author advances related to the Heath acquisition. In addition,
the Company has written off approximately $5.8 million of author advances.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HOUGHTON MIFFLIN COMPANY
Registrant
/s/ Nader F. Darehshori
By: ------------------------------------
Nader F. Darehshori
Chairman of the Board, President, and
Chief Executive Officer
March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Nader F. Darehshori Chairman of the Board, President,
- ---------------------- and Chief Executive Officer, Director March 24, 1997
Nader F. Darehshori
/s/ Gail Deegan Executive Vice President,
- ---------------------- Chief Financial Officer, and Treasurer March 24, 1997
Gail Deegan
/s/ Michael J. Lindgren Vice President and Controller
- ----------------------
Michael J. Lindgren March 24, 1997
/s/ Joseph A. Baute Director
- ----------------------
Joseph A. Baute March 24, 1997
/s/ James O. Freedman Director
- ----------------------
James O. Freedman March 24, 1997
/s/ Mary H. Lindsay Director
- ----------------------
Mary H. Lindsay March 24, 1997
/s/ Charles R. Longsworth Director
- ----------------------
Charles R. Longsworth March 24, 1997
/s/ John F. Magee Director
- ----------------------
John F. Magee March 24, 1997
/s/ Claudine B. Malone Director
- ----------------------
Claudine B. Malone March 24, 1997
/s/ Alfred L. McDougal Director
- ----------------------
Alfred L. McDougal March 24, 1997
/s/ George Putnam Director
- ----------------------
George Putnam March 24, 1997
/s/ Ralph Z. Sorenson Director
- ----------------------
Ralph Z. Sorenson March 24, 1997
/s/ DeRoy C. Thomas Director
- ----------------------
DeRoy C. Thomas March 24, 1997
</TABLE>
36
<PAGE>
HOUGHTON MIFFLIN COMPANY
INDEX TO EXHIBITS
(Item 14(a)(3))
<TABLE>
<CAPTION>
Exhibit No. Description of Document Page Number in this report
- ------------- -------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
(3)(i) Restated Articles of Organization of the Filed as Exhibits (4.1) and (4.2) to Registration
Company Statement No. 33-14850 as amended, and
incorporated herein by reference thereto
Amendment to Restated Articles of Filed as Exhibit (3)(i) to Form 10-K for the year
Organization of the Company in the form of a ended December 31, 1995, and incorporated
certificate of vote of directors establishing a herein by reference thereto
series of a class of stock
(3)(ii) By-laws of the Company Filed as Exhibit (3)(ii) to Form 10-K for the
year ended December 31, 1995, and
incorporated herein by reference thereto
(4) Registration Statement under the Securities Filed on June 20, 1967, and incorporated herein
Exchange Act of 1934 on Form 10 dated June by reference thereto
20, 1967, as amended, with particular reference
to the description of the common stock of the
Company
Rights Agreement between the Company and Filed as Exhibit (4) to Form 10-K for the year
the First National Bank of Boston, as Rights ended December 31, 1995, and incorporated
Agent herein by reference thereto
Registration Statement under the Securities Filed September 4, 1992, and incorporated
Exchange Act of 1934 on Form S-3 dated herein by reference thereto
September 4, 1992
Indenture dated as of March 15, 1994 between Filed as Exhibit (4.1) to Registration Statement
the Company, as successor trustee to the First No. 33-51700 as amended, and incorporated
National Bank of Boston herein by reference thereto
First Supplemental Indenture dated as of July Filed as Exhibit (4.2) to Registration Statement
27, 1995 between the Company and State Street No. 33-64903 as amended, and incorporated
Bank and Trust Company, as successor trustee herein by reference thereto
to the First National Bank of Boston
Registration Statement under the Securities Act Filed on December 11, 1995 and incorporated
of 1933 on Form S-3 dated December 11, 1995 herein by reference hereto
(10)(ii) Lease between Two Twenty Two Berkeley Page 39
(D) Venture, as landlord, and Houghton Mifflin
Company, as tenant
Lease between New England Mutual Life Page 125
Insurance Company, as sublandlord, and
Houghton Mifflin Company, as subtenant
(10)(iii) Benefits Trust Agreement between Houghton Filed as Exhibit (10)(ii)(C) to Form 10-K for the
(A) Mifflin Company and State Street Bank and year ended December 31, 1992, and
Trust Company dated June 3, 1992 incorporated herein by reference thereto
Severance Agreement between the Company Filed as Exhibit (10)(iii)(A) to Form 10-K for
and Mr. Darehshori the year ended December 31, 1995, and
incorporated herein by reference thereto
Form of Senior Executive Severance Agreement Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
Form of Key Managers' Severance Agreement Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Document Page Number in this report
- ------------- ------------------------------------------------ -------------------------------------------------
<S> <C> <C>
Supplemental Benefits Plan Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
Non-Employee Directors Retirement Benefit Filed as Exhibit (10)(iii)(A) to Form 10-K for
the year ended December 31, 1995, and
incorporated herein by reference thereto
1996 Senior Executive Incentive Compensation Page 143
Plan
Restricted Stock Agreement between the Page 149
Company and Mr. Darehshori
Restricted Stock Agreement between the Page 155
Company and Ms. Deegan
1995 Stock Compensation Plan Page 161
Trust Agreement for the Houghton Mifflin Filed as Exhibit (10)(iii)(A) to Form 10-K for
Pension Plan with State Street Bank and Trust the year ended December 31, 1995, and
Company incorporated herein by reference thereto
1994 Executive Stock Purchase Plan Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
Form of Option Grant and Exercise Agreement Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
Non-Employee Directors Stock Purchase Plan Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
Forms of Stock Purchase Agreement Filed as Exhibit (10)(iii)(A) to Form 10-Q for
the quarter ended September 30, 1994, and
incorporated by reference thereto
(12) Computation of Ratio of Earnings to Fixed Page 165
Charges
(21) List of Subsidiaries Page 166
(23) Consent of Experts and Counsel Page 167
(27) Financial Data Schedule Page 168
</TABLE>
38
Exhibit (10)(ii)(D)
LEASE
between
TWO TWENTY TWO BERKELEY VENTURE, as LANDLORD
and
HOUGHTON MIFFLIN COMPANY, as TENANT
Dated as of December 16, 1991
<PAGE>
BASIC LEASE INFORMATION
Date: December 16, 1991
Tenant: Houghton Mifflin Company
Address: One Beacon Street
Boston, MA 02108
Landlord: Two Twenty Two Berkeley Venture
Address: c/o Hines Interests Limited Partnership
500 Boylston Street, Suite 1800
Boston, MA 02116
Location of Leased Floors three (3) through eleven (11), as
Premises: shown on Exhibit A, of the Building located
on the Land described in Exhibit A-1
Net Rentable Area: 263,923 square feet
Term Commencement Date: March 1, 1992
Scheduled Completion Date: March 1, 1993
Estimated Outside December l, 1993
Completion Date:
Scheduled Rent
Commencement Date: March 1, 1994
Term Expiration Date: The thirteenth (13th) anniversary of the
Rent Commencement Date
Options to Extend Term: Either (A) One (1) two year option
or
(B) One (1) five year option,
and one (1) subsequent option
for, as determined by
Landlord pursuant to Section
9.01, either five years or
ten years
Base Rent Years 1 - 10: $12.27 per square foot per
year of Net Rentable Area leased
Years 11 - 15: $15.55 per square foot per year
of Net Rentable Area leased
-2-
<PAGE>
Tenant's Proportionate The ratio, expressed as a percentage, of the Net
Share: Rentable Area of the Leased Premises to the
greater of (i) ninety-five percent (95%) of the
total Net Rentable Area of the Office Section,
or (ii) the Total Leased Net Rentable Area. As
of the date of this Lease, based on 95% of the
total Net Rentable Area of the Office Section,
the Tenant's Proportionate Share is 58.67%
-3-
<PAGE>
INDEX
-----
SECTION PAGE
NUMBER NUMBER
- ------- ------
Basic Lease Information......................................... 2
Schedule of Exhibits............................................ 9
ARTICLE l. LEASE
1.01 Lease........................................................... 10
ARTICLE 2. TERM; USE; RENT
2.01 Term............................................................ 10
2.02 Use............................................................. 12
2.03 Rent............................................................ 12
2.04 Operating Cost.................................................. 12
2.05 Impositions..................................................... 19
2.06 Computation of Operating Cost and
Impositions..................................................... 20
2.07 Adjustment for Variation Between Estimated
and Actual Operating Cost and Impositions....................... 23
2.08 Notice of Adjustments........................................... 23
2.09 Operating Cost for 1994......................................... 23
ARTICLE 3. LANDLORD'S COVENANTS
3.01 Basic Services.................................................. 24
3.02 Extra Services.................................................. 27
3.03 Graphics and Signage............................................ 28
3.04 Repair Obligation............................................... 29
3.05 Peaceful Employment............................................. 30
3.06 Restricted Uses................................................. 30
-4-
<PAGE>
SECTION PAGE
NUMBER NUMBER
- ------ ------
ARTICLE 4. TENANT'S COVENANTS
4.01 Construction of Tenant Improvements............................ 30
4.02 Taxes on Personal Property..................................... 30
4.03 Repairs by Tenant.............................................. 31
4.04 Waste.......................................................... 31
4.05 Assignment or Sublease......................................... 31
4.06 Alterations and Surrender...................................... 36
4.07 Compliance with Laws and Insurance Standards................... 39
4.08 Entry for Repairs and Leasing.................................. 39
4.09 No Nuisance.................................................... 40
4.10 Subordination.................................................. 40
4.11 Estoppel Certificate........................................... 41
4.12 Tenant's Remedies.............................................. 41
4.13 Rules and Regulations.......................................... 42
4.14 Personal Property at Tenant's Risk............................. 42
4.15 Payment of Landlord's Expenses................................. 42
4.16 Window Coverings............................................... 43
ARTICLE 5. CASUALTY and EMINENT DOMAIN
5.01 Casualty Insurance............................................. 43
5.02 Liability Insurance............................................ 44
5.03 Tenant's Insurance............................................. 44
5.04 Indemnity and Exoneration...................................... 46
5.05 Waiver of Subrogation Rights................................... 47
-5-
<PAGE>
SECTION PAGE
NUMBER NUMBER
- ------ ------
5.06 Condemnation and Loss or Damage................................ 47
5.07 Damage Due to Fire and Casualty................................ 49
ARTICLE 6. DEFAULT
6.01 Events of Default.............................................. 52
6.02 Remedies upon Default.......................................... 54
6.03 Damages upon Termination....................................... 54
6.04 Computation of Rent for Purposes of Default.................... 56
6.05 Rights of Landlord in Bankruptcy............................... 56
6.06 Interest on Late Payments....................................... 56
ARTICLE 7. APPRAISAL
7.01 Appraisal of Fair Market Net Rent.............................. 57
ARTICLE 8. MISCELLANEOUS
8.01 Holding Over................................................... 59
8.02 Amendments and Modifications................................... 60
8.03 Transfers by Landlord.......................................... 60
8.04 Severability................................................... 60
8.05 Notices........................................................ 60
8.06 No Joint Venture............................................... 61
8.07 Successors and Assigns......................................... 61
8.08 Applicable Law................................................. 61
8.09 Time of the Essence............................................ 61
8.10 Submission Not an Option ...................................... 61
8.11 Brokerage...................................................... 61
8.12 Waiver of Jury Trial........................................... 62
-6-
<PAGE>
SECTION PAGE
NUMBER NUMBER
- ------ ------
8.13 All Agreements Contained...................................... 62
8.14 Cumulative Remedies........................................... 62
8.15 Failure to Enforce............................................. 62
8.16 Notice of Lease; Other Notices and Agreements................. 63
8.17 Moving Expense Reimbursement.................................. 63
8.18 Release of Existing Lease Obligations......................... 63
8.19 Hiring Practices.............................................. 64
ARTICLE 9. OPTIONS TO EXTEND THE TERM
9.01 Grant and Exercise of Options to Extend....................... 64
9.02 Election to Reduce the Leased Premises........................ 65
9.03 Rent During Extended Term..................................... 66
9.04 Lease Continues in Effect..................................... 67
ARTICLE 10. OPTIONS TO EXPAND THE LEASED PREMISES
10.01 Grant of Initial Option to Expand............................. 67
10.02 Grant of Options to Expand.................................... 67
10.03 Exercise of Options to Expand................................. 69
10.04 Rent for Expansion Space...................................... 70
10.05 Condition of Expansion Space.................................. 71
10.06 Expansion Space Part of Leased Premises....................... 71
ARTICLE 11. FIRST RIGHT TO LEASE
11.01 Exercise of First Right to Lease.............................. 72
ARTICLE 12. ADDITIONAL OPTIONS
12.01 Parking....................................................... 74
-7-
<PAGE>
SECTION PAGE
NUMBER NUMBER
- ------ ------
12.02 Storage Area.................................................. 75
12.03 Antenna or Satellite Dish..................................... 76
12.04 Security...................................................... 76
12.05 Exhibits...................................................... 77
ARTICLE 13. DEFINITIONS
13.01 Definitions................................................... 77
Signatures
<PAGE>
SCHEDULE OF EXHIBITS
Exhibit A Leased Premises
Exhibit A-1 Description of Land
Exhibit A-2 Description of 500 Boylston Parcel
Exhibit B Work Letter
Exhibit C Storage Area
Exhibit D Building Rules and Regulations
Exhibit E Net Rentable Area of Floors in the Building
Exhibit F Berkeley Entrance Graphic
Exhibit G Paving Graphic
Exhibit H Location of Tenant Directory Board
Exhibit I Janitorial Service to Leased Premises
Exhibit J Impositions on the Building as of the date of the
Lease
-9-
<PAGE>
THIS LEASE is entered into as of the date hereof between Landlord and
Tenant.
ARTICLE 1
LEASE
-----
1.01. Lease. Landlord leases to Tenant and Tenant leases from Landlord the
Leased Premises, and as appurtenant to the Leased premises, the right to use in
common with others entitled thereto, the Common Areas, the Project Common Areas,
the Loading Docks and the Parking Section, all upon the terms, covenants and
conditions set forth herein.
ARTICLE 2
TERM; USE; RENT
---------------
2.01. Term. Except as otherwise provided herein, this Lease shall commence on
the Term Commencement Date, and shall continue in full force for the Term.
Except as otherwise provided herein, Landlord's obligations under this Lease
shall commence upon the date hereof. Tenant's obligations under this Lease shall
commence upon the Completion Date (except as expressly otherwise provided herein
with respect to obligations arising earlier), unless Tenant shall have taken
occupancy of all or any portion of the Leased Premises for the conduct of its
business on an earlier date, in which case such obligations shall commence on
the date of such occupancy, but only with respect to any floor or portion
thereof so occupied by Tenant. Notwithstanding the foregoing, Tenant's
obligation to pay Gross Rent shall commence upon the Rent Commencement Date,
unless subsequent to the Scheduled Rent Commencement Date but prior to the Rent
Commencement Date Tenant shall have taken occupancy of all or any portion of the
Leased Premises for the conduct of its business in which case Tenant's
obligation to pay Gross Rent shall commence upon such occupancy, but any such
obligation shall commence only with respect to any floor or portion thereof so
occupied by Tenant, Landlord agrees to use reasonable efforts to Substantially
Complete the Leased Premises by the Scheduled Completion Date, failing which,
Landlord shall continue to use reasonable efforts to Substantially Complete the
Leased Premises unless and until this Lease shall have been terminated pursuant
to this Section 2.01 (which agreement shall hereinafter be referred to as
"Landlord's Delivery Covenant"). If the Leased Premises are not Substantially
Complete by the
-10-
<PAGE>
Scheduled Completion Date for any reason, Landlord shall not be liable for any
claims, damages or liabilities by reason thereof, but the Rent Commencement Date
shall be delayed by two (2) days for each day of such delay in Substantial
Completion, unless and to the extent such delay was caused by Force Majeure or
any Tenant's Delay (in which case the Rent Commencement Date shall not be so
delayed). Landlord shall use reasonable efforts to give Tenant notice of the
occurrence of any event which may cause a delay in the Completion Date beyond
the Scheduled Completion Date, and the estimated length of any such delay. In
any event, if landlord fails to give Tenant written notice within three (3)
Business Days of the occurrence of any such event, then any Tenant Delay caused
thereby shall not be deemed to have commenced until the date such notice is
given. Landlord shall also provide Tenant with thirty (30) days prior notice of
the date when Landlord reasonably expects to achieve Substantial Completion,
based upon the progress of the work. Tenant will commence occupancy of the
Leased Premises after the Completion Date, with occupancy of no less than
seventy five percent (75%) of the Leased Premises (including the executive
offices of Tenant) by the first anniversary of the Completion Date. If Landlord
has not commenced construction of the Initial Tenant Improvements by the date
which is one hundred and twenty (120) days prior to the Outside Completion Date,
then for so long as such failure to commence construction shall continue, Tenant
may give Landlord notice of its intent to terminate this Lease if such
construction is not commenced within the next thirty (30) days following such
notice, and, if construction is not commenced within such period, then Tenant
may terminate this Lease by notice to Landlord given within thirty (30) days
following the expiration of the initial thirty (30) day period. So long as
Landlord is not in default of Landlord's Delivery Covenant, this right of
termination shall be Tenant's sole remedy in the event construction is not
commenced as aforesaid. If the Leased Premises are not Substantially Complete by
the Outside Completion Date, then for so long as the Leased Premises are not
Substantially Complete, Tenant may give Landlord notice of its intent to
terminate this Lease if Substantial Completion does not occur within the next
thirty (30) days following such notice, and, if Substantial Completion does not
occur within such period, then Tenant may terminate this Lease by notice to
Landlord given within thirty (30) days following the expiration of the initial
thirty (30) day period, Tenant shall have the continuing right to terminate this
Lease at any time before Substantial Completion occurs in the same manner as
provided in the immediately preceding sentence. So long as Landlord is not in
default of Landlord's Delivery Covenant, this right of termination shall be
Tenant's sole remedy in the event Substantial Completion does not occur. If
Tenant gives Landlord notice that Tenant desires to terminate this Lease under
the terms
-11-
<PAGE>
of the previous three sentences of this Section 2.1, then, as a condition to
such termination Tenant shall reimburse Landlord for all previously
uncompensated Tenant Extra Costs; such termination shall not be deemed effective
unless such costs and expenses are paid in full. In the event Tenant provides
Landlord with such notice of termination and this Lease is terminated in
accordance with the provisions of this paragraph, Tenant shall not be liable to
Landlord for any Tenant Extra Costs incurred by Landlord after the date of such
notices. If Substantial Completion does not occur within eighteen (18) months
after the Estimated Outside Completion Date (as extended by any period of delay
to the extent resulting from Landlord's failure to fulfill Landlord's Delivery
Covenant), then Landlord shall have the right to terminate this Lease by notice
to Tenant.
2.02. Use. Tenant shall use the Leased Premises solely for the Permitted Use and
for no other use or purpose, except as permitted by Landlord pursuant to
Landlord's written consent (which consent Landlord may withhold in its absolute
and sole discretion).
2.03. Rent. All obligations of Tenant to make payments to Landlord under this
Lease shall constitute Rent. Tenant shall pay the Rent at the times and in the
manner hereinafter set forth. All Rent shall be paid in lawful money of the
United States, Gross Rent shall be paid commencing on the Rent Commencement Date
and continuing thereafter in twelve (12) equal monthly installments (subject,
however, to an adjustment of the portion thereof representing Tenant's
Proportionate Share of the Estimated Operating Cost and Tenant's Proportionate
Share of the Estimated Impositions in accordance with Section 2.08) on the first
day of each calendar month during each year of the Term and any extensions
thereof, in advance without demand, and all Rent shall be paid without any
reduction, abatement counterclaim or set-off (except as expressly set forth in
Sections 3.01(b), 5.06(b) and 5.07(e)), at the address for Landlord specified on
the Basic Lease Information sheet or at such other address as may be designated
in a notice by Landlord from time to time. If the Rent Commencement Date occurs
on other than the first day of a month, then Gross Rent provided for such
partial month shall be equitably prorated on such date of commencement. If the
Term terminates on other than the last day of a calendar month, then Gross Rent
provided for such partial month shall be equitably prorated on such date of
termination.
2.04. Operating Cost.
(a) Operating Cost shall mean all expenses and costs of every kind and
nature incurred by Landlord in its reasonable business judgment which
Landlord shall pay or
-12-
<PAGE>
become obligated to pay because of or in connection with the
management, maintenance, preservation or operation of the Building
(determined in accordance with generally accepted accounting
principles, consistently applied) including, but not limited to the
following:
(1) Expenses of the operation, maintenance and security of the
Building, including compensation in the form of wages, salaries,
and other compensation and benefits (including payroll taxes,
federal, state and local unemployment taxes and social security
taxes), insurance, welfare and retirement benefits, and related
expenses and benefits of all on-site employees (not exceeding the
level of property manager) and off-site employees (but only to the
extent such employees are involved directly in the operation,
maintenance, management and preservation of the Building, and with
respect to off-site employees above the level of the property
manager directly responsible for the Building, only so long as
Hines Interests Limited Partnership or an affiliate thereof is
managing the Building; it being agreed that the manner in which
Landlord allocates the expenses for such off-site employees and
categories to which such expenses are allocated will not change
from the manner utilized by Landlord as of the date of this Lease
and Landlord agrees to certify that such manner and categories
have not changed (the "Allocable Share Certification") in
connection with the delivery by Landlord to Tenant of the
statement of the Operating Cost and Impositions pursuant to
Section 2.06) but excluding employees and other personnel to the
extent they are engaged in the initial development and
construction of the Building;
(2) The Building's allocable share of the cost incurred by Landlord in
Greater Boston for Landlord's office and management office
operation for the Building (provided, however, that if such office
is located outside the Project, such allocable share shall not
exceed the allocable share of the cost which would have been
incurred had the office been located within the Project);
(3) All tools, supplies materials and equipment used in the operation
and maintenance of the Building (the "Building Equipment"),
including rental fees for the same, if such items are not
purchased and
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amortized, or, if Landlord in its reasonable business judgement
determines that it is ultimately less costly to purchase than to
rent, then the cost of such Building Equipment, as amortized by
Landlord in accordance with requirements governing the
amortization of such Building Equipment under the Internal Revenue
Code, together with reasonable financing charges (the
reasonableness of such financing charges to be determined with
reference to the rates then being offered by institutional lenders
for such financing);
(4) Utilities, including water and power, sewer, gas, heating,
lighting, air conditioning and ventilating the entire Building
(provided, however, that should any tenant in the Building,
including Tenant, have special needs or uses requiring the use of
any such utility beyond the ordinary for a typical tenant in a
first-class office building like the Building, as determined by
Landlord in its reasonable judgment (which, in the case of
electrical usage, is established pursuant to Section 3.01(a)(v)
and (vi)), Landlord shall monitor such additional usage by the
installation of meters or by other reasonable means, exclude the
cost of such additional usage from the Operating Cost and bill the
tenant directly therefor);
(5) All maintenance, janitorial and service agreements or costs for
the Building, including, without limitation, alarm service,
landscaping, window cleaning, escalator and elevator maintenance,
rubbish and snow removal, pest control, equipment maintenance or
servicing or maintenance or cleaning for sidewalks, Building
exterior, roof and service areas (provided, however, that the
additional cost for any such services beyond the ordinary for
providing such services to typical tenants in a first-class office
building like the Building or which are made necessary by the
special needs or uses of any party, including Tenant, as
determined by Landlord in its reasonable judgment, shall not be
included in the Operating Cost but shall be billed directly to
such party);
(6) A management cost recovery in connection with the operation of the
Building; Tenant's share to be three percent (3%) of all Gross
Rent, excluding such cost recovery;
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(7) Legal and accounting services for the Building, including the
costs of audits by certified public accountants; excluding,
however, the cost of dispute resolution auditing of the Operating
Cost or Impositions pursuant to leases with tenants in the
Building, costs incurred as a result of the negligence or willful
misconduct of Landlord or Landlord Responsible Parties, costs
incurred in proceedings against any specific tenant, and costs
incurred in connection with the financing, refinancing, leasing,
development and/or construction of, the Building;
(8) All insurance premiums and costs applicable to the Building and
Landlord's personal property used in connection therewith,
including but not limited to, the premiums and cost of fire,
casualty and liability coverage and rental abatement or business
interruption insurance;
(9) Repairs (including, where necessary, replacements which do not
constitute capital improvements) together with reasonable
financing charges until the full cost of such repairs is repaid to
Landlord by tenants in the Building (the reasonableness of such
financing charges to be determined with reference to the rates
then being offered by institutional lenders for such financing)
and general maintenance (except for repairs the cost of which is
paid for by, or would have been paid for by, the proceeds of
insurance which Landlord is required to carry pursuant to Section
5.01 of this Lease or which are paid for directly by Tenant or
other third parties, and except for alterations to the extent
attributable to tenants of the Building);
(10) Capital improvements made to the Building, including replacements
as amortized by Landlord in accordance with requirements governing
the amortization of such capital improvements under the Internal
Revenue Code, together with reasonable financing charges (the
reasonableness of such financing charges to be determined with
reference to the rates then being offered by institutional lenders
for such financing) subsequent to the Completion Date which (i)
are designed to and will improve the operating efficiency of the
Building,
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or (ii) may be required by governmental authorities pursuant to
applicable laws, ordinances or regulations subsequent to the
approval of the Initial Tenant Improvement Plans (other than those
which are required for the exclusive benefit of an individual
tenant or tenants and not relating to the general use or operation
of the Building); provided, however, that the amount of such
amortization and financing charges for items in (i) above shall
not exceed in any year the amount of costs reasonably determined
by Landlord to have been saved in such year by the expenditure
either through direct reduction or minimization of increases which
would have otherwise occurred, and provided further that with
respect to (ii) above, Landlord shall take reasonable steps to
comply with such governmental requirements in the most economical
manner.
(b) Notwithstanding any other provision herein to the contrary, in the
event that the Building is not fully occupied during any year of the
Term, an adjustment shall be made in computing those items
constituting components of Operating Cost which vary depending on the
level of occupancy of the Building for such year so that Operating
Cost shall be extrapolated and computed as though the Building had
been fully occupied during such year; provided, however, that in no
event shall Landlord collect in total, from Tenant and all other
tenants of the Building, an amount greater than one hundred percent
(100%) of the actual Operating Cost during any year of the Term.
(c) Notwithstanding the foregoing, Operating Cost shall not include any
costs and expenses excluded expressly by the provisions of subsection
(a) above or any costs and expenses relating to:
(1) the management, maintenance, preservation or operation of (i) the
Parking Section, (ii) the Commercial Section, to the extent
constituting leasable space for tenants of the Commercial Section,
and (iii) the Common Areas to the extent reasonably allocable to
the Parking Section or the Commercial Section;
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(2) any special needs or uses of tenants with respect to storage areas
resulting in extraordinary costs or expenses in connection with
maintaining, repairing and operating such storage areas;
(3) leasing commissions or tenants inducements associated with leasing
activities;
(4) costs or improvements to any tenant's leased premises or otherwise
exclusively for the benefit of an individual tenant;
(5) principal, interest, late charges or other payments on loans
(except as provided in (a)(3), (a)(9) or (a)(10) above), ground
rent, rent paid for the right to locate Project Common Areas or
Loading Docks outside of the Building, or payments on equity
obligations;
(6) costs of repairing, replacing or otherwise correcting defects in
the design or construction of the Project, or design or
construction defects in any leasehold improvements in rentable
areas of the Building;
(7) leasing commissions, attorneys' fees, costs and disbursements and
other expenses, any of which are incurred in connection with
negotiations or disputes with tenants or prospective tenants,
except with respect to disputes with other tenants the resolution
of which is reasonably likely to result in a material benefit to
the tenants of the Project (other than costs incurred in
connection with the lease termination and eviction of any tenant);
(8) depreciation and amortization of the Project or equipment, except
as provided in (a)(3) and (a)(10) above;
(9) expenses in connection with services of a type which Tenant does
not receive under this Lease but which are provided to another
tenant;
(10) fines, penalties or indemnification obligations incurred due to
violations by Landlord or Landlord Responsible Parties of any
governmental rule or authority, or any agreement made in
connection therewith with a governmental entity, and any costs
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of remedying such violations or defending the prosecution thereof
(except for the costs of remedying such violations to the extent
such costs are permitted Operating Costs pursuant to Section
2.04(a)(10));
(11) all amounts paid to principals, subsidiaries, affiliates or other
parties related to Landlord for services for the Project in excess
of the amount payable for comparable services provided by a party
who is not a principal, subsidiary, affiliate or otherwise related
party;
(12) costs and expenses to the extent related to the ownership (as
distinguished from operation and maintenance, including the
charges contemplated by (a)(2) above) of the Project;
(13) any particular items and services for which Tenant otherwise
reimburses Landlord by direct payment over and above Base Rent and
Tenant's Proportionate Share of Operating Cost;
(14) advertising, marketing, promotional and like expenditures;
(15) costs of refinancing the Project;
(16) interest or penalties resulting from delinquent payments by
Landlord, provided such delinquent payments are not caused by
Tenant;
(17) repairs or other work occasioned by fire, windstorm or other
casualty to the extent covered by insurance required to be carried
by Landlord hereunder, or by the exercise of the right of eminent
domain, or voluntary conveyance in lieu thereof, to the extent
reimbursed by condemnation proceeds;
(18) Landlord's costs of electricity and other services to the extent
they are separately chargeable to tenants as an additional charge
or rental over and above the regular installments of rent payable
under the lease with such tenant;
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(19) costs incurred by Landlord which are considered capital
improvements and replacements under generally accepted accounting
principles ("GAAP") including contributions to replacement or
contingency reserves created by Landlord, except as provided in
(a)(3) or (a)(10) above;
(20) any compensation paid to clerks, attendants, or other persons in
commercial concessions operated by Landlord; and
(21) costs for the purchase of sculpture, paintings, or other objects
of art, and any royalties payable in connection therewith; and
(22) the cost of any curative action required, or any repair,
replacement or alteration made, by Landlord (or by a third party,
the cost of which is imposed upon Landlord) to remedy a condition
or damage caused by or resulting from the negligence or willful
misconduct of Landlord or Landlord Responsible Parties, and,
except to the extent such costs are permitted Operating Costs
pursuant to Section 2.04(a)(10), the costs of complying with
governmental or insurance requirements to the extent caused by a
condition existing as of the date the Initial Tenant Improvement
Plans are approved unless and to the extent caused by Tenant.
2.05. Impositions. Impositions shall mean all real estate or personal property
taxes, possessory interest taxes, so-called "linkage payments" made by Landlord
with respect to the Building pursuant to that certain Development Impact Project
Agreement dated as of June 28, 1985, as amended by that certain First Amendment
to Development Impact Project Agreement dated as of May 11, 1988 and as the same
may be further amended (provided that if any further amendment increases the
amount to be paid by Landlord, such increase shall not constitute an
Imposition), or similar charges, business or license taxes or fees, service
payments in lieu of such taxes or fees, annual or periodic license or use fees,
excises, assessments, levies, fees or charges, general and special, ordinary and
extraordinary, unforeseen as well as foreseen, of any kind (including fees
"in-lieu" of any such tax or assessment) payable over the longest permitted
period (provided no extra costs are incurred as a result thereof), which are
assessed, levied, charged, confirmed or imposed by any public authority upon the
Land, the Building, its operations or the Rent (or any portion or component
thereof) including in the year paid, all reasonable fees and costs incurred by
Landlord in seeking to
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obtain an abatement or reduction of, or a limit on any increase, in any taxes,
regardless of whether any abatement, reduction or limitation is obtained, but
excluding (i) inheritance or estate taxes imposed upon or assessed against the
Building, or any part thereof or interest therein, (ii) taxes computed upon the
basis of the net income derived from the Building by Landlord or the owner of
any interest therein, (iii) that portion of the items enumerated in this Section
which is allocable to the Commercial Section or the Parking Section of the
Building and (iv) any involuntary payments which Landlord may agree to make with
respect to the Building after the date hereof. Attached hereto as Exhibit J is
an itemization of the Impositions for 1991 and the respective amounts thereof,
on an annualized basis, which currently relate to the Building. Landlord
represents that it is not aware of any other Impositions affecting the Building
as of the date hereof; however, Landlord and Tenant acknowledge that said
itemization of Impositions may change during the Term hereof. Upon the written
request of Tenant, Landlord will either (x) institute such proceedings as it
may, in its reasonable business judgment, consider appropriate to seek an
abatement of the Impositions, or (y) permit Tenant to institute such proceedings
as it may, in its reasonable business judgment, consider appropriate to seek an
abatement of the Impositions, provided that if Landlord reasonably believes that
there is not a reasonable probability of success (without regard to the impact
of such proceedings upon any building other than the Building), Landlord may
refuse to permit Tenant to institute any such proceedings.
