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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-22154
MANUGISTICS GROUP, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 52-1469385
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2115 EAST JEFFERSON STREET, ROCKVILLE, MARYLAND 20852
(Address of principal executive offices) (Zip code)
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(301) 984-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.002
PAR VALUE PER SHARE
(Title of Class)
Name of each exchange on which registered: NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. [ ]
As of May 22, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $531.1 million. As of that
date, the number of shares outstanding of the Registrant's common stock was
26.0 million, based on information provided by the Registrant's transfer agent.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement relating to the 1998
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K. The Company anticipates that its Proxy Statement will be filed
with the Securities and Exchange Commission within 120 days after the end of
the Company's fiscal year ended February 28, 1998.
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PART I
ITEM 1. BUSINESS.
GENERAL
Manugistics Group, Inc. ("Manugistics" or the "Company") develops,
markets and supports software products for synchronized supply chain
management(TM) and provides related services. Synchronized supply chain
management refers to managing the complex interactions involved in the flows of
products through the supply chain. It involves forecasting product demand and
coordinating the timing of distribution, manufacturing, procurement and
transportation activities to meet this demand, not only across an entire
enterprise, but also among an enterprise and its suppliers and customers. The
Company provides an integrated suite of strategic, tactical and operational
supply chain planning software products, including a high-level optimizer, that
address the four key operational areas of supply chain management: demand
planning, supply planning, manufacturing scheduling and transportation
management. The Company was incorporated in Delaware in 1986, completed its
initial public offering in August 1993 and completed another underwritten
offering of its common stock in August 1997.
BACKGROUND
In recent years, many companies have faced increased competition and
more demanding customer service requirements. Customers have had the leverage
to demand better service from suppliers, in part because bargaining power has
shifted to retailers and consumers from manufacturers and distributors
following such changes as the advent of "superstores" and specialty category
stores. Also, many companies have contended with shorter product life cycles
in recent years. In addition, manufacturing companies in a number of industries
have incurred very high costs to build, acquire, maintain and operate plants
and equipment. Given these significant costs and increased competition, many
companies have sought ways to increase their returns from significant
investments in manufacturing assets.
Manufacturers, distributors, retailers and transportation providers
are seeking to improve customer service, lower operating costs and increase
returns on assets through more effective management of their supply chains.
Some of the first companies to recognize the need for effective supply chain
management were consumer packaged goods and food and beverage firms, which
generally make product to stock in inventory ("make to stock"). Many of these
companies produce their finished goods using process manufacturing, distribute
their products through complex networks, and sell their products through retail
channels. Suppliers to these consumer-oriented process manufacturers, such as
chemical companies, which generally use process manufacturing and sell to
industrial customers, have also been significantly affected by the changed
business environment.
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Companies in the apparel and consumer electronics industries, among
others, have also contended with more difficult business conditions and have
been particularly affected by the shorter product life cycles and the
associated difficulty of forecasting product demand. Such companies manufacture
products for consumers in discrete or high volume repetitive manufacturing
environments, and generally make or assemble their products upon receipt of a
customer order ("make to order"). These companies, as well as discrete
manufacturers that sell to industrial customers, have begun to recognize that
they can provide better service to their customers, have lower operating costs
and increase their return on assets by effective management of their supply
chains.
Companies in many different industries now recognize that effective
supply chain management is a source of competitive advantage, and these
companies are seeking software that can help them deliver the right product to
the right place at the right time at the lowest possible cost. The Company's
supply chain management software enables companies to plan their supply and
manufacturing activities to meet anticipated customer demand, while considering
capacity and material constraints and other factors. Manugistics' supply chain
software complements Enterprise Resource Planning ("ERP") systems and provides
companies with information not only about their own enterprises, but also about
demand from customers and other information relating to suppliers and
transportation providers.
Manugistics' solutions consider and balance relevant demand, customer
service, production, constraints, cost and profitability information, both
within an enterprise and among an enterprise and its suppliers and customers.
The Company's integrated suite of supply chain management software includes (i)
strategic tools, such as Supply Chain Navigator's functionality for determining
the initial setup of a supply chain network, (ii) tactical capabilities, such
as Supply Planning's functionality for performing production planning across
multiple facilities, and (iii) operational capabilities, such as Advanced
Manufacturing Scheduling's functionality for producing specified quantities of
product within given time parameters. The Company's solution provides the
following benefits:
Synchronized Planning and Scheduling. The Company's software
immediately alerts planners of changes that occur along the supply chain,
enabling them to evaluate and incorporate the effects of the changes and to
rapidly adjust the relevant pieces of the supply chain planning process. This
software thus enables them to synchronize their companies' supply planning,
transportation planning and manufacturing scheduling activities with the
revised forecast of customer demand.
End-to-End Supply Chain Functionality. Manugistics' software provides
planners with a single view of their company's entire supply chain and its
links to suppliers and customers. This single view of the whole supply chain
provides critical real-time information about all of the effects of supply
chain actions, which enables users to make superior decisions.
Rapid Time-to-Benefit. The Company's supply chain management software
products frequently deliver cost savings and improvements in customer service
within one year after implementation. (Implementation typically requires 3 to
12 months, depending on the products
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licensed and the complexity and geographic scope of the project.) As a result,
customers typically receive a quick payback on their investment.
Constantly-Updated Supply Chain Information Common to All Users.
Manugistics' distributed client/server architecture enables users throughout a
company, regardless of their location, to access the same, constantly-updated
supply chain information at the same time. This architecture enables global
access, a single view of the supply chain and rapid communication of
information and decisions. It also enables users to take advantage of the
collaborative communication capabilities available through the Internet and the
World Wide Web and extends the availability of a company's view of the supply
chain to its suppliers and customers.
Tight Integration with Complementary ERP Systems. Because of the
Company's architecture, its object-oriented foundation (which enables
sophisticated communication between applications) and its mutual interest with
ERP vendors in enabling clients to derive the maximum benefits from both their
Manugistics and ERP systems, the Company offers tight integration with the ERP
systems of most leading vendors. In addition, the Company entered into an
agreement with CrossWorlds Software, Inc. ("CrossWorlds") in January 1998 to
jointly extend CrossWorlds' application integration technology to address the
integration between Manugistics' supply chain management software and other
enterprise software applications. See "Products" and "Alliances and
Partnering."
STRATEGY
The Company's objective is to be the leading provider of supply chain
management solutions to companies worldwide. The Company's strategy includes
the following elements:
Provide comprehensive solutions. As more companies recognize the
potential for significant and rapidly achievable benefits from effective supply
chain management, the Company's strategy is to deliver comprehensive solutions
to enable customers to fully realize these benefits. The Company delivers a
robust supply chain planning software solution, and continuously seeks to
expand and enhance its product offerings. The Company also provides consulting
and implementation services, education and training, product support and other
services. Through the Company's unique supply chain management experience and
its collaboration with customers in a variety of industries for more than a
decade, the Company has developed extensive knowledge of supply chain
management issues and solutions. Based on this knowledge, the Company is
continuing to define comprehensive supply chain solutions and is delivering
these solutions to the market.
At the core of these solutions is the Company's software, and the
Company has introduced, and plans to continue to introduce, new applications
and functionality in order to address specific aspects of supply chain planning
more completely. An important aspect of the Company's solutions is its ability
to rapidly deliver new features and functions to the market in response to
emerging market opportunities and requirements. During fiscal 1998, the Company
introduced NetWORKS(TM), a framework for collaborative planning and a full
suite of Internet
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applets designed to help companies manage inter-enterprise supply chain
coordination, and also acquired complementary supply planning capabilities for
manufacturers of complex products.
Customers have increasingly demanded the services offered by the
Company. In fiscal 1998 the Company acquired Synchronology Group Limited
("SGL"), a consulting company with significant domain expertise in
manufacturing processes and manufacturing planning and scheduling software. See
"Product Related Services". To help reduce the need to hire additional
professional services employees necessary to meet maximum anticipated demand
for services, the Company offers an extensive education and training program to
third-party consultants from firms such as Andersen Consulting, Inc. ("Andersen
Consulting"), Computer Sciences Corporation ("CSC"), Ernst & Young LLP ("Ernst
& Young"), IBM Consulting, KPMG Peat Marwick LLP ("KPMG Peat Marwick"), and
Price Waterhouse LLP ("Price Waterhouse"). The availability of these
third-party consultants to provide implementation services will assist the
Company to ensure that, during periods of increased demand, customers will
continue to receive effective and timely consulting and implementation
services.