2.06. Computation of Operating Cost and Impositions.
(a) Landlord shall, within a reasonable period of time following each
calendar year, give Tenant a statement of the Operating Cost and
Impositions during such calendar year (prepared by a certified public
accountant), which shall be accompanied by a computation of Tenant's
Proportionate Share of such Operating Cost and Impositions and an
Allocable Share Certification. Landlord agrees to use reasonable
efforts to provide Tenant, within one hundred and twenty (120) days
after each calendar year, with either such statement or a written
explanation of why such statement is not available, but Landlord's
failure to provide Tenant with either such statement or such written
explanation within said period shall not release either party from the
obligation to make the adjustment provided for in Section 2.07.
Notwithstanding the foregoing, Landlord shall have no right to collect
an adjustment under Section 2.07 for a given calendar year should
Landlord
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fail to deliver such statement within three hundred and sixty (360)
days after such calendar year. Tenant shall have the right, for one
hundred and eighty (180) days following the presentation of such
statement by Landlord, to examine and audit Landlord's books and
records with respect to the Operating Cost and/or Impositions for such
calendar year (it being agreed that Tenant shall not have the right,
beyond that otherwise provided herein, to audit the books and records
which establish the basis for the Allocable Share Certification). If
the results of such audit indicate that Tenant has overpaid its share
of Operating Cost or Impositions for such calendar year, Tenant shall
give notice to Landlord of the results of the audit within said one
hundred and eighty (180) day period (the "Overpayment Notice"), which
notice shall be accompanied by a copy of the audit together with a
statement in reasonable detail of the reasonable cost of such audit,
and thereupon Landlord may elect to either (i) pay to Tenant the
amount of such overpayment, plus, if Tenant has overpaid its share of
Operating Cost or Impositions for such calendar year by more than
three percent (3%), the reasonable cost of such audit, within thirty
(30) days of the Overpayment Notice or (ii) submit the issue to the
dispute resolution procedure set forth in subsection 2.06(b) by notice
given to Tenant within thirty (30) days of the Overpayment Notice (the
"Dispute Resolution Notice"). In the event that Landlord delivers its
statement of Operating Cost and Impositions for the calendar year more
than one hundred and twenty (120) days after the end of the calendar
year and in the event that Tenant has overpaid its share of Operating
Cost or Impositions for such calendar year, then if Tenant complies
with the provisions of the immediately preceding sentence and if
Tenant is not otherwise in default hereunder beyond any applicable
grace period, Landlord shall pay Tenant, together with the amount of
Tenant's overpayment interest to Tenant on the amount of such
overpayment calculated from the first day of the calendar year
following such calendar year to the date of repayment to Tenant at the
then prime rate of the Bank of Boston, or any successor institution
thereto.
(b) Landlord and Tenant shall each within thirty (30) days after Landlord
gives the Dispute Resolution Notice to Tenant appoint a person to act
as the expert on its behalf and notify the other of such appointment.
Each expert shall have at least ten (10) years experience in the
operation of first-class commercial office
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buildings. If either party shall fail to so appoint an expert within
said thirty (30) day period, the expert appointed by the other shall
determine the issue. In the event that the two experts are appointed
within said thirty (30) day period, the experts so chosen shall meet
within ten (10) business days after the second expert is appointed to
determine Tenant's Proportionate Share of Operating Cost or
Impositions, as the case may be.
If the two experts are unable to agree within ten (10) business days
after such first meeting, they shall appoint a third expert, who shall
be a competent and impartial person with qualifications similar to
those required of the first two experts. In the event the two experts
are unable to agree upon such appointment within five (5) business
days after the expiration of said ten (10) day period, then either
party, on behalf of both, may request the appointment of such
qualified person by an officer of the American Arbitration Association
in Boston. The expert appointed by each party shall state in writing
his or her determination of Tenant's Proportionate Share of Operating
Cost or Impositions, as the case may be, supported by the reasons
therefor, with counterpart copies to each party. The experts shall
arrange for a simultaneous exchange of such proposed determinations.
The role of the third expert shall be to select which of the two
proposed determinations most closely approximates his own
determination, and the third expert shall have no right to propose a
middle ground or any modification of either of the two proposed
determinations. The determination chosen by the third expert shall
constitute the decision of the experts and shall be final and binding
upon the parties. This provision for determination shall be
specifically enforceable to the extent such remedies are available
under applicable law, and either party shall have the right to enter
judgment thereon, unless otherwise provided by applicable law.
Landlord and Tenant shall each pay for the fees and disbursements of
any expert appointed by it and shall share equally in the fees and
expenses of any third expert.
In the event of a failure, refusal or inability of any expert to act,
his or her successor shall be appointed by him or her, but in the case
of the third expert, his or her successor shall be appointed in the
same manner as provided for appointment of the third expert.
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2.07. Adjustment for Variation Between Estimated and Actual Operating Cost and
Impositions. If the Operating Cost and/or the Impositions for any calendar year
exceed, respectively, the Estimated Operating Cost and/or the Estimated
Impositions, Tenant shall pay to Landlord Tenant's Proportionate Share of such
excess within thirty (30) days after presentation of Landlord's statement
pursuant to Section 2.06. If the Operating Cost and/or Impositions for any
calendar year are less than, respectively, the Estimated Operating Cost and/or
the Estimated Impositions, then Landlord shall pay to Tenant Tenant's
Proportionate Share of such difference with the presentation of Landlord's
statement pursuant to Section 2.06. Should the Rent Commencement Date occur or
the Term of this Lease terminate at any time other than on the first day of a
calendar year, Tenant's Proportionate Share of the Operating Cost and/or the
Impositions shall be prorated for the exact number of calendar days occurring in
the partial year in question, and in the case of any termination, the provisions
of this Section 2.07 shall survive such termination.
2.08. Notice of Adjustments. Commencing with the calendar year during which the
Rent Commencement Date occurs and prior to each subsequent calendar year during
the Term, and otherwise from time to time as Landlord deems appropriate,
Landlord shall give Tenant notice of Tenant's Proportionate Share of the
Estimated Operating Cost and Tenant's Proportionate Share of the Estimated
Impositions set forth in reasonable detail, Tenant shall thereafter pay
Landlord, in accordance with the provisions of Section 2.03, Tenant's
Proportionate Share of such Estimated Operating Cost and such Estimated
Impositions. For any calendar year, or portion thereof, for which Landlord does
not provide Tenant with the notice referred to in this Section 2.08, Tenant
shall pay Tenant's Proportionate Share of the Estimated Operating Cost and
Tenant's Proportionate Share of the Estimated Impositions at the rate for the
previous calendar year, subject, however, to the annual adjustment described in
Section 2.06 and Section 2.07.
2.09. Operating Cost for 1994. Notwithstanding anything in this Lease to the
contrary, the Operating Cost for the calendar year 1994 shall in no event exceed
the amount set forth in this Section 2.09. As of the date hereof, the Tenant's
Proportionate Share of Operating Cost which will be a part of the Gross Rent is
$6.71 per square foot of Net Rentable Area. Of this $6.71, electricity charges,
water and sewer charges, insurance premiums, and management cost recovery of
three percent (3%) thereon is $2.63 per square foot of Net Rentable Area. The
balance of the Tenant's Proportionate Share of Operating Cost is $4.08 per
square foot of Net Rentable Area. In the 1994 calendar year, Tenant's
Proportionate Share of Operating Cost with respect to all Operating Cost, other
than the costs incurred by Landlord as part
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of Operating Cost constituting electricity charges, water and sewer charges,
insurance premiums and management cost recovery of three percent (3%) thereon
shall not exceed the sum of (a) $4.08 per square foot of Net Rentable Area and
(b) the product of (i) the percentage increase in the United States Department
of Labor, Bureau of Labor Statistics Consumer Price Index (All Urban Consumers,
All Items, 1982-1984 equals 100) between Calendar Year 1991 and Calendar Year
1994 and (ii) $4.08 per square foot of Net Rentable Area. If such Index is
discontinued or revised, the average rate of inflation shall be determined by
reference to the index designated as the successor or substitute index by the
government of the United States.
ARTICLE 3
LANDLORD'S COVENANTS
-------------------
3.01. Basic Services. Landlord or its affiliates shall operate the Building to a
standard of quality consistent with that of first-class office buildings in
Boston, Massachusetts and shall:
(a) Furnish Tenant during the hours contemplated hereunder during Tenant's
occupancy of the Leased Premises:
(i) Water used by the building standard cooling, drinking and
sanitation systems, domestic hot and cold water and water for
maintenance and janitorial services, such water to be available at
all times.
(ii) During Business Hours, central heat, ventilation and air
conditioning which, subject to applicable laws, ordinances, rules
and regulations (but not any voluntary standards) shall be
sufficient during the season in question to meet the following
temperature requirements under load conditions which do not exceed
occupancy of one (1) person per one hundred (100) square feet of
usable area and power consumption for lighting and electrical
equipment at a rate of four (4) watts per square foot of usable
area, with no humidity control and assuming the use of appropriate
blinds on all windows to shade the Leased Premises: (1) a minimum
temperature of 72 degrees Fahrenheit inside, plus or minus 2
degrees, with a minimum
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temperature outside of 0 degrees Fahrenheit, and (2) a maximum
temperature of 76 degrees Fahrenheit inside, plus or minus 2
degrees, with a maximum temperature outside of 91 degrees
Fahrenheit (dry bulb) or 75 degrees Fahrenheit (wet bulb).
(iii) Maintenance, repairs, structural and exterior maintenance
(including glass and glazing for the exterior of the Building and
for the Winter Garden), painting and electric lighting service for
the Project Common Areas and the Common Areas in the manner and to
the extent customarily provided by landlords in first-class office
buildings in Boston, such maintenance, repairs and service to be
provided at such times as Landlord may reasonably determine.
(iv) Janitorial service to the Leased Premises in accordance with
Exhibit I, after Business Hours on Business Days (except as
otherwise set forth in Exhibit I).
(v) Electricity for typewriters, voice writers, calculating machines,
low consumption duplicating machines, low consumption electronic
data processing equipment, and other machines of similar low
electrical consumption (it being agreed that Tenant's total
consumption for such items shall not exceed one (1) watt per
square foot of Net Rentable Area per month at one hundred and
twenty (120) volts). The electricity shall be provided from a
central bus duct which shall have the capacity to deliver two (2)
watts per square foot of two hundred and seventy-seven (277) volt
single phase electricity and two (2) watts per square foot of one
hundred and twenty (120) volt single phase electricity.
(vi) Initial lamps, bulbs, starters and ballasts for building standard
fixtures used within the Leased Premises, replacement bulbs
(including the replacement of such bulbs) for building standard
fixtures used within the Leased Premises for one year following
the Tenant's initial occupancy of the Leased Premises for the
purpose of conducting its business, and electricity for lighting
such fixtures.
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(vii) Security for the Building consistent with the operation of a
first-class office building in downtown Boston, which as of the
date hereof includes security personnel during Business Hours and
a card access system during non-Business Hours. Notwithstanding
the foregoing, Landlord shall have the right to alter specific
aspects of said security, so long as the level of security
provided at all times during the Term is comparable or exceeds the
level provided as of the date of this Lease.
(viii) Public elevator service serving the floors on which the Leased
Premises are situated, including (x) during Business Hours, three
(3) elevators in the low rise bank of elevators, five (5)
elevators in the high rise bank of elevators, and a freight
elevator and (y) after Business Hours, elevator service as
reasonably determined by Landlord consistent with the standards of
a first class office building, but in no event less than one (1)
elevator in the low rise bank of elevators and one (1) elevator in
the high rise bank of elevators during such hours.
(ix) Access to, and the right in common with other tenants of the
Building to use, the Loading Docks, subject to Landlord's
reasonable rules and regulations.
(b) Landlord shall not be liable for injuries to persons or damage to
property, nor shall Landlord be deemed to have evicted Tenant, nor
shall there be any abatement of Rent (except as expressly set forth in
this Section 3.01(b)), nor shall Tenant be relieved from performance
of any covenant on its part to be performed hereunder by reason of (i)
deficiency in the provision of Basic Services (except to the extent
caused by the negligence or willful misconduct of Landlord or Landlord
Responsible Parties), (ii) breakdown of equipment or machinery
utilized in supplying services or (iii) curtailment or cessation of
services due to causes or circumstances beyond the reasonable control
of Landlord or Landlord Responsible Parties. Landlord shall use
reasonable diligence to make or cause to be made such repairs as may
be required to machinery or equipment within the Building or the
Project Common Areas to provide restoration of services and, where the
cessation or interruption of service has occurred due to
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circumstances or conditions beyond the Building boundaries, to cause
the same to be restored, by diligent application or request to the
provider thereof. Landlord also agrees to use reasonable efforts to
avoid unnecessary inconvenience to Tenant by reason thereof and
agrees, where reasonable, not to perform such work during Business
Hours. In the event Landlord fails to provide or cause to be provided
any one or more Basic Services, and such failure causes the Leased
Premises, or a portion thereof, to be rendered untenantable for the
purpose of conducting Tenant's business operations, and such condition
shall continue for any three (3) consecutive Business Days after
Tenant's notice thereof to Landlord or such condition shall occur on
any five (5) Business Days during any thirty (30) day period after
Tenant's notice thereof to Landlord, Tenant shall have the right to
abate the portion of Gross Rent which corresponds to the portion of
the Leased Premises rendered untenantable.
3.02. Extra Services. Landlord shall provide to Tenant at Tenant's sole cost and
expense at standard Building charges in effect from time to time (which, in the
case of services described in subparagraphs (a), (b) and (e) below shall be
reimbursed by Tenant at Landlord's actual cost, and which in all cases shall be
reasonably consistent with amounts charged by Landlords of other first class
office buildings in the City of Boston providing such extra services) and
subject to the limitations hereinafter set forth, the following:
(a) Heating, ventilation, or air conditioning provided by Landlord to
Tenant (i) during hours other than Business Hours, (ii) on days other
than Business Days, said heating, ventilation or air conditioning to
be furnished solely upon the prior written request of Tenant given
with such advance notice as Landlord may reasonably require (but not
exceeding two (2) Business Days);
(b) Chilled and/or condenser water required by reason of any electrical,
data processing or other equipment or facilities or services required
to support the same, in excess of that which would be required for
Building Standard Improvements;
(c) Repair and maintenance which is the obligation of Tenant hereunder
which Tenant requests Landlord to perform and Landlord agrees to
perform;
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(d) Additional cleaning and janitorial services beyond those specified in
Exhibit I;
(e) Additional electricity above the standards specified in Sections
3.01(a)(v) and (vi), as determined by reference to a separate meter or
meters measuring Tenant's electrical consumption, which shall be
included in the plans to be prepared in accordance with the Work
Letter and installed as part of the Initial Tenant Improvements;
(f) maintenance and replacement of initial lamps, bulbs, starters and
ballasts (except as provided in Section 3.01(a)(vi));
(g) Except as otherwise contemplated by this Section 3.02, any Basic
Service in amounts which exceed the amounts required to be provided
under Section 3.01(a), but only if Landlord elects to provide such
additional or excess service.
3.03. Graphics and Signage. Landlord shall provide, at Landlord's expense,
Tenant or Building identification on the main entrance of the Building in the
locations shown as 2 and 3 on, and otherwise in accordance with, Exhibit F and
in the granite paving on Boylston Street in accordance with Exhibit G and
Landlord shall provide, at Tenant's expense, Tenant identification on the main
entrance of the Building in the location shown as 1 on, and otherwise in
accordance with, Exhibit F and in the granite paving on Berkeley Street and St.
James Avenue in accordance with Exhibit G. The referenced graphics shall remain
a part of the Building as long as an Event of Default has not occurred and is
not continuing under Section 6.01 of this Lease, and Tenant and/or any Tenant
Affiliates are in occupancy of at least seventy-five percent (75%) of the Net
Rentable Area included in the Leased Premises on the Term Commencement Date.
Landlord shall provide on the Building directory board in the main lobby of the
Building a space for Tenant's name and space for up to one (1) name per floor
occupied by Tenant in the Building. Landlord shall provide space on the Building
directory board in the main lobby of the Building to any subtenant or assignee
of Tenant permitted under the provisions of Section 4.05 hereof, equivalent to
the space to which such subtenant or assignee would have been reasonably
entitled if the subtenant or assignee had entered into a lease with Landlord
directly for the same premises demised pursuant to the sublease or assignment
with Tenant. So long as Tenant and/or any Tenant Affiliates are in occupancy of
at least seventy-five percent (75%) Of the Net Rentable Area included in the
Leased Premises on the Term Commencement Date, Landlord shall provide Tenant, at
Tenant's
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option and at Tenant's expense, a directory board solely for tenant in the main
lobby of the Building, of the same quality and character as the main directory
in the location shown on Exhibit H. So long as Tenant and/or any Tenant
Affiliates are in occupancy of at lease fifty percent (50%) of the Net Rentable
Area included in the Office Section of the Building, Landlord agrees that (a)
except for retail tenants having frontage on Berkeley street, no other tenant or
other occupant of the Building or project shall have a sign or other
identification on the exterior of the Berkeley Street side of the Building
(including the sidewalk in front thereof), and (b) no other tenant or other
occupant of the Building or Project will be permitted to have a sign or other
identification in the first floor front lobby of the Building unless Tenant
shall be offered the option to maintain a sign of equal or greater quality,
character and prominence. All signs, notices and graphics of every kind or
character, visible in or from the Common Areas or the exterior of the Leased
Premises shall be subject to Landlord's prior approval, which Landlord shall
have the right to withhold in its absolute and sole discretion.
3.04. Repair Obligation. Subject to the provisions of Article V, Landlord shall
be obligated to maintain, repair and, as necessary, replace, (or to cause to be
maintained, repaired or replaced), consistent with maintaining the Building as a
first class office building, only the following: (i) the structural portions of
the Building, (ii) the exterior walls of the Building (which shall include walls
facing the Winter Garden as if the same were exterior walls), including glass
and glazing, (iii) the roof, (iv) mechanical, electrical, plumbing and life
safety systems located in the Building, whether within the Leased Premises or
otherwise, (v) the Common Areas and the Project Operational Common Areas, and
(vi) any damage caused to the Leased Premises by any act or omission of Landlord
or Landlord Responsible Parties. If, within ten (10) Business Days after notice
from Tenant, Landlord shall fail or refuse to either (a) commence diligently
work of repair which Landlord is required to perform pursuant to clause (vi) of
this Section 3.04, or (b) provide Tenant with an explanation of why such work of
repair has not been commenced, then, so long as such work does not affect the
items referred to in items (i) through (v) of this Section 3.04 and does not
affect other tenant's of the Project, Tenant shall have the right, but not the
obligation, to perform such work and all reasonable costs incurred by Tenant in
performing such work shall be repaid by Landlord within (10) days of Landlord's
receipt of an invoice therefor. If Tenant shall fail or refuse to commence
diligently work of repair which Tenant is required to perform pursuant to
Section 4.03 within ten (10) Business Days after notice from Landlord (except in
cases of emergency, in which event no prior notice shall be
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required), or Tenant does not thereafter diligently pursue such work of repair
to completion, then Landlord shall have the right, but not the obligation, to
perform such work and all costs incurred by Landlord in performing any such work
for the account of Tenant shall be repaid by Tenant to Landlord upon demand,
together with an amount equal to ten percent (10%) of such costs, to reimburse
Landlord for its administration and managerial effort. Landlord agrees to use
reasonable efforts to avoid unnecessary inconvenience to Tenant by reason of any
work performed pursuant to Landlord's repair obligations contained in this
Section 3.04.
3.05. Peaceful Enjoyment. So long as Tenant pays the Rent and performs all of
Tenant's covenants and agreements contained in this Lease after any required
notice and within any applicable cure periods, Tenant shall peacefully have,
hold and enjoy the Leased Premises.
3.06. Restricted Uses. Landlord agrees that it will not enter into a lease for
space in the Building under which the tenant thereunder is permitted to use the
premises so leased for offices of any agency or bureau of the United States or
any state or political subdivision thereof without the prior written approval of
Tenant, unless Landlord determines in its reasonable business judgment that such
use is consistent with the operation of the Building as a first class office
building in Boston.
ARTICLE 4
TENANT'S COVENANTS
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4.01. Construction of Tenant Improvements. All additions to or improvements of
the Leased Premises, including, without limitation, the Initial Tenant
Improvements, shall become the property of Landlord upon termination of this
Lease and shall be surrendered to Landlord upon termination of this Lease by
lapse of time or otherwise, subject to Tenant's rights and obligations of
removal with respect thereto in the same manner as provided in Section 4.06,
unless Tenant has notified Landlord and Landlord has agreed in writing prior to
installation thereof to allow some or all of the Tenant Improvements to remain
the property of Tenant.
4.02. Taxes on Personal Property. In addition to, and wholly apart from its
obligation to pay Tenant's Proportionate Share of Operating Costs and
Impositions, Tenant shall be responsible for and shall pay, prior to
delinquency, any taxes imposed upon, levied with respect to or assessed against
Tenant's Personal
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Property, or the value of the Tenant Improvements, or any other tax, charge,
levy or fee imposed in substitution therefor. To the extent that any such taxes
are not separately assessed and billed to Tenant, but are reasonably allocable
to Tenant and billed to Landlord, Tenant shall pay the amount thereof as
invoiced to Tenant by Landlord.
4.03. Repairs by Tenant. Except to the extent of Landlord's responsibility
hereunder for such maintenance and repairs, Tenant shall be obligated for
maintenance and repair of the Leased Premises, to keep the same in good order,
repair and condition, reasonable wear and tear and damage by casualty or
condemnation excepted. Tenant's obligation shall include, without limitation,
the obligation to maintain and repair all walls, floors, ceilings, windows,
doors and fixtures (except for windows located on the exterior of the Building
or overlooking the Winter Garden, the structural portions of the Building and
the mechanical, electrical, plumbing and life safety systems located in the
Building, unless the damage thereto is caused by the negligence of Tenant or any
Tenant Responsible Party, in which event such maintenance or repair shall be
performed by Landlord and Tenant shall pay to Landlord the costs of such
maintenance or repair), and to repair all damage caused by Tenant or any Tenant
Responsible Party to the Building, subject however to the provisions of Section
5.05 below. At the request of Tenant, Landlord shall perform the work of
maintenance and repair constituting Tenant's obligation pursuant to this Section
4.03 at Tenant's sole cost and expense and as an extra service to be rendered
pursuant to Section 3.02(c). Any work of repair performed by or for the account
of Tenant by persons other than Landlord shall be performed by contractors
reasonably approved by Landlord and in accordance with the provisions of Section
4.06 below. Nothing herein contained, however, shall be deemed to impose upon
Tenant the obligation for performance of work of maintenance and repair required
to be performed by reason of Landlord's negligence or willful misconduct or
those of any Landlord Responsible Party.
4.04. Waste. Tenant shall not commit waste or allow any waste or damage to occur
in any portion of the Leased Premises.
4.05. Assignment or Sublease.
(a) In the event Tenant assigns this Lease or sublets the Leased Premises
or any part thereof to a Tenant Affiliate, then Tenant shall give
Landlord notice of such assignment or sublease no later than the
consummation of such assignment or sublease, unless it is not
reasonably possible to give notice by such time,
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in which event Tenant shall give Landlord notice thereof as soon as
reasonably practicable thereafter, Landlord's approval shall not be
required, but Tenant shall, at the time of such notice, provide
Landlord with a copy of all executed documents effecting such
assignment or sublease.
(b) Subject to the provisions hereof, Tenant shall have the right to
assign or sublet the Leased Premises, or any portion thereof, to a
person or entity other than a Tenant Affiliate on the earlier of: (i)
the second anniversary of the Term Commencement Date, or (ii) the date
on which 95% of Net Rentable Area of the Office Section in the
Building is initially leased. In the event Tenant intends to assign
this Lease or sublet the Leased Premises or any part thereof to a
person or entity other than a Tenant Affiliate, then Tenant shall give
Landlord notice of such intent.
(1) If Tenant and/or any Tenant Affiliates are in occupancy of at
least seventy-five (75%) of the Net Rentable Area included in the
Leased Premises on the Term Commencement Date, any such assignment
of this Lease or subletting of the Leased Premises shall be
subject to Landlord's right to consent or withhold consent thereto
as hereinafter provided, and Tenant shall provide Landlord with
(i) the name of the proposed assignee or sublessee, (ii) such
information as to the financial responsibility and standing of the
assignee or subtenant as Landlord shall reasonably require, (iii)
such of the relevant terms and provisions upon which the proposed
assignment or subletting is to be made as Landlord shall
reasonably require, (iv) any additional information or documents
reasonably requested by Landlord. Landlord shall have a period of
ten (10) days following the receipt of any additional information
(or twenty (20) days from the date of Tenant's original notice, if
Landlord does not request additional information) within which to
notify Tenant whether or not Landlord consents to the proposed
assignment or sublease. Landlord's right to withhold consent to
any such proposed assignment or sublease shall be limited to one
or more of the following reasons: (x) the use of the Leased
Premises by the proposed assignee or sublessee would not
constitute a Permitted Use, (y) the character and business
reputation of the proposed assignee or sublessee is
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inconsistent with the character of the Building as a first-class
office building, or (z) the proposed assignee or sublessee is not
of sound financial condition as determined by Landlord in the
reasonable exercise of its business judgement. If Landlord should
fail to notify Tenant whether or not Landlord consents to the
proposed assignment or sublease within said period, Landlord shall
be deemed to have consented thereto. In no event shall a failure
by Landlord to approve or disapprove a proposed subtenant or
assignee cause a termination of this Lease.
(2) If Tenant and/or any Tenant Affiliates are in occupancy of less
than seventy-five (75%) of the Net Rentable Area included in the
Leased Premises on the Term Commencement Date, Tenant's notice to
Landlord of its intention to sublet or assign space shall be
accompanied by (i) a summary of the proposed business terms
(including, without limitation, financial terms) on which Tenant
intends to assign this Lease or sublet said space, (ii) the
location of the sublet space, if a proposed sublease, and (iii)
any additional information or documents as Landlord may reasonably
require. Landlord shall have a period of ten (10) days following
the receipt of any additional information (or twenty (20) days
from the date of the Tenant's original notice, if Landlord does
not request additional information) within which to notify Tenant
of Landlord's election either (i) to terminate that portion of the
Leased Premises so affected by Tenant's desire to sublet or the
entire Leased Premises if Tenant's desire is to assign this Lease,
or (ii) permit Tenant to market said space. If Landlord should
fail to notify Tenant of its election within said period, Landlord
shall be deemed to have allowed Tenant to market said space. If
Landlord cancels this Lease as to a portion of the Leased Premises
as provided above, Landlord and Tenant shall enter into a
modification of the Lease so as to equitably reflect the effects
of such cancellation of the space. If Landlord cancels this Lease
as to the entire Leased Premises as provided above, Landlord and
Tenant shall execute such documents as are reasonably necessary to
memorialize such cancellation. If Landlord shall allow Tenant to
market said space, when Tenant has
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located such assignee or sublessee, the Tenant shall notify
Landlord in accordance with the provisions of subparagraph (1)
above and the other provisions thereof shall apply.
(3) Notwithstanding anything in this Lease to the contrary, Tenant
shall not assign this Lease, nor sublet the Leased Premises or any
portion thereof, to any person or entity who is then a tenant or
subtenant in the Project or who has executed a lease or sublease
to occupy space in the Project, unless at the time Tenant requests
Landlord's consent to assign this Lease or sublet space (i)
ninety-five (95%) or more of the total rentable area of the
Project is subject to leases which have not been terminated by
either Landlord or the tenants thereunder the terms of which
extend at least three (3) months beyond the commencement date of
the proposed assignment or sublease, or (ii) Landlord reasonably
determines that it will be unable to accommodate the proposed
assignee's or sublessee's need for space anywhere within the
Project within three (3) months after the commencement date of the
proposed assignment or sublease.
(4) Any other assignment or sublease without the consent of Landlord
(which may be withheld in Landlord's sole and absolute discretion)
shall be prohibited.
(c) Any rent or other consideration realized by Tenant in connection with
any sublease or assignment (except pursuant to Section 4.05(a)) in
excess of the Rent payable hereunder, after amortization (over the
term of such sublease or assignment) of all reasonable costs incurred
by Tenant in connection with such subletting or assignment (including,
without limitation, brokerage commissions, legal fees, tenant
inducements, and reasonable financing charges (the reasonableness of
which is to be determined with reference to the rates then being
offered by institutional lenders for such financing)), shall be
divided and paid as follows: (i) so long as after such assignment or
subletting Tenant and/or any Tenant Affiliate shall occupy not less
than seventy-five percent (75%) of the Net Rentable Area included in
the Leased Premises on the Term Commencement Date, fifty percent (50%)
of the excess shall be paid to
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Tenant and fifty percent (50%) to Landlord; and (ii) in all other
cases, twenty-five percent (25%) of the excess shall be paid to Tenant
and seventy-five percent (75%) to Landlord.
(d) In any subletting undertaken by Tenant, other than subletting to
Tenant Affiliates or where Landlord agrees to the contrary, Tenant
shall seek to obtain rent at the market rate for the space so sublet.
In any assignment of this Lease, other than an assignment to a Tenant
Affiliate or where Landlord agrees to the contrary, Tenant shall seek
to obtain from the assignee consideration reflecting rent at the
market rent for the space subject to such assignment. Tenant shall not
be obligated to obtain rent at the market rate for the space so sublet
or assigned.
(e) In the case of each assignment or sublease: (i) Tenant and the
assignee or subtenant, as the case may be, shall execute an assignment
or sublease which shall include terms that do not materially differ
from those previously disclosed to Landlord; (ii) promptly, but in any
event within five (5) Business Days after the execution thereof, an
executed copy of the assignment or sublease shall be delivered to
Landlord; (iii) the terms and provisions of any sublease whereby the
sublessee occupies less than seventy-five percent (75%) of the Net
Rentable Area included in the Leased Premises on the Term Commencement
Date shall specifically prohibit the assignment of the interest of the
sublessee, or the sub-subletting of all or any portion of the Leased
Premises covered by the sublease without the prior written consent of
the Landlord, which consent shall not be unreasonably withheld; (iv)
no assignment or sublease shall affect the continuing primary
liability of Tenant (which, following assignment or sublease, shall be
joint and several with the assignee or subtenant, as the case may be;
however, Landlord shall have no obligation to name any such assignee
or sublessee, in connection with enforcing any of Landlord's rights
against Tenant hereunder); (v) no consent by Landlord to any of the
foregoing in the specific instance shall operate as a waiver in any
subsequent instance; (vi) no assignment or sublease shall permit the
assignee, sublessee or any other person or entity having an interest
in the possession, use, occupancy or utilization of the Leased
Premises, to receive or to pay rental or payment on account of the
use, occupancy or utilization of the Leased Premises based in whole or
in part on the net
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income or profits derived by any person or entity from any property
leased, used, occupied or utilized (other than an amount based on a
fixed percentage or percentages of receipts of sales); and (vii) no
assignment shall be binding upon Landlord, unless Tenant shall deliver
to Landlord an instrument in form and in substance reasonably
satisfactory to Landlord and in recordable form which contains a
covenant of assumption by the assignee with respect to the period
following the effective date of the assignment running to Landlord and
all persons claiming by, through and under Landlord, but the failure
or refusal of the assignee to execute such instrument of assumption
shall not release or discharge the assignee from its primary liability
as Tenant hereunder.
(f) No assignment or sublease by Tenant shall relieve Tenant of any
obligation under this Lease. Any assignment or subletting which
conflicts with the provisions hereof shall be void.
(g) If Tenant has obtained Landlord's consent to assign this Lease or
sublet all or any portion of the Leased Premises, and Tenant has
failed to execute an assignment or sublease within six (6) months
following the date of Landlord's consent (which is referred to in
Section 4.05(b) above), Tenant shall again be obligated to notify
Landlord of any intent to assign this Lease or sublet all or any
portion of the Leased Premises, and Landlord shall again have the
right to approve any proposed assignment or sublease under Section
4.05(b)(1) and (2) above and, if applicable, to terminate this Lease
as to all or a portion of the Leased Premises in accordance with
Section 4.05(b)(2) above.
4.06. Alterations and Surrender. Tenant shall not make or allow to be made any
Tenant Alterations in or to the Leased Premises without obtaining the prior
written consent of Landlord, which consent shall not be unreasonably withheld
with respect to proposed alterations and additions which (i) comply with all
applicable laws, ordinances, rules and regulations, (ii) are compatible with the
Building and its mechanical, electrical, HVAC and life safety systems, and do
not excessively burden the capacity of such systems; (iii) do not materially
interfere with the use and occupancy of any other portion of the Building; and
(iv) do not affect the structural integrity of the Building, Specifically, but
without limiting the generality of the foregoing, Landlord's right of consent
shall encompass plans and specifications for proposed alterations or additions,
construction
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means and methods, the identity of any contractor or subcontractor to be
employed on the work of alterations or additions, and the time for performance
of such work. Tenant shall supply to Landlord any documents and information
reasonably requested by Landlord in connection with its consent hereunder.
Notwithstanding the foregoing, nonstructural Tenant Alterations which do not
impact the Building's mechanical, electrical, HVAC and life safety systems and
which otherwise satisfy the criteria set forth in (i) through (iv) above, and
the other provisions hereof, shall not require Landlord's consent if the cost
thereof does not exceed twenty-five thousand dollars ($25,000), provided,
however, that Tenant shall nonetheless provide written notice of the proposed
alteration, together with plans and specifications therefor (or such other
information in lieu of plans and specifications as Landlord may reasonably
require) at least ten (10) Business Days before undertaking any such work.
Notwithstanding that the same may constitute Building Common Areas, Tenant may
paint or decorate that portion of the Building's fire stairwells located between
floors constituting the Leased Premises, subject to the prior written consent of
Landlord (which shall not be unreasonably withheld).
All Tenant Alterations permitted hereunder shall be made and performed by Tenant
without cost or expense to Landlord, and the work necessary therefor shall be
handled in such a manner as to maintain harmonious labor relations and not
interfere with or delay the work of any contractor employed by Landlord;
provided, however, that Tenant and Landlord shall each use reasonable efforts to
avoid any interference between their respective contractors. Tenant's
contractors, subcontractors and labor shall be subject to reasonable rules and
regulations of the site. If any contractors, subcontractors or labor employed by
or on behalf of Tenant in connection with such Tenant Alterations cause any
dispute, strike or unrest with or amongst other contractors, subcontractors or
labor who may then or thereafter be engaged to work at the Project, Tenant
shall, within two (2) Business Days after written notice to do so by Landlord,
either eliminate the problem or remove the person(s) causing the problem, and
after said two (2) Business Day period, Landlord shall have the right to deny
access to the Project to such person(s). Tenant shall reimburse Landlord upon
demand for any and all costs or expenses incurred by Landlord as a result of
such dispute. Tenant shall take such steps as may be necessary to avoid the
filing, perfection or enforcement of any lien for labor or materials against the
Land or the Building by reason of work performed by or on behalf of Tenant, and
shall cause any such lien to be discharged of record by payment, deposit, order
of court of competent jurisdiction, bonding or other manner reasonably
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acceptable to Landlord as soon as is reasonably possible but in no event more
than ten (10) Business Days after the first to occur of (i) the date on which
Tenant receives actual notice of the filing thereof, or (ii) the date on which
Landlord gives notice to Tenant of the filing thereof (except where such lien is
filed as a result of the failure of Tenant to pay any contractor, subcontractor
or labor any amount owing to such contractor, subcontractor or labor when due,
or other fault of Tenant, in which case Tenant shall cause such lien to be
discharged as soon as is reasonably possible). Landlord agrees to make
reasonable efforts to cooperate with Tenant as reasonably necessary to discharge
such lien.
Such Tenant Alterations when made to the Leased Premises, together with all
Initial Tenant Improvements, shall become the property of Landlord upon the
termination of this Lease and shall be surrendered to Landlord upon the
termination of this Lease by lapse of time or otherwise; provided, however, that
this clause shall not apply to Tenant's Personal Property and shall not apply to
any Initial Tenant Improvements or Tenant Alterations specified by Tenant in a
notice given to Landlord and approved by Landlord in writing prior to effecting
the same, or which as a condition of approval Landlord specifies that Tenant
remove, and all of Tenant's Personal Property together with any Initial Tenant
Improvements or Tenant Alterations so specified by Landlord or Tenant shall be
removed by Tenant, at Tenant's expense, prior to the expiration of the Term. At
the expiration or termination of this Lease, Tenant shall peaceably yield up the
Leased Premises clean and neat, subject to and in accordance with the
requirements of Section 4.04 (and the obligations of Tenant provided for in this
sentence, and the balance of this paragraph shall survive any expiration or
termination of this Lease). Title to all Tenant Alterations and Initial Tenant
Improvements not removed by Tenant pursuant to the immediately preceding
sentence on or prior to the termination of the Term shall automatically be
conveyed and transferred by Tenant to Landlord upon such expiration or
termination, and shall be deemed abandoned by Tenant and shall thereupon become
the property of Landlord. Tenant shall execute such documentation confirming and
ratifying such conveyance and transfer as Landlord shall reasonably require.
Tenant shall repair at its sole cost and expense, in a manner reasonably
acceptable to Landlord, all damage caused to the Leased Premises or the Building
by removal of Tenant's Personal Property and such Initial Tenant Improvements or
Tenant Alterations as Tenant shall remove or be required to remove as a
condition of approval from the Leased Premises.
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4.07. Compliance with Laws and Insurance Standards. Tenant shall not permit any
portion of the Leased Premises to be occupied or used for any business or
purpose which is inconsistent with the operation of the Building as a first
class office building in Boston, creates a fire hazard, or would in any way
increase the rate of insurance coverage on the Building and/or its contents. If
Tenant does or permits anything to be done which shall directly increase the
cost of any insurance policy carried hereunder, Landlord shall deliver to Tenant
a written statement setting forth the amount of and reason for any such
insurance cost increase and showing in reasonable detail the manner in which it
has been computed, and Tenant shall, within ten (10) days after receiving such
statement, reimburse Landlord for any such additional premiums. Landlord agrees
that if any other tenant of the Building does or permits anything to be done
which directly increases the cost of any insurance policy carried by Landlord
hereunder, Tenant shall not be required to pay for any portion of such increase
and such increase shall not be included in Operating Costs. Tenant shall comply
with all laws, ordinances, orders, rules and regulations (state, federal,
municipal or promulgated by other agencies or bodies having or claiming
jurisdiction) related to the occupancy, maintenance and repair (unless within
Landlord's obligation under Section 3.01(a)(iii)) of the Leased Premises by
Tenant, and, in pursuance thereof, Tenant shall keep the Leased Premises
equipped with all safety appliances required by any law or ordinance or other
regulation of any public authority because of the manner of use made by Tenant
of the Leased Premises (as distinguished from those required because of the use
of the Leased Premises for the Permitted Use), and shall procure all licenses
and permits required by any law or ordinance or other regulation of any public
authority because of such manner of use, and, if required by Landlord, do any
work required by any law or ordinance or other regulation of any public
authority because of such manner of use, it being understood that the foregoing
provisions shall not be construed to broaden in any way the Permitted Use.
Nothing done by Tenant in the manner of its use or occupancy of the Leased
Premises shall create, require or cause imposition of any requirement by any
public authority for structural or other upgrading of or improvement to the
Building, other than in the Leased Premises provided that any such upgrading is
done at Tenant's sole expense and otherwise in accordance with the provisions
hereof, including Section 4.06.
4.08. Entry for Repairs and Leasing. After reasonable notice (but not more than
two (2) Business Days notice (excluding the day such notice is given), except in
emergencies, when no such notice shall be required), Landlord, its agents and
representatives, shall have the right to enter the Leased Premises to inspect
the same, to exercise such rights as may be permitted hereunder, to
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make repairs to the Building or alterations required for the Building or other
tenant spaces therein, to deal with emergencies, or to exhibit the Leased
Premises to prospective tenants (during the last two (2) years of the Term),
purchasers, encumbrancers or others, or for any other purpose as Landlord may
deem necessary or desirable; provided, however, that Landlord shall use
reasonable efforts not to unreasonably interfere with Tenant's business
operations. Tenant shall not be entitled to any abatement of Rent by reason of
the exercise of any such right of entry.
4.09. No Nuisance. Tenant shall conduct its business and control its agents,
employees, invitees and visitors in such manner as not to create any nuisance,
or unreasonably interfere with or disturb any other tenant or Landlord in its
operation of the Building.
4.10. Subordination. This Lease and the rights of Tenant hereunder shall be
subject and subordinate to any Mortgage, and to any and all advances made
thereunder, interest thereon or costs incurred in connection therewith, so long
as in connection therewith the holder of any such Mortgage and Tenant shall have
executed an agreement in commercially reasonable form and substance (with due
weight being given to the amount of space then being leased by Tenant) which
provides, inter alia, (i) that so long as this Lease is in full force and effect
and there exists no Event of Default hereunder, Tenant's rights under this Lease
shall not be disturbed by reason of such subordination or by reason of
foreclosure of such Mortgage, or exercise of the statutory power of sale, or
receipt of a deed in lieu of foreclosure, and (ii) that Tenant shall attorn to
the holder or the purchaser at any such sale or foreclosure or the grantee of
any such deed. Until the holder of such Mortgage shall enter into actual
possession of the Leased Premises, such holder shall not be liable to perform
any of the obligations of Landlord hereunder. In the event of attornment by
Tenant pursuant to the provisions of this Section 4.10, this Lease shall
continue in full force and effect as a direct lease between such mortgagee,
purchaser or grantee, as a successor landlord, and Tenant, upon all the terms,
conditions and covenants set forth herein (including, without limitation, the
obligation of Landlord to provide Basic Services pursuant to Section 3.01(a)),
except that such mortgagee, purchaser or grantee (unless formerly the Landlord
under this Lease) shall not be (a) bound by any payment of Rent for more than
one month in advance; (b) bound by any amendment of modification of this Lease
made without the consent of the holder of the Mortgage; (c) liable in any way to
Tenant for any act or omission, neglect or default on the part of Landlord under
this Lease, (d) obligated to perform any tenant improvements to be done by
Landlord in the Leased Premises (other than the Initial Tenant Improvements), or
(e) subject to any counterclaim or set-off which theretofore
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accrued to Tenant against Landlord. Without the consent of Tenant, the holder of
any such Mortgage shall have the right to elect to be subject and subordinate to
this Lease, such subordination to be effective upon such terms and conditions as
such holder may direct which are consistent with the provisions hereof.
4.11. Estoppel Certificate. At Landlord's request, Tenant shall execute,
acknowledge and deliver (within ten (10) Business Days after Tenant receives any
such request) estoppel certificates on a form specified by Landlord, addressed
to (i) any mortgagee or prospective mortgagee of Landlord or (ii) any purchaser
or prospective purchaser of all or any portion of, or interest in the Building,
certifying as to such facts (if true) and agreeing to such notice provisions and
other matters as such mortgagee(s) or purchaser(s) may reasonably require;
provided, however, that in no event shall any such estoppel certificate require
an amendment of the provisions hereof or otherwise affect or abridge Tenant's
rights hereunder. At Tenant's request, Landlord shall execute, acknowledge and
deliver (within ten (10) Business Days after Landlord receives any such request)
an estoppel certificate certifying (a) that this Lease is in full force and
effect, or is in full force and effect as modified and stating any
modifications, (b) whether or not, to the best of Landlord's knowledge, Tenant
is in default hereunder, and (c) such other matters as Tenant may reasonably
request. All requests for estoppel certificates pursuant to this Section 4.11,
whether by Landlord or Tenant, shall specifically reference this Section 4.11
and the ten (10) Business Day period set forth herein.
4.12. Tenant's Remedies. Tenant shall look solely to Landlord's interest in the
Building for recovery of any judgment from Landlord. Notwithstanding the
foregoing, in the event Landlord intends (whether or not voluntarily) to
transfer its interest in the Building, Landlord shall notify Tenant of such
intended transfer ("Landlord's Transfer Notice"), exercising reasonable efforts
to do so on the date which is thirty (30) days prior to the date of closing, but
in any event no later than the date of closing. With respect to any claim which
Tenant knows it may then have against Landlord which is set forth in a notice
given to Landlord within thirty (30) days of Landlord's Transfer Notice (the
"Initial Claim Period"), or, with respect to claims Tenant becomes aware of
after the date Landlord's Transfer Notice is given and which are set forth in a
notice given to Landlord during the period from the date upon which Landlord's
Transfer Notice is given to the date of closing (the "Extra Claim Period"),
Landlord's liability for any such claim shall not be limited to Landlord's
interest in the Building, but may also be satisfied out of the proceeds of such
transfer net of all reasonable costs
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incurred in connection with such transfer (but not out of any other assets of
Landlord). In the event Tenant fails to give such notice to Landlord within said
Initial Claim Period or Extra Claim Period, as the case may be, Tenant shall be
deemed to have waived the rights granted with respect to such claims under this
Section 4.12. in the event of any transfer by Landlord of its interest in the
Building to an affiliate with the intent to hinder, delay or defraud Tenant with
respect to such claim, then notwithstanding such transfer and the provisions of
Section 8.03 to the contrary, Tenant shall be entitled to look to the Building
for recovery of such claim irrespective of the fact that Landlord shall have no
further interest therein. Landlord, its agents, employees, and, if Landlord is a
partnership, its partners, whether general or limited, or if Landlord is a
corporation, its directors, officers or shareholders, shall never be personally
liable for any such judgment. Any lien obtained to enforce any such judgment and
levy of execution thereon shall be subject and subordinate to any Mortgage.
4.13. Rules and Regulations. Tenant shall comply with the rules and regulations
for the Building attached as Exhibit D and such reasonable amendments thereto as
Landlord may adopt from time to time with prior notice to and consultation with
Tenant. Nothing contained in the Rules and Regulations shall preempt the rights
expressly granted to Tenant under this Lease. All rules and regulations shall be
enforced Building-wide in a nondiscriminatory manner.
4.14. Personal Property at Tenant's Risk. All of Tenant's Personal Property
shall be at the sole risk and hazard of Tenant, and if the whole or any part
thereof shall be destroyed or damaged by fire, water or otherwise, by the
leakage or bursting of water pipes, steam pipes or other pipes, or by theft or
from any other cause, no part of said loss or damage is to be charged to or be
borne by Landlord, except Landlord shall in no event be held harmless or
exonerated for any liability to Tenant or to any other person, for any injury,
loss, damage or liability to the extent caused by the negligence or willful
misconduct of Landlord or any Landlord Responsible Party.
4.15. Payment of Landlord's Expenses. Tenant shall pay, as Additional Rent, all
reasonable costs, including without limitation counsel and other fees incurred
by Landlord in connection with all requests by Tenant for consent or approval
hereunder (to the extent such costs are not ordinary and usual costs associated
with the ownership or management of the Building which are included as part of
the Operating Cost), and/or the successful enforcement by Landlord of any
obligation of Tenant under this Lease. Landlord agrees that any such costs
incurred by
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Landlord in connection with other tenants of the Building shall be paid by such
party and not by Tenant (except to the extent such costs are ordinary and usual
costs associated with the ownership management of the Building which are
included as part of the Operating Cost).
4.16. Window Coverings. Tenant shall not place or maintain any window coverings,
blinds or drapes (other than those supplied by Landlord) on any exterior window
of the Building or on any interior window facing the "Winter Garden" without
Landlord's prior approval, which may be withheld in Landlord's absolute and sole
discretion. Tenant shall not place any furniture or equipment of any kind within
two (2) feet of the interior surface of any interior window facing the Winter
Garden (other than chairs or similar moveable furniture temporarily located
within said two (2) foot area) and Tenant shall at all times maintain such
interior windows so as to preserve the visual aesthetics of the Winter Garden.
Landlord agrees to impose the requirements of this Section 4.16 upon all other
applicable tenants of the Building and to enforce such provisions in a uniform
manner.
ARTICLE 5
CASUALTY and EMINENT DOMAIN
---------------------------
5.01. Casualty Insurance. Landlord shall maintain, or cause to be maintained, a
policy or policies of insurance with the premiums thereon fully paid in advance,
issued by and binding upon an insurance company of good financial standing,
insuring the Building and the Project Common Areas against loss or damage by
fire or other insurable hazards and contingencies as are covered in the usual
standard extended coverage endorsement or all-risks endorsement, for one hundred
percent (100%) of the replacement cost of the Building and for ninety percent
(90%) of the replacement cost of the Project Common Areas (excluding, however,
the foundation and footings of the Building and a reasonable deductible);
provided, that Landlord shall not be obligated to insure any of Tenant's
Personal Property, or any Tenant Improvements in excess of the Building Standard
Improvements. If the annual premiums charged Landlord for such casualty
insurance exceed the standard premium rates because the nature of Tenant's
operations results in extra-hazardous exposure, then Tenant shall, upon receipt
of appropriate premium invoices, reimburse Landlord for such increases in
premium as Additional Rent. Landlord agrees that any such costs incurred by
Landlord in connection with other tenants of the Building shall not be included
as an Operating Cost, and shall not be charged to Tenant. Upon the request of
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Tenant, Landlord shall provide Tenant with a certificate of such insurance. Any
such insurance may be maintained by Landlord under blanket policy or policies;
provided, however, that the minimum amount of the total insurance afforded by
such blanket policy Which shall be allocated to the Building and the Project
Common Areas and any sublimits of such policy allocable to the Building and the
Project Common Areas, shall be in amounts which shall not be less than the
amounts of insurance required hereunder and the protection afforded Landlord
under such policy shall be not less than that which would have been afforded
under a separate policy relating only to the Building and the Project Common
Areas and the certificate evidencing such insurance shall contain provisions
confirming the foregoing.
5.02. Liability Insurance. Landlord (with respect to the Building) and Tenant
(with respect to the Leased Premises and the Building) shall maintain or cause
to be maintained a policy or policies of comprehensive general liability
insurance with the premiums thereon fully paid in advance issued by and binding
upon an insurance company of good financial standing, such insurance to afford
minimum protection of not less than Three Million Dollars ($3,000,000.00) for
personal injury or death in any one occurrence and of not less than Five Hundred
Thousand Dollars ($500,000.00) for property damage in any one occurrence. Such
insurance shall be written on an occurrence basis and the coverages required to
be carried thereunder shall be extended to include blanket contractual
liability, personal injury liability (libel, slander, false arrest and wrongful
eviction), and broad form property damage liability. The insurance carried by
Tenant pursuant to this Section 5.02 shall specifically recognize the liability
assumed by Tenant under this Lease and shall provide that where insurance
coverage is provided under more than one policy, Tenant's insurance is primary,
and any other insurance available to Landlord or any other named insured is
excess. Upon request of either party, the other party shall provide reasonable
evidence that the insurance required to be maintained hereunder is in full force
and effect (it being understood and agreed that the foregoing obligation to
provide evidence of insurance is in addition to any obligation to provide
certificates pursuant to Section 5.01 or Section 5.03).
5.03. Tenant's Insurance.
(a) Tenant shall carry the comprehensive general liability insurance
required by Section 5.02 hereof and shall also carry fire and extended
coverage insurance on Tenant's Personal Property in the Leased
Premises in the amount of their full replacement cost (subject only to
a reasonable deductible and co-insurance factor). In
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addition, Tenant shall maintain workers' compensation insurance and
all such other insurance relating to Tenant's use and occupancy of the
Leased Premises and the Building as may be required by applicable law.
All such policies required to be carried by Tenant hereunder and all
evidence of insurance provided to Landlord shall be issued by
responsible, financially sound companies qualified to do business and
in good standing in the Commonwealth of Massachusetts and shall
contain an endorsement showing that Landlord and each holder of a
Mortgage (disclosed in writing to Tenant) is included as an additional
insured (except as to workers' compensation insurance), as its
interests may appear and an endorsement whereby the insurer agrees not
to cancel or alter the policy without at least thirty (30) days prior
written notice to Landlord, to the holder of such Mortgage and all
other named insureds. Tenant shall, on or prior to occupying any
portion of the Leased Premises, deposit with Landlord certificates of
such insurance, and thereafter, on or prior to fifteen (15) days
before the expiration date of any coverage thereunder, shall deposit
with Landlord certificates evidencing the renewal of such policies.
Any such insurance may be maintained by Tenant under a blanket policy
or policies; provided, however, that the minimum amount of the total
insurance afforded by such blanket policy which shall be allocable to
the Leased Premises and any sublimits of such policy allocable to the
Leased Premises, shall be in amounts which shall not be less than the
amounts of the insurance required hereunder, and the protection
afforded to Landlord and each holder of a Mortgage under such policy
shall be not less than that which would have been afforded under a
separate policy or policies relating only to the Leased Premises, and
the certificate evidencing such insurance shall contain provisions
confirming the foregoing.
(b) In the event that Tenant fails to timely furnish Landlord evidence of
the insurance required to be provided by Tenant pursuant to Subsection
(a) above, and such failure shall continue for five (5) Business Days
after notice thereof from Landlord, Landlord shall be authorized (but
not required) to procure such coverage in the amounts stated with all
costs thereof to be chargeable to Tenant as Additional Rent, and
payable by Tenant upon receipt of written invoice therefor.
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5.04. Indemnity and Exoneration. Except to the extent such indemnity or
exoneration is prohibited by law or as otherwise expressly provided in this
Lease,
(a) Landlord shall not be liable to Tenant for injury to any person or any
loss or damage to any property or any inconvenience caused by (i)
theft, burglary or acts of unauthorized persons in or about the
Building, or (ii) any act of Force Majeure, any repair or alteration
of any part of the Building, or any failure to make any such repair,
except in each case to the extent the same is caused by the negligence
or willful misconduct of Landlord or any Landlord Responsible Party;
(b) Tenant shall indemnify Landlord and hold Landlord harmless of and from
any and all loss, cost, damage, injury or expense arising out of or
related to claims of injury to or death of persons or damage to
property occurring upon, or resulting from the use or occupancy of,
the Leased Premises or the Building by Tenant, or resulting from
activities of Tenant in or about the Leased Premises or the Building,
such indemnity to include, without limitation, the obligation to
provide all costs of defense against any such claims, except in each
case to the extent the same is caused by the negligence or willful
misconduct of Landlord or any Landlord Responsible Party;
(c) Tenant shall hold and save Landlord harmless and indemnify Landlord of
and from any and all loss, cost, damage, injury or expense arising out
of or in any way related to claims for work or labor performed,
materials or supplies furnished to or at the request of Tenant or in
connection with performance of any work done for the account of Tenant
in the Leased Premises or the Building, excluding all Tenant Initial
Improvements, such indemnity to include, without limitation, the
obligation to provide all costs of defense against any such claim; and
(d) Landlord shall indemnify Tenant and hold Tenant harmless of and from
any loss, cost, damage, injury or expense incurred by Tenant in
connection with injury to or death of persons or damage to property
occurring upon the Leased Premises or the Building to the extent the
same is caused by the negligence or willful misconduct of Landlord or
any Landlord Responsible Party, or as a result of any claim asserted
against Tenant by the City of Boston or any other governmental
authority based on
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any alleged noncompliance of the Leased Premises or the Building with
any applicable building codes or regulations in effect on the
Completion Date, such indemnity to include, without limitation, the
obligation to provide all costs of defense against any such claim;
provided that Landlord shall not be responsible for any noncompliance
of Tenant Alterations.
5.05. Waiver of Subrogation Rights. Anything in this Lease to contrary
notwithstanding, to the extent any claim is covered by casualty insurance, or
should be covered by any required casualty insurance, Landlord and Tenant each
waive all rights of recovery, claim, action or cause of action against the
other, its agents (including partners both general and limited), officers,
directors, shareholders or employees, for any loss or damage that may occur to
the Leased Premises, or any improvements thereto, to the Building or to any
personal property of such party therein, by reason of fire, the elements, or any
other cause which are required to be insured against under the terms of such
insurance policies, or any other peril which is in fact insured, regardless of
cause or origin, including negligence of the other party hereto, its agents,
officers or employees; and each party covenants that no insurer shall hold any
right of subrogation against such other party. Each party shall advise insurers
of the foregoing and such waiver shall be a part of each applicable policy
maintained by Landlord and/or Tenant which applies to the Leased Premises, any
part of the Building or Tenant's use and occupancy of any part thereof; provided
that this waiver shall be null and void if the affected insurer refuses to
consent to such waiver, and provided further that all costs (if any) associated
with obtaining insurer consent shall be borne by the party benefited by such
waiver, unless such party elects to waive the benefit of such provision.
5.06. Condemnation and Loss or Damage.
(a) If all or any portion of the Leased Premises or the Building shall be
taken or condemned for any public purpose to such an extent as to
render the Leased Premises untenantable as reasonably determined by
either Landlord or Tenant, this Lease shall, at the option of either
party (provided such option shall be exercised by the giving of notice
by the exercising party to the other party within sixty (60) days from
the date the exercising party has been notified of such taking or
condemnation) forthwith cease and terminate as of the date of the
taking. If this Lease is not terminated in accordance with the
provisions of this subparagraph (a), the Rent due shall be abated in
proportion to the
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portion of the Leased Premises so taken, and Landlord shall be
obligated to repair and restore the Leased Premises and/or the
Building and shall proceed diligently to do so; provided, however,
that Landlord shall have no obligation to incur costs to repair and
restore the Leased Premises and/or the Building which exceeds the
amount of condemnation proceeds Landlord realizes or any insurance
proceeds which, as a result of such taking, Landlord realizes or would
have realized had Landlord procured the insurance required by Section
5.01, and provided further Landlord shall have no obligation to repair
and restore any Tenant Alterations, Excess Building Standard
Improvements or Premium Tenant Improvements to the extent the same
were paid for by Tenant. All proceeds from any taking or condemnation
of the Leased Premises shall belong to and be paid to Landlord, and
Tenant hereby assigns to Landlord its interest in said proceeds,
subject to the rights of any holder of any Mortgage; provided,
however, Tenant shall be entitled to any proceeds attributable to
Tenant Alterations, Excess Building Standard Improvements or Premium
Tenant Improvements to the extent the same were paid for by Tenant,
and provided further Landlord shall cooperate with Tenant if Tenant
seeks to recover, at its cost and expense, compensation for its moving
expenses and personal property. In no event shall any such recovery by
Tenant have the effect of diminishing or delaying the award payable to
Landlord on account of any taking or condemnation.
(b) In the event of a temporary taking of all or any portion of the Leased
Premises, the Rent due shall be abated in proportion to the portion of
the Leased Premises so taken. In such event, Landlord shall be
obligated to restore the Building and the Leased Premises as may
reasonably be required as a result of such taking and shall proceed
diligently to do so; provided, however, that Landlord shall have no
obligation to incur costs to repair and restore the Leased Premises
and/or the Building which exceeds the amount of condemnation proceeds
Landlord realizes or any insurance proceeds which Landlord realizes or
would have realized had Landlord procured the insurance required by
Section 5.01, and provided further Landlord shall have no obligation
to repair and restore any Tenant Alterations, Excess Building Standard
Improvements or Premium Tenant Improvements to the extent the same
were paid for by Tenant.
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5.07. Damage Due to Fire and Casualty. In the event of a fire or other casualty
in the Leased Premises, Tenant shall immediately have notice thereof to
Landlord. In the event of any fire or other casualty in the Building, the
following provisions shall apply:
(a) Unless either Landlord or Tenant is entitled to terminate this Lease
pursuant to subparagraphs (b), (c) or (d) below, and this Lease is so
terminated, Landlord shall be obligated to repair and restore the
Leased Premises and/or the Building and shall proceed diligently to do
so; provided, however, that Landlord shall have no obligation to incur
costs to repair and restore the Leased Premises and/or the Building
which exceed the amount of insurance proceeds which Landlord realizes
(or would have realized had Landlord procured the insurance required
by Section 5.01) for such purpose plus an amount equal to (a) any
deductible for such insurance and (b) with respect to the Project
Common Areas only, if one hundred percent (100%) replacement cost
coverage was not obtained with respect thereto, the difference between
the proceeds of the replacement cost insurance actually obtained and
the proceeds which would have been obtained from one hundred percent
(100%) replacement cost coverage.
(b) If, at the time a fire or other casualty occurs, there remains less
than twenty-four (24) months in the Term, and if Landlord reasonably
estimates that upon completion of the repairs and restoration with
substantially all damage repaired less than six (6) months will remain
in the Term, Landlord shall, within forty-five (45) days after the
occurrence of the fire or other casualty give Tenant notice either (i)
setting forth the reasons for Landlord's determination and eliminating
from the Leased Premises, those full floors, if any, which incurred
substantial damage, or (ii) offering Tenant the option of either (x)
electing to eliminate from the Leased Premises those full floors which
incurred substantial damage, or (y) terminating this entire Lease by
notice to Landlord given during the thirty (30) day period following
the date Landlord's notice is given.
(c) Subject to the provisions of paragraph (b) above, if the damage caused
by such fire or other casualty renders untenantable either (i) fifty
percent (50%) or more of
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the Net Rentable Area of the Leased Premises, or (ii) twenty-eight
percent (28%) or more of the Net Rentable Area of the Office Section
(including some portion of the Office Section outside of the Leased
Premises) then, if:
(x) such untenantable space cannot, in Landlord's reasonable judgment,
be made tenantable with substantially all damage repaired within
twelve (12) months of the occurrence of the fire or other
casualty, but can be so repaired or restored within eighteen (18)
months thereof, then
(I) if at least twelve (12) months will remain in the Term after
completion of such repair, Landlord shall give Tenant notice
within forty-five (45) days after the date of such fire or
other casualty, following which Tenant shall, within thirty
(30) days of the date Landlord's notice is given, give
Landlord notice either (i) terminating this Lease, or (ii)
electing not to terminate this Lease; and
(II) if less than twelve (12) months will remain in the Term after
completion of such repair, Landlord shall, within forty-five
(45) days after the date of such fire or other casualty, give
Tenant notice (A) setting forth the reasons for Landlord's
determination and, if all other leases in the Building are to
be terminated as a result thereof, terminating this Lease, (B)
setting forth the reasons for Landlord's determination and, if
all other leases in the Building are not going to be
terminated as a result thereof, eliminating from the Leased
Premises those full floors, if any, which incurred substantial
damage, or (C) offering Tenant the option of (m) electing to
eliminate from the Leased Premises those full floors which
incurred substantial damage, or (n) terminating this entire
Lease by notice to Landlord given during the thirty (30) day
period following the date Landlord's notice is given;
(y) such untenantable space cannot, in Landlord's reasonable judgment,
be made tenantable with substantially all damage repaired within
eighteen (18) months of the occurrence of the fire or other
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casualty, but at least seventy-five percent (75%) of the Net
Rentable Area of the Leased Premises is or can be made tenantable
with substantially all damage repaired within such eighteen (18)
month period, and at least twelve (12) months will remain in the
Term after completion of such repair, then Landlord shall notify
Tenant within forty-five (45) days after the date of such fire or
other casualty, following which Tenant shall, within thirty (30)
days of the date Landlord's notice is given, give Landlord notice
(i) electing to eliminate from the Leased Premises those full
floors which cannot be made tenantable within such eighteen (18)
month period, (ii) terminating this entire Lease, or (iii)
electing not to terminate this Lease; and
(z) notwithstanding the foregoing, (I) at least seventy-five percent
(75%) of the Net Rentable Area of the Leased Premises cannot be
made tenantable with substantially all damage repaired within
eighteen (18) months following the fire or other casualty or (II)
even if at least seventy-five percent (75%) of the Net Rentable
Area of the Leased Premises can be made tenantable with
substantially all damage repaired within such eighteen (18) month
period but less than twelve (12) months will remain in the Term
after the completion of such repair, then Landlord shall notify
Tenant within forty-five (45) days after the date of the fire or
other casualty, and either Landlord or Tenant may terminate this
Lease within thirty (30) days of the date Landlord's notice is
given.