Capitalize on leadership position. The Company seeks to take advantage
of its leadership position in the market for supply chain management software
by expanding its business in the following areas: new geographic markets, new
industries and mid-sized companies.
New geographic markets. The Company believes that companies outside
North America face similar supply chain management issues as North American
companies and will increasingly demand supply chain management solutions.
Accordingly, the Company plans to take advantage of its knowledge of these
issues to provide solutions to these companies. Although they trail their North
American counterparts in terms of their adoption of supply chain management
practices, the Company believes that companies in the South American, European,
and Asia/Pacific regions, as well as international subsidiaries of North
American companies, are increasingly seeking the benefits of effective supply
chain management. To meet anticipated demand, the Company maintains offices in
Australia, Belgium, Brazil, France, Germany, Ireland, Japan, the Netherlands,
Singapore and the United Kingdom. The Company believes that companies in these
and other geographic markets will increasingly demand supply chain management
solutions. See "Forward Looking Statements."
New industries. The Company is capitalizing on its experience with,
and operational knowledge of, process manufacturing companies that target
consumers, such as consumer packaged goods and food and beverage firms, and
process manufacturers that target the industrial sector, such as chemical
companies, to further penetrate other industries. These industries include
discrete and high-volume repetitive manufacturers that target consumers, such
as firms that make apparel, consumer durables and consumer electronics, and
manufacturers that target the industrial sector such as communications
equipment makers and motor vehicle and parts manufacturers.
Mid-sized companies. In addition, the Company believes it can
capitalize on its supply chain management knowledge and the price/performance
profile of client/server products to provide solutions to mid-sized companies.
Client/server product offerings have enabled the
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Company to expand its target market to include mid-sized companies with annual
revenues ranging from $250 million to $1 billion.
Expand product distribution through alliances and partnering. The
Company is building and maintaining strong working relationships with
organizations that the Company believes can play important roles in marketing
the Company's products. These include: (i) ERP system vendors, such as The Baan
Company, N.V. ("Baan"), Glovia LLC, Marcam Solutions, Inc. ("Marcam"), Oracle
Corporation ("Oracle") and SAP AG ("SAP"), whose ERP systems maintain the data
used by the Company's supply chain planning products; (ii) consulting firms,
such as Andersen Consulting, CSC, Ernst & Young, IBM Consulting, KPMG Peat
Marwick, and Price Waterhouse, that are active in the selection and
implementation of large information systems; (iii) other complementary solution
providers such as Microsoft Corporation; and (iv) hardware vendors, such as
Hewlett-Packard, IBM, Digital Equipment Corporation and Sun Microsystems, that
offer hardware products on which the Company's products run. See "Alliances and
Partnering."
The Company believes that these relationships will enable prospective
customers to select various hardware systems, operating environments, ERP or
transaction systems and databases that can be easily integrated and rapidly
implemented with the Company's products. The Company also believes that these
relationships will provide benefits to customers, the Company and the Company's
alliance partners, including enhanced potential for increased market
penetration.
Offer products based on Manugistics' supply chain business object
model, incorporating advanced decision sciences, with state-of-the-art user
interface and integration technology. Manugistics' technology strategy is to
offer products based on the Company's unique set of software objects developed
specifically to support the business processes involved in supply chain
planning, which provide customers with highly accurate models of their supply
chains and superior flexibility, scalability and performance. Manugistics'
applications incorporate a variety of advanced decision sciences, including
constraint-based optimization, heuristics and linear programming, providing
customers with the most appropriate solver techniques for different types of
supply chain problems. The Company's user interface technology provides a
state-of-the-art "look and feel" to enhance user productivity and support
visualization of the supply chain. The Company's leading-edge integration
technology enables seamless interchange among Manugistics applications, ERP
systems, and suppliers and customers.
The Company offers products for distributed, open systems enabling
customers to use the Company's supply chain management software with various
combinations of hardware systems, operating environments, complementary
software and databases. Open operating systems such as Windows NT and UNIX
enable customers to take advantage of portability, scalability and
interoperability of operating environments. Distributed computing such as that
associated with client/server architectures moves the Company's decision-making
capabilities closer to the user by providing a distributed user interface,
distributed processing (rather than more centralized processing) and
distributed database access. As more companies expand their operations and
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supply chains globally, the Company's distributed approach supports customers
in their global supply chain planning activities.
The Company's products incorporate standards-based technologies, which
provide a flexible foundation and leverage the technology investments of
customers. The Company's use of object-oriented technology for product
development enables it to develop new software program code with modular
components, which permits and encourages developers to re-use these
components and improves quality while shortening the time required to develop
or enhance products.
PRODUCTS
During fiscal 1998, the Company released several enhancements to
Manugistics5, the fifth version of its client/server software. The Company's
supply chain management software provides strategic, tactical and operational
supply chain planning products and includes the Supply Chain Navigator, four
major families (Demand Planning, Supply Planning, Manufacturing Scheduling and
Transportation Management), the Manugistics Integrator, and NetWORKS, a
framework for inter-enterprise collaborative planning that includes a suite of
Internet applets. The software operates in most major environments and supports
database software from leading relational database software vendors.
SUPPLY CHAIN NAVIGATOR. Manugistics Supply Chain Navigator ("SCN")
features a graphical representation of a company's entire supply chain network
and enables executives to make longer-term business planning decisions about
the configuration of the supply chain network and network-wide capacity,
production, inventory and distribution as well as shorter-term tactical
planning decisions. SCN can produce an optimized sourcing network and an
optimized plan for the ideal mix of products to be produced at each plant and
distributed to each warehouse and distribution center. SCN considers multiple
time periods to maximize the profitability of a portfolio of products or
minimize the costs of raw materials, manufacturing, inventory and distribution.
The strategic and tactical planning functionality of SCN is fully integrated
with the other tactical and operational products in Manugistics' suite, giving
users the ability to implement immediately the strategic supply chain decisions
that SCN supports.
SCN is a strategic and tactical optimizer of the flows of materials
through a supply chain, which uses detailed, constraint-based models. By
simultaneously evaluating both manufacturing-related and distribution-related
constraints, and using powerful optimization routines, SCN generates the
optimal solution for specific user-defined goals (such as maximizing product
profitability or minimizing costs), and can be used to solve a wide array of
strategic and tactical supply chain problems.
DEMAND PLANNING. Manugistics Demand Planning addresses a key element
of successful supply chain planning: forecasting demand with a high degree of
accuracy. There are two products in the Demand Planning family: Demand Planning
and Demand Planning Extended Edition.
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Demand Planning. Using advanced statistical techniques, Demand
Planning develops sophisticated demand forecasts for specific products at
specific locations. Users can adjust forecasts for market intelligence,
financial projections, sales promotion impact, or other information about
expected demand at any level of aggregation, and the software automatically
disaggregates this information to individual products. The resulting demand
forecasts are critical to meeting customers' service expectations and become
the basis for inventory, distribution, production and transportation plans. In
addition, the software provides the capability to track and manage forecast
accuracy.
Demand Planning Extended Edition. Demand Planning Extended Edition
("DP/EE") utilizes advanced forecasting methods to extend the capabilities of
the Company's Demand Planning product. DP/EE produces a forecast that
incorporates causal factors, such as the effects of changes in price, the
effects of non-seasonal holidays and macro-economic factors. To improve
precision, DP/EE also recognizes both long-term and short-term trends in
product demand and selects appropriate techniques to forecast demand more
accurately. To simplify forecasting demand for a new product over the course of
its life cycle, DP/EE can synthesize and analyze life-cycle information from
other, similar products to produce a forecast for the new product. This
capability is very important in industries that conduct some discrete and
high-volume repetitive manufacturing operations, such as apparel or consumer
electronics, in which product life cycles are short and life-cycle management
is crucial to the success of new products.