(d) If Landlord is obligated to restore the Leased Premises or the
Building in accordance with subparagraph (a) above, and Landlord has
not commenced restoration within six (6) months from the date of
damage or destruction, Tenant may terminate this Lease, such
termination right to be exercised by notice to Landlord within thirty
(30) days after such right accrues.
(e) During any period when Tenant's use of the Leased Premises is
materially affected by damage or destruction, Gross Rent shall abate
proportionately until such time as the Leased Premises are made
tenantable as reasonably determined by Landlord and no portion of the
Rent so abated shall be subject to subsequent recapture, except from
the proceeds of
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insurance policies maintained by Landlord covering such lost Rent, if
any.
(f) The proceeds from any insurance paid by reason of damage to or
destruction of the Building or any part thereof, the Building Standard
Improvements or any other element, component or property insured by
Landlord shall belong to and be paid to Landlord, subject to the
rights of the holder of any Mortgage, and Tenant hereby assigns to
Landlord any interest in said proceeds.
ARTICLE 6
DEFAULT
-------
6.01. Events of Default. The occurrence of any of the following shall constitute
an "Event of Default" on the part of Tenant:
(a) Nonpayment of Gross Rent. Failure to pay any regularly scheduled
payment of Gross Rent due and payable hereunder, upon the date when
payment is due, such failure continuing for a period of five (5)
Business Days after notice of such failure; provided, however, that
Landlord shall not be required to provide such notice more than twice
during any consecutive twenty-four (24) month period within the Term
and the third and any subsequent such non-payment occurring within the
same twenty-four (24) month period shall constitute an Event of
Default without requirement of notice;
(b) Nonpayment of Other Amounts. Failure to make any other payment due and
payable hereunder, upon the date when payment is due, such failure
continuing for a period of ten (10) Business Days after written notice
of such failure;
(c) Other Obligations. Failure to perform any other obligation, agreement
or covenant under this Lease, other than those matters specified in
Section 6.01(a) or (b), such failure continuing for fifteen (15)
Business Days after notice of such failure (or such longer period as
is reasonably necessary to remedy such default, provided that Tenant
shall within such fifteen (15) Business-Day period have commenced such
remedy and thereafter Tenant shall continuously and diligently pursue
such remedy at all times until such default is cured);
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(d) Abandonment. Abandonment of more than 40,000 square feet of Net
Rentable Area of the Leased Premises during the Term, unless, within
ten (10) days after such abandonment, Tenant shall have indicated an
intention to itself to reoccupy the entire Leased Premises within one
hundred and twenty (120) days (or if such reoccupancy shall include
occupancy by subtenants or assignees in accordance with Section 4.05
hereof, within one hundred and eighty (180) days), or the failure of
Tenant to so reoccupy the entire Leased Premises within said one
hundred and twenty (120) day period (or, in the case of occupancy by
subtenants or assignees, within said one hundred and eighty (180) day
period). Tenant shall be deemed to have abandoned the Leased Premises
if the Leased Premises remain substantially vacant or unoccupied to an
extent that might reasonably jeopardize the validity of insurance
coverage thereon;
(e) General Assignment. A general assignment by Tenant for the benefit of
creditors;
(f) Bankruptcy. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's
creditors, which involuntary petition remains undischarged or unstayed
for a period of one hundred and eighty (180) days. In the event that
under applicable law the trustee in bankruptcy or Tenant has the right
to affirm this Lease and continue to perform the obligations of Tenant
hereunder, such trustee or Tenant shall, in such time period as may be
permitted by the bankruptcy court having jurisdiction, cure all
defaults of Tenant hereunder outstanding as of the date of the
affirmance of this Lease and provide to Landlord such adequate
assurances as may reasonably be necessary to ensure Landlord of the
continued performance of Tenant's obligations under this Lease;
(g) Receivership. The employment of a receiver to take possession of
substantially all of Tenant's assets or the Leased Premises, if such
receivership remains undissolved for a period of ninety (90) days
after creation thereof;
(h) Attachment. The attachment, execution or other judicial seizure of all
or substantially all of Tenant's assets or the Leased Premises, if
such attachment or other seizure remains undismissed or undischarged
for a period of ninety (90) days after the levy thereof;
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(i) Insolvency. The admission by Tenant in writing of its inability to pay
its debts as they become due, the filing by Tenant of a petition
seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, the filing by Tenant of an answer
admitting or failing timely to contest a material allegation of a
petition filed against Tenant in any such proceeding or, if within one
hundred and eighty (180) days after the commencement of any proceeding
against Tenant seeking any reorganization, or arrangement,
composition, readjustment, liquidation, dissolution or similar relief
under any present or future statute, law or regulation, such
proceeding shall not have been dismissed.
6.02. Remedies upon Default.
(a) If an Event of Default occurs, Landlord shall have the right, with or
without notice or demand, immediately to terminate this Lease, and at
any time thereafter recover possession of the Leased Premises or any
part thereof and expel and remove therefrom Tenant and any other
person occupying the same, by any lawful means, and again repossess
and enjoy the Leased Premises without prejudice to any of the remedies
that Landlord may have under this Lease, or at law or equity by reason
of Tenant's default or of such termination.
(b) Even though an Event of Default shall have occurred pursuant to
Section 6.01, this Lease shall continue in effect and Tenant shall
have the right to cure any such Event of Default for so long as
Landlord does not terminate this Lease under Section 6.02(a) hereof,
and Landlord may enforce all of its rights and remedies under this
Lease, including, without limitation, the right to recover Rent as it
becomes due. Acts of maintenance, preservation or efforts to lease the
Leased Premises or the appointment of a receiver upon application of
Landlord to protect Landlord's interest under this Lease shall not
constitute an election to terminate the Lease.
6.03. Damages upon Termination. Should Landlord terminate this Lease pursuant to
the provisions of Section 6.02(a) hereof, in addition to any other rights and
remedies to which Landlord may be entitled under applicable law, Landlord shall
be entitled to recover from Tenant: (i) the worth at the time of award of the
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unpaid Rent and other amounts which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of such Rent loss that the Tenant proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
Rent for the balance of the Term after the time of award exceeds the rental
value of the Premises for the balance of the Term; and (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. Tenant further
covenants, as an additional cumulative obligation after any such termination, to
punctually pay to Landlord all sums and perform all obligations which Tenant
covenants in this Lease to pay and to perform, as if this Lease had not been
terminated, whether or not such obligations arose prior to, concurrent with or
after such termination. In calculating the amounts to be paid by Tenant pursuant
to the immediately preceding sentence, Tenant shall be credited with any amount
paid to Landlord pursuant to the first sentence of this Section 6.03, and also
with the net proceeds of any rent obtained by Landlord by reletting the Leased
Premises through the time of award, after deducting all Landlord's expenses in
connection with such reletting, including without limitation, all repossession
costs, brokerage commissions, fees for legal services and expenses of preparing
the Leased Premises for reletting, it being agreed by Tenant that Landlord may
(x) relet the Leased Premises or any part thereof for a term or terms which may
at Landlord's option be equal or less than or exceed the period which would
otherwise have constituted the balance of the Term and may grant such
concessions and free rent as Landlord in its exercise of business judgment
considers advisable or necessary to relet the same and (y) make such
alterations, repairs and decorations in the Leased Premises and the Building as
Landlord in its sole judgment considers advisable or necessary to relet the
same, and no action of Landlord in accordance with the foregoing or failure to
relet or collect rent under Landlord's reletting of the Premises shall operate
or be construed to release or reduce Tenant's liability as aforesaid unless and
to the extent Tenant proves such failure could reasonably have been avoided. The
"time of award" shall refer to such time as (I) Tenant shall, as a settlement of
the amounts due pursuant to this Section 6.03, pay to Landlord such sums
pursuant to a written agreement in form and substance satisfactory to Landlord,
or (II) the date on which a Judgment shall be entered in a court of competent
jurisdiction to the effect that Tenant shall pay Landlord the amounts due and
owing pursuant to this Section 6.03. The "worth at the time of award" of the
amounts referred to in (i) and (ii) shall mean such amounts together with
interest at the lesser of eighteen percent per annum or the maximum rate allowed
by law. The "worth at
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the time of award" of the amount referred to in (iii) shall mean such amounts as
computed by reference to competent appraisal evidence or the formula prescribed
by and using the lowest discount rate utilized by commercial appraisers in
calculating such amounts for such purpose.
6.04. Computation of Rent for Purposes of Default. For purposes of computing
unpaid Rent which would have accrued and become payable under this Lease for the
balance of the Term pursuant to the provisions of Section 6.03, unpaid Rent
shall consist of the sum of:
(a) the total Net Rent for the balance of the Term, plus
(b) a computation of the Operating Cost and Impositions for the balance of
the Term, the assumed Operating Cost for the calendar year of the
default and each future calendar year in the Term to be equal to the
Operating Cost for the calendar year prior to the year in which the
default occurs compounded at a per annum rate equal to the mean
average rate of inflation for the preceding five (5) calendar years as
determined by the United States Department of Labor, Bureau of Labor
Statistics Consumer Price Index (All Urban Consumers, All Items,
1982-1984 equals 100). If such Index is discontinued or revised, the
average rate of inflation shall be determined by reference to the
index designated as the successor or substitute index by the
government of the United States.
6.05. Rights of Landlord in Bankruptcy. Nothing contained in this Lease shall
limit or prejudice the right of Landlord to prove for and obtain in proceedings
for bankruptcy or insolvency, by reason of the termination of this Lease, an
amount equal to the maximum allowed by any statute or rule of law in effect at
the time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater, equal to, or less than the amount
of the loss or damages referred to in this Article 6.
6.06. Interest on Late Payments. In addition to its other remedies, Landlord
shall have the right to add to the amount of any payment required to be made by
Tenant hereunder, and which is not paid on or before the date the same is due,
interest on all unpaid payments at the rate of six percent (6%) per annum over
the prime rate of the Bank of Boston, or any successor institution thereto, for
so long as the delinquency remains outstanding, the parties agreeing that
Landlord's damage by virtue of such delinquencies would be difficult to compute
and the amount stated
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herein represents a reasonable estimate thereof. All such interest charges shall
be due upon demand by Landlord. Tenant shall reimburse Landlord for all costs
and expenses (including reasonable attorneys' fees) incurred by Landlord to
recover the interest charges due hereunder.
ARTICLE 7
APPRAISAL
----------
7.01. Appraisal of Fair Market Net Rent. In the event that Tenant disputes the
amount claimed by Landlord as Fair Market Net Rent, and such dispute cannot be
resolved by mutual agreement, the dispute shall be submitted to the appraisal
process hereinafter set forth. The amount of Fair Market Net Rent determined
pursuant to such appraisal process shall be final and binding between the
parties. The appraisal process shall be conducted as follows:
(a) Tenant shall make demand for appraisal in writing within thirty (30)
days after service of Landlord's determination of Fair Market Net Rent
given under Section 9.02 or Section 10.04 or otherwise under this
Lease, specifying therein the name and address of the person to act as
the appraiser on its behalf. The appraiser shall be a real estate
appraiser with at least ten (10) years' experience in the leasing or
appraisal of first-class commercial office space (with at least five
(5) years experience in Boston) and a qualified member of the American
Institute of Real Estate Appraisers, or any successor of such
Institute (or if such organization or successor shall no longer be in
existence, a recognized national association or institute of land
appraisers). Failure on the part of the Tenant to make a timely and
proper demand for such appraisal shall constitute a waiver of the
right thereto. Within ten (10) business days after the service of the
demand for appraisal, Landlord shall give notice to Tenant, specifying
the name and address of the person designated by Landlord to act as
appraiser on its behalf who shall be similarly qualified. If Landlord
fails to notify Tenant of the appointment of its appraiser, within or
by the time above specified then the Tenant may thereafter send a
second notice to Landlord indicating such failure and requesting
Landlord to appoint such an appraiser. If Landlord fails to
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notify Tenant of the appointment of its appraiser within ten (10)
business days after the giving of such second notice by Tenant then
the appraiser appointed by Tenant shall be the sole appraiser to
determine the issue.
(b) In the event that two (2) appraisers are chosen pursuant to Section
7.01(a) above, the appraisers so chosen shall meet within ten (10)
business days after the second appraiser is appointed and, if within
ten (10) business days after such first meeting the two appraisers
shall be unable to agree upon a determination of Fair Market Net Rent,
they, themselves, shall appoint a third appraiser, who shall be a
competent and impartial person with qualifications similar to those
required of the first two appraisers. In the event they are unable to
agree upon such appointment within five (5) business days after
expiration of said ten (10) day period, the third appraiser shall be
selected by the parties themselves, if they can agree thereon, within
a further period of ten (10) business days. If the parties do not so
agree, then either party, on behalf of both, may request appointment
of such a qualified person by an officer of the American Arbitration
Association in Boston. The three (3) appraisers shall decide the
dispute, if it has not previously been resolved, by following the
procedure set forth in Section 7.01(c) below.
(c) Where the issue cannot be resolved by agreement between the two
appraisers selected by Landlord and Tenant or settlement between the
parties during the course of the appraisal process, the issue shall be
resolved by the three appraisers in accordance with the following
procedure. The appraiser selected by each of the parties shall each
state in writing his determination of the Fair Market Net Rent,
supported by the reasons therefor, with counterpart copies to each
party. The appraisers shall arrange for a simultaneous exchange of
such proposed determinations. The role of the third appraiser shall be
to select which of the two proposed determinations most closely
approximates his own determination of Fair Market Net Rent. The third
appraiser shall have no right to propose a middle ground or any
modification of either of the two proposed determinations. The
determination he chooses as most closely approximating his
determination shall constitute the decision of the appraisers and be
final and binding upon the parties. This provision for determination
by appraisal shall be specifically enforceable to the
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extent such remedies are available under applicable law, and any
determination hereunder shall be final and binding upon the parties
hereto, and either party shall have the right to enter judgement
thereon, unless otherwise provided by applicable law. If a
determination of Fair Market Net Rent is to be made pursuant to this
Section 7.01, Landlord and Tenant shall each pay for the fees and
disbursements of any appraiser appointed by it and shall share equally
in the fees and expenses of any third appraiser.
(d) In the event of a failure, refusal or inability of any appraiser to
act, his successor shall be appointed by him, but in the case of the
third appraiser, his successor shall be appointed in the same manner
as provided for appointment of the third appraiser.
ARTICLE 8
MISCELLANEOUS
-------------
8.01. Holding Over. In the event of holding over by Tenant after expiration or
termination of this Lease without the written consent of Landlord, Tenant shall
pay for each month or portion thereof of the holdover tenancy holdover rent at
the rate of twice the rate of Gross Rent which Tenant was obligated to pay for
the month or portion thereof immediately preceding the end of the Term together
with such other amounts as may become due hereunder. No holding over by Tenant
after the Term or Extended Term shall operate to extend the Term. In the event
of any unauthorized holding over, Landlord may give notice to Tenant of such
holdover, and, if Landlord gives such notice to Tenant, Tenant shall indemnify
Landlord (i) against all claims for damages by any other tenant to whom Landlord
may have leased all or any part of the Leased Premises covered hereby effective
upon the termination of this Lease, and (ii) for all other losses, costs and
expenses, including reasonable attorneys' fees, incurred by Landlord by reason
of such holding over. Landlord shall include in its notice to Tenant hereunder
an estimate of the damages which Landlord reasonably anticipates suffering in
the six (6) months following such notice as a result of Tenant's holdover, but
such indemnity shall be effective whether or not any of the damages actually
suffered by Landlord were set forth in Landlord's notice to Tenant and shall not
in any manner be limited to Landlord's failure to list any such damage in its
notice to Tenant so long as Landlord
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was reasonable in furnishing Tenant its estimate. Any holding over with the
consent of Landlord in writing shall thereafter constitute a lease from month to
month subject to the terms hereof.
8.02. Amendments and Modifications. This Lease may not be altered, changed or
amended, except by an instrument in writing signed by both parties hereto. If in
connection with obtaining financing for the Building, a bank, insurance company,
pension trust or other institutional lender shall request modifications to this
Lease as a condition to such financing, Tenant shall promptly consider such
requests, shall give serious consideration to all reasonable requests, and, if
Tenant shall not consent to any such request, shall set forth in writing the
reasons for its refusal to do so. No modification which would increase the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created shall be deemed a reasonable request.
8.03. Transfers by Landlord. Landlord shall have the right to transfer and
assign all of its rights and obligations hereunder in the Building, and in such
event and upon such transfer, no further liability or obligations shall
thereafter accrue for obligations arising after such transfer or assignment
against such party as Landlord hereunder. No owner of the Leased Premises shall
be liable under this Lease except for breaches of Landlord's obligations
occurring while such person is the owner of the Leased Premises.
8.04. Severability. If any term or provision of this Lease, or the application
thereof to any person or circumstances, shall to any extent be invalid or
unenforceable, the remainder of this lease, or the application of such provision
to persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each provision of this Lease
shall be valid and shall be enforceable to the fullest extent permitted by law.
8.05. Notices. All notices, demands, consents and approvals which may be or are
required to be given by either party to the other hereunder shall be in writing
and shall be deemed to have been fully given (a) in the case of Landlord, when
personally delivered to the Landlord at the address specified for Landlord on
the Basic Lease Information Sheet, and in the case of Tenant, when two (2) of
the same are personally delivered to the Tenant addressed "Attention: General
Counsel" and to the Tenant addressed "Attention: Treasurer", both at the address
specified for Tenant on the Basic Lease Information Sheet (provided, however,
that in the case of any notice by Landlord to Tenant regarding a lien pursuant
to Section 4.06 or regarding an Event of
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Default pursuant to Section 6.01, such notice shall state "NOTICE OF LIEN" or
"NOTICE OF DEFAULT", respectively, in boldfaced capital letters), or (b) when
deposited with the United States mail, certified or registered, postage prepaid,
or with a recognized overnight delivery service which furnishes receipts of
delivery in the ordinary course of its business, in the case of Landlord, at the
address specified for Landlord on the Basic Lease Information Sheet, and in the
case of Tenant, addressed "Attention: General Counsel" and "Attention:
Treasurer", both at the address specified for Tenant on the Basic Lease
Information Sheet (provided, however, that in the case of any notice by Landlord
to Tenant regarding a lien pursuant to Section 4.06 or regarding an Event of
Default pursuant to Section 6.01, such notice shall state "NOTICE OF LIEN" or
"NOTICE OF DEFAULT", respectively, in boldfaced capital letters). Any party may,
from time to time, designate a new address for delivery, for purposes of this
notice provision, by notice given at least fifteen (15) days in advance in
accordance herewith of such new address.
8.06. No Joint Venture. This Lease shall not be deemed or construed to create or
establish any relationship of partnership or joint venture or similar
relationship or arrangement between Landlord and Tenant hereunder.
8.07. Successors and Assigns. This Lease shall be binding upon and inure to the
benefit of Landlord, its successors and assigns (subject to the provisions
hereof, including, but without limitation, Section 8.03); and shall be binding
upon and, subject to the provisions of Section 4.06 hereof, inure to the benefit
of Tenant, its successors and assigns.
8.08. Applicable Law. All rights and remedies of Landlord and Tenant under this
Lease shall be construed and enforced according to the laws of the Commonwealth
of Massachusetts.
8.09. Time of the Essence. Time is of the essence of each and every covenant
herein contained.
8.10. Submission Not an Option. The submission of this Lease for examination
does not constitute a reservation of or option for the Leased Premises or an
offer to lease, it being understood and agreed that neither Landlord nor Tenant
shall be legally bound with respect to the leasing of the Leased Premises unless
and until this Lease has been executed and delivered by both Landlord and
Tenant.
8.11. Brokerage. Tenant and Landlord each warrant to the other that it has had
no dealings with any broker or agent in connection with this Lease other than
Meredith & Grew and Leggat McCall/Grubb
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and Ellis Inc., and each covenants to defend (with counsel reasonably approved
by the other party), hold harmless and indemnify the other party from and
against any and all costs, expense or liability for any compensation, commission
and charges claimed by any broker or agent arising out of the warranting party's
dealings in connection with this Lease or the negotiation thereof. The fee for
the brokers referred to above shall be paid by Landlord.
8.12. Waiver of Jury Trial. Landlord and Tenant hereby waive trial by jury in
any action, proceeding or counterclaim brought by either of the parties hereto
against the other, on or in respect of any matter whatsoever arising out of or
in any way connected with this Lease, the relationship of Landlord and Tenant
hereunder, Tenant's use or occupancy of the Leased Premises, and/ or any claim
of injury or damages.
8.13. All Agreements Contained. This Lease contains all of the agreements of the
parties with respect to the subject matter hereof and supersedes all prior
dealings between them with respect to such subject matter.
8.14. Cumulative Remedies. The specific remedies to which Landlord may resort
under the terms of this Lease are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which it may be lawfully
entitled in case of any breach or threatened breach by Tenant of any provisions
of this Lease. In addition to the other remedies provided in this Lease,
Landlord and Tenant shall each be entitled to the restraint by injunction of the
violation or attempted or threatened violation of any of the covenants,
conditions or provisions of this Lease or to a decree compelling specific
performance of any such covenants, conditions or provisions.
8.15. Failure to Enforce. The failure of Landlord or Tenant to declare any
default upon its occurrence or to seek redress for any default of, or to insist
upon strict performance of, any covenant or condition of this Lease, shall not
be deemed a waiver of such default, nor prevent a subsequent act which would
have originally constituted a default from having all the force and effect of
the original default. The failure of the Landlord to enforce any of the rules
and regulations applicable to the Building against any other tenant in the
Building shall not be deemed a waiver of any such rules or regulations,
provided, however, that Landlord shall not enforce such rules and regulations in
a discriminatory manner. The receipt by Landlord of Rent with knowledge of the
breach of any covenant of this Lease shall not be deemed a waiver of such
breach. No provision of this Lease shall be deemed to have been waived by
Landlord, unless such waiver shall be in writing and
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signed by Landlord. No consent or waiver, express or implied, by Landlord or
Tenant to any breach of any agreement or duty shall be construed as a waiver or
consent to or of any other breach of the same or any other agreement or duty.
8.16. Notice of Lease; Other Notices and Agreements. Tenant agrees not to record
this Lease, but on the request of either party hereto, both parties hereto shall
execute and deliver (i) a notice of this Lease in form appropriate for recording
and registration, (ii) an agreement setting forth the Term Commencement Date,
(iii) a notice in form appropriate for recording and registration of any
amendment of this Lease, (iv) as reasonably requested by any holder of a
Mortgage, an agreement by Tenant to make payments and give notices to whatever
individual or entity shall be designated by Landlord for receiving any such
notice or payment and to comply with the provisions of any assignment of rents
granted to the holder of any Mortgage, and (v) if this Lease is terminated
before the expiration of the Term, an instrument in form appropriate for
recording and registration pursuant to which Tenant acknowledges the date of
termination.
8.17. Moving Expense Reimbursement. Landlord agrees to reimburse Tenant for
expenses incurred by Tenant in relocating to the Leased Premises in an amount
equal to One Dollar ($1.00) per square foot of Net Rentable Area of the Leased
Premises at the time of Tenant's initial occupancy. Such amount shall be payable
by Landlord to Tenant in cash installments as such expenses are incurred by
Tenant in the ordinary course of such relocation in a manner consistent with
normal business practices during the second year of the Term, with each
installment due within thirty (30) days of Landlord's receipt of an invoice
therefor from Tenant. Tenant agrees not to voluntarily prepay any of such moving
expenses.
8.18. Release of Existing Lease Obligations. Tenant is expected to have
continuing obligations under Tenant's existing leases at One Memorial Drive,
Cambridge or One Beacon Street, Boston (the "Existing Leases") with respect to
the period from the Completion Date to the Rent Commencement Date. Any cost
savings achieved by subletting or assigning any portion of the premises under
the Existing Leases, successfully negotiating a release of Tenant from any of
Tenant's obligations to pay rent or escalations under the Existing Leases, or
reducing any identifiable operating costs payable to the landlord under the
Existing Leases or to a utility company providing service to the premises
demised under the Existing Leases (as determined in comparison to the such costs
for the full calendar year immediately preceding the Completion Date), shall be
shared equally by Landlord and Tenant, after deducting any cost incurred by
Tenant which is associated with achieving the
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same. Nothing stated herein shall obligate Tenant to achieve any such savings,
but Tenant shall discuss with Landlord in good faith any attempts at achieving
such savings and pursue in good faith such efforts as Tenant shall determine is
appropriate to achieve such savings (it being understood that Tenant may, in
good faith, elect not to relocate all or any portion of its operations for the
first year after the Term Commencement Date).
8.19. Hiring Practices. Tenant covenants that Tenant shall comply with all laws,
ordinances, regulations and orders referenced in Section 12.01 of the Amended
and Restated Sale and Construction Agreement by and among the City of Boston,
the Boston Redevelopment Authority, New England Mutual Life Insurance Company
and Gerald D. Hines Interests, Inc. dated April 15, 1986, recorded with the
Suffolk Registry of Deeds in Book 12515, Page 78. Notwithstanding any other
provision of this Lease, Landlord shall have no right to terminate this Lease by
reason of Tenant's breach of this covenant, but Tenant shall in good faith make
reasonable efforts to cure any breach of this covenant after notice to Tenant
from any public agency, authority or other instrumentality with Jurisdiction to
enforce any such laws, ordinances, regulations or orders that Tenant has failed
to so comply, or after notice to Tenant from Landlord that Landlord has received
notice from any such public agency, authority or other instrumentality that
Tenant has failed to so comply, provided that Tenant may in good faith challenge
any assertion by a public agency, authority or other instrumentality that Tenant
has failed to so comply or the validity or enforceability of any such laws,
ordinances, regulations or orders.
ARTICLE 9
OPTIONS TO EXTEND THE TERM
--------------------------
9.01. Grant and Exercise of Options to Extend. So long as there shall exist, at
the time of the giving of Tenant's Two Year Notice or Tenant's Five Year Notice
hereunder, as the case may be, no Event of Default, or condition as to which
Tenant has received notice, which, with the passage of time, would constitute an
Event of Default (unless Tenant commences to cure such condition prior to the
occurrence of an Event of Default as a result thereof and thereafter
continuously and diligently pursues such cure to completion), Tenant shall have
the right to extend the Term beyond the Term Expiration Date (such extension
being hereinafter referred to as an "Extended Term") for either (i) one
additional two (2) year period by giving Landlord notice of its election to
extend ("Tenant's Two Year Notice") no less than thirty-six (36)
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months prior to the Term Expiration Date (the "Two Year Option") or (ii) one
additional period of five (5) years by giving Landlord notice of its election to
extend ("Tenant's Five Year Notice") no less than twenty-four (24) months prior
to the Term Expiration Date (the "Five Year Option"). The giving of Tenant's Two
Year Notice or Tenant's Five Year Notice by Tenant, as the case may be, shall
automatically extend the term of the Lease for the applicable Extended Term. In
the event Tenant elects to exercise the Five Year Option, and so long as there
shall exist, at the time of the giving of Tenant's Second Notice hereunder, no
Event of Default, or condition as to which Tenant has received notice, which,
with the passage of time, would constitute an Event of Default (unless Tenant
commences to cure such condition prior to the occurrence of an Event of Default
as a result thereof and thereafter continuously and diligently pursues such cure
to completion), Tenant shall also have the right to an additional Extended Term
(the "Additional Extended Term") for one additional period of five (5) years or
ten (10) years (as determined by Landlord in its sole discretion) (the "Extra
Option"). In the event Tenant desires to exercise the Extra Option, Tenant
shall, no earlier than thirty-six (36) months prior to the end of the existing
Extended Term and no later than twenty-six (26) months prior to the end of the
existing Extended Term, provide Landlord notice of such intention and request
Landlord to determine whether the length of the Additional Extended Term shall
be five (5) years or ten (10) years ("Tenant's Notice of Intention"). Landlord
shall, within thirty (30) days of Tenant's Notice of Intention, notify Tenant
whether the length of the Additional Extended Term stall be five (5) years or
ten (10) years. Following such determination by Landlord, Tenant may exercise
the Extra Option by giving Landlord notice of such election ("Tenant's Second
Notice") no later than twenty-four (24) months prior to the end of the existing
Extended Term. The giving of Tenant's Second Notice by Tenant shall
automatically extend the term of the Lease for the Additional Extended Term.
Failure by Tenant to give any notice required hereunder in a timely manner shall
constitute a waiver of such Option to Extend and any subsequent Option to
Extend. If Tenant does not exercise either the Two Year Option or the Five Year
Option, the Term shall continue until the Term Expiration Date; if the Tenant
exercises the Five Year Option, but fails to exercise the Extra Option, the Term
shall continue until the last day of the first Extended Term.
9.02. Election to Reduce the Leased Premises. The rights to extend shall apply
only to all of the space included as a part of the Leased Premises on the last
day of the Term Expiration Date, or if Tenant exercises the Extra Option, on the
last day of the existing Extended Term; provided, however, that (a) Tenant may
elect in Tenant's Five Year Notice (but not in Tenant's Two Year
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Notice) to reduce the Leased Premises for the Extended Term by eliminating from
the Leased Premises the top floor or the top two floors then included in the
Leased Premises, specified in such notice; and (b) Tenant may elect in Tenant's
Second Notice to reduce the Leased Premises for the Additional Extended Term by
eliminating from the Leased Premises the top floor then included in the Leased
Premises, as specified in Tenant's Second Notice, but only if Tenant did not
elect to reduce the Leased Premises in Tenant's Five Year Notice or elected to
reduce the Leased Premises by only one floor, or Tenant may elect to reduce the
Leased Premises for the Additional Extended Term by eliminating from the Leased
Premises the top two floors then included in the Leased Premises, but only if
Tenant did not elect to reduce the Leased Premises at all in Tenant's Five Year
Notice. If Tenant exercises its election to reduce the Leased Premises
hereunder, Tenant and Landlord shall execute an amendment to this Lease
appropriately revising the Basic Lease Information Sheet: (i) to delete the
floor or floors removed from the Leased Premises and deleting the floor or
floors from Exhibit A, (ii) to restate the Net Rentable Area of the Leased
Premises, and (iii) to restate the Tenant's Proportionate Share.