During fiscal 1998, the Company delivered new capabilities in its
Demand Planning product family that enable the software to incorporate
point-of-sale ("POS") checkout scanner data and to integrate with On-Line
Analytical Processing ("OLAP") software. As part of the agreements, which the
Company entered into with Information Resources, Inc. ("IRI") during the first
quarter of fiscal 1998, the Company enhanced its Demand Planning products to
use multiple sources of daily, store-level POS data, including that of IRI. The
Company believes that using these POS data will provide more accurate
forecasts, thereby helping companies make superior planning decisions,
particularly in demand-sensitive, consumer-oriented, process manufacturing
industries.
SUPPLY PLANNING. The higher, tactical level functionality in Supply
Planning facilitates effective management of production while considering
constraints such as capacity, raw materials, availability of components and
labor. Supply Planning enables managers to review planned manufacturing
activities at all manufacturing facilities for time periods up to several
years, and allows them to analyze the ability of their companies to meet demand
and supply requirements and customer service goals given aggregate capacity and
materials constraints.
At the operational level, Supply Planning provides managers with the
ability to plan supply activities across multiple plants and distribution
centers to meet demand requirements, and contains extensive Continuous
Replenishment Planning ("CRP") and Vendor Managed Inventory ("VMI")
capabilities. The software considers the interdependencies among distribution
and manufacturing activities and uses this information as the basis for
decisions about stocking levels, sourcing, location, movement and use of
available materials and inventory. As a result, customer service can be
improved while inventories and cycle times are reduced.
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Master Supply Plan. The higher, tactical level functionality in Supply
Planning is used for longer-term, aggregate planning across multiple facilities
and produces a master supply plan considering aggregate capacity and materials
constraints (as well as planning for a single plant, consistent with the master
plan). Supply Planning incorporates inputs from multiple sources, including the
planned orders that are the result of collaborative or VMI or CRP and customer
orders to develop a feasible master production plan (for multiple weeks or
months) that fits within capacity and materials constraints. This master
production plan then provides input for production planning and manufacturing
scheduling. If a product should be manufactured at an alternate plant to
relieve constraints, bottlenecks or both, appropriate adjustments are made
throughout the Manugistics solution. The software can also identify capacity
constraints and materials shortages likely to occur in the future, enabling
planners to take corrective action, such as leveling production load over time
or across lines, before problems develop.
Distribution Plan. The operational level functionality in Supply
Planning synthesizes demand planning, inventory planning and distribution
network data to produce a distribution plan - a schedule of shipping
requirements for each source and destination to meet the demand for every
product at every location in each planning period. Supply Planning constructs a
daily operational plan recommending a schedule of shipments to implement the
distribution plan that makes the best use of available inventory.
Manufacturing Plan. To satisfy the distribution plan, Supply Planning
assists managers in developing long-term and short-term enterprise-wide
production plans and detailed daily production schedules while calculating
materials needs. In addition, this software assists managers in making
cost-effective decisions regarding the use of manufacturing and materials
resources.
Supply Planning produces a master schedule and translates that master
schedule into time-phased materials requirements schedules for raw materials
and intermediate or component products. The software produces an
enterprise-wide replenishment schedule of time-phased requirements for each
vendor, listing the planned and firm orders for each item. In addition, the
software can recommend the optimal source for raw materials or components, and
contains "available-to-promise" functionality which provides managers who are
responsible for sourcing or supplying raw materials or components (both within
and outside an enterprise) with information about the ability to satisfy
production plans based on anticipated future levels of raw materials or
components. This capability enables these managers to work proactively to find
alternate materials or components or alternative production cycles to minimize
the effect of any anticipated shortages.
Industry-tailored Functionality. To more thoroughly address the needs
of discrete manufacturers of computer and communications equipment, industrial
vehicles and other complex products, Supply Planning includes functionality for
handling the issues that are critical in these vertical industries: scarce
materials and capacity and customers' demands for order promising in real-time
and for product design and engineering issues. These capabilities of
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Supply Planning use a constraint-based computational engine to create, analyze
and optimize the manufacturing plans of companies in these industries by
identifying all material, capacity and other resource bottlenecks and analyzing
the impact of each on individual orders and overall plan performance. The
software enables users to determine the mix of products to produce that
maximizes product or company profitability or minimizes costs based on
materials availability, substitution and configuration, and supplier
alternatives. The software also enables users to perform real-time order
promising, and if a material shortage is constraining delivery performance, it
identifies the problem part so that corrective action can be taken. In
addition, this software provides tools for unique/common parts analysis and
advanced bill of materials and inventory analysis, which assists in improving
product design and engineering.
ADVANCED MANUFACTURING SCHEDULING. Manugistics Advanced Manufacturing
Scheduling ("AMS") delivers realistic, executable manufacturing schedules for
producing specified quantities of product within the time parameters contained
in the production plan. AMS is integrated with the rest of the Manugistics
supply chain planning software suite, giving users the same constantly updated
demand and supply information available to planners throughout an organization.
Correspondingly, planners elsewhere in the organization have current
information about manufacturing schedules. AMS optimizes production schedules
given certain user-defined constraints for process, high-volume repetitive and
discrete manufacturing environments, enabling schedulers to maximize customer
service and asset utilization, minimize cost and reduce cycle time.
Users can configure AMS to model the unique manufacturing environments
of their enterprises for various short- to medium-term time periods, including
large, complex processes, production of either small or large numbers of
products, a range of constraints including materials, labor, machine and
storage capacity and environmental restrictions. AMS generates a manufacturing
schedule meeting defined objectives while respecting constraints.
AMS enables users to employ a range of methods to respond to the
frequent changes in the manufacturing schedule, from regenerative scheduling to
incremental rescheduling. A key feature of AMS is its rescheduling capability.
AMS identifies the best location and time period to schedule a job or
production run. For example, when a company receives a new order, AMS searches
in real time for the optimal plant and date to run the job, preserving the
existing schedule and enabling the scheduler to quote a delivery date
immediately. AMS also addresses floating capacity-constrained resources or
bottlenecks, again by leveraging the existing schedule, preserving the parts
that are unaffected by the change and revising other elements as necessary to
meet the updated requirements. The Company believes that the evolutionary
nature of the rescheduling capability of AMS provides users with greater
control, because the schedule remains stable, and greater speed, because the
software reschedules only the necessary portion of the entire schedule.
TRANSPORTATION MANAGEMENT. Manugistics Transportation Management
provides managers with decision-making and optimization tools to determine how
to assign transportation resources so as to minimize costs while meeting
customer service requirements. This software allows for the coordination of
material and product movements on an enterprise-wide basis.
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Transportation Management enables companies to plan and integrate
inbound, outbound and inter-company moves in a coordinated way and to build
feasible, cost-effective, consolidated loads that meet customer service and
business operating requirements and minimize enterprise-wide transportation
costs. This product also assists managers to determine the best available mix
of transportation modes and common carriers. In addition, Transportation
Management enables managers to integrate private fleet operations into the
shipment planning process to optimize transportation asset utilization and
customer service.
Communication among trading partners, particularly communication about
the status of transportation activities, is essential to effective supply chain
management. Transportation Management includes the Manugistics Intelligent
Messenger, which provides electronic commerce capabilities by collecting and
distributing supply chain data among trading partners. The Manugistics
Intelligent Messenger evaluates messages from the supply chain planning
applications, recognizes key business events, determines required action and
sends timely notification messages to appropriate decision makers. This product
was developed in partnership with Frontec AMT, Inc., a leading provider of
intelligent messaging solutions.
The Company's Transportation Management family also includes the
Routing and Scheduling product. It provides automated daily routing and is
designed for private fleet managers whose main concern is developing the best
possible distribution routes in order to maximize customer service and minimize
operating costs such as fuel, equipment and personnel.
During fiscal 1998, the Company released the Manugistics Bulk
Distribution Planning product, which addresses the needs of the bulk chemical,
petroleum and industrial gas industries. Bulk Distribution Planning includes
extensive transportation management capabilities, as well as specialized demand
planning, unique inventory management features and dynamic sourcing to meet
demand, enabling companies in these industries to improve customer service and
reduce inventory and transportation costs.
MANUGISTICS NETWORKS. Manugistics NetWORKS enables planners to manage
some of their supply chain interactions with customers and suppliers via the
Internet and the World Wide Web. NetWORKS provides a standardized, open
framework and a set of user-friendly, customizable Internet applets that a
company can use to permit trading partners to place orders, check product
availability or verify materials needs according to the company's Manugistics
supply chain planning software, with which NetWORKS is integrated. Using
NetWORKS' Internet communication capabilities, companies can rapidly
incorporate current information from customers and suppliers to accelerate and
improve their supply chain decision-making.
Just as Manugistics' other supply chain planning products immediately
alert planners within a single company of changes along the supply chain, the
Supply Chain Broadcast feature of NetWORKS immediately alerts trading partners
of a change, enabling them to evaluate and incorporate the effects of the
change and to synchronize their activities accordingly. NetWORKS also contains
some Internet applets. NetWORKS/Demand provides users with remote access to
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forecast data, and enables them to update this information based on orders or
market intelligence. NetWORKS/ATP (available to promise) offers remote users
the ability to access availability, capability and delivery date information.
NetWORKS/Carrier provides some interactive functionality for tendering and
prioritizing loads. NetWORKS/Materials, like Supply Planning for intra-company
activities, enables manufacturers and suppliers to share production plans and
materials requirements, which enables these parties to identify potential
shortages and to take corrective action before production is affected.
MANUGISTICS INTEGRATOR. The Manugistics Integrator is a software
application that integrates the Company's supply chain planning products with
ERP applications, such as SAP's R/3(R). Initially developed jointly by
Manugistics and SAP, the Integrator enables customers to implement an
integrated Manugistics' supply chain software and an ERP solution that uses
functionality from both applications without the need to develop custom
interface programming. The Integrator reduces companies' integration costs,
which can shorten the payback period on their investments in supply chain
planning and ERP systems.
STATGRAPHICS SOFTWARE. Additionally, the Company markets and supports
STATGRAPHICS, a software application containing a comprehensive set of
statistical tools to control, manage and improve the quality of production
processes in manufacturing companies. It utilizes statistical quality control
and design of experiments to implement quality management in individual
locations throughout an enterprise or plant. In response to decreased demand,
the Company has decreased the resources dedicated to marketing STATGRAPHICS.
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CUSTOMERS
The Company's supply chain management software has been licensed by
large organizations in the process manufacturing industries, such as the
consumer packaged goods, food and beverage, chemicals, paper and pharmaceuticals
industries and by customers in the discrete and high-volume repetitive
industries, including the apparel, consumer durables, electronics/high
technology and motor vehicles and parts industries. The Company has licensed
various combinations of its supply chain management software products to more
than 600 companies worldwide. The following customers are representative of the
Company's customer base in terms of their size and the magnitude of revenues
generated by their license agreements with the Company. During fiscal 1998, all
of these customers have either licensed software products from the Company or
its distributors or purchased maintenance, consulting or other services, or
both, from the Company. See "Sales and Marketing."
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CONSUMER PACKAGED GOODS CHEMICALS AND PETROCHEMICALS
Eveready Battery Co., Inc. BASF Corporation
General Electric Company Dow Chemical Company, Limited
The Gillette Company E. I. du Pont de Nemours and Company
Lever Brothers Company Exxon Company, International
The Procter & Gamble Company Mobil Oil Corporation
Revlon Consumer Products Corporation The Rohm & Haas Company
FOOD AND BEVERAGE CONSUMER ELECTRONICS/HIGH TECHNOLOGY
Ameriserve Food Distributors, Inc. (f/k/a PepsiCo., Inc.) Analog Devices, Inc.
Coors Brewing Company Hewlett-Packard Company
Frito-Lay, Inc. IBM Corporation
McDonald's Corporation Philips Consumer Electronics Company
Nabisco, Inc. Xilinx, Inc.
Ocean Spray Cranberries, Inc.
Starbucks Corporation MOTOR VEHICLES AND PARTS
Automotive Products plc
PHARMACEUTICALS BMW AG
Bristol-Myers Squibb Company General Motors Service Parts Operations
Eli Lilly and Company Harley-Davidson, Inc.
Glaxo Wellcome Inc. Deere & Co.
Schering-Plough HealthCare Products, Inc. Tenneco Automotive-Monroe Auto Equipment
Warner-Lambert Company
APPAREL
RETAIL DRUG/MASS MERCHANDISE/SPECIALTY RETAIL Fruit of the Loom, Inc.
Dayton Hudson Corporation Levi Strauss & Co.
Kmart Corporation NIKE, Inc.
CVS, Inc. Russell Corporation
Rite Aid Corporation The Timberland Company
Staples, Inc.
Toys 'R' Us, Inc. PAPER
Wal-Mart Stores, Inc. Fort James Corporation
Mead Corporation
GROCERY Sweetheart Cup Company, Inc.
Food Lion, Inc.
Giant Eagle, Inc. OTHER
The Kroger Co. Baxter Healthcare Corporation
Richfood, Inc. Black & Decker, Inc.
Safeway Stores, Inc. Bridgestone/Firestone, Inc.
Winn-Dixie Stores, Inc. British Airways
Eastman Kodak Company
Owens & Minor Medical, Inc.
</TABLE>
PRODUCT-RELATED SERVICES
A key element of the Company's business is to provide clients with
comprehensive solutions to their supply chain planning problems by combining
software with professional services that enable clients to derive the maximum
benefit from Manugistics' supply chain products. Typically, a client will make
many changes to its overall operations in order to achieve the benefits of the
Company's supply chain management solution, including its planning functions,
while implementing the Company's software. To assist clients in making these
changes, the Company offers a wide range of product-related services, including
business operations consulting, change management consulting, end-user and
system administrator education and training, and, in certain circumstances,
software product modification. These services help clients reengineer their
operations to take maximum advantage of the Company's software and of effective
supply chain management.
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In June 1997, the Company acquired all of the outstanding capital
stock of SGL, a closely held firm that provides manufacturing planning and
scheduling consulting services. SGL maintains offices at its headquarters in
the United Kingdom and in Belgium. SGL provides the Company with additional
domain knowledge about manufacturing planning and scheduling and additional
resources to serve clients in Europe and other regions.
These product-related services generally are not included in the
Company's software license fees and are provided on a time and materials basis.
The Company's product-related services group consisted of 360 employees as of
February 28, 1998.
CUSTOMER SUPPORT
Another element of the Company's comprehensive solution is to provide
on-going support to existing customers. Substantially all of the Company's
supply chain management customers enter into annual product maintenance
agreements entitling them to receive product support, including access to a
hotline and an electronic bulletin board, and to receive product revisions and
enhancements. The Company also uses its customer support function to collect
information from customers to assist in focusing future product development
efforts and in identifying market demand.
As of February 28, 1998, the Company's customer support and
maintenance staff consisted of 36 employees.
PRODUCT DEVELOPMENT
The Company directs its current product development efforts toward the
development of new, complementary products, the enhancement of the features and
functions of existing products (including additional Internet capabilities,
enhancements for use in foreign countries and foreign language translations),
and the development of products tailored to particular industries. To date,
most of the Company's supply chain products have been developed by its internal
staff, occasionally supplemented by acquisitions. Product documentation is
generally created internally.
In developing new products or enhancements, the Company works closely
with current and prospective customers, as well as with other industry leaders,
to address their needs and requirements. The Company believes that these
collaborative efforts will lead to improved software functionality and will
result in superior products likely to have greater market demand. The Company
maintains committees of users and developers for its products. Among other
things, these committees define and rank issues associated with products and
discuss product enhancement priorities and directions.
Since its inception, the Company has made substantial investments in
product development. The Company believes that getting products to market
quickly, without compromising quality, is critical to the success of these
products. The Company is continuing to
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make significant product development expenditures that it believes are
necessary for it to rapidly deliver new product features and functions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company conducts a Product Launch Program for new applications and
major enhancements, which allows customers to review design specifications and
prototypes and participate in product testing. The Company has also established
channels for customer feedback, which include periodic surveys and focus
groups. In addition, the Company's product development staff works closely with
the Company's marketing, sales, support and services groups to develop supply
chain management software products that meet the needs of its current and
prospective customers.