9.03. Rent During Extended Term. The Base Rent for the Extended Term shall be
(i) for the two year Extended Term, $16.00 plus seventy-five (75%) of the amount
by which Fair Market Net Rent exceeds $16.00 but in no event shall it be less
than $16.00 or (ii) for any other Extended Term, Fair Market Net Rent. Such Base
Rent shall be in effect as of the first day of such Extended Term. The Fair
Market Net Rent shall be determined by Landlord with notice given to Tenant no
later than one hundred and twenty (120) days prior to the commencement of the
Extended Term subject to the Tenant's right to demand appraisal pursuant to the
provisions of Section 7.01. Failure on the part of the Landlord to give such
notice in a timely manner shall not vitiate the right to require an adjustment
of the Base Rent but such delay shall result in deferral of any increase or
decrease in the Base Rent to a date one hundred and twenty (120) days after the
date of such notice. Failure on the part of Tenant to demand appraisal within
thirty (30) days after receipt of notice from Landlord of Landlord's
determination of Fair Market Net Rent shall constitute a waiver of Tenant's
right to demand appraisal, and shall bind Tenant to the Fair Market Net Rent as
determined by Landlord. Should Tenant elect to exercise its right to demand
appraisal and should the appraisal process not have been concluded prior to the
Extended Term, then the greater of (i) the Base Rent which was previously in
effect or (ii) Tenant's estimate, if any, of the Fair Market Net Rent, as
applicable, shall be temporarily applicable for purposes of determining Tenant's
obligation to pay the Base Rent. However, once the new rate is in fact agreed
upon or determined,
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if it is higher than the rate paid by Tenant during the period such rate should
have been in effect, then Tenant shall pay to Landlord within ten (10) days
after agreement upon or determination of the new rate an amount sufficient to
result in Landlord's having been paid rental at the new rate from the
commencement of the portion of the term during which such rate was to have been
in effect, together with interest at the then Bank of Boston Prime Rate with
respect to any portion of such rent not paid when due because of the operation
of this paragraph, from the date payment was due to the date paid.
9.04. Lease Continues in Effect. From and after commencement of each Extended
Term hereunder, all of the other terms, covenants and conditions of this Lease
shall apply, and reference to the Term shall thereafter be deemed to include the
Extended Term in question, except that the Base Rent shall be revised by an
amendment to the Lease to reflect any adjustment in the Base Rent, and from and
after the commencement of the two year Extended Term or the Additional Extended
Term, as the case may be, Tenant shall have no right to extend the Term further.
ARTICLE 10
OPTIONS TO EXPAND THE LEASED PREMISES
-------------------------------------
10.01. Grant of Initial Option to Expand. Tenant may elect to Increase the
Leased Premises by leasing between 5,000 and 8,000 square feet of space on the
second or twelfth floor of the Building (the specific amount and location of
such space to be determined by Landlord at the time of Tenant's notice of its
intention to exercise such option) by providing notice to Landlord on or before
December 31, 1991. If Tenant exercises its option hereunder, Tenant and
Landlord shall execute an amendment to this Lease appropriately revising the
Basic Lease Information Sheet: (i) to identify the space added to the Leased
Premises and adding the space to Exhibit A. (ii) to restate the Net Rentable
Area of the Leased Premises, and (iii) to restate the Tenant's Proportionate
Share. All other terms, covenants and conditions of the Lease shall remain
unchanged and in full force and effect.
10.02. Grant of Options to Expand.
(a) Provided that (i) no Event of Default, or condition as to which Tenant
has received notice, which, with the passage of time would constitute
an Event of Default, (unless Tenant commences to cure such condition
prior to the occurrence of an Event of Default as a result
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thereof and diligently pursues such cure to completion), then exists,
and (ii) Tenant and/or any Tenant Affiliates, shall then be in
occupancy of Net Rentable Area constituting not less than seventy-five
percent (75%) of the Net Rentable Area included in the Leased Premises
on the date of Tenant's Expansion Notice, Tenant shall have the option
to expand the Leased Premises at the times set forth below, subject to
the other provisions set forth below, by adding the following space
located on floors eleven (11) through twenty-two (22) of the Building,
as determined by Landlord pursuant to this Section 10.02
(collectively, the "Expansion Space"):
(1) One entire floor located on floors eleven (11) through twenty-two
(22) to be made available between September 1995 and September
1997;
(2) One entire floor located on floors eleven (11) through twenty-two
(22) to be made available between September 1997 and September
1999;
(3) One entire floor located on floors eleven (11) through twenty-two
(22) to be made available between July 2000 and July 2002.
(b) If Landlord shall be unable to deliver any portion of the Expansion
Space at the time required hereunder, by reason of the holding over of
any prior tenant or occupant or otherwise due to no fault of Tenant,
Landlord shall use reasonable efforts to obtain possession of such
Expansion Space and otherwise deliver possession thereof to Tenant,
but Landlord shall not be subject to any liability for failure to give
possession thereof to Tenant at the time required hereunder, except
that (i) until the date on which all such Expansion Space shall
actually be delivered to Tenant, Tenant shall not be required to pay
to Landlord any Rent with respect to the Net Rentable Area of such
Expansion Space, unless and to the extent Tenant has commenced
occupancy of such portion of the Expansion Space for the conduct of
its business operations, (ii) if Landlord shall be unable to deliver
all of such Expansion Space within six (6) months after the time
required hereunder, Tenant shall have the option to terminate its
election to take such Expansion Space (or, if Landlord has delivered
only a portion of such Expansion Space, the remainder of such
Expansion Space) by notice to Landlord given within fifteen (15) days
thereafter, and (iii) if
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Landlord shall be unable to deliver all of such Expansion Space within
twelve (12) months after the time required hereunder, Tenant shall
have the option to terminate its election to take such Expansion Space
(or, if Landlord has delivered only a portion of such Expansion Space,
the remainder of such Expansion Space) by notice to Landlord given
within fifteen (15) days thereafter. In addition to the foregoing, if,
as part of Tenant's Expansion Notice (as defined in Section 10.03(a)),
Tenant shall notify Landlord that such Expansion Space is to be
utilized in conjunction with existing space in the Leased Premises for
the operation of a single division or other business unit of Tenant,
and if Landlord shall be unable to deliver the Expansion Space under
clause (iii) above, then Tenant may elect in its notice to terminate
its election to take such Expansion Space to reduce the Leased
Premises by eliminating from the Leased Premises the top floor then
included in the Leased Premises. If Tenant exercises its election to
reduce the Leased Premises hereunder, Tenant and Landlord shall
execute an amendment to this Lease appropriately revising the Basic
Lease Information Sheet: (i) to delete the floor removed from the
Lease Premises and deleting the floor or floors from Exhibit A, (ii)
to restate the Net Rentable Area of the Leased Premises, and (iii) to
restate the Tenant's Proportionate Share.
(c) Landlord shall use reasonable efforts to keep Tenant informed of the
status, from time to time, of the space which may constitute Expansion
Space hereunder.
10.03. Exercise of Options to Expand.
(a) Landlord shall furnish Tenant not less than fifteen (15) months nor
more than twenty-four (24) months prior notice of the time when such
Expansion Space is scheduled to become available within the time
periods set forth in Section 10.02(a) hereof. Such notice shall set
forth the floor of the Building constituting such space, the date on
which Landlord estimates that the Expansion Space will become
available, and the Landlord's determination of Fair Market Net Rent.
Tenant may thereupon exercise its option to add Expansion Space to the
Leased Premises by giving notice ("Tenant's Expansion Notice") to
Landlord not later than twelve (12) months prior to the date on which
such
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Expansion Space is scheduled to become available. Tenant's exercise of
its options shall be final and shall not depend upon the determination
of Fair Market Rent pursuant to Article 7.
(b) Tenant's failure to give Landlord timely notice of the exercise of its
option to expand shall constitute a final waiver of its option to take
Expansion Space during the applicable time period set forth in Section
10.02(a) hereof, and Landlord shall have no further obligation to make
such Expansion Space available to Tenant except during the next time
period set forth in Section 10.02(a) hereof, if any.
(c) In the event that any of the Expansion Space becomes available before
the time indicated in Section 10.02(a) for such space, Landlord shall
so notify Tenant, and Tenant shall thereupon have the right to
accelerate its corresponding option to expand with respect to such
Expansion Space, by notice to Landlord not later than thirty (30) days
after the date of Landlord's notice of availability. Such notice by
Tenant shall, for all purposes, be deemed to be the Tenant's Expansion
Notice required by Section 10.03(a). Tenant's exercise of such option
to expand shall constitute the option to expand which would have
occurred during the next time period set forth in Section 10.02(a),
and Tenant shall not thereafter have any additional option to expand
during such time period, but Tenant's failure to exercise such option
to expand shall not negate Tenant's option to expand during such time
period.
10.04. Rent for Expansion Space. Tenant shall pay to Landlord all of the Rent
required hereunder with respect to the Expansion Space; provided, however, that
the Base Rent shall be adjusted to reflect the then Fair Market Net Rent for the
Expansion Space, such Fair Market Net Rent to be determined by Landlord, subject
to Tenant's right to demand appraisal in accordance with the provisions of
Article 7. Notwithstanding anything in this Lease to the contrary, it is agreed
that for the purposes of this Section 10.04, neither the value of any demolition
work performed by Landlord pursuant to Section 10.05(b), nor the value of the
sixty (60) day period referred to in this Section 10.04 shall be considered in
calculating the Fair Market Net Rent. Payment of Rent with respect to Expansion
Space shall commence on the earlier of (i) occupancy by Tenant for the conduct
of its business or (ii) sixty (60) days after Landlord makes the Expansion Space
available to Tenant in the condition required by Section 10.05 hereof.
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10.05. Condition of Expansion Space. All Expansion Space shall be leased by and
delivered to Tenant on an "as is" basis, except as follows:
(a) If any portion of the Expansion Space is unimproved at the time of the
exercise of Tenant's option to expand, Landlord shall provide Building
Standard Improvements in accordance with Schedule I of the Work
Letter, prior to the Expansion Space being made available to Tenant.
(b) If the Expansion Space has been previously constructed, Landlord will
repair all floor cuts and will demolish walls, doors, millwork and
other items in the occupiable space in accordance with plans and
written instructions prepared by Tenant and delivered to Landlord no
later than ninety (90) days prior to the date on which Landlord
estimates the Expansion Space will become available as set forth in
Landlord's notice to Tenant in accordance with Section 10.03(a)
hereof, prior to the Expansion Space being made available to Tenant.
10.06. Expansion Space Part of Leased Premises. Upon Tenant's exercise of each
option to expand, the particular Expansion Space shall become a part of the
Leased Premises on the date Landlord makes the Expansion Space available to
Tenant in the condition required by Section 10.05 hereof, and thereafter the
Expansion Space shall be subject to all of the terms, covenants and conditions
of this Lease, as the same may be amended from time to time, except that Rent
shall not commence with respect to the Net Rentable Area of the Expansion Space
until the earlier of (a) occupancy by Tenant for the conduct of its business, or
(b) sixty (60) days after the date the Expansion Space became part of the
Premises. Tenant and Landlord shall execute an amendment to this Lease
appropriately revising the Lease to reflect the addition of such Expansion
Space, including the Basic Lease Information Sheet: (i) to identify the floor or
portion thereof added to the Leased Premises and adding the same to Exhibit A,
(ii) to restate the Net Rentable Area of the Leased Premises, (iii) to restate
the Tenant's Proportionate Share, and (iv) to add the Base Rent to be paid by
Tenant with respect to the Expansion Space.
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ARTICLE 11
FIRST RIGHT TO LEASE
---------------------
11.01. Exercise of First Right to Lease. Provided that no Event of Default, or
condition as to which Tenant has received notice which, with the passage of time
would constitute an Event of Default (unless Tenant commences to cure such
condition prior to the occurrence of an Event of Default as a result thereof and
thereafter continuously and diligently pursues such cure to completion) then
exists and that Tenant and/or any Tenant Affiliates occupy not less than
seventy-five percent (75%) of the Net Rentable Area included in the Leased
Premises on the date of Tenant's First Lease Notice, and not greater than
eighty-five percent (85%) of the total Net Rentable Area of the Office Section
of the Building, Landlord shall offer any space that becomes Available Space on
floor(s) eleven (11) through twenty-two (22) to Tenant for such rent and upon
such other terms as Landlord proposes to offer such Available Space to third
parties and otherwise substantially upon the terms and conditions set forth
herein. In addition to any obligation of Landlord to inform Tenant of Available
Space set forth below, Landlord agrees to use reasonable efforts to periodically
advise Tenant of space in the Building which is scheduled to become Available
Space. Tenant's first right to lease shall be exercised as follows:
(a) Not later than sixty (60) days prior to the expiration of the term
then applicable to such Available Space (except in cases where the
term expires by reason of default or other causes which cannot
reasonably be foreseen by Landlord, in which case Landlord shall give
reasonable notice), Landlord shall give notice to Tenant of the
expected availability of such Available Space together with a summary
of the financial terms and other key provisions (to the extent
different from the terms of this Lease) on which Landlord proposes to
offer such Available Space to third parties for lease.
(b) At any time within fifteen (15) days after Landlord gives the notice
described in subsection (a), Tenant may, by notice to Landlord
("Tenant's First Lease Notice"), elect to (i) lease the Available
Space described in Landlord's summary for the consideration and upon
the business terms set forth in Landlord's summary, or (ii) lease the
Available Space described in Landlord's summary for Fair Market Net
Rent and upon
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such other of the business terms set forth in Landlord's summary as
are consistent therewith, such Fair Market Net Rent to be as agreed
upon by Landlord and Tenant within thirty (30) days of Tenant's First
Lease Notice or, if the parties cannot agree, as determined in
accordance with Article 7, or (iii) waive its first right to lease
with respect to such Available Space. Tenant's failure to elect by
notice to Landlord one of the options set forth above within said
fifteen (15) days shall be deemed an election to waive the first right
to lease such Available Space.
(c) In the event Tenant elects to lease such Available Space, Landlord and
Tenant shall promptly (but not later than forty-five (45) days prior
to the expiration of the term then applicable to such Available Space)
enter into an amendment to this Lease adding the Available Space to
the Leased Premises for the consideration and upon the terms set forth
in Landlord's summary (subject to Tenant's right to demand appraisal
if option (ii) set forth in (b) above is elected), or, at Landlord's
election, a new lease for the Available Space for the consideration
and upon the terms set forth in Landlord's summary and such other
terms and conditions as are contained in this Lease, or as Landlord
and Tenant may mutually agree (subject to Tenant's right to demand
appraisal if option (ii) set forth in (b) above is elected).
(d) In the event Tenant elects or is deemed to elect to waive its right to
lease such Available Space, Landlord shall be free to lease the
Available Space to any other party; provided, however, that if
Landlord has not entered into a lease or commitment to lease the
Available Space within six (6) months after Landlord's notice to
Tenant of the availability of the Available Space, Landlord shall
reoffer the Available Space to Tenant by notice to Tenant given within
such six (6) month period accompanied by a summary of the financial
terms and other key provisions (to the extent different from the
summary provided in the previous notice) on which Landlord proposes to
offer to lease the Available Space to third parties. Tenant's first
right to lease shall be a continuing right and Landlord shall continue
to provide such a notice within each subsequent six (6) month period
until Landlord has entered into a lease or commitment to lease such
Available Space.
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ARTICLE 12
ADDITIONAL OPTIONS
------------------
12.01. Parking. Tenant shall have the right to park in the Parking Section a
total of up to fifty (50) automobiles, the precise number to be designated by
Tenant by notice to Landlord not later than December 31, 1991. Landlord agrees
to designate, by a sign or other reasonable means determined by Landlord, one of
the spaces in the Parking Section as a space for the exclusive use of Tenant,
but Landlord shall have no obligation to ensure compliance by third parties with
such designation or the availability of such space for use by Tenant. Landlord
agrees that if in excess of ten percent (10%) of the parking spaces in the
Parking Section become designated for particular tenants, Tenant shall be
entitled to the identical percentage of the parking spaces allocable to Tenant
similarly designated. If Tenant does not require all of the parking spaces
allocable to it, Tenant shall relinquish its right to such parking spaces to
Landlord, whereupon Tenant shall no longer have a right to such relinquished
parking spaces and shall obtain future additional parking solely on a
space-available basis; provided, however, that Tenant shall have the right to
two (2) additional parking spaces for each floor in the Building which it adds
to the Leased Premises after the Term Commencement Date or if greater, the
number of spaces which the immediately preceding tenant or tenants of such floor
had the right to use pursuant to leases with Landlord, provided Tenant notifies
Landlord no less than ninety (90) days prior to the date on which such floor is
scheduled to be added to the Leased Premises of the number of parking spaces, if
any, which Tenant requires. Landlord agrees to provide Tenant with information
regarding the availability of parking spaces upon the request of Tenant during
the Term of this Lease and shall within thirty (30) days of notice from Tenant
that it desires additional parking spaces and the number which it desires,
inform Tenant of whether such spaces are then available, or how many are
available, and the terms upon which such spaces are available. Tenant shall
execute a separate license agreement with the garage operator with respect to
the parking spaces allocable to the Tenant. The rates charged by the garage
operator for such parking shall be the prevailing market rates for parking in
the Building as established by the garage operator from time to time, which
shall not unreasonably exceed (as determined by Landlord in its reasonable
business judgment) the average parking rates in comparable first class office
buildings in Boston. Tenant's right to use the parking spaces shall be subject
to (i) compliance with
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the license agreement between Tenant and the garage operator, (ii) such
reasonable rules and regulations as Landlord or its operator may establish for
the Building from time to time, and (iii) all applicable laws, ordinances and
regulations.
12.02. Storage Area. Tenant shall have the option to lease the Storage Area,
located on floor P3 of the Building, and more specifically described on Exhibit
C attached to the Lease, by notice given to Landlord prior to January 1, 1992.
If Tenant exercises such option, the Storage Area shall be used by Tenant upon
the following terms, covenants and conditions:
(a) Tenant shall pay as part of Gross Rent an amount equal to Ten Dollars
($10.00) per square foot of Net Rentable Area of the Storage Area for
each year of the Term. During any Extended Term, the Rent per square
foot of Net Rentable Area of the Storage Area for each year shall be
increased by multiplying Ten Dollars ($10.00) by a fraction, the
numerator of which is the Base Rent payable during such Extended Term
and the denominator of which is Twelve and 27/100 Dollars ($12.27).
(b) There shall not be a separate Operating Cost or Impositions charge to
Tenant with respect to the Storage Area; rather, the cost of
maintaining, repairing and operating the Storage Area and Impositions
thereon, shall be paid by Landlord as a part of the cost of operating
and maintaining the Building, and shall be included in the total
Operating Cost and Impositions allocated among the tenants in the
Building.
(c) Tenant shall be responsible for maintenance of the interior of the
Storage Area and shall assume all risk of loss or damage with respect
to property stored therein, except to the extent that such loss is
caused by the negligence or willful misconduct of Landlord.
Maintenance of the exterior of the Storage Area, the portion of the
Building in which the Storage Area is located and access thereto shall
be the responsibility of Landlord, which Landlord shall perform in the
same manner as is provided with respect to other areas in the Building
for which Landlord has retained responsibility.
(d) Landlord shall deliver the Storage Area to Tenant hereunder on a
"shell" basis, which shall consist of space enclosed by a concrete or
sheet rock wall and a
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concrete floor, one lockable entry, lights provided by strip lighting
and one light switch (or additional entries or light switches as may
be required by the applicable building codes).
12.03. Antenna or Satellite Dish. Tenant shall have the right to install an
antenna, a satellite dish, or both, on the roof of the Building, subject to (i)
the availability of space for the installation of such antenna or satellite
dish, (ii) the obtaining of all permits and approvals from governmental
authorities required for such installation at Tenant's expense, and (iii) the
approval of Landlord after submission to Landlord of plans and specifications
therefor describing in sufficient detail the nature of the antenna or satellite
dish which Tenant wishes to install and the manner of its proposed installation,
which approval shall not be unreasonably withheld or delayed by Landlord. It
shall not be unreasonable for Landlord to withhold its consent to such
installation if Landlord determines that the installation of such antenna or
satellite dish would damage the aesthetic appearance of the Building from street
level or any public open space, interfere with sight lines from any portion of
the Project, or interfere in any manner with antennas, satellite dishes or other
structures then existing on the roof of the Building. The installation of any
such antenna and/or satellite dish shall be done at Tenant's sole cost and
expense, but, at the option of Landlord, the installation shall be effected by
Landlord at the reasonable cost and expense of Tenant. To the extent that the
installation will be undertaken directly by Tenant, the method of installation,
the materials to be used and the contractors to be performing the work shall be
subject to Landlord's approval, which approval shall not be unreasonably
withheld or delayed, and the installation shall be performed in accordance with
the provisions of Section 4.06 hereof. Tenant shall pay as a part of Gross Rent
an amount equal to the fair market rent, as determined by Landlord in its
reasonable business judgement, for the space utilized in connection with such
antenna or satellite dish for any period in which the same is maintained on the
roof of the Building.
12.04. Security. Tenant shall have the option to station one (1) security
officer/receptionist at the security desk located in the lobby of the Building.
Such security officer/receptionist shall not interfere with the security
officers retained by Landlord nor shall such security officer/receptionist
interfere with the use of the Building by Landlord, other tenants in the
building and their guests. Such security officer/receptionist shall also comply
with reasonable rules and requirements established by Landlord and Landlord's
security officers from time to time. At the reasonable request of Landlord,
Tenant shall replace any security officer/receptionist which it places in the
lobby of the Building with
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another security officer/receptionist reasonably acceptable to Landlord.
Landlord agrees that any such request shall specify the nature of the problem
with the existing security officer/receptionist and specify the reason why
Landlord requests such security officer/receptionist be replaced. Landlord
agrees to take reasonable steps to cooperate with Tenant with respect to the
implementation of any security system installed by Tenant for the Leased
Premises, including, without limitation, a system which permits Tenant to use
the fire stairwells adjacent to the Leased Premises for interfloor access and
egress. The installation of any such system shall be subject to the provisions
of Section 4.06 hereof.
12.05 Exhibits. The Exhibits listed in the Schedule of Exhibits are incorporated
in this Lease by reference and are to be construed as part hereof.
ARTICLE 13
DEFINITIONS
-----------
13.01. Definitions. Terms used herein shall have the following meanings:
"Additional Rent" shall mean all monetary obligations of Tenant hereunder, other
than the obligation for payment of Gross Rent.
"Available Space" shall mean space in the Office Section of the Building (i)
with respect to which a tenant's lease has terminated, whether by expiration or
earlier termination of the term of such lease, and which is not encumbered by
any extension option, right of first refusal or agreement of expansion, or
otherwise, and (ii) which has not been relet to such tenant immediately
thereafter, whether as a result of renewal, extension, a new lease or otherwise,
or with respect to which any expansion or like right previously granted to such
tenant or to a third person has not been exercised.
"Base Rent" shall mean the amount set forth on the Basic Lease Information
sheet, as adjusted in accordance with the provisions of the Lease.
"Basic Services" shall mean the services described in Section 3.01 hereof.
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"Building" shall mean the 22-story building (consisting of a 6-story low-rise
portion, a 16 story high-rise portion and 3 levels of parking space below grade)
located on the Land, and comprising the Office Section, the Commercial Section,
the Parking Section together with the Common Areas.
"Building Common Areas" shall mean all areas of the Building servicing more than
one floor of the Building as a whole, including, but not limited to fire
stairwells, central mechanical rooms, elevator machine rooms, pump rooms,
loading dock facilities, electrical and communication rooms, postal, security
and janitorial facilities and the ground floor lobby (and if any such area is
bordered by any demising wall which abuts any space that is leasable, such area
shall be measured from the midpoint of such demising wall), but excluding Floor
Common Areas, General Common Areas and the Parking Section.
"Building Standard Improvements" shall mean the improvements specified in
Schedule II to the Work Letter.
"Business Hours" shall mean 8 A.M. to 6 P.M. on Business Days.
"Business Days" shall mean Monday through Friday excluding federal holidays.
"Commercial Section" shall mean that portion of the Building dedicated to
commercial and retail uses and not included in the Office Section.
"Common Areas" shall mean the Building Common Areas, the Floor Common Areas and
the General Common Areas.
"Completion Date" shall mean the later of (i) the Scheduled Completion Date or
(ii) the date on which the Leased Premises are Substantially Complete.
"Estimated Impositions" for any calendar year shall mean Landlord's estimate of
Impositions for such calendar year.
"Estimated Operating Cost" for any calendar year shall mean Landlord's estimate
of Operating Cost for such calendar year.
"Event of Default" shall have the meaning attributed to it in Section 6.01.
"Excess Building Standard Improvements" shall mean improvements of the type
specified in Schedule II to the Work Letter, in excess of the quantities set
forth in said Schedule II.
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"Fair Market Net Rent" shall mean, subject to the last two sentences herein, the
annual rental value, net of Operating Cost and Impositions, of the space in
question, as determined by reference to comparable space being offered for rent
or recently rented in the Building or in comparable buildings in Boston,
Massachusetts, in each case taking into consideration the following factors
related to the Leased Premises: floor level, tenant improvements, proposed term
of lease, extent of service provided or to be provided, the lack of a brokerage
commission applicable to the transaction, the time the particular rate under
consideration became or is to become effective, the location of the Building,
the reputation of the Building, including its ownership and management, and any
other relevant terms or conditions (but specifically excluding the fact that
Tenant will not incur moving expenses). With respect to the determination of
Fair Market Net Rent for any Extended Term, all inducements which would
otherwise be offered excluding, however, the residual value of any Tenant
Alterations, Excess Building Standard Improvements or Premium Tenant
Improvements to the extent paid for by Tenant which are in the nature of capital
improvements rather than normal maintenance or repairs), giving due regard to
the factors cited above, shall be considered, but shall be factored into an
equation to arrive at a rental figure, net of such inducements, unless otherwise
agreed by Landlord and Tenant. With respect to the determination of Fair Market
Net Rent for any Expansion Space or Available Space, all inducements which would
otherwise be offered, giving due regard to the factors cited above, shall be
considered, and shall be included as part of a Fair Market Net Rent package for
such space, unless otherwise agreed by Landlord and Tenant.
"Floor Common Areas" shall mean all areas on those floors of the Building which
are from time to time occupied by more than one tenant which are devoted to
non-exclusive uses, such as corridors, lobbies, fire vestibules, elevator
foyers, service elevator receiving areas, mailrooms, electric and communication
closets and other similar facilities for the benefit of all tenants or invitees
on that particular floor, but excluding Building Common Areas, General Common
Areas and the Parking Section.
"Force Majeure" shall mean any circumstance beyond the reasonable control of
Landlord, including, without limitation, acts of God, acts of the public enemy,
governmental interference, court orders, requisition or orders of governmental
bodies or authorities, requirements under any statute, law, rule, regulation or
similar requirements of a governmental authority which shall be enacted or shall
arise following the date of this Lease, inability to obtain labor, insurrection,
riot, civil commotion, lock-out or any other
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unforeseeable event (other than the inability to obtain financing), the
occurrence of which would prevent or preclude Landlord from fully and completely
carrying out and performing its obligations under this Lease.
"General Common Areas" shall mean those areas forming part of the Building and
devoted to non-exclusive uses which are not measured, including, but not limited
to, the "Winter Garden", walkways, courtyards and all landscaped areas
(including pools and fountains). General Common Areas shall not include Floor
Common Areas, Building Common Areas or the Parking Section.
"Gross Rent" shall mean, for each year of the Term, the sum of Base Rent,
Tenant's Proportionate Share of Operating Cost and Impositions, charges incurred
by Tenant for Extra Services in accordance with Section 3.02, and Rent for the
Storage Area, if any.
"Impositions" shall have the meaning attributed to it in Section 2.05.
"Initial Tenant Improvements" shall mean all initial improvements to be
constructed in the Leased Premises in accordance with the Work Letter.
"Initial Tenant Improvement Plans" shall mean the plans for the Initial Tenant
Improvements, as set forth in the Work Letter.
"Land" shall mean the parcel of real property owned by the Landlord, located in
the City of Boston, Suffolk County, Massachusetts, and bounded in part by
Berkeley and Boylston Streets and St. James Avenue and more specifically
described in Exhibit A-1 attached hereto.
"Landlord Responsible Parties" shall mean all agents, servants, employees,
contractors and business invitees of Landlord (but excluding other tenants of
the Project and their agents, servants, employees, contractors, licensees and
business invitees).
"Leased Premises" shall mean the floor area more particularly shown on Exhibit A
attached hereto, containing the Net Rentable Area specified on the Basic Lease
Information sheet.
"Loading Docks" shall mean the loading dock facilities serving the Project.
"Mortgage" shall mean any and all institutional mortgages securing indebtedness
for money borrowed by Landlord or indebtedness for the refinancing of any such
indebtedness, including all amendments
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and modifications thereto, from time to time, provided any such mortgage
encumbers all or any portion of the Building, and provided further that with
respect to any Mortgage held by an affiliate of Landlord the indebtedness
secured thereby is actually debt financing for the Building (which may, however,
include an associated equity component), and the mortgage instrument reflects
terms consistent with an "arms length" transaction. Any reference to "Mortgage"
and "Mortgagee" herein shall include a sale and leaseback and the grantee-lessor
of a sale and leaseback used for financing purposes as limited hereby.
"Net Rentable Area" shall mean the area or areas of the space within the
Building determined as follows:
(a) Net Rentable Area on a single tenancy floor in the Office Section
shall consist of (i) the area determined by measuring from the inside
surface of the outer glass of each exterior wall (and extensions of
the plane thereof in non-glass areas) to the inside surface of the
outer glass on the opposite exterior wall (and extensions of the plane
thereof in non-glass areas), but shall exclude vertical penetrations
(including, without limitation, fire stairs, elevator shafts, and
areas for central heating, ventilation and air conditioning and
mechanical and electrical facilities), as set forth on Exhibit E
attached hereto for each corresponding floor; plus
(ii) Tenant's Allocation of Building Common Areas, as set forth on
Exhibit E attached hereto for each corresponding floor;
(b) Net Rentable Area for a multi-tenancy floor shall consist of:
(x) all space within the demising walls determined by measuring from
the mid-point of the demising walls of each interior wall and from
the inside surface of the outer glass of each exterior wall (and
extensions of the plane thereof in non-glass areas); plus
(y) Tenant's Allocation of Building Common Areas, as set forth on
Exhibit E attached hereto for the corresponding floor; plus
(z) Tenant's Floor Share of all Floor Common Areas.
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No deductions from Net Rentable Area shall be made for columns or
projections necessary to the Building, or for vertical penetrations which are
for the exclusive use of Tenant (such as, but not limited to, special elevators
or stairs, mechanical and electrical facilities and air conditioning equipment).
The Net Rentable Area of the Leased Premises has been calculated on the basis of
the foregoing definition and is hereby stipulated for all purposes hereof to the
be amount, expressed in terms of square feet, stated on the Basic Lease
Information sheet.
"Office Section" shall mean that portion of the Building dedicated to office
uses. The square feet of Net Rentable Area included in the Office Section on
each floor of the Building is set forth in Exhibit E.
"Operating Cost" shall have the meaning given in Section 2.04.
"Outline Specifications" shall mean the improvements specified in Schedule III
to the Work Letter.
"Outside Completion Date" shall mean the Estimated Outside Completion Date set
forth on the Basic Lease Information sheet, as the same may be delayed by reason
of any Tenant's Delay.
"Parking Section" shall mean the three (3) levels of below-grade parking located
in the Project, excluding however any Common Areas or Project Common Areas.
"Permitted Use" shall mean with respect to the Leased Premises corporate,
executive and professional office use and all uses accessory thereto as
permitted by law in the Leased Premises of a kind appropriate in a building of
the type and quality of the Building; provided, however, that Permitted Use
shall not include (a) offices of any agency or bureau of the United States or
any state or political subdivision thereof; (b) offices or agencies of any
foreign government or political subdivision thereof; (c) offices of any health
care professionals or service organization which include patient or client
treatment or other on-premises services; (d) schools or other training
facilities which are not ancillary to corporate, executive or professional
office use (excluding, however, the executive offices of such schools or
training facilities which are otherwise consistent with the use of the Building
as a first class office building in Boston); (e) retail or restaurant uses
(except in the Commercial Section and except for facilities limited to the
exclusive use of Tenant's employees and other Tenant Responsible Parties); (f)
radio, television and/or recording studios, or like uses; (g) employment
agencies (excluding, however, the executive offices of such employment agencies
which otherwise are consistent with the use of
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the Building as a first class office building in Boston); or (h) any use or
activity which is inconsistent with the use of the Building as a first class
office building in Boston, creates a fire hazard or would cause Landlord's
insurance rate to be increased.