As of February 28, 1998, the Company's product development staff
consisted of 325 employees. The Company's gross development costs were
approximately $41.1 million, $24.2 million and $16.1 million for fiscal 1998,
1997 and 1996, representing 23.4%, 25.5% and 25.9%, respectively, of total
revenues. The Company's net product development expenses were approximately
$31.7 million, $17.4 million and $11.2 million for fiscal 1998, 1997 and 1996,
representing 18.0%, 18.3% and 18.0%, respectively, of total revenues. The
Company capitalized internally developed software costs of $9.4 million, $6.8
million and $4.9 million for fiscal 1998, 1997 and 1996, representing 23.9%,
28.3% and 30.4% of gross product development costs, respectively. The Company
amortizes its internally developed capitalized software costs over a product's
estimated economic life, generally two years, commencing when a product is
available for general commercial release.
SALES AND MARKETING
The Company's supply chain management sales operation for North and
South America is headquartered at the Company's offices in Rockville, Maryland
and includes field sales personnel in the Atlanta, Charlotte, Chicago,
Cleveland, Columbus, Dallas, Denver, Detroit, Houston, Los Angeles, Milwaukee,
Ottawa, Philadelphia, San Francisco, Sao Paulo (Brazil) and Toronto
metropolitan areas. The Company's direct sales organization focuses on sales
of supply chain management software to large, multi-national companies, as well
as mid-sized companies with significant supply chain issues.
The Company markets its products in regions outside of North and South
America primarily through subsidiaries. The Company's British, German, French,
Belgian and Dutch subsidiaries, located in Bracknell, England, Essen, Germany,
Paris, France, Brussels, Belgium and Utrecht, The Netherlands, respectively,
provide direct sales, support, or both, of supply chain management software,
primarily to customers located in continental Europe and the United Kingdom. In
fiscal 1998, the Company established a subsidiary in Tokyo, Japan to sell and
support its software in Japan. The Company also has subsidiaries in Australia
and Singapore for sales and support to customers in the Pacific Rim. The
Company adapts its software for use in international markets by addressing
different languages, different standards of weights and measures and other
operational considerations. In fiscal 1998, approximately 29.2% of the
Company's total revenues was attributable to sales outside the United States
and Canada. See Note 10 of Notes to Consolidated Financial Statements.
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The Company also uses indirect sales channels, such as complementary
software vendors, third-party alliances and distributorships. See "Alliances
and Partnering." Using these channels, Manugistics seeks to increase the market
penetration of its supply chain management software products by leveraging the
installed base and prospective customers of these parties. In fiscal 1998, the
Company entered into agreement with Fujitsu Limited, under which Fujitsu has
agreed to distribute the Company's software in Japan and in other countries
where Japanese companies have operations. In fiscal 1998, the Company also
entered into an agreement with NEC Corporation to distribute the Company's
software in Japan. The Company participates in an initiative with Oracle
Corporation, a large database and enterprise application software vendor, under
which Oracle has the nonexclusive right to conduct marketing and sales
activities on behalf of Manugistics (and on behalf of a small number of other
complementary vendors) to potential customers in the consumer packaged goods
industry. By participating in this initiative, the Company and the other
participating vendors are seeking to provide a more complete offering that
incorporates many capabilities and satisfies many of the supply chain planning,
ERP and other needs of customers and prospective customers in the consumer
packaged goods industry.
The Company supports its supply chain management sales activities by
conducting a variety of marketing activities, including an annual clients'
conference, product "steering committees," appearances at industry conferences
such as those organized by the American Production and Inventory Control
Specialists (APICS) organization, the Council of Logistics Management (CLM) and
the North American Wholesale Grocers Association, client conferences hosted by
complementary software vendors and product demonstration seminars. In addition,
the Company conducts lead generation programs including advertising, direct
mail, public relations, seminars, telemarketing and ongoing customer
communication programs.
The Company had 149 employees engaged in sales activities, 61
employees engaged in marketing activities and 49 employees engaged in business
development consulting activities at February 28, 1998.
The Company sells its STATGRAPHICS product in the U.S. and in other
countries through independent distributors, national resellers and local
dealers.
ALLIANCES AND PARTNERING
The Company has established business alliances or partnerships with
leading software companies, consulting firms and other complementary vendors.
During fiscal 1997, the Company joined the Oracle initiative. See "Sales and
Marketing". The Company has also entered into joint marketing agreements with
Baan and Marcam, which generally provide that Manugistics and these companies
will conduct joint marketing activities. In support of these joint efforts, the
Manugistics Integrator product is being enhanced to integrate the Company's
supply
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chain management software with the software of Baan, Marcam, and other ERP
application vendors.
The Company continues to develop relationships with leading consulting
firms in order to provide marketing leverage to the Company's own marketing
efforts. For example, Andersen Consulting in North America displays the
Company's supply chain management software at Logistics 2020, its logistics
Center of Excellence in Atlanta, Georgia, and at its SAP Center of Excellence
in Cincinnati, Ohio. Similarly, the Company works closely with CSC, Ernst &
Young, IBM Consulting, KPMG Peat Marwick, and Price Waterhouse. Manugistics
products are installed in a CSC solution center in Cleveland, Ohio and at an
IBM demonstration facility in Lexington, Kentucky. In addition to formal
programs, the Company cooperates with other professional services firms
informally on a client-by-client basis, which involves cooperation at the field
level.
LICENSE AGREEMENTS AND PRICING
Software products license revenues consist principally of fees
generated from licenses of software products. In consideration of the payment
of license fees, the Company generally grants nonexclusive, nontransferable,
perpetual licenses which are primarily computer, site or user specific. License
fee arrangements vary depending upon the type of software product being
licensed and the computer environment. License fees are based primarily on
which products are licensed and on the number of users or locations. The United
States list price for supply chain management software products ranges from
$200,000 for a single product to several million dollars for the complete
product suite.
Customers may obtain support services and maintenance for an annual
fee that ranges from 12% to 18% of the then-current license fee, depending on
the level of support and the size of the license fee. The support and
maintenance fee is generally billed annually and is subject to changes in
software license list prices. The Company also provides pre-installation
assistance, systems administration, training and other product-related
services, generally on a time and materials basis. This allows the customer to
determine the level of support appropriate for its needs.
COMPETITION
The market for supply chain planning software is highly competitive.
Other applications software vendors and certain professional services
organizations, including such vendors as i2 Technologies, Inc., Logility,
Numetrix, Inc. and McHugh Freeman Warehouse System Group, Inc., offer products
that are directly competitive with some of the software applications marketed
by the Company. In addition, certain ERP vendors, most of which are
substantially larger than the Company, have acquired supply chain management
software companies, products or functionality, or have announced intentions to
develop and sell supply chain management solutions. Such ERP vendors include
Baan, PeopleSoft, Inc. and SAP.
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The principal competitive factors in the supply chain planning
software markets served by the Company include product functionality and
quality, product suite integration, ease of use, customer service and
satisfaction, ability to provide customer references, product support,
product-related services, compliance with industry standards, vendor reputation
and, in international markets, availability in foreign languages. The Company
believes that it currently competes favorably with respect to these factors,
and that its principal competitive advantages are its comprehensive, integrated
solution, its significant list of referenceable customers, its substantial
investment in product development, its client support and its extensive
knowledge of supply chain planning.
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies on a
combination of trade secret, copyright and trademark laws, license agreements,
confidentiality agreements with its employees, nondisclosure and other
contractual requirements imposed on its customers, consulting partners and
others, and technical measures to protect its proprietary rights in its
products. The Company distributes its supply chain management software under
software license agreements, which typically grant customers nonexclusive,
nontransferable licenses to the Company's products and have perpetual terms
unless terminated for breach. Under these license agreements, the Company
retains all rights to market its products. Use of the licensed software is
usually restricted to the customer's internal operations on designated
computers at specified sites unless the customer obtains a site license for use
of the software that is restricted to designated users. Use is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the
software. The Company also seeks to protect the source code of its software as
a trade secret and as an unpublished, copyrighted work.
EMPLOYEES
As of February 28, 1998, the Company had 1,141 full-time regular
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are generally good. In addition, the Company utilizes consultants,
independent contractors and temporary employees to meet its staffing needs.
RISK FACTORS
Potential Fluctuations in Quarterly Results; Seasonality. The
Company's quarterly operating results have varied in the past and might vary
significantly in the future because of factors such as domestic and
international business conditions or the general economy, the timely
availability and acceptance of the Company's products, technological change,
the effect of competitive products and pricing, the effects of marketing
pronouncements by competitors or potential competitors, changes in the
Company's strategy, the mix of direct and indirect sales, changes in operating
expenses, personnel changes and foreign currency exchange rate fluctuations. In
addition, the Company has experienced and might continue to experience from
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time to time very large, individual license sales which can cause significant
variations in quarterly license revenues.
The Company typically ships software products shortly after license
agreements are signed and, therefore, does not maintain any material contract
backlog. Furthermore, the Company has typically recognized a substantial
portion of its revenues in the last month of a quarter. As a result, software
products revenues in any quarter are substantially dependent on orders booked
and shipped in that quarter, and the Company cannot predict software products
revenues for any future quarter with any significant degree of certainty.
The Company's software products license revenues are also difficult to
forecast because the market for business application software products is
evolving rapidly, and the Company's sales cycles vary substantially from
customer to customer. Because the licensing of the Company's products generally
involves a significant capital expenditure by the customer, the Company's sales
process is subject to the delays and lengthy approval processes that are
typically involved in such expenditures. In addition, the Company expects that
sales derived through indirect channels will be harder to predict in timing and
size than for direct sales because there is less direct contact and influence
with the prospective customer. For these and other reasons, the sales cycle
associated with the licensing of the Company's products varies substantially
from customer to customer and typically lasts between four and six months,
during which time the Company might devote significant time and resources to a
prospective customer, including costs associated with multiple site visits,
product demonstrations and feasibility studies, and might experience a number
of significant delays, over which the Company has no control.
The Company's expense levels vary, at least in part, based on its
anticipated future revenues. A substantial portion of the Company's revenues
in any quarter is typically derived from a limited number of large contracts.
Therefore, if revenues in a period are below expectations, operating results
are likely to be adversely affected. Net income might be disproportionately
affected by a reduction in revenues because a proportionately smaller amount of
the Company's expenses varies directly with revenues. As a result of the
foregoing factors, it is likely that in some quarters, the Company's operating
results will be below the published expectations of financial research
analysts. In that event, the price of the Company's common stock would likely
be materially adversely affected.
The Company has generally realized lower revenues in its first fiscal
quarter (ending in May) than in the immediately preceding quarter. The Company
believes that these fluctuations are caused primarily by customer budgeting and
purchasing patterns and by the Company's sales commission policies, which
compensate personnel for meeting or exceeding annual and other performance
quotas.
Competition. The market for business applications software is highly
competitive and subject to rapid change. Many application software vendors
offer products that are directly competitive with some of the software products
marketed by the Company. Some of the Company's current and potential
competitors have significantly greater financial, marketing,
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technical and other competitive resources than the Company. As a result, they
may be able to adapt more quickly to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products than can the Company. In addition, certain
ERP system vendors have acquired supply chain management software companies,
products or functionality or have announced plans to develop new products or to
incorporate additional functionality into their current products that, if
successfully developed and marketed, could compete with the products offered by
the Company. Furthermore, current and potential competitors may make
acquisitions of other competitors or may establish cooperative relationships
among themselves or with third parties to increase the ability of their
products to address the supply chain management needs of the Company's
prospective customers. Accordingly, it is possible that new competitors may
emerge and rapidly acquire significant market share. If this were to occur, the
business, operating results, financial condition and cash flows of the Company
could be materially adversely affected.
Dependence on New Products and Rapid Technological Change; Risk of
Product Defects. The market for the Company's products is characterized by
rapidly changing technologies, frequent new product introductions, rapid
changes in customer requirements and evolving industry standards. The Company
believes that its future financial performance will depend in large part on its
ability to maintain and enhance its current product line, develop new products
that achieve market acceptance, maintain technological competitiveness and meet
an expanding range of customer requirements. There can be no assurance,
however, that the Company will be successful in developing and marketing new
products or product enhancements that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products, or that its new products and product enhancements
will adequately meet the requirements of prospective customers and achieve
market acceptance. If the Company is unable, for technological or other
reasons, to successfully develop and introduce new products or product
enhancements, the Company's business, operating results, financial condition
and cash flows would be materially adversely affected.
In addition, software products as complex as those offered by the
Company might contain undetected errors or failures when first introduced or
when new versions are released. There can be no assurance, despite testing by
the Company and by current and prospective customers, that errors will not be
found in new products or product enhancements after commercial release,
resulting in loss of or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results, financial
condition and cash flows.
Year 2000 Compliance Issues. Many older computer systems and software
products that are still in use today were programmed to accept only two digit
entries in the date code field (i.e., "98" for "1998"). Systems and software
containing two digit date code fields need to be modified or upgraded to
distinguish 21st century dates (e.g., "2002") from 20th century dates (e.g.,
"1902"), in order to avoid the possibility of erroneous results or system
failures.
Many companies might need to modify or upgrade their information
systems to address this "Year 2000" issue. The effects of this issue and of the
efforts by companies to address it are
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unclear. The Company believes that the purchasing patterns of customers and
prospective customers might be affected by Year 2000 issues. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures might result in reduced
funds available to purchase software products such as those offered by the
Company. Additionally, Year 2000 problems inherent in a customer's other
software programs might significantly limit that customer's ability to realize
the intended benefits to be derived from the Company's supply chain management
software. These events could result in a material adverse effect on the
Company's business, operating results, financial condition and cash flows.
The Company utilizes other third party vendor equipment,
telecommunication products, and software products which may or may not be Year
2000 compliant. Although the Company is currently taking steps to address the
impact, if any, of the Year 2000 issue surrounding such third party products,
failure of any critical technology components to operate properly may have an
adverse impact on business operations or require the Company to incur
unanticipated expenses to remedy any problems.
Software products as complex as those offered by the Company might
contain undetected errors or failures when first introduced or when new
versions are released, including products intended to be Year 2000 compliant.
There can be no assurance that the Company's software products contain or will
contain all necessary date code changes or that errors will not be found in new
products or product enhancements after commercial release, resulting in loss of
or delay in market acceptance. In addition, the Company might experience
difficulties that could delay or prevent the continued successful development
and release of products that are Year 2000 compliant or that meet the Year 2000
requirements of customers. If the Company is unable or is delayed in its
efforts to make the necessary date code changes, there could be a material
adverse effect upon the Company's business, operating results, financial
condition and cash flows.
Expansion of Indirect Channels. The Company is building and
maintaining significant working relationships with complementary vendors, such
as ERP system vendors and consulting firms, that the Company believes can play
important roles in marketing the Company's products. The Company is currently
investing, and intends to continue to invest, significant resources to develop
these relationships, which could adversely affect the Company's operating
margins. There can be no assurance that the Company will be able to attract
organizations that will be able to market the Company's products effectively or
that will be qualified to provide timely and cost-effective customer support
and service. In addition, difficulties experienced by these complementary
vendors in selling the Company's products and services may adversely affect the
Company's results of operations. Furthermore, the Company's arrangements with
these organizations are not exclusive and, in many cases, may be terminated by
either party without cause, and many of these organizations are also involved
with competing products. Certain ERP system vendors have acquired supply chain
management software companies, products or functionality or have announced
plans to develop new products or to incorporate additional functionality into
their current products that would compete with the Company's products.
Therefore, there can be no assurance that any organization will continue its
involvement with the Company and its products, and the loss of important
organizations could materially adversely
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affect the Company's results of operations. In addition, if the Company is
successful in selling products as a result of these relationships, any material
increase in the Company's indirect sales as a percentage of total revenues
would be likely to adversely affect the Company's average selling prices and
gross margins because of the lower unit prices that the Company receives when
selling through indirect channels.