"Premium Tenant Improvements" shall mean that portion of the Initial Tenant
Improvements which do not constitute "Building Standard Improvements" or "Excess
Building Standard Improvements", as set forth in the Work Letter.
"Project" shall mean the Building together with the building commonly known as
500 Boylston Street and located on the parcel of land described in Exhibit A-2.
"Project Operational Common Areas" shall mean those areas of the Project located
outside of the Building which service, in whole or in part, the Building,
including, but not limited to central mechanical rooms and loading dock
facilities.
"Project Non-Operational Common Areas" shall mean those areas of the Project
devoted to non-exclusive uses which tenants of the Building have a right to use
in common with other tenants of the Project, including, but not limited to,
walkways, courtyards and landscaped areas.
"Project Common Areas" shall mean the "Project Operational Common Areas" and the
"Project Non-operational Common Areas".
"Rent" shall mean Gross Rent and Additional Rent.
"Rent Commencement Date" shall mean the later of (i) the Scheduled Rent
Commencement Date, or (ii) sixty (60) days after the Completion Date.
"Storage Area" shall mean the approximately 5,032 square feet of storage space
located on floor P3 of the Building, more specifically described on Exhibit C
attached hereto.
"Sublease" shall include any sublease, underletting at any level, tenancy,
concession, license, franchise or other arrangement providing for the use or
occupancy of all or any portion of the Leased Premises.
"Substantial Completion" shall mean (and the Leased Premises or any Expansion
Space, as the case may be, shall be deemed "Substantially Complete") when (i)
installation of the Initial Tenant Improvements or the Building Standard
Improvements required to be provided by Landlord for Expansion Space, as
applicable, has
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been substantially completed in accordance with the plans and specifications
therefor notwithstanding a requirement to complete "punchlist" items or similar
corrective work which can be completed without causing material interference
with Tenant's use of the Leased Premises for the Permitted Use; (ii) Tenant has
direct access from the street to the elevator lobby on the floor (or floors)
where the Leased Premises are, or the Expansion Space is, as applicable,
located; (iii) Basic Services (as defined in Section 3.01 hereof) and any Extra
Services (as defined in Section 3.02(a) hereof) are available to the Leased
Premises or the Expansion Space, as applicable; (iv) Landlord's architect shall
have issued a certificate of Substantial Completion with respect to the Leased
Premises or the Expansion Space, as applicable; and (v) a temporary or permanent
certificate of occupancy has been issued by appropriate governmental
authorities, permitting use of the Leased Premises or the Expansion Space, as
applicable, and not subject to any conditions which cannot be satisfied without
material interference with Tenant's use of the Leased Premises or the Expansion
Space for the Permitted Use.
"Tenant Affiliate" shall mean a person or entity which controls, is controlled
by or is under common control with Tenant, or an entity into or with which
Tenant is merged or consolidated or to which substantially all of Tenant's
assets are transferred.
"Tenant's Allocation" shall mean an area determined by multiplying the total
square footage of the Building Common Areas by the ratio of the Net Rentable
Area of the Leased Premises (excluding any allocation of Building Common Areas)
to the Net Rentable Area of the Office Section (excluding only the Building
Common Areas).
"Tenant Alterations" shall mean any alterations or physical additions to the
Leased Premises beyond the Initial Tenant Improvements, together with any
painting or decorating of the firestairwells pursuant to Section 4.06 hereof,
any antenna or satellite dish installed pursuant to Section 12.03 hereof, and
any security system installed pursuant to Section 12.04 hereof.
"Tenant's Delay" shall have the meaning attributed to it in the Work Letter.
"Tenant Extra Costs" shall mean the cost of the Excess Building Standard
Improvements and the Premium Tenant Improvements for which Tenant is responsible
pursuant to the Work Letter.
"Tenant Improvements" shall mean the Initial Tenant Improvements and any Tenant
Alterations.
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<PAGE>
"Tenant's Floor Share" shall mean the ratio of Tenant's Useable Area to the
aggregate Useable Area on Tenant's floor.
"Tenant's Personal Property" shall mean all of the furnishings, fixtures,
equipment, effects and personal property of every kind, nature and description
of Tenant and of all persons claiming by, through and under Tenant which, during
the continuance of this Lease or any occupancy of the Leased Premises by Tenant
or anyone claiming under Tenant may be on the Leased Premises or else where in
the Building.
"Tenant's Proportionate Share" is specified on the Basic Lease Information
sheet.
"Tenant Responsible Parties" shall mean all agents, servants, employees,
contractors, licensees and business invitees of Tenant.
"Term" shall mean a period of calendar years, or fractions thereof, commencing
with the Term Commencement Date and ending on the Term Expiration Date stated on
the Basic Lease Information sheet.
"Term Commencement Date" shall mean the date when the Term commences as set
forth on the Basic Lease Information Sheet.
"Term Expiration Date" shall mean the date specified on the Basic Lease
Information sheet when the Term shall end, unless sooner terminated pursuant to
the terms of this Lease.
"Total Leased Net Rentable Area" shall mean the sum of the Net Rentable Area
leased to all Office Section tenants over the course of a year, determined on
the basis of a weighted averaging of the sum of the Net Rentable Area leased to
all Office Section tenants on each day of that year.
"Useable Area" shall mean the Net Rentable Area of the Leased Premises in
question, less the portion of such Net Rentable Area attributable to Floor
Common Areas and Building Common Areas.
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<PAGE>
"Work Letter" shall mean the instrument executed by Landlord and Tenant of even
date herewith attached hereto as Exhibit B governing construction of the Initial
Tenant Improvements.
Other terms used on the Basic Lease Information sheet which is a part of this
Lease, or elsewhere in this Lease, shall have the meaning given them thereon and
herein.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as a sealed
instrument as of the day and year first above written.
"Landlord"
TWO TWENTY TWO BERKELEY VENTURE
a Joint Venture
By: Hines 222 Berkeley Limited
Partnership, Venturer
By: /s/ Gerald D. Hines
-----------------------------------------
Gerald D. Hines, a General Partner
"Tenant"
HOUGHTON MIFFLIN COMPANY, a
Massachusetts corporation
By: /s/ Stephen O. Jaeger
-----------------------------------------
Stephen O. Jaeger
Title: Executive Vice President and
------------------------------------
Chief Financial Officer
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Exhibit (10)(ii)(D)
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "Sublease") is made and entered into this
6th day of February, 1996, between New England Mutual Life Insurance Company, a
Massachusetts corporation ("Sublandlord"), and Houghton Mifflin Company, a
Massachusetts corporation ("Subtenant").
WHEREAS, Sublandlord, as tenant, entered into that certain Lease
Agreement dated May 29, 1986, as amended by that certain First Amendment to
Lease Agreement dated as of September 9, 1986 and by that certain Second
Amendment to Lease Agreement dated as of March 25, 1987 (the Lease Agreement, as
so amended, will be referred to herein as "the Prime Lease"), a copy of which is
attached hereto and marked as "Exhibit A", with Five Hundred Boylston West
Venture ("Prime Landlord"), pursuant to which Sublandlord is currently leasing
212,063 square feet of Net Rentable Area, as more particularly described in the
Prime Lease, (the "Prime Premises"), in the building located at 500 Boylston
Street, Boston, Massachusetts (the "Building");
WHEREAS, any capitalized term used herein and not otherwise defined
shall have the meaning given to it in the Prime Lease; and
WHEREAS, the parties hereto have agreed that Sublandlord shall sublet a
portion of the Prime Premises to Subtenant, on the terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, Sublandlord and Subtenant do hereby agree as
follows:
1. Lease of Sublease Premises. Sublandlord hereby leases to Subtenant,
and Subtenant hereby leases from Sublandlord, upon and subject to the terms,
covenants and conditions contained in this Sublease and in the Prime Lease, as
incorporated herein, a portion of the Prime Premises as outlined on Exhibit B
attached hereto (the "Sublease Premises"), being all of the fifth (5th) floor of
the Building, which may be used by Subtenant for any of the purposes permitted
under the Prime Lease. The Sublease Premises contain a Net Rentable Area of
56,142 square feet.
2. Term; Rent Commencement Dates.
(a) Term. The term of this Sublease shall commence as to portions of
the Sublease Premises as the same are delivered to Subtenant in accordance with
the terms of this Sublease as set forth below, and shall expire as to the entire
Sublease Premises on February 28, 2007, unless sooner terminated pursuant to the
terms of this Sublease.
<PAGE>
(b) Delivery of the Phase I Area and the Phase I Rent Commencement
Date. Sublandlord shall deliver vacant possession of approximately 22,000 square
feet of the Sublease Premises (the specific area of which is described on
Exhibits B and C and will be referred to herein as "the Phase I Area"), in broom
clean condition on February 15, 1996, and the date upon which Basic Rent shall
commence to accrue under this Sublease with respect to the Phase I Area shall be
May 1, 1996 (the "Phase I Rent Commencement Date").
(c) Delivery of the Phase II Area and the Phase II Rent Commencement
Date. Sublandlord shall deliver vacant possession of approximately 25,800 square
feet of the Sublease Premises (the specific area of which is described on
Exhibits B and C and will be referred to herein as "the Phase II Area"), in
broom clean condition on April 1, 1996, and the date upon which Basic Rent shall
commence to accrue under this Sublease with respect to the Phase II Area shall
be July 1, 1996 (the "Phase II Rent Commencement Date").
(d) Delivery of the Phase III Area and the Phase III Rent
Commencement Date. Sublandlord shall deliver vacant possession of the food
service area of the Sublease Premises (the specific area of which is described
on Exhibits B and C and will be referred to herein as the "Phase III Area"), in
broom clean condition on April 1, 1996 and the date upon which Basic Rent shall
commence to accrue under this Sublease with respect to the Phase III Area shall
be October 1, 1996 (the "Phase III Rent Commencement Date").
(e) Written Confirmation of Partial Deliveries of Sublease Premises
and of Rent Commencement Dates; Delays. Upon the delivery by Sublandlord to
Subtenant of each of the Phase I Area, Phase II Area, and Phase III Area in
accordance with this Sublease, Sublandlord and Subtenant shall enter into a
written stipulation to confirm when the same occurred.
If Sublandlord fails to deliver the Phase I Area in the condition
required by this Sublease by February 15, 1996, or fails to deliver the Phase II
Area in the condition required by this Sublease by April 1, 1996, or fails to
deliver the Phase III Area in the condition required by this Sublease by April
1, 1996,and the reason for any of such failures to deliver are not due to
Subtenant's actions, then the date which otherwise would have been fixed for the
Phase I, Phase II, or Phase III Rent Commencement Date, as the case may be, will
be extended one day for each day of delay in delivery.
If Sublandlord fails to deliver the Phase I Area in the condition
required by this Sublease by May 15, 1996, or fails to deliver the Phase II Area
in the condition required by this Sublease by July 1, 1996, or fails to deliver
the Phase III Area in the condition required by this Sublease by July 1, 1996,
and the reason for any of such failures to deliver are not due to Subtenant's
actions, then the date which otherwise
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would have been fixed for the Phase I, Phase II or Phase II Rent Commencement
Date, as the case may be, will be extended two days for each day of delay in
delivery.
If Sublandlord fails to deliver the Phase I Area in the condition
required by this Sublease by June 15, 1996, or fails to deliver the Phase II
Area in the condition required by this Sublease by August 1, 1996, or fails to
deliver the Phase III Area in the condition required by this Sublease by August
1, 1996, and the reason for any of such failures to deliver are not due to
Subtenant's actions, then Subtenant shall have the option to terminate this
Sublease by giving notice to Sublandlord.
3. Basic Rent. Commencing on the Phase I Rent Commencement Date with
respect to the Phase I Area, the Phase II Rent Commencement Date with respect to
the Phase II Area, and the Phase III Rent Commencement Date with respect to the
Phase III Area, Subtenant shall pay to Sublandlord, as "Basic Rent" for the
Sublease and use of the Sublease Premises an annual amount equal to $25.00 per
square foot of Net Rentable Area of the space contained therein, which annual
amount shall be payable in equal monthly installments on the first day of each
calendar month. If any of the Phase I Rent Commencement Date, Phase II Rent
Commencement Date or Phase III Rent Commencement Date do not fall on the first
day of the month, then the Basic Rent for any partial months shall be
appropriately prorated. If the term of this Sublease shall expire other than on
the last day of a calendar month, then the Basic Rent shall also be
appropriately prorated. Basic Rent shall be paid to Sublandlord at the notice
address included herein, or to such other party or address as Sublandlord shall
designate from time to time. Basic Rent shall be paid without notice, demand,
offset, deduction or abatement, except as otherwise expressly provided elsewhere
in this Sublease.
4. Additional Rent.
(a) Additional Rent. (1) Commencing January 1, 1997, Subtenant shall
pay to Sublandlord annually as additional rent the amount, if any, by which the
Comparison Year Operating Costs exceed the Base Year Operating Costs
("Subtenant's Share of Operating Costs"), and (2) commencing July 1, 1997,
Subtenant shall pay to Sublandlord annually as additional rent the amount, if
any, by which the Comparison Year Taxes exceed the Base Year Taxes ("Subtenant's
Share of Taxes", and, together with Subtenant's Share of Operating Costs,
"Subtenant's Share of Expenses"). Notwithstanding the foregoing, in no event
shall Subtenant's obligation to pay Subtenant's Share of Expenses allocable to
any portion of the Sublease Premises commence to accrue until the occurrence of
the rent commencement date therefor determined in accordance with Paragraph 2.
(b) Definitions. As used herein, the following definitions shall
apply:
(i) Subtenant's Percentage. A fraction expressed as a
percentage, determined each calendar year, the numerator of which is the
number of
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square feet of Net Rentable Area contained in the Sublease Premises and the
denominator of which is the number of square feet of Net Rentable Area
contained in the Prime Premises. If the number of square feet contained in the
Sublease Premises or the Prime Premises should change during any calendar year,
then the numerator or denominator of the aforesaid fraction, as the case may
be, shall be adjusted to equal the weighted average of the applicable amounts
of Net Rentable Area. As of the date hereof, if the entire Sublease Premises
were delivered to Subtenant in accordance with the terms of this Sublease, the
Subtenant's Percentage would be 26.47% (56,142 square feet of Net Rentable Area
in the Sublease Premises divided by 212,063 square feet of Net Rentable Area in
the Prime Premises).
(ii) Operating Costs. "Operating Costs" shall mean the Basic
Cost, as defined in the Prime Lease, but not including the taxes and other costs
defined in Paragraph 4.04(a)(vii) of the Prime Lease.
(iii) Base Year Operating Costs. An amount equal to the
product of Operating Costs which are charged to Sublandlord under the Prime
Lease for the calendar year 1996, multiplied by Subtenant's Percentage for
calendar year 1996.
(iv) Comparison Year Operating Costs. An amount equal to the
product of Operating Costs which are charged to Sublandlord under the Prime
Lease for each calendar year of the term after the calendar year 1996,
multiplied by Subtenant's Percentage for such calendar year.
(v) Taxes. "Taxes" shall mean the taxes and other costs which
are defined in Paragraph 4.04(a)(vii) of the Prime Lease.
(vi) Base Year Taxes. An amount equal to the product of Taxes
which are charged to Sublandlord under the Prime Lease for the period of July 1,
1996 through June 30, 1997 multiplied by a fraction, the numerator of which is
the sum of (1) the Subtenant's Percentage for calendar year 1996 and (2) the
Subtenant's Percentage for calendar year 1997, and the denominator of which is
2.
(vii) Comparison Year Taxes. An amount equal to the product of
Taxes which are charged to Sublandlord under the Prime Lease for each successive
one year period subsequent to the July 1, 1996 through June 30, 1997 period
(each such period being hereinafter referred to as a "Comparison Tax Fiscal
Year"), multiplied by a fraction, the numerator of which is the sum of (1) the
Subtenant's Percentage for the calendar year in which the first half of the
Comparison Tax Fiscal Year falls and (2) the Subtenant's Percentage for the
calendar year in which the second half of the Comparison Tax Fiscal Year falls,
and the denominator of which is 2.
(c) Estimate of Subtenant's Share of Expenses. From time to time as
Sublandlord reasonably deems appropriate, Sublandlord will give Subtenant
reasonable
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estimates of Subtenant's Share of Expenses for the coming year, based upon the
information received by Sublandlord from Prime Landlord under Section 4.04 of
the Prime Lease. Subtenant shall pay one twelfth (1/12) of the estimated amount
of Subtenant's Share of Expenses with each monthly payment of Basic Rent
throughout the year. After Sublandlord has received reconciliation statements
for a particular period from Prime Landlord pursuant to Section 4.04(e) of the
Prime Lease, Sublandlord shall provide Subtenant with a reconciliation of the
estimated amounts of Subtenant's Share of Expenses which have been paid during
the year with the actual amount of Operating Costs and Taxes which have been
charged to Sublandlord under the Prime Lease. Any underpayment by Subtenant
shall be paid to Sublandlord as additional rent within thirty (30) days after
delivery of the reconciliation statement; any overpayment shall be credited
against the next installment of Basic Rent and additional rent due (or, if this
Sublease has expired or been terminated, such overpayment shall be paid to
Subtenant by Sublandlord within thirty (30) days after delivery of the
reconciliation statements). No delay by Sublandlord in providing any statement
of the Subtenant's Share of Expenses shall be deemed a waiver of Subtenant's
obligation to pay the Subtenant's Share of Expenses.
(d) Partial Year Calculations. In the event of any partial years at
the beginning or end of the term hereof, the additional rent charges hereunder
for such partial years shall be appropriately prorated.
(e) Audits. Subtenant at its expense shall have the right at all
reasonable times, and upon reasonable notice to Sublandlord, to audit
Sublandlord's books and records relating to this Sublease for any year or years
for which additional rent payments become due; provided that Subtenant's right
to audit Sublandlord's books and records shall expire two (2) years after
delivery to Subtenant of the reconciliation statements for such year.
5. Electricity. The parties acknowledge that the Prime Landlord, at
Sublandlord's expense, has agreed to install a separate electricity meter for
the Sublease Premises. The separate electricity meter will become operational
upon the delivery of the Phase III Area to Subtenant, and from and after that
time Subtenant shall pay to Sublandlord as additional rent the costs of all
electricity service provided for the lights and plugs in the Sublease Premises.
Sublandlord will invoice Subtenant on a monthly basis for the electricity costs,
and Subtenant shall pay such invoices within twenty (20) calendar days of
receipt thereof. Subtenant shall not have any obligation with respect to
payments for electricity service prior to the time that the aforesaid separate
electricity meter becomes operational.
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6. Condition of Sublease Premises; Leasehold Improvement Allowance;
Alterations.
(a) Condition of Sublease Premises. Sublandlord shall deliver, and
Subtenant shall accept, the Sublease Premises in its "AS-IS" condition, except
that:
(i) As a condition to the delivery of the Phase I Area,
Sublandlord shall, at its expense, (1) remove the staircase in the Phase I Area,
as marked on Exhibit B attached hereto, and (2) make all necessary repairs to
fill the hole and otherwise restore the floor slabs on the fifth and sixth floor
levels that had accommodated the staircase and (3) if the alterations described
in subsections (1) and (2) have any deleterious effect on the structural
integrity of the existing walls such that the wall must be repaired or altered
in order to restore the wall to a structurally sound condition, then Sublandlord
shall perform such repairs and/or alterations;
(ii) As a condition to the delivery of the Phase III Area,
Sublandlord shall, at its expense, (1) remove all equipment which is not
permanently affixed to the Building, and (2) cause the Sublease Premises to be
separately metered as described in Paragraph 5 above; and
(iii) As a condition to the delivery of each of the Phase I
Area, the Phase II Area, and the Phase III Area, the condition of such space
shall not have materially changed from its existing "As-Is" condition as of the
date hereof in a manner that would render the Sublease Premises unfit for its
intended use, except as otherwise expressly provided herein, and except for
reasonable wear and tear.
Neither Sublandlord nor any of Sublandlord's agents has made any oral or written
representations with respect to the condition of the Sublease Premises, other
than as may be specifically set forth in this Sublease Agreement.
(b) Leasehold Improvement Allowance. Sublandlord will provide
Subtenant with an allowance of $15 per square foot of Net Rentable Area
contained within the Sublease Premises (the "Leasehold Improvement Allowance")
towards the costs incurred by Subtenant for (1) the initial improvements to be
made to the Sublease Premises by Subtenant (the "Leasehold Improvements"),
including architectural and engineering costs associated with the Leasehold
Improvements, and (2) moving expenses incurred by Subtenant in moving into the
Sublease Premises, (collectively, "Reimbursable Costs"). As the invoices for the
Reimbursable Costs are received by Subtenant, Subtenant may deliver copies of
the invoices and other supporting documentation to Sublandlord along with a
request for payment. Provided Subtenant has provided lien waivers from the
appropriate contractors with respect to Sublandlord's prior advances of the
Leasehold Improvement Allowance that were to be remitted to contractors, and
(ii) Subtenant has provided a certificate from its architect to Sublandlord
certifying that any work that is the subject of the particular invoices that
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accompany Subtenant's request for payment was completed substantially in
accordance with the plans and specifications approved by Sublandlord and Prime
Landlord as part of this Sublease, that said work is in compliance with all
applicable laws, and that said work was in fact incorporated into the Sublease
Premises, then Sublandlord shall pay to Subtenant the amount of the invoice
within thirty (30) days of receiving such request accompanied by the aforesaid
supporting documentation; however, Sublandlord's cumulative obligations
hereunder shall in no event exceed the Leasehold Improvement Allowance.
Subtenant is responsible for all Reimbursable Costs to the extent same exceed
the Leasehold Improvement Allowance. If Subtenant shall be in default beyond any
applicable grace period at the time of Subtenant's request for payment, or at
any time during the aforesaid thirty (30) day period before which Sublandlord is
required to make payment, then Sublandlord shall have the right to withhold
payment pending Subtenant's cure of such default. Any portion of the Leasehold
Improvement Allowance that has not either been advanced to Subtenant, nor is the
subject of a pending requisition request by Subtenant, on the date which is one
hundred twenty (120) days following the latest to occur of the Phase I, Phase
II, or Phase III Rent Commencement Dates, may be retained by Sublandlord.
Notwithstanding anything in this Sublease (or incorporated by reference
from the Prime Lease) to the contrary, no fees or charges, such as, but not
limited to, construction management or supervision fees, shall be payable by
Subtenant to Sublandlord in connection with Subtenant's performance of the
Leasehold Improvements. Any construction management or supervision fees, or
similar fees, which, by virtue of the application of Section 7.03 of the Prime
Lease, may be payable to Prime Landlord in connection with Subtenant's
performance of the Leasehold Improvements shall be paid by Subtenant directly to
Prime Landlord.
(c) Alterations. Any alterations, additions, or improvements in and
to the Sublease Premises (collectively, the "Alterations") which Subtenant
proposes to make shall be subject to Sublandlord's consent on the same terms and
conditions as apply to Sublandlord under the Prime Lease (except that if
Sublandlord does not expressly withhold its consent to Subtenant's proposal for
alterations within ten (10) business days after notice thereof, Sublandlord
shall be deemed to have consented to such alterations), and shall be performed
in accordance with the terms of the Prime Lease, including, but not limited to,
the requirement of obtaining the Prime Landlord's prior consent to any such
proposed Alterations. The parties acknowledge that the initial Leasehold
Improvements identified in those certain plans and specifications dated
January 15, 1996, prepared by ADD Inc., and identified as Bid-Permit Set, Fifth
Floor, 500 Boylston Street, Boston, MA, a copy of which is hereby incorporated
into this Sublease by this reference, have been approved and consented to by
Sublandlord and Prime Landlord contemperaneously herewith.
7. Assignment and Subletting.
(a) In the event Subtenant should desire to assign this
Sublease, Subtenant shall give Sublandlord written notice of such desire (and
the proposed
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effective date thereof) at least sixty (60) days in advance of the date on which
Subtenant desires to make such assignment. Sublandlord shall then have a period
of thirty (30) days following receipt of such notice (together with the identity
of the proposed assignee, its proposed use of the Sublease Premises and such
financial information as is reasonably necessary for a determination by
Sublandlord as to creditworthiness), within which to notify Subtenant in writing
that Sublandlord elects either (i) to terminate this Sublease as of the date so
specified by Subtenant in which event Subtenant will be relieved of all further
obligations under this Sublease or (ii) to permit Subtenant to assign this
Sublease subject, however, to written approval of the proposed assignee by
Sublandlord, and further subject to the requirement that Subtenant enter into
written agreements with Sublandlord, and with the assignee, that one-half of any
profit actually received by Subtenant as a result of such assignment (meaning
the consideration for the assignment which is actually received) shall, to the
extent such profit is immediate, be due and payable by Subtenant to Sublandlord
upon the execution of an assignment, and, to the extent such profit is deferred,
be payable to Sublandlord by the assignee as it accrues, or (iii) to refuse to
consent to Subtenant's assignment of this Sublease and to continue this Sublease
in full force and effect as to the entire Sublease Premises. If Sublandlord
should fail to notify Subtenant in writing of such election within the stated
thirty (30) day period, Sublandlord shall be deemed to have elected option (iii)
above. Sublandlord's approval of any proposed assignee as contemplated in (ii)
above shall not be unreasonably withheld if the proposed assignee (x) is of a
kind and type customarily found as office space tenants in First-Class Office
Building, and (y) is creditworthy in Sublandlord's reasonable judgment
considering the Sublease obligations it is expected to undertake, provided that
in no event shall any domestic or foreign governmental agency, or any entity
which would have diplomatic immunity, or any entity seeking to use the Sublease
Premises for a medically-related use be required to be approved as an assignee.
Notwithstanding the foregoing, Sublandlord shall not be deemed unreasonable for
withholding its approval of any proposed assignee as contemplated in (ii) above
if the Prime Landlord shall have withheld its approval of such proposed
assignee. No consent by Sublandlord to any assignment shall be deemed to be
consent to a use not permitted under this Sublease, to any act in violation of
the Sublease, or any other or subsequent assignment, and no assignment by
Subtenant shall relieve Subtenant of any obligation under this Sublease. Any
attempted assignment by Subtenant in violation of the terms and covenants of
this paragraph shall be void. No such assignment shall be effective until a
fully executed copy of the relevant assignment, in which the assignee
specifically assumes the obligations of Subtenant under this Sublease, is
delivered to Sublandlord.
(b) Subtenant shall have the right, subject to the provisions of
this clause (b), to sublet portions of the Sublease Premises from time to
time during the term of this Sublease. Subtenant's right to execute any sublease
pursuant to this clause (b) shall be subject to the following conditions:
8
<PAGE>
(i) At the time of any such subletting, this Sublease shall
be in full force and effect, and there shall be no default hereunder on the part
of Subtenant.
(ii) The proposed sublessee must be of a kind and type
customarily found as office space tenants in First-Class Office Buildings, and
must be creditworthy in Sublandlord's reasonable judgment considering the
sublease obligations it is expected to undertake. Subtenant shall notify
Sublandlord of the proposed sublease and the identity of the subtenant and
provide such financial information as is reasonably necessary for a
determination by Sublandlord as to creditworthiness, at least sixty (60) days in
advance thereof. Sublandlord shall approve or disapprove the proposed sublessee
within thirty (30) days after receipt of such notices and information.
Sublandlord's consent shall not be unreasonably withheld if the proposed
sublessee meets the criteria set forth herein. In no event shall any domestic or
foreign governmental agency, or any entity which would have diplomatic immunity,
or any entity seeking to use the subleased premises for a medically-related use
be required to be considered as a suitable sublessee. Failure to disapprove any
proposed sublessee within the 30-day period provided for in the second preceding
sentence above shall be deemed to constitute approval by Sublandlord of the
proposed sublessee, provided that Subtenant's notification of the proposed
sublease contained a request for Sublandlord's specific approval within thirty
(30) days and state in capital letters that Sublandlord's failure to respond
within such time would be deemed approval pursuant to the provisions of this
clause (b)(ii).
(iii) A copy of the original sublease (and all amendments
thereto) shall be delivered to Sublandlord prior to the effective date thereof.
(iv) Any such subletting shall be subject to all the
provisions, terms, covenants and conditions of this Sublease, and shall provide
that no assignment of the interest of the sublessee under the Sublease, or
sub-subletting of the portion of the Sublease Premises covered by the sublease,
shall be permitted or effective without the application of the terms and
conditions hereof.
(v) Subrentals provided for in the sublease for any given
period shall be commercially reasonable at the time of execution of the
sublease, and not intentionally lessened so as to deprive Sublandlord of the
share of profit it would otherwise be entitled to receive pursuant to (vi)
below.
(vi) Subtenant shall enter into a written agreement with
Sublandlord whereby it is agreed that 50% of any profit realized by Subtenant as
a result of said sublease (that is, after deducting all of Subtenant's costs
associated therewith, including reasonable brokerage fees and the reasonable
cost of remodeling or otherwise improving the subleased premises for said
sublessee, provided that for purposes of this deduction only such portion of
such costs may be deducted for any given period equal to the portion of such
costs which would be payable during such
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<PAGE>
period if such costs were evenly amortized on a monthly basis over the entire
sublease term) shall be payable to Sublandlord as it is received by Subtenant
as additional rent hereunder.
(vii) In no such event shall Subtenant advertise by written
publication anything relating to the rate or rates at which it is willing to
sublease space within the Sublease Premises if such rates are lower than then
current market rates as determined by the Prime Landlord.
(viii) Notwithstanding the foregoing, Sublandlord may
withhold its consent to any proposed sublease by Subtenant for the additional
reason that the Prime Landlord has withheld its consent to the proposed sublease
in accordance with the terms and conditions of the Prime Lease.
Any attempt to sublease not complying with the foregoing conditions
shall be void.
(c) If Sublandlord shall recover or come into possession of the
Sublease Premises before the date herein fixed for the termination of this
Sublease, or in the event of an occurrence of any of the events specified in
paragraph 12 of this Sublease and expiration of the opportunity to cure provided
for therein after notice from Sublandlord, Sublandlord shall have the right, at
its option, to take over any and all subleases made by Subtenant and to succeed
to all the rights of Subtenant in said subleases or such of them as it may elect
to take over. Subtenant hereby expressly assigns and transfers to Sublandlord
such of the subleases as Sublandlord may elect to take over at the time of such
recovery of possession, such assignment and transfer not to be effective until
the termination of this Sublease or re-entry by Sublandlord hereunder or if
Sublandlord shall otherwise succeed to Subtenant's estate in the Sublease
Premises, at which time Subtenant shall upon request of Sublandlord execute,
acknowledge and deliver to Sublandlord such further assignments and transfers as
may be necessary to vest in Sublandlord the then existing subleases. Every
sublease hereunder is subject to the condition, and by its acceptance and entry
into a sublease each subtenant thereunder shall be deemed conclusively to have
thereby agreed, that from and after the termination of this Sublease or re-entry
by Sublandlord hereunder, or if Sublandlord shall otherwise succeed to
Subtenant's estate in the Sublease Premises, such subtenant shall waive any
right to surrender possession or to terminate the sublease, and, at
Sublandlord's election, such Subtenant shall attorn to and recognize Sublandlord
as its landlord under all of the then executory terms of such sublease, except
that Sublandlord shall not (i) be subject to any counterclaim or offset which
theretofore accrued to such subtenant against Subtenant, (ii) be bound by any
previous modification or amendment of such sublease unless and until it shall
have been provided a copy thereof, or which provided for rents which were
commercially unreasonable at the date of execution or otherwise contains
provisions not permitted by reason of the provisions of this Sublease, (iii) be
bound by any previous prepayment of more than one (1) month's rent and
additional rent which shall be payable as provided
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<PAGE>
in the sublease, or (iv) be obligated to perform any work in the subleased
space, other than as required under this Sublease or as Sublandlord may have
subsequently agreed to do in writing, and the subtenant shall execute and
deliver to Sublandlord any instruments Sublandlord may reasonably request to
evidence and confirm such attornment.
8. Provisions of Prime Lease; Rights of Parties.
(a) Subtenant hereby acknowledges and agrees that this Sublease is
in all respects subject and subordinate to the terms and conditions of the Prime
Lease, to the term thereof, and to the rights of Prime Landlord. Without
limiting the generality of the foregoing, in the event of the termination or
cancellation of the Prime Lease for any reason, this Sublease shall
automatically be deemed, and shall be, terminated effective as of the same day
of such cancellation or termination of the Prime Lease, and Sublandlord shall
have no liability or obligation to Subtenant as a result thereof, except as set
forth in the indemnity provision of Paragraph 9.
(b) Subtenant covenants and agrees not to do or permit anything to
be done which would cause the Prime Lease to be terminated, nor shall Subtenant
do or permit anything to be done which would cause Sublandlord, as tenant under
the Prime Lease, to be or become in default under the Prime Lease. Sublandlord
covenants and agrees (i) not to take any action in violation of the terms of the
Prime Lease, and (ii) not to do or permit anything to be done or fail to take
any action required by the terms of the Prime Lease, which would cause the Prime
Lease to be terminated prior to the natural expiration date of the initial term
of the Prime Lease, or would result in the deprivation of any rights of
Subtenant as set forth in this Sublease. Notwithstanding anything to the
contrary in the foregoing sentence, in no event will Sublandlord be required
under the terms of this Sublease to elect to exercise any renewal or extension
rights it may have under the terms of the Prime Lease.
(c) Except as otherwise expressly limited herein, Subtenant shall
have the benefit of all of Sublandlord's rights, as tenant in and to the Prime
Lease with respect to the Sublease Premises, in accordance with the terms of the
Prime Lease. Nothing contained herein, however, shall be deemed to purport to
give Subtenant the benefit of any rights in and to the Sublease Premises or the
Prime Lease greater than those of Sublandlord as tenant under the Prime Lease.
Notwithstanding the foregoing, Subtenant may not exercise any of the following
rights of Sublandlord under the Prime Lease: (i) the right to renew in Article
XVII, (ii) the rights to expand in Articles XVIII and XIX as amended, (iii) the
right of first refusal in Article XX, and (iv) the right to Storage Space and
Garage Parking Permits or parking spaces in the Garage. In addition, the
following provisions of the Prime Lease shall specifically be of no application
with respect to this Sublease Agreement: (a) the provisions of Article XII
regarding the right of tenant to make certain transfers, and (b) the right to
any cure periods provided under Article XI. The right to cure periods specified
under Section
11
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11.01 of the Prime Lease are superseded by the cure periods specified in
Paragraph 10 of this Sublease.
(d) With respect to this Sublease and the Sublease Premises,
Sublandlord shall have all of the rights and remedies of the Prime Landlord as
set forth in the Prime Lease, including, but not limited to,: (i) the right to
enter the Sublease Premises as provided in Section 7.09, (ii) the right to
separately meter usage of water in Section 5.04, but only if Prime Landlord
separately meters the usage of the water in the Prime Premises under Section
5.04 of the Prime Lease, (iii) the right to obtain an estoppel certificate under
Section 16.02, and (iv) the rights upon default under Article XI of the Prime
Lease.
(e) The following provisions of the Prime Lease shall specifically
be of no application with respect to this Sublease and shall be expressly
excluded from this Sublease: (i) the definition of "Premises" in Article I; (ii)
Article III; and (iii) the initial Leasehold Improvements obligations set forth
in Section 7.01 and Exhibit D.
9. Performance of Obligations; Indemnity. Subtenant shall fully and
promptly perform all obligations of the Sublandlord as tenant under the Prime
Lease (other than the payment of Basic Rent and Additional Rent owing to the
Prime Landlord under the Prime Lease, and except as otherwise expressly provided
herein) with respect to the Sublease Premises as and when required in accordance
with the terms and conditions of the Prime Lease as incorporated in this
Sublease. Subtenant shall indemnify, defend and hold Sublandlord harmless from
and against any and all claims, actions, loss, cost, damage, liability or
expense (including, without limitation, attorneys' fees) incurred by Sublandlord
by reason of any default by Subtenant hereunder. Subtenant shall indemnify,
defend and hold Sublandlord and Prime Landlord harmless from and against any and
all claims, actions, loss, cost, damage, liability or expense (including,
without limitation, attorneys' fees) in connection with loss of life, personal
injury or damage to property, arising out of (i) any occurrence in the Sublease
Premises, or (ii) the occupancy or use of the Sublease Premises or any part
thereof. Notwithstanding anything in this Paragraph 9 to the contrary, in no
event shall Subtenant be liable to Sublandlord for consequential damages
pursuant to the foregoing provisions.
Sublandlord shall indemnify, defend and hold Subtenant harmless from
and against any and all claims, actions, loss, cost, damage, liability or
expense (including, without limitation, attorneys' fees) incurred by Subtenant
by reason of any default by Sublandlord under the Prime Lease that is not the
consequence of Subtenant's default under this Sublease; provided, however, that
in no event shall Sublandlord be liable to Subtenant for consequential damages
pursuant to the foregoing provision. Sublandlord shall indemnify, defend and
hold Subtenant harmless from and against any and all claims, actions, loss,
cost, damage, liability or expense (including, without limitation, attorneys'
fees) in connection with loss of life, personal injury or damage to property,
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<PAGE>
arising out of any negligent act or omission of Sublandlord or its employees,
agents or contractors.
The obligations set forth in this Paragraph 9 shall survive the
expiration or termination of this Sublease.
10. Default. Subtenant shall be deemed in default of this Sublease if
any of the following occurs:
(a) Subtenant fails to make any payment of Basic Rent or additional
rent when due, and does not cure such default within five days after written
notice of default from Sublandlord;
(b) Subtenant fails to perform any other obligation imposed on it
by this Sublease or the Prime Lease and does not cure such default within twenty
days after written notice of default from Sublandlord; or
(c) Subtenant assigns or sublets the Sublease Premises or any
portion thereof, except as may be permitted herein.
11. Services of Prime Landlord. Subtenant acknowledges that all
building services (including, without limitation, repairs, maintenance,
cleaning, heating, ventilating, air-conditioning, elevators, water and
electricity), repairs and restorations to and for the Sublease Premises and the
Common Areas, if any, shall be supplied by Prime Landlord pursuant to the terms
of the Prime Lease, and Sublandlord shall have no obligation during the term of
this Sublease to provide such building services, repairs, or restorations.
Sublandlord shall in no event be liable to Subtenant nor shall Subtenant's
obligations hereunder be impaired or the performance thereof be excused because
of any failure or delay on the part of Prime Landlord in furnishing any such
building services, repairs, or restorations. However, Sublandlord covenants and
agrees to use reasonable efforts, but not requiring the expenditure of money or
the institution of legal proceedings against the Prime Landlord, to enforce all
of the obligations of the Prime Landlord in so far as they affect the Sublease
Premises. If Prime Landlord shall default in any of its obligations to
Sublandlord with respect to the Sublease Premises, Subtenant shall be entitled
to participate with Sublandlord in the enforcement of Sublandlord's rights
against Prime Landlord. Notwithstanding the foregoing, Sublandlord agrees that,
subject to Sublandlord's prior approval (which approval shall not be
unreasonably withheld, delayed or conditioned), Subtenant shall have the right
to pursue a claim, action, proceeding or arbitration in the name of Sublandlord,
if necessary, against Prime Landlord for the benefit of Subtenant, and
Sublandlord agrees that Sublandlord will, at Subtenant's expense, cooperate with
Subtenant in the pursuit of any such claims, action, proceeding or arbitration.
Subtenant shall indemnify, defend and hold Sublandlord harmless from and against
all liability, loss, damage or expense, including, without limitation,
attorneys' fees, which Sublandlord shall suffer
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<PAGE>
or incur by reason of such action; and provided that copies of all papers and
notices in all such actions or proceedings shall be promptly delivered to
Sublandlord by Subtenant. The indemnity contained in this provision shall
survive the expiration or termination of the Sublease.
12. Intentionally omitted.
13. Surrender. On the date upon which the term hereof shall expire or
be terminated, Subtenant, at its sole cost and expense, shall quit and surrender
the Sublease Premises to Sublandlord in the same good order and condition as
Sublandlord is delivering them to Subtenant, subject to the provisions of the
Prime Lease. Notwithstanding anything to the contrary in the foregoing,
Subtenant shall be responsible for removing the raised floor on the fifth (5th)
floor level and Subtenant shall be entitled to any proceeds from the sale of the
raised floor.
14. Holding Over by Subtenant. If Subtenant remains in possession of
the Sublease Premises after the termination or expiration of the term of this
Sublease, then Sublandlord, without waiving any other rights or remedies it may
have hereunder or at law, may, but shall not be required to, elect to treat
Subtenant as a tenant from month to month, subject to all of the covenants and
obligations of this Sublease except that Subtenant shall pay to Sublandlord
Basic Rent at two times the per square foot rental rate which was in effect
during the last month of the term of this Sublease; provided, however, that in
the event that Subtenant's holding over under this Sublease is the only reason
for Sublandlord being deemed to be holding over under the Prime Lease, then
Subtenant shall pay to Sublandlord all rent, including holdover penalties, which
Sublandlord is charged for the entire Prime Premises during said holdover
period.
15. Insurance. With respect to the Sublease Premises, Subtenant shall
maintain at its own expense the types and amounts of insurance as are required
of Sublandlord in its capacity as tenant under the Prime Lease, naming Prime
Landlord and Sublandlord as additional insureds.
16. Waiver of Subrogation Rights. In the event either Sublandlord or
Subtenant sustains a loss by reason of a risk required to be insured against
pursuant to this Sublease or the Prime Lease or any risk actually covered by
insurance maintained by the party suffering such loss, and the loss is caused,
in whole or in part, by actions or omissions of the other party or its partners,
agents, employees or representatives, then the party incurring such loss hereby
waives its rights against the other party or the partners, agents, employees or
representatives of such other party, and no third party (including any insurance
carrier) shall have any such right by way of assignment, subrogation or
otherwise against the other, to the extent that such loss is covered by such
insurance. Each party shall obtain, if necessary, a consent to the foregoing
(and an appropriate endorsement to the relevant policy evidencing waiver of
subrogation) from those of its insurers which are affected thereby. If, as to
any such policy, no such waiver of subrogation from an insurer is available at
commercially reasonable rates
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<PAGE>
without voiding the policy, this waiver shall not be effective insofar as the
insurer under said policy is concerned.
17. Brokers. Sublandlord and Subtenant each represent and warrant that
they have not directly or indirectly dealt with any broker concerning the
Sublease Premises, except for McCall & Almy and Cushman and Wakefield of
Massachusetts, Inc.. Commissions due to McCall & Almy and Cushman and Wakefield
of Massachusetts, Inc. will be paid by Sublandlord according to the terms of a
separate written agreement. Each party agrees to exonerate and save harmless and
indemnify the other against any claims for commission by any other broker,
person, or firm with whom such party had dealt in connection with the execution
and delivery of this Sublease or out of negotiations between Sublandlord and
Subtenant with respect to leasing of space in the Building.
18. Memorandum of Sublease. Neither party shall record this Sublease in
any Registry of Deeds or Registry District; however, upon request by either
party, the other shall agree to execute in recordable form a memorandum of this
Sublease which may then be recorded in the appropriate Registry of Deeds or
Registry District. Upon the expiration or termination of this Sublease, upon
request of Sublandlord, the Subtenant shall execute in recordable form a
memorandum that this Sublease has expired or terminated which may then be
recorded in the appropriate Registry of Deeds or Registry District.
19. Notices. Any notice required or permitted hereunder shall be in
writing. Notices shall be addressed to the respective parties as follows:
Sublandlord:
New England Mutual Life Insurance Company
501 Boylston Street
Boston, MA 02117
Attn: Facilities Control
Subtenant:
Houghton Mifflin Company
222 Berkeley Street
Boston, MA 02116
Attention: General Counsel
and
Houghton Mifflin Company
222 Berkeley Street
Boston, MA 02116
Attention: Treasurer
15
<PAGE>
and
Houghton Mifflin Company
222 Berkeley Street
Boston, MA 02116
Attention: Director of Corporate Services
Any communication so addressed shall be deemed duly given when delivered by
hand, by Federal Express (or other guaranteed one day delivery service), or by
registered or certified mail return receipt requested. Either party may change
its notice address by giving notice to the other. Any notice of default shall be
deemed duly given only if such notice shall state therein "NOTICE OF DEFAULT" in
boldface capital letters.
20. Waivers. No consent, approval or waiver, express or implied, by
either party, to or of any act, or to or of any breach of any covenant,
condition or duty of the other on any occasion shall be construed as a consent,
approval or waiver to or of any other act or any other breach of the same
covenant, condition or duty on any other occasion.
21. Prime Landlord's Consent to Sublease. The parties hereto agree that
this Sublease shall not become effective unless and until the Prime Landlord has
indicated its written consent to this Sublease. Upon receipt of such approval, a
copy of the written consent shall be attached to this Sublease as "Exhibit D".
22. Sublandlord's Covenant of Quiet Enjoyment. Sublandlord covenants
and agrees that Subtenant, on paying all rent and performing its obligations
under this Sublease, shall have the quiet and peaceful possession and enjoyment
of the Sublease Premises and all appurtenances thereto for the term hereof,
without hindrance by Sublandlord or any person claiming or to claim title to the
Project or any part thereof by, through, or under Sublandlord but not otherwise,
subject, nevertheless, to the terms of the Prime Lease, to matters of record, to
the terms of any agreement, instrument, matter, lien or interest to which the
Prime Lease is subordinate, and subject specifically to that certain Sale and
Construction Agreement ("Sale and Construction Agreement") dated June 30, 1984,
executed by and among the City of Boston, the Boston Redevelopment Authority,
New England Mutual Life Insurance Company and Gerald D. Hines Interests, Inc.,
recorded with the Suffolk Registry of Deeds in Book 11692, Page 1 in Suffolk
County, Massachusetts, as amended by First Amendment thereto dated June 28,
1985, recorded with the Suffolk Registry of Deeds in Book 11692, Page 199, and
as amended and restated by that certain Amended and Restated Sale and
Construction Agreement by and among the same parties dated March __, 1986,
recorded with the Suffolk Registry of Deeds in Book ___, Page _____, the
covenants therein which are expressly stated to be separate covenants running
with the Western Component Site (as defined therein) being incorporated by
reference herein as required
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<PAGE>
pursuant to the terms of Section 13.04 thereof. It is expressly recognized,
however, notwithstanding anything to the contrary contained in this Sublease,
Sublandlord shall not be in default of its obligations hereunder, nor shall
Subtenant be entitled to enforce its rights hereunder, to the extent that such
compliance or enforcement would result in a default under the Sale and
Construction Agreement. With respect to any hindrance to Subtenant's quiet
enjoyment of the Sublease Premises by the Prime Landlord, or any person claiming
or to claim title to the Project or any part thereof by, through or under the
Prime Landlord but not otherwise, Sublandlord covenants and agrees to use
reasonable efforts, but not requiring the expenditure of money or the
institution of legal proceedings, to enforce the obligations of the Prime
Landlord under Section 14.01 of the Prime Lease. In addition, if Prime Landlord
shall default in any of its obligations to Sublandlord under Section 14.01 with
respect to the Sublease Premises, Subtenant shall be entitled to participate
with Sublandlord in the enforcement of Sublandlord's rights against Prime
Landlord. Notwithstanding the foregoing, Sublandlord agrees that, subject to
Sublandlord's prior approval (which approval shall not be unreasonably withheld,
delayed or conditioned), in the event of a breach by the Prime Landlord of the
terms of Section 14.01 of the Prime Lease, Subtenant shall have the right to
pursue a claim, action, proceeding or arbitration in the name of Sublandlord, if
necessary, against Prime Landlord for the benefit of Subtenant, and Sublandlord
agrees that Sublandlord will, at Subtenant's expense, cooperate with Subtenant
in the pursuit of any such claims, action, proceeding or arbitration. Subtenant
shall indemnify, defend and hold Sublandlord harmless from and against all
liability, loss, damage or expense, including, without limitation, attorneys'
fees, which Sublandlord shall suffer or incur by reason of such action; and
provided that copies of all papers and notices in all such actions or
proceedings shall be promptly delivered to Sublandlord by Subtenant. The
indemnity contained in this provision shall survive the expiration or
termination of the Sublease.
23. Prime Lease in Full Force and Effect. Sublandlord hereby represents
and warrants to Subtenant that, as of the date of this Sublease, (i) the Prime
Lease is in full force and effect and has not been modified or amended except as
set forth in the recitals of this Sublease, (ii) there are no outstanding events
of default by Sublandlord, nor, to the best of Sublandlord's knowledge, by Prime
Landlord, under the Prime Lease (nor, to the best of Sublandlord's knowledge,
have there occurred any events that, with the giving of notice or the passage of
time, would constitute events of default under the Prime Lease), and (iii) the
Prime Lease constitutes the entire understanding between Prime Landlord and
Sublandlord with respect to the premises demised under the Prime Lease.
24. Entire Agreement; Modification. This Sublease contains the entire
agreement between the parties concerning the Sublease Premises. This Sublease
shall not be modified, canceled, or amended except by written agreement signed
by both parties.
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IN WITNESS WHEREOF, the parties hereto have executed this Sublease
Agreement as a sealed instrument as of the date first set forth above.
Sublandlord: Subtenant:
New England Mutual Life Houghton Mifflin Company
Insurance Company
By: James S. Butt By: Paul D. Weaver
-------------------------- -----------------------------
Name: James G. Beaton Name: Paul D. Weaver
-------------------------- -----------------------------
Title: Vice President CAS Title: Senior Vice President
and General Counsel
Witnesses: Witnesses:
/s/ William J. Evers /s/ Tracy L. Metivier
-------------------------- -----------------------------
/s/ Harriet B. Roe /s/ Tracy L. Metivier
-------------------------- -----------------------------
Exhibit (10)(iii)(A)
May 16, 1996
HOUGHTON MIFFLIN COMPANY
1996 SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
A. Purpose. The purpose of the Plan is to motivate and reward
performance that contributes to the achievement of divisional
and corporate strategy.
B. Payment Thresholds.
1. Financial Objectives. Payment of incentive compensation
for achievement of individual financial factors may occur
if
a. 80% or more of the budget for that financial fac-
tor is achieved; and
b. Corporate net income exceeds $20.8 million;
2. Operating Objectives. Payment of incentive compensation
for achievement of operating objectives only may occur if
the weighted average achievement of all financial factors
exceeds 50% and corporate net income exceeds 50% of
budget, or $14.85 million.
C. Payments.
1. Financial Objectives. Payment of incentive compensation
for achievement of financial objectives is based on the
degree to which those financial objectives are achieved.
a. Payment of incentive compensation is determined by
the extent to which budgeted corporate and operat-
ing unit financial performance is achieved.
b. Achievement in excess of budgeted corporate and
operating unit financial performance for all
financial objectives permits payment in cash of up to
30% of the participant's December 31, 1995 salary as
incentive compensation.
c. If the weighted average achievement of all finan-
cial factors exceeds 120%, additional incentive
compensation may be earned.
<PAGE>
2. Operating Objectives. Payment of incentive compensation
for achievement of operating objectives is based on the
Chief Executive Officer's assessment of each
participant's degree of success in achieving operating
objectives. Maximum payment for achievement of operating
objectives is 10% of the participant's December 31, 1995
salary.
3. Incentive for Cash Flow and Net Income Budget Achievement
a. Cash Flow: If the Company achieves its cash flow
budget of $18 million (before debt repayment), the
incentive compensation of participants will in-
crease by 5%. If the Company does not achieve its
cash flow budget, the incentive compensation of
participants will decrease by 5%.
b. Net Income. If the Company achieves its net in-
come budget of $29.7 million, the incentive com-
pensation of participants will increase by 5%. If
the Company does not achieve its net income bud-
get, the incentive compensation of participants
will decrease by 5%.
4. Payments in excess of 40% of December 31, 1995 salary. If the
total incentive compensation earned exceeds 40% of a participant's
December 31, 1995 salary, the excess amount is paid in restricted
shares of Houghton Mifflin Company common stock.
a. The number of shares awarded will be determined on
the basis of the average closing price of Houghton
Mifflin Company common stock on the New York Stock
Exchange during the last calendar quarter.
b. Full ownership of the restricted stock will occur
after three years, provided that the recipient is
still employed by Houghton Mifflin Company on that
date. If the recipient ceases to be employed by the
Company prior to the expiration of the restrictions,
all shares are forfeited to the Company without
payment to the recipient.
c. During the period of restriction, the recipient is
entitled to vote any restricted shares awarded and to
receive any dividends paid on the shares. Any
additional shares issued with respect to the
restricted shares (e.g., as a result of a stock
split, dividend, or other distribution or corpo-
2
<PAGE>
rate transaction or event) shall be subject to the
same restrictions as the underlying shares.
d. The recipient may not sell, assign, transfer,
exchange, pledge, hypothecate, or otherwise encum-
ber any of the shares until the restrictions
lapse.
e. The shares shall be held by the Registrar and
Transfer Agent designated by the Company until the
restrictions lapse.
f. In the event a termination of the recipient's em-
ployment during the restricted period results from
(i) the recipient's retirement at a time at which the
recipient is eligible to receive benefits under the
provisions of the Houghton Mifflin Pension Plan,
(ii) the recipient's death, or (iii) the recipient's
becoming "permanently and totally disabled" (as
defined in Section 22 of the Internal Revenue Code
of 1986, as amended from time to time), the recipient
(or, in the event of the recipient's death, his or
her estate) shall be entitled to receive, free of
restrictions, a pro rata number of shares of Houghton
Mifflin Company common stock determined by
multiplying the number of restricted shares awarded
hereunder to the recipient by a fraction, the
numerator of which shall be the number of whole
months which have elapsed from January 1 of the year
the shares were awarded to the date of such
termination, and the denominator of which shall be
thirty-six (36).
g. All restrictions shall lapse in the event of a
"Change in Control" as defined in Section F hereof.
h. The Compensation and Nominating Committee of the
Board of Directors, or the Board of Directors, acting
by a majority of its directors who are not employees
of the Company, may at any time accelerate the time
at which the restrictions lapse.
5. Maximum Payment. The maximum amount of incentive
compensation, including any restricted stock portion,
which may be awarded to any participant is 100% of
the participant's December 31, 1995 salary.
3
<PAGE>
D. Eligibility.
1. Participants in this Plan include executive vice presidents,
division heads, and corporate staff senior executives as
designated by the Chief Executive Officer. Individuals who
become participants after the beginning of the year
participate on a prorated basis.
2. In the event a termination of a participant's employment
occurs during the year and results from circumstances
described in Section C.3.f. hereof, a pro rata share of the
award (based on the number of days of eligible employment
during the year) will be paid to the participant (or, in the
event of the participant's death, his or her estate), based
upon the extent of partial achievement of applicable ob-
jectives. In the event of a leave of absence during the
year, a pro rata share of the award may be paid. In the
event of a Change in Control, and as soon as practicable
thereafter, each participant will be paid a pro rata bonus
determined by multiplying forty percent (40%) of his or
her salary on the day immediately preceding the Change in
Control by a fraction, the numerator of which shall be the
number of days in 1995 up to and including the day the
Change in Control occurred and the denominator of which
shall be three hundred-and-sixty-five (365).
3. Except as provided in Section D.2. or D.4. hereof, a
participant whose employment terminates, voluntarily or
involuntarily, for reasons other than circumstances
described in Section C.3.f. hereof, is not eligible for an
incentive award.
4. Except as provided in Section D.2. hereof, the eligibility
of a participant whose participation ceases during the year
will be determined by the Chief Executive Officer.
5. If the participant during the year transfers to another
position and continues to participate in the Plan, the
employee's performance will be measured against the
objectives in each position and then prorated on the number
of months each position was held.
6. Nothing contained in the Plan shall be construed to limit in
any way the right of the Company to termi-
4
<PAGE>
nate a participant's employment or to adjust an employee's
position or salary at any time, or be evidence of any
agreement or understanding, expressed or implied, that any
person will be employed in a particular position or at a
particular rate of compensation. If a pro rata payment is
made to a participant in accordance with the provisions of
this Section D. the participant will have no right to any
additional payment under the Plan.
7. The Compensation and Nominating Committee of the Board of
Directors reserves the right to amend the terms of this Plan
whenever in its best judgment it is in the best interest of
the Company to do so.
E. Interpretation. The Compensation and Nominating Committee of the
Board of Directors ("Committee") shall administer this Plan and
approve any payments pursuant to the Plan. Any interpretations of
the Plan, including adjustments to the financial objectives
under the Plan, shall be made by the Committee. Determinations of
the Committee shall be final and binding on all participants.
F. Change in Control.
1. For purposes of the Plan, a "Change in Control" of the
Company shall be deemed to have occurred if any of the following occurs:
i) any "Person" (as defined in this
Section F) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities;
ii) during any period of no more
than two consecutive years beginning after the date of this Amendment and
Restatement individuals who at the beginning of such period constitute the
Board, and any new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election contest relating
to the election of the directors of the Company) whose election by the Board or
nomination for election by the Company's stockholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or whose nomination for election was previously so approved or
recommended, cease for any reason to constitute at least a majority thereof;
5
<PAGE>
iii) there occurs a merger or con-
solidation of the Company or a subsidiary thereof with or into any other entity,
other than (x) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), more than 75% of the
combined voting power of the voting securities of the Company or such surviving
entity or any parent thereof outstanding immediately after such merger or
consolidation or (y) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no Person
acquires 25% or more of the combined voting power of the Company's then
outstanding securities; or
iv) the stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the Company's
assets.
2. For purposes of the Plan, "Person" has the meaning given such term in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) of the Exchange Act, but excludes (a) the Company or any of its
subsidiaries, (b) any trustee or other fiduciary holding securities under an
employee benefit plan of the Company (or of any subsidiary of the Company), (c)
any corporation owned, directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of stock of
the Company and (d) an underwriter temporarily holding securities pursuant to
an offering of such securities.
6
<PAGE>
Exhibit (10)(iii)(A)
(NADER F. DAREHSHORI)
GRANT OF RESTRICTED SHARES OF
COMMON STOCK UNDER THE HOUGHTON MIFFLIN COMPANY
1995 STOCK COMPENSATION PLAN
No. of Shares: (14,414) As of January 31, 1996
Pursuant to its 1995 Stock Compensation Plan (the "Plan"), approved on April 26,
1995, by its shareholders, Houghton Mifflin Company (the "Company"), which term
shall include its successors as provided in the Plan, hereby grants to (NADER F.
DAREHSHORI) (the "Grantee") Fourteen Thousand Four Hundred Fourteen (14,414)
restricted shares of Common Stock of the Company (the "Restricted Shares") and
the "Make-Whole Payment" described in Section 3 hereof, subject to the terms and
conditions set forth hereinafter and in the Plan (together, the "Grant").
1. Lapse of Restrictions. Subject to the provisions of this Section and Section
2 hereof, the restrictions on the Restricted Shares shall lapse upon the third
anniversary hereof, if the Grantee is still employed by the Company on such
anniversary (which shall mark the completion of the "Vesting Period").
If, during the Vesting Period, the Committee determines that the Company may
lose its federal income tax deduction in connection with the future lapsing of
the restrictions on such Restricted Shares because of the deductibility cap of
Section 162(m) of the Internal Revenue Code of 1986, as amended from time to
time (the "Code"), the Committee, in its discretion, may convert some or all of
such Restricted Shares into an equal number of Restricted Share Units, as to
which payment will be postponed until the first day that the payment will not
cause the Company to lose its federal income tax deduction for such payment
under Section 162(m). Until payment of the Restricted Share Units is made, if
any dividends are paid on the Company's outstanding shares of Common Stock
("Shares"), the Grantee will be credited with dividend equivalents on the
Restricted Share Units outstanding hereunder (and if any Shares or other
securities are issued with respect to the Company's outstanding Shares (e.g., as
a result of a stock split, dividend, or other distribution or corporate
transaction or event),
<PAGE>
the Grantee will be credited with equitable equivalents on the Restricted Share
Units), all dividend and other equivalents will be converted into additional
Restricted Share Units, which shall be subject to the same restrictions (and
other provisions hereof) as the underlying Restricted Share Units. When payment
of any Restricted Share Units is made, it will be made in the same number of
unrestricted Shares.
Notwithstanding the foregoing, the Compensation and Nominating Committee (the
"Committee") of the Board of Directors, or the Board of Directors, acting by a
majority of its directors who are not employees of the Company, may at any time
accelerate the time at which the restrictions lapse on Restricted Shares or
Restricted Share Units and payment of Restricted Share Units is made.
Further, notwithstanding the foregoing, all restrictions with respect to the
Restricted Shares or Restricted Share Units shall lapse, and payment of
Restricted Share Units shall be made, upon the occurrence of a "Change in
Control" (as defined in Section 6 hereof) of the Company.
2. Termination of Employment. Except as provided in this Section or Section 1
hereof, if the Grantee ceases to be employed by the Company during the Vesting
Period, all Restricted Shares (and any Restricted Share Units outstanding
hereunder) are forfeited to the Company without payment to the Grantee. In the
event a termination of the Grantee's employment during the Vesting Period
results from (i) the Grantee's death, or (ii) the Grantee's becoming
"permanently and totally disabled" (as defined in Section 22 of the Code), the
Grantee (or, in the event of the Grantee's death, his estate) shall be entitled
to receive, free of restrictions, a pro rata number of Shares determined by
multiplying the number of Restricted Shares originally granted hereunder
(subject to any equitable adjustments made thereto pursuant to Section 6 hereof)
by a fraction, the numerator of which shall be the number of whole months which
have elapsed from the date hereof to the date of such termination, and the
denominator of which shall be thirty-six (36). In the event the Grantee's
employment is terminated by the Company during the Vesting Period without his
prior written consent and without "Cause" (as defined below in this Section 2),
the Grantee shall be entitled to receive, free of restrictions, a number of
Shares equal to the number of Restricted Shares originally granted here-
2
<PAGE>
under (subject to any equitable adjustments made thereto pursuant to Section 7
hereof).
For purposes of this Section 2, "Cause" shall mean (i) the willful and continued
failure by the Grantee to substantially perform the Grantee's duties with the
Company (other than any such failure resulting from the Grantee's incapacity due
to physical or mental illness) after a written demand for substantial
performance is delivered to the Grantee by the Company's Board of Directors,
which demand specifically identifies the manner in which the Board believes that
the Grantee has not substantially performed the Grantee's duties, or (ii) the
willful engaging by the Grantee in conduct which is demonstrably and materially
injurious to the Company or its subsidiaries, monetarily or otherwise. For
purposes of clauses (i) and (ii) of this definition, no act, or failure to act,
on the Grantee's part shall be deemed "willful" unless done, or omitted to be
done, by the Grantee not in good faith and without reasonable belief that the
Grantee's act, or failure to act, was in the best interest of the Company.
3. Additional Payment upon Lapse of Restrictions. Upon any lapse of restrictions
with respect to any or all of the Restricted Shares granted hereunder (or the
lapse of restrictions on Restricted Share Units outstanding hereunder and the
payment of such Restricted Share Units), the Company shall pay the Grantee a
lump sum cash payment (the "Make-Whole Payment") equal to the amount which will
make the Grantee whole for the imposition of any federal, state or local income
taxes with respect to any such event and with respect to the payment provided by
this Section 3.