Management of Internal Growth. The Company has recently experienced a
period of rapid growth in revenues that has placed significant strains upon its
management systems and resources. The Company's ability to compete effectively
and to manage future growth, if any, will require the Company to continue to
improve its financial and management controls, reporting systems and procedures
on a timely basis. The Company has recently hired a significant number of
employees, and in order to maintain its ability to grow in the future, the
Company will be required to increase significantly its total number of
employees and to train and manage its employee work force on a timely and
effective basis. There can be no assurance that the Company will be able to do
so successfully. The Company's failure to do so could have a material adverse
effect upon the Company's business, operating results, financial condition and
cash flows. See also "Risk Factors - Integration of Acquired Businesses."
Integration of Acquired Businesses. The Company investigates
potential candidates for acquisition, joint venture opportunities or other
relationships on an ongoing basis. The Company is currently involved in the
evaluation of, and discussions with, one or more such candidates. Acquisitions,
including the acquisition of ProMIRA in February 1998, involve the integration
of companies that have previously operated independently. There can be no
assurance that the Company will be able to integrate these or any future
employees or operations effectively or that the Company will realize the
expected benefits of these or any future transactions. In addition, there can
be no assurance that the Company will not experience the loss of key employees
of these or any future acquired operations. The process of integrating acquired
employees and operations into the Company might result in unanticipated
operational difficulties and expenditures. In addition, there can be no
assurance that the anticipated benefits of any specific acquisition will be
realized.
International Operations. The Company currently conducts operations
in a number of countries in Europe, Asia/Pacific and South America and plans to
conduct operations in additional regions outside the United States, which will
require significant management attention and financial resources and could
adversely affect the Company's operating margins. The Company plans to
accelerate the growth of, and increase its investment in, its international
operations. There can be no assurance that the Company will be able to
generate, maintain or increase demand for the Company's products in new
geographic markets. Certain risks are inherent in international operations. The
majority of the Company's contracts are denominated in U.S. currency. Most of
the revenues from sales outside the United States have been denominated in
foreign currencies, typically the local currency of the Company's business
unit. The Company anticipates that the proportion of its revenues denominated
in foreign currencies will increase. A decrease in the value of foreign
currencies relative to the U.S. dollar could result in losses from foreign
currency translations. In connection with transactions denominated in foreign
currency,
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the Company has taken steps to minimize the risks associated with such foreign
currency in the past and might take such steps in similar circumstances in the
future. With respect to the Company's international sales that are U.S.
dollar-denominated, currency fluctuations could make the Company's products and
services less price competitive. The Company's international sales and
operations might be adversely affected by the imposition of government
controls, changes in financial currencies (such as the unified currency known
as the European Monetary Unit), political and economic instability,
difficulties in staffing and managing international operations and general
economic and currency exchange rate conditions in foreign countries.
Lack of Product Diversification. The Company's future results depend
on continued market acceptance of supply chain management software and services
as well as the Company's ability to continue to adapt and modify this software
to meet the evolving needs of its prospects and customers. Any reduction in
demand or increase in competition in the market for supply chain management
software products could have a material adverse effect on the Company's
business, operating results, financial condition and cash flows.
Dependence Upon Key Personnel. The loss of the services of one or
more of the Company's executive officers could have a material adverse effect
on the Company's business, operating results, cash flows and financial
condition. The Company does not have employment contracts with any of its
executive officers and does not maintain key person insurance. There can be no
assurance that the Company will be able to retain its key personnel. The
Company's future success also depends on its continuing ability to attract,
assimilate and retain highly qualified sales, technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can attract, assimilate or retain such personnel in
the future.
Intellectual Property and Proprietary Rights. The Company regards its
software as proprietary and relies on a combination of trade secret, copyright
and trademark laws, license agreements, confidentiality agreements with
employees, nondisclosure and other contractual requirements imposed on its
customers, consulting partners and others, technical measures and other methods
to protect its proprietary rights in its products. There can be no assurance
that these protections will adequately protect its proprietary rights or that
the Company's competitors will not independently develop products that are
substantially equivalent or superior to the Company's products. In addition,
the laws of certain countries in which the Company's products are or may be
licensed do not protect the Company's products and intellectual property rights
to the same extent as the laws of the United States. Although the Company
believes that its products, trademarks and other proprietary rights do not
infringe upon the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company.
Possible Volatility of Stock Price. Factors such as announcements of
new products or technological innovations by the Company or its competitors, as
well as quarterly variations in the Company's operating results, have caused
and may cause the market price of the Company's common stock to fluctuate
significantly. In addition, the stock market in recent years has
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experienced price and volume fluctuations which have particularly affected the
market prices of many high technology stock issues and which have often been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations, as well as general economic conditions, may
adversely affect the market price of the Company's common stock.
ITEM 2. PROPERTIES.
The Company's principal sales, marketing, product development, support
and administrative facilities are located in Rockville, Maryland, where the
Company leases approximately 116,000 square feet of office space under a lease
agreement which expires on April 30, 2002. The Company also leases
approximately 52,000 square feet of additional office space under a lease
agreement that expires on June 30, 2002. This space is located in a building a
few miles from the Company's headquarters facilities. In addition, the Company
leases approximately 41,000 square feet of additional office space under lease
agreements expiring on or before October 31, 1999. This space is located in a
complex adjacent to the Company's headquarters facilities. The Company also
leases office space for its 15 sales, service and product development offices
in the United States and its subsidiaries in North America, South America,
Europe and Asia/Pacific.
In order to consolidate the Company's three facilities located in the
Rockville, Maryland area, including its headquarters facility, and to provide
for the Company's long-term expansion needs, the Company entered into an
agreements effective as of March 26, 1998 with a commercial real estate
developer to lease a new office building of approximately 300,000 square feet
to be built at a site near its current headquarters in Rockville, Maryland. The
Company anticipates taking occupancy of the new facility in the spring of the
year 2000. Under the agreements, the Company has options, subject to certain
conditions, to lease up to an additional 550,000 square feet of office space
(increasing the total potential office space to 850,000 square feet) in two
additional phases. The options for additional office space, if not terminated
sooner pursuant to the agreements, expire in fiscal 2011 and 2013.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is a party to legal
proceedings and claims. In addition, from time to time, the Company may have
contractual disagreements with certain customers concerning the Company's
products and services. The Company has established accruals related to such
matters that are probable and reasonably estimable. In management's opinion,
any liability that may ultimately result from the resolution of these matters
in excess of amounts provided would not be likely to have a material adverse
effect on the financial position of the Company. In communications with the
Company, a customer alleges that it has been damaged as a result of the breach
by the Company of a 1991 contract for development and installation of a custom
software system and misrepresentations made by the Company in connection
therewith. The customer has threatened to commence an action if the matter is
not resolved to the customer's satisfaction. The Company believes that there is
no merit to this customer's claims and that the Company has met its obligations
to this customer. (In recent years, custom software has constituted an
immaterial portion of the Company's product development efforts.) Although the
Company is seeking to resolve the claims by this customer, resolution of this
matter is subject to various uncertainties and it is possible that this matter
may be resolved unfavorably to the Company. However, the Company's management
believes that the ultimate resolution of this matter will not have a material
adverse effect on the financial position of the Company.
24
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The name, age and position held by each of the executive officers of
the Company or Manugistics, Inc., its principal operating subsidiary, are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
William M. Gibson ................. 53 President, Chief Executive Officer and Chairman of
the Board of Directors
Joseph E. Broderick................ 53 Executive Vice President, Client Sales and Services
Kenneth S. Thompson................ 42 Executive Vice President, Supply Chain Products
Keith J. Enstice................... 47 Senior Vice President, Field Operations Division,
Americas
Mary Lou Fox....................... 55 Senior Vice President, Product and Industry
Marketing
Peter Q. Repetti................... 36 Senior Vice President and Chief Financial Officer
David M. Roth...................... 40 Senior Vice President, Marketing
</TABLE>
25
<PAGE> 26
Mr. Gibson has served as President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since its formation in 1986.