4. No Transferability during Vesting Period. The Grantee shall not sell, assign,
transfer, exchange, pledge, hypothecate, or otherwise encumber any of the
Restricted Shares until the restrictions lapse (or any Restricted Share Units
outstanding hereunder until restrictions lapse and payment is made). The
Restricted Shares shall be held by the Registrar and Transfer Agent designated
by the Company until the restrictions lapse. No certificates for the Restricted
Shares on which the restrictions lapse (or for Shares representing payment of
Restricted Share Units) will be issued to the Grantee until the Company has
completed all steps required by law to be taken in connection with the issue and
sale of the Shares, including without limitation, receipt of any
3
<PAGE>
agreements or representations from the Grantee necessary to prevent a resale or
distribution of the Shares in violation of federal or state securities laws.
5. Other Effects of Vesting Period. During the Vesting Period and while
Restricted Shares are outstanding hereunder, the Grantee shall be entitled to
vote the Restricted Shares and to receive any dividends paid on the Restricted
Shares. Any additional Shares (or other securities) issued hereunder with
respect to the Restricted Shares (e.g., as a result of a stock split, dividend,
or other distribution or corporate transaction or event) shall be subject to the
same restrictions (and other provisions hereof) as the underlying Restricted
Shares.
6. Change in Control.
a. For purposes of this Grant, a "Change in Control" of the Company shall be
deemed to have occurred if any of the following occurs:
i) any "Person" (as defined in Section 6.b. hereof) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), directly or indirectly, of securities
of the Company representing 25% or more of the combined voting power of the
Company's then outstanding securities;
ii) during any period of no more than two consecutive years beginning
after the date of this Grant individuals who at the beginning of such period
constitute the Board, and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of the directors of the Company) whose election
by the Board or nomination for election by the Company's stockholders was
approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of the period or
whose election or whose nomination for election was previously so approved or
recommended, cease for any reason to constitute at least a majority thereof;
iii) there occurs a merger or consolidation of the Company or a
subsidiary thereof with or into any other entity, other than (x) a merger or
consolidation
4
<PAGE>
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving entity
or any parent thereof), more than 75% of the combined voting power of the voting
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation or (y) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person acquires 25% or more of the combined
voting power of the Company's then outstanding securities; or
iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
b. For purposes of this Grant, "Person" has the meaning given such term in
Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and
14(d) of the Exchange Act, but excludes (a) the Company or any of its
subsidiaries, (b) any trustee or other fiduciary holding securities under an
employee benefit plan of the Company (or of any subsidiary of the Company), (c)
any corporation owned, directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the Company
and (d) an underwriter temporarily holding securities pursuant to an offering of
such securities.
7. Equitable Adjustments and Miscellaneous. The Restricted Shares which are the
subject of this Grant are shares of the Common Stock of the Company as
constituted on the date hereof, subject to adjustment as provided in Section 9
of the Plan. Any Restricted Share Units outstanding hereunder shall be subject
to adjustment in a similar manner. Notices hereunder shall be mailed or
delivered to the Company at its principal place of business, 222 Berkeley
Street, Boston, Massachusetts 02116, Attention: Treasurer, and shall be mailed
or delivered to the Grantee at his or her address set forth below, or in either
case at such other address as one party may subsequently furnish to the other
party in writing. This Grant is made and accepted pursuant to the terms and
provisions of the Plan and expressly incorporates herein all of the terms and
provisions of the Plan. Notwithstanding anything in this Grant to the contrary,
in the event that any inconsistency arises between any term or provision of the
Plan and any term or provision of this
5
<PAGE>
Grant, then the applicable term or provision of the Plan shall control. This
Grant shall not confer upon the Grantee any right with respect to continuance of
employment by the Company or a subsidiary, nor shall it interfere in any way
with any right of the Grantee's employer to terminate the Grantee's employment
at any time.
8. Income Tax Withholding. In connection with the lapse of restrictions on any
or all of the Restricted Shares granted hereunder (or the lapse of restrictions
on, and the payment of any Restricted Share Units outstanding hereunder), the
Company is expressly authorized to take any and all steps it deems necessary to
comply with its tax withholding obligations under state and federal laws
including without limitation (i) withholding cash in an amount sufficient to
satisfy the Company's tax withholding obligations with respect to the Grantee
from the compensation then payable to the Grantee (including, without
limitation, the Make-Whole Payment), (ii) conditioning the delivery of Shares
(and any other securities hereunder) to the Grantee upon the payment to the
Company of an amount sufficient to satisfy the Company's tax withholding
obligations with respect to the Grantee and this Grant, or (iii) reducing the
number of Shares (and any other securities hereunder) deliverable to the Grantee
by such number as is sufficient in value to satisfy the Company's tax
withholding obligations with respect to the Grantee and this Grant, provided
that such reduction does not cause the Grantee to incur liability under Section
16(b) of the Exchange Act.
HOUGHTON MIFFLIN COMPANY
By: /s/ Gary L. Smith
---------------------------
Gary L. Smith
Senior Vice President,
Administration
Receipt of the foregoing Grant is hereby acknowledged and accepted and the
Grant's terms and conditions are hereby agreed to.
/s/ Nader F. Darehshori
--------------------------
Nader F. Darehshori
44 Carisbrooke Road
Wellesley, MA 02181
6
Exhibit (10)(iii)(A)
RESTRICTED STOCK AWARD AGREEMENT UNDER THE
HOUGHTON MIFFLIN COMPANY
1995 STOCK COMPENSATION PLAN
Agreement effective as of February 26, 1996, between Houghton Mifflin
Company (the "Company") and Gail Deegan (the "Employee") pursuant to the
Houghton Mifflin Company 1995 Stock Compensation Plan (the "Plan") approved on
April 29, 1995 by the stockholders of the Company, the terms of which are
incorporated herein by reference.
WHEREAS, the Employee's efforts are basic to the continued success and
growth of the Company;
WHEREAS, the Company desires to provide an incentive to the Employee so
that she will exert her utmost efforts on the Company's behalf and thus enhance
its chances of success;
WHEREAS, the Company believes that this objective may be accomplished by
encouraging the Employee to acquire a proprietary or an increased proprietary
interest in the Company and that the Company should assist the Employee in
acquiring such interest; and
WHEREAS, pursuant to the Plan, the Board of Directors of the Company has
awarded to the Employee shares of common stock, par value $1 per share, of the
Company (the "Common Stock") subject, however, to certain restrictions as set
forth below; and
WHEREAS, the Company and the Employee desire to set forth their mutual
understanding with respect to the "Restricted Shares" (as hereinafter defined):
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the Employee and the Company hereby agree as follows:
1. Grant of Shares of Common Stock Subject to Restrictions. The Employee
hereby acknowledges that the Company has awarded to the Employee 5,000 shares
of Common Stock effective immediately. Consideration equal to the aggregate par
value of the Common Stock has been provided by the Employee's past services as
a member of the Company's Board of Directors. The Employee and the Company
acknowledge that such shares shall be subject to the restrictions contained
herein and shall hereinafter be referred to as the "Restricted Shares." As soon
as practicable hereafter, the Company will establish a restricted stock account
in the name of the Employee with the Company's registrar and transfer agent,
the Bank of Boston (the "Registrar") and credit to said account the number of
shares indicated above.
<PAGE>
2
2. Voting Rights: Dividends and Other Distributions. Subject to the
restrictions on transfer set forth in Paragraph 3, the Employee is for all
purposes the record and beneficial owner of the Restricted Shares; as such, the
Employee is entitled to vote all such Restricted Shares at all meetings of
stockholders, and is entitled to receive and retain all cash dividends and
other cash distributions (regardless of amount) which may be paid with respect
to such Restricted Shares. However, if and to the extent the Company shall
effect a stock split, stock dividend or distribution of any securities with
respect to its Common Stock, the securities distributed pursuant thereto shall
be credited to the Employee's restricted stock account with the Registrar, such
additional securities shall enjoy the privileges and be subject to the
restrictions applicable to the Restricted Shares, and the Employee shall be
entitled to sell, transfer, assign, pledge or otherwise dispose of such
additional securities at such time as the restrictions on transferability of
the Shares to which the distribution relates shall have been removed pursuant
to Paragraph 3.
3. Restrictions Upon Transfer. The Employee hereby agrees that during the
Restricted Period (as defined in Paragraph 4 hereof) she will not sell, assign,
transfer, exchange, pledge, hypothecate or otherwise encumber any of the
Restricted Shares (or any restricted derivative securities). Removal of such
restrictions on the transferability of any securities shall be accomplished by
means of a letter of instructions to the Registrar signed by two officers of
the Company, specifying the Restricted Shares (and any restricted derivative
securities) as to which such restrictions are to be removed, and instructing
the Registrar to issue to the Employee a stock certificate representing such
formerly Restricted Shares (and appropriate evidence of ownership with respect
to any such formerly restricted derivative securities), registered in the name
of the Employee or in such name or names as the Employee may request in writing
(which request shall be accompanied by payment of any stock transfer taxes
which may be due as a result of such registration in such other name or names).
The Registrar shall debit the Employee's restricted stock account accordingly.
Following removal of such restrictions upon the transferability of Restricted
Shares (any restricted derivative securities), the Employee shall be free to
sell, transfer, assign, pledge or otherwise dispose of such securities, subject
to applicable securities laws and Company policies then in effect.
4. Lapse of Restrictions. The restrictions set forth in Paragraph 3 hereof
shall lapse on February 25, 1999; provided, however that such restrictions
shall immediately lapse upon a "Change in Control" as defined in Paragraph 5.
In addition, if termination of employment occurs by reason of the Employee's
death, or disability ("disability" being defined for purposes of this Agreement
in the same manner that "permanently and totally disabled" is defined in
Section 22 (e)(3) of the Internal Revenue Code of 1986, as amended), the
Restricted Period shall lapse with respect to a pro rata number of Restricted
Shares and restricted derivative securities (and such shares and restricted
derivative securities shall no longer constitute Restricted Shares or
restricted derivative securities hereunder) based upon a fraction, the
numerator of which is the number of whole months from the date of this
Agreement to the date of disability or death and the denominator of which is
36. Notwithstanding the foregoing, the Company's Board of
<PAGE>
3
Directors, acting by a majority of its non-employee Directors or the
Compensation and Nominating Committee of the Board of Directors ("Committee")
may at any time accelerate the time at which the restrictions on all or any
part of the Restricted Shares and restricted derivative securities will lapse.
The period during which said restrictions are in effect is referred to herein
as the "Restricted Period." Upon the expiration of the Restricted Period, the
appropriate number of shares of Common Stock and derivative securities shall be
issued to the Employee or her legal representative.
5. Taxes. Before any taxes due to the lapse of restrictions become payable,
the Company will pay to Employee a tax gross-up reimbursement to offset
completely any net additional cash cost to be incurred by her due to federal
income tax, state income tax or Social Security/Medicare taxes on (a) the
taxable income recognized as a result of the lapse of restrictions on the
Restricted Stock and (b) the taxable income recognized as a result of the tax
gross-up payment. Employee will provide the Company with copies of her federal
and state tax returns as filed so that the Company can adjust the tax gross-up
payment(s) in total as necessary to eliminate completely the net cash cost to
her of the restriction lapse and gross-up. As much as possible, the gross-up
payments will be made in the form of additional withholding taxes paid by the
Company on Employee's behalf.
6. Change in Control.
(A) For purposes of the Plan, a "Change in Control" of the Company shall be
deemed to have occurred if any of the following occurs:
(i) any "person" (as defined in Section 3 (B) hereof) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), directly or indirectly, of
securities of the Company representing 25% or more of the combined voting power
of the Company's then outstanding securities;
(ii) during any period of no more than two consecutive years
individuals who at the beginning of such period constitute the Board, and any
new director (other than a director designated by a person who has entered into
an agreement with the Company to effect a transaction described in clause (i),
(iii) or (iv) of this definition) whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or whose nomination
for election was previously so approved, cease for any reason to constitute at
least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other entity, other than (x) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 75% of the combined voting
<PAGE>
4
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation or (y) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person acquires 25% or more of the combined
voting power of the Company's then outstanding securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(B) As used in this Plan, the term "Person" has the meaning given such term
in Section 3(a)(9) of the Exchange Act, as modified and used in Section 13(d)
and 14(d) of the Exchange Act, but excludes (a) the Company, (b) any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company (or of any subsidiary of the Company) and (c) any corporation owned,
directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company.
7. Termination of Employment. In the event that an Employee ceases to be
employed by the Company and its subsidiaries prior to the expiration of the
Restricted Period, then, except as otherwise provided in Paragraph 4 hereof,
all remaining Restricted Shares (and restricted derivative securities) shall be
forfeited to the Company without payment of any consideration by the Company
and neither the Employee nor any of her successors, heirs, assigns or personal
representatives shall thereafter have any further rights of interests in such
shares or certificates. Pursuant to such reversion, the Employee authorizes the
Registrar to debit the Employee's restricted stock account accordingly.
8. Legal Requirements. This award of Restricted Shares shall be subject to
the requirement that, if at any time the Company shall determine that (i) the
listing, registration or qualification of the shares of Common Stock subject or
related thereto upon any securities exchange or under any state or federal law,
or (ii) the consent or approval of any government regulatory body, or (iii) an
agreement by the Employee with respect to the disposition of shares of Common
Stock, is necessary or desirable as a condition of, or in connection with, the
granting of such award or the issue of shares of Common Stock thereunder, such
award may not be consummated in whole or in part unless such listing,
registration, qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the Company.
<PAGE>
5
9. Rights to Terminate Employment. Nothing in the Plan or in this Agreement
shall confer upon the Employee the right to continue in the employment of the
Company or any of its subsidiaries or affect any right which the Company or
any of its subsidiaries may have to terminate the employment of the Employee.
10. Nonassignability. This award of Restricted Shares shall not
be assignable or transferable by the Employee except by will or by
the laws of descent and distribution. During the life of the
Employee, such award shall be exercisable only by the Employee or by
the Employee's guardian or other legal representative.
11. Adjustments. In the event of any change in the outstanding Common Stock
of the Company by reason of a stock dividend or distribution,
recapitalization, merger, consolidation, split-up, combination, exchange of
shares or the like, the Company shall adjust the number of Restricted Shares
subject to this award.
12. Termination: Amendment. The Company may terminate or amend
the Plan at any time; provided, however, that except as set forth
in the Plan or in Paragraph 10 hereof, the termination or amendment
of the Plan shall not, without the consent of the Employee, impair
her rights under this Agreement.
13. Miscellaneous. Notices hereunder shall be mailed or delivered to the
Company at its principal place of business, 222 Berkeley Street, Boston,
Massachusetts 02116, attention Treasurer, and shall be mailed or delivered to
the Employee at her or her address set forth below, or in either case at such
other address as one party may subsequently furnish to the other party in
writing. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts. This Agreement is entered into by the Employee and the Company
pursuant to the terms and provisions of the Plan and expressly incorporates
herein all of the terms and provisions of the Plan. Notwithstanding anything
in this Agreement to the contrary, in the event that any inconsistency arises
between any term or provision of the Plan and any term or provision of this
Agreement, then the applicable terms and provisions of the Plan shall control.
<PAGE>
6
HOUGHTON MIFFLIN COMPANY
By /s/Gary L. Smith
---------------------------------------
Gary L. Smith
Senior Vice President, Administration
Receipt if acknowledged of the foregoing grant of Restricted Shares and their
terms and conditions are hereby agreed to as of February 26, 1996.
/s/Gail Deegan
---------------------------------------
Gail Deegan
240 Upland Road
Newtonville, MA 02160
Exhibit (10)(iii)(A)
As amended January 2, 1997
HOUGHTON MIFFLIN COMPANY
1995 STOCK COMPENSATION PLAN
The primary purpose of this Plan is to attract, retain, and motivate
the employees of Houghton Mifflin Company (the "Company") and of any subsidiary
corporation of which more than 50% of the outstanding voting stock is owned by
the Company (a "Subsidiary") who will most assist the Company or its
Subsidiaries in achieving the Company's long-term goals and objectives, and to
provide an opportunity for these employees to acquire an interest in the Company
through the granting of options or restricted or bonus stock or other
performance awards, as herein provided. Additionally, the Plan is intended to
provide an incentive to non-employee members of the Board of Directors of the
Company ("director-participants") to increase their efforts for the success of
the Company by increasing their proprietary interest in the Company, through the
receipt of shares of the Company's common stock and options to purchase shares
of the Company's Common Stock. To achieve those purposes, the Plan amends and
restates the 1992 Stock Compensation Plan (the "1992 Plan").
1. SHARES OF STOCK SUBJECT TO THE PLAN
The stock that may be issued under the Plan shall not exceed, in the
aggregate, 900,000 shares of the Company's common stock ("Company Stock"), which
may be (i) authorized but unissued shares, (ii) treasury shares, (iii) shares
previously reserved for issue upon exercise of options under the Plan, which
options have expired or been terminated, or (iv) shares previously reserved for
issue of restricted stock under the Plan or for issue in connection with
Performance Awards under the Plan, which shares have been forfeited. The stock
that may be issued under the Plan to any one individual between the Plan's
Effective Date (as defined in Section 10 hereof) and its termination shall not
exceed, in the aggregate, 250,000 shares of the Company Stock. The number of
shares subject to the Plan and the number of shares which can be issued to any
one individual thereunder shall, however, be subject to adjustment as provided
in Section 9 hereof.
On and after the Effective Date of the Plan, no further grants of
options or restricted stock shall be made under the 1992 Plan. Options and other
awards granted under either the 1992 Plan or the 1987 Stock Compensation Plan
(the "1987 Plan") which are outstanding on and after the Effective Date shall be
subject to and governed by the terms and conditions of the Plan. The actual
provisions of any such outstanding option agreement or other award agreement,
however, shall not be altered unless an amendment thereto is approved by the
Committee and (if the affected participant's approval is required by the 1992
Plan, the 1987 Plan, the Plan, the appropriate agreement, or applicable law)
approved by the affected participant.
2. ELIGIBILITY
Except with respect to director-participants, awards will be granted
only to persons who are employees of the Company or a Subsidiary whose efforts
are important to the continued success and growth of the Company and, in the
case of incentive stock options, who are eligible to receive an incentive stock
option under the Internal Revenue Code of 1986, as amended from time to time
(the "Code"). The Board of Directors of the Company (the "Board") shall appoint
a committee to administer the Plan (the "Committee"). The Committee shall
consist of two or more directors of the Company, each of whom is a "non-employee
director" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, as amended, and an "outside director" within the meaning of Section 162(m)
of the Code. The Committee, acting by a majority of its members, shall determine
the participants in the Plan to whom grants will be made, the number of shares
subject to each grant, and the terms of the grant, consistent with the
provisions of this Plan.
3. TYPES OF GRANTS
The Committee may make grants under this Plan in the form of Stock
Options [either incentive Stock Options ("ISOs") or Non-Qualified Options
("NQOs")], Restricted Stock, Bonus Stock, or Performance Awards, each as defined
below. Unless prohibited by law or regulation, the Committee may make grants
under this Plan (except ISO grants) "in tandem" (i.e., the participant may be
given the right to select the form in which the grant is exercised). The
Committee may also make cash awards (i) in connection with, or as part or all
of, a Performance Award or (ii) pursuant to Section 8 hereof with respect to any
Bonus Stock or Restricted Stock.
o Incentive Stock Options
ISOs are a right to buy shares of Company Stock in the future
at the market price at the time of grant, subject to the
requirements of Section 422 of the Code. A stock option
intended to be an ISO shall be designated as an ISO in its
grant. The aggregate fair market value (determined at the time
the ISO is granted) of the Company Stock with respect to which
ISOs are exercisable for the first time by an optionholder
during any calendar year (under all plans of the Company and
any Subsidiary) shall not exceed $100,000.
o Non-Qualified Options
NQOs are stock options (i) which do not meet the ISO
restrictions, either in the grant itself or as the participant
treats the grant, or (ii) the terms of which provide that the
options will not be treated as ISOs. NQOs do not receive the
special tax consequences given ISOs by the Code.
o Restricted Stock
Restricted Stock is a grant of Company Stock to an individual
subject to forfeiture if specific requirements (including
continued employment or performance goals) described in the
grant documents are not met for the restriction period.
o Bonus Stock
Bonus Stock is a grant of Company Stock to an individual which
is made free of any restrictions. Bonus Stock may be granted
as a bonus or instead of cash under other compensatory
arrangements of the Company or a Subsidiary.
o Performance Awards
Performance Awards are awards granted, subject to applicable
law, with value, payment, or other terms contingent upon
performance of the Company or specified Subsidiaries or any
other factors designated by the Committee. Performance Awards,
in whole or in part, may be (i) denominated or payable in
cash, (ii) denominated or payable in, valued by reference to,
or otherwise based on, or related to Company Stock, or (iii)
denominated or payable in, valued by reference to, or
otherwise based on, or related to, either Company Stock or
cash, to be determined in the discretion of the Committee.
4. GRANTS
Grants may be made under this Plan to participants by the Committee at
any scheduled or unscheduled meeting. In making a grant to a participant under
this Plan, the Committee will specify (either at the time of grant or
thereafter) the terms and conditions of the grant, all of which shall be subject
to the terms and conditions of this Plan (including Section 11 hereof). Unless
the Committee specifies otherwise or applicable law requires otherwise, with
respect to any grant to an individual of Restricted Stock or Bonus Stock or of
Company Stock in connection with a Performance Award, past services of that
individual equal to the aggregate par value of Company Stock subject to such
grant shall constitute the only consideration paid upon the issuance of such
stock. If at any time, consideration other than past services is required by
applicable law with respect to a grant, such consideration shall be paid within
the sixty (60) days immediately following such grant.
5. PERIOD OF OPTION AND CERTAIN LIMITATIONS ON RIGHT
TO EXERCISE
Each stock option grant shall be exercisable at such time or times as
the Committee shall from time to time determine, but in no event after the
expiration of ten years from the date of grant. The delivery of certificates
representing shares under any stock option grant will be contingent upon receipt
by the Company from the optionholder (or a purchaser acting in his or her stead,
in accordance with the provisions of the grant) of the full purchase price for
such shares in the form of cash and/or shares of Company Stock either previously
owned by the optionholder or withheld by the Company pursuant to an election by
the optionholder under Section 7 below, the total value of which is equal to the
total purchase price of the optioned shares then being purchased and the
fulfillment of any other requirements contained in the option or applicable
provisions of law. No optionholder or person entitled to exercise the stock
option grant shall be deemed to be a holder of any shares subject to the grant
for any purpose until certificates for such shares are issued to him or her
under the terms of the grant and the Plan.
6. NON-TRANSFERABILITY OF CERTAIN OPTIONS
The Committee, in its discretion, may grant transferable options or
amend outstanding options to make them transferable (collectively, "Transferable
Options"). The option agreement with respect to a Transferable Option shall
provide that (i) the optionholder can transfer the Transferable Option to (x)
members of his or her immediate family (i.e., children, grandchildren or
spouse), (y) trusts for the benefit of such family members, and (z) partnerships
whose only partners are such family members; (ii) no consideration can be paid
for the transfer of the Transferable Option; and (iii) the transferee of a
Transferable Option is subject to all conditions applicable to the Transferable
Option prior to its transfer.
The option agreement with respect to any option granted hereunder shall
state the transferability restrictions for such option determined by the
Committee.
The rights and obligations of the Company under the Plan and any grant
may be assigned by the Company to a successor to the whole or any part of its
business if the successor assumes in writing all of such rights and obligations.
7. WITHHOLDING
The Company may defer making payment or delivery of any shares of
Company Stock to a participant under the Plan until satisfactory arrangements
have been made for the payment of any federal, state, or local income taxes
required to be withheld with respect to such payment or delivery. Each
participant may elect to have the Company withhold shares of Company Stock
having an aggregate value equal to the amount required to be withheld. If no
such election is in effect, the Company shall nevertheless have the right to
impose a mandatory withholding of such shares. In addition, at the election of a
participant, upon exercise of an option, the Company may withhold shares of
Company Stock equal to all or a portion of the purchase price of the shares then
being purchased. The value of fractional shares remaining after payment of the
withholding taxes or the exercise price shall be paid to such participant in
cash. Shares so withheld shall be valued at fair market value at the close of
the regular business day on which the option is exercised.
8. CASH AWARDS
If the payment or delivery of (or lapsing of restrictions with respect
to) any Bonus Stock or Restricted Stock awarded to a participant under this
Plan, the 1992 Plan or the 1987 Plan (the "Stock Payment") shall be subject to
the imposition of any federal, state, or local income tax, the Committee, in its
discretion, either at the time the award is granted or thereafter, may also
grant the participant a cash award. The cash award may be in any amount up to an
amount such that the value retained by the participant (from the total of the
Stock Payment and the related cash award) after payment of any such income taxes
imposed on the Stock Payment and any such income taxes imposed on the cash award
itself shall be equal to the Stock Payment.
<PAGE>
9. EQUITABLE ADJUSTMENTS
In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Company Stock, or other
property), recapitalization, stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Company Stock in such a way
that an adjustment is appropriate in order to prevent dilution or enlargement of
the rights of participants under the Plan, then the Committee shall make such
equitable changes or adjustments as it deems appropriate and, in such manner as
it may deem equitable, adjust any or all of (i) the number and kind of shares of
stock of the Company (or other securities) which may thereafter be issued in
connection with grants under the Plan (including, without limitation, grants
pursuant to Section 13 hereof), (ii) the number and kind of shares of stock of
the Company (or other securities) issued or issuable in respect of outstanding
grants, and (iii) the exercise price, grant price, or purchase price relating to
any grant.
10. EFFECTIVE DATE AND STOCKHOLDER APPROVAL
The Effective Date of the Plan shall be the date the Plan is approved
by the stockholders of the Company. Until the Effective Date of the Plan, the
1992 Plan shall continue in full force and effect in accordance with its terms.
11. ADMINISTRATION AND AMENDMENT OF THE PLAN
The Plan shall be administered by the Committee, as provided in Section
2 hereof, which shall make the grants under the Plan, determine the form of
options or other awards to be granted in each case (either at the time of grant
or thereafter), and make any other determination under or interpretation of any
provisions of the Plan.
Any of the actions taken by the Committee shall be final and
conclusive. Without the consent of the affected participant, however, no
amendment or other action with respect to any outstanding award hereunder may
impair or adversely affect the rights of the participant holding the award.
The Board may amend the Plan as it may deem proper and in the best
interest of the Company. However, no such action shall adversely affect or
impair any options or other awards previously granted under the Plan, the 1992
Plan or the 1987 Plan without the consent of the grantee, and no amendment which
requires stockholder approval in order for the Plan to comply with the
requirements of Section 162(m) of the Code shall be effective unless that
amendment shall be approved by the stockholders of the Company entitled to vote
thereon as required by Section 162(m).
12. EXPIRATION AND TERMINATION OF THE PLAN
Unless earlier terminated by the Board, the Plan shall terminate on the
tenth anniversary of its Effective Date. Grants may be made under the Plan at
any time, or from time to time, prior to the termination of the Plan. The Plan
may be abandoned or terminated at any time prior to the tenth anniversary of its
Effective Date by the Board, except with respect to any awards then outstanding.
13. GRANTS TO DIRECTOR-PARTICIPANTS
Each individual who has served as a non-employee member of the Board
during any calendar year shall be a director-participant in the Plan with
respect to such year. With respect to each calendar year each
director-participant shall be granted, as compensation, (x) 500 shares of
Company Stock, and (y) options to purchase 1,000 shares of Company Stock, in
each case as of the day before the regularly scheduled meeting of the Board in
the month of January following the close of such calendar year; provided,
however, that the number of shares or options so granted shall be prorated in
the case of any director-participant whose service on the Board began during
such year or who retired or resigned from the Board during such year. The
proration shall be based on the portion of such year the director-participant
served as a non-employee member of the Board.
HOUGHTON MIFFLIN COMPANY
EXHIBIT 12--COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1996 1995(C) 1994(B) 1993(A) 1992
-------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before fixed charges:
Net income (loss) before extraordinary
item and cumulative effect of
accounting changes ........................ $43.6 $ (7.2) $52.4 $31.4 $19.0
Provision (benefit) for income taxes ...... 30.3 (4.2) 32.7 17.7 9.4
------ ------ ------ ------ ------
Income (loss) from continuing operations
before taxes, extraordinary item, and
cumulative effect of accounting changes 74.0 (11.4) 85.1 49.1 28.4
Interest expense ........................... 41.6 15.2 7.7 3.6 4.4
Interest portion of rental expense* ...... 3.0 3.8 3.4 3.3 3.7
------ ------ ------ ------ ------
Earnings (loss) before fixed charges ...... 118.6 $ 7.6 $96.2 $56.0 $36.5
Fixed charges:
Interest expense ........................... 41.6 15.2 7.7 3.6 4.4
Interest portion of rental expense* ...... 3.0 3.8 3.4 3.3 3.7
Total fixed charges ........................ 44.6 $ 19.0 $11.1 $ 6.9 $ 8.1
Ratio of earnings to fixed charges ......... 2.7 0.4 8.6 8.1 4.5
</TABLE>
(A) On June 4, 1993, the Company completed an early redemption of $25 million in
senior notes due December 15, 1994. The Company recognized an extraordinary
loss of $1.0 million, net of a tax benefit of $0.6 million. The
extraordinary loss is excluded from earnings before fixed charges and
interest expense in calculating the ratio of earning to fixed charges.
(B) On March 30, 1994, the Company completed an early redemption of $25 million
in senior notes due March 30, 1997. The Company recognized an extraordinary
loss of $1.2 million, net of a tax benefit of $0.8 million. This
extraordinary loss is excluded from earnings before fixed charges and
interest expense in calculating the ratio of earning to fixed charges.
(C) The Company would need $11.4 million in additional income to cover its fixed
charges in 1995.
* Includes the portion of rent expense for each period presented that is deemed
by management to be the interest component of such rentals.
HOUGHTON MIFFLIN COMPANY
EXHIBIT 21
LIST OF SUBSIDIARIES
All of the subsidiaries of the Company, all of which are directly or
indirectly wholly owned by the Company, including those significant subsidiaries
listed below, are include in the consolidated financial statements.
1. McDougal Littell Inc., a Delaware corporation.
2. The Riverside Publishing Company, a Delaware corporation.
3. Great Source Educational Group, Inc., a Delaware corporation.
HOUGHTON MIFFLIN COMPANY
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-69298, 33-59015 and 33-51098) pertaining to the Employees'
Savings and Thrift Plan, the 1992 Stock Compensation Plan and the 1995 Stock
Compensation Plan of Houghton Mifflin Company and in the Registration Statement
(Form S-3 No. 33-64903) of Houghton Mifflin Company and in the related
prospectuses pertaining to the $300 million debt securities of our report dated
January 27, 1997 with respect to the consolidated financial statements and
schedule of Houghton Mifflin Company included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-31-1996
<CASH> 11,534
<SECURITIES> 612
<RECEIVABLES> 194,671
<ALLOWANCES> (29,859)
<INVENTORY> 138,547
<CURRENT-ASSETS> 337,969
<PP&E> 261,095
<DEPRECIATION> (144,648)
<TOTAL-ASSETS> 1,006,442
<CURRENT-LIABILITIES> 185,930
<BONDS> 0
0
0
<COMMON> 14,781
<OTHER-SE> 255,512
<TOTAL-LIABILITY-AND-EQUITY> 1,006,442
<SALES> 717,863
<TOTAL-REVENUES> 717,863
<CGS> 329,686
<TOTAL-COSTS> 630,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,875
<INCOME-PRETAX> 73,953
<INCOME-TAX> 30,331
<INCOME-CONTINUING> 43,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,622
<EPS-PRIMARY> 3.13
<EPS-DILUTED> 3.13
</TABLE>