From 1983 until 1986, when it was purchased by the Company, Mr. Gibson served
as President, Chief Executive Officer and Chairman of the Board of Directors of
STSC, Inc. (now Manugistics, Inc.). He joined STSC, Inc. as Executive Vice
President and Chief Operating Officer in 1982.
Mr. Broderick has served as Executive Vice President, Client Sales and
Services since December 1995. From 1991 to 1995, Mr. Broderick served as
President and Chief Operating Officer of Netwise, Inc., a communications
systems software company. From 1990 to 1991, Mr. Broderick served as Vice
President of Sales and Marketing for XA Systems, a productivity tools software
company.
Mr. Thompson has served as Executive Vice President, Supply Chain
Products, since January 1996. From 1990 to 1996, Mr. Thompson served as Senior
Vice President, Supply Chain Products. Mr. Thompson joined the Company in 1990
upon the Company's acquisition of The ROVER Technology Company, a
transportation software products and services company, of which Mr. Thompson
had served as Chief Executive Officer.
Mr. Enstice has served as Senior Vice President, Field Operations
Division, Americas, since October 1995. From 1994 to 1995, he served as Senior
Vice President, Channels and Alliances Division, and from 1991 to 1994, Mr.
Enstice served as Vice President, Worldwide Sales. From 1989 until 1991, he
served as Vice President, Marketing. Mr. Enstice joined STSC, Inc. in 1983.
Ms. Fox has served as Senior Vice President, Product and Industry
Marketing since November 1997. From April 1993 to November 1997, she served as
Senior Vice President, Professional Services Division. She joined the Company
in 1982 as a Senior Systems Analyst and subsequently served in various
technical and professional services roles and as Vice President, Professional
Services, from March 1990 through March 1993.
Mr. Repetti has served as Senior Vice President and Chief Financial
Officer since November 1997. Prior thereto Mr. Repetti served as Vice
President, Finance and Administration and Chief Financial Officer since April
1996. From 1994 to 1996, Mr. Repetti served as Vice President, Finance. From
1990 to 1994, he served as Director of Financial Planning and Analysis for
USAir Group, Inc.
Mr. Roth has served as Senior Vice President, Marketing since November
1997 and as Vice President, Marketing from October 1994 to November 1997. Prior
to joining the Company, Mr. Roth served as Vice President of Marketing at
American Software, Inc., where he also worked in various other marketing and
consulting positions from 1989 to 1994.
26
<PAGE> 27
There are no family relationships among any of the executive officers
or directors of the Company. Executive officers of the Company are elected by
the Board of Directors on an annual basis and serve at the discretion of the
Board of Directors.
27
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $.002 par value per share, trades on The
Nasdaq Stock Market under the symbol "MANU".The following table sets forth the
high and low closing prices in dollars per share for the respective quarterly
periods over the last two fiscal years, as reported in published financial
sources. These prices reflect inter-dealer prices, without retail markup,
markdown or commission, and may not necessarily represent actual transactions.
All share prices provided below have been adjusted to reflect the stock split
effected on June 11, 1997, for stockholders of record on May 23, 1997.
<TABLE>
<CAPTION>
Fiscal Year 1998 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter 34 14 7/8
(ended May 31, 1997)
Second Quarter 49 3/4 30
(ended August 31, 1997)
Third Quarter 45 3/4 28 1/2
(ended November 30, 1997)
Fourth Quarter 48 1/2 35 7/8
(ended February 28, 1998)
Fiscal Year 1997 High Low
---------------- ---- ---
First Quarter 8 1/2 5 5/8
(ended May 31, 1996)
Second Quarter 14 1/2 7 1/4
(ended August 31, 1996)
Third Quarter 24 1/8 13 13/16
(ended November 30, 1996)
Fourth Quarter 26 7/8 15 5/8
(ended February 28, 1997)
</TABLE>
As of May 22, 1998, there were approximately 210 stockholders of
record and approximately 7,000 beneficial owners of the Company's common stock,
according to information provided by the Company's transfer agent.
The Company has never declared or paid any cash dividends on its
common stock and does not intend to do so in the foreseeable future. It is the
present intention of the Company to retain any future earnings to provide funds
for the operation and expansion of its business. In addition, the Company has
an unsecured committed revolving credit facility with a commercial bank that
will expire on September 30, 1998, unless it is renewed. See "Management's
28
<PAGE> 29
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Note 5 of Notes to Consolidated Financial
Statements. During the term of the facility, the Company is subject to a
covenant not to declare or pay cash dividends to holders of its common stock.
Future payment of cash dividends, if any, will be at the discretion of the
Board of Directors and will be dependent upon the Company's financial
condition, results of operations, capital requirements and such other factors
as the Board of Directors may deem relevant, and will be subject to the
covenants contained in the credit facility.
Recent Sale of Unregistered Securities
As previously reported by the Company in its Current Report on Form 8-K
dated February 13, 1998, on that date, the Company, through its indirect,
wholly-owned subsidiary, Manugistics Nova Scotia Company ("Manugistics Nova
Scotia"), a Nova Scotia unlimited liability company, acquired all of the then
outstanding capital stock of ProMIRA Software Incorporated ("ProMIRA"), a Nova
Scotia company (such transaction being referred to as the "Acquisition")
pursuant to a certain Stock Purchase Agreement (the "Stock Purchase Agreement")
which was privately negotiated among the parties thereto.
In connection with the purchase and sale of the ProMIRA capital stock and
the cancellation of outstanding options to purchase ProMIRA stock, Manugistics
Nova Scotia paid or delivered to or for the benefit of the holders of ProMIRA
capital stock and options (the "ProMIRA Sellers") the following: cash in the
aggregate amount of approximately $5,300,000 (Cdn. $7,633,330); and an
aggregate of 1,550,000 shares of the Company's Common Stock (the "Shares"). In
addition, the Company issued to ProMIRA Sellers options to purchase a total of
78,379 shares of the Company's Common Stock. The options were issued under the
Company's Employee Stock Option Plan and vest and become exercisable in
installments of 25% per year commencing twelve months after the date of the
grant of the option. Each option has an exercise price of $43.75 per share.
An aggregate of 561,533 of the Shares were issued to a total of 22 persons
then resident in the United States. Options to purchase an aggregate of 20,750
shares of Common Stock were issued to a total of 7 persons then resident in the
United States. Such Shares and options were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder.
(The balance of the Shares and options were issued to persons then resident in
Canada or the United Kingdom and were not registered under the Securities Act
in reliance upon Regulation S thereunder.) The Stock Purchase Agreement and a
related Registration Rights Agreement imposed certain restrictions on the
resale and other transfers of the Shares necessary to make the Regulation D and
Regulation S exemptions available. No underwriters were involved in connection
with the sale of the Shares under the Stock Purchase Agreement. In accordance
with the terms of the Registration Rights Agreement, the Company subsequently
registered the Shares for resale on Form S-3 under the Securities Act.
29
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA.
Selected consolidated financial data with respect to the Company for
each of the five fiscal years in the period ended February 28, 1998 are set
forth below. This data should be read in conjunction with the Consolidated
Financial Statements of the Company and related Notes thereto for the
corresponding periods, which are contained in Part IV of this Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended February 28 or 29,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software products $ 105,018 $ 51,186 $ 29,494 $ 24,758 $ 19,590
Consulting, maintenance
and other services 70,648 43,944 32,828 24,652 18,371
----------- --------- --------- --------- ---------
Total revenues 175,666 95,130 62,322 49,410 37,961
Operating expenses:
Cost of software sold 11,031 4,940 2,974 2,842 2,878
Cost of consulting, maintenance
and other services 32,652 19,101 14,614 12,990 9,518
Sales and marketing 64,194 32,909 21,365 16,580 13,374
Product development 31,665 17,380 11,229 7,550 5,011
General and administrative 13,959 8,817 6,080 5,130 3,714
Purchased research and development (1) 47,340 3,697 - - -
----------- --------- --------- --------- ---------
Total operating expenses 200,841 86,844 56,262 45,092 34,495
----------- --------- --------- --------- ---------
(Loss) income from operations (25,175) 8,286 6,060 4,318 3,466
Other income - net 2,828 1,016 1,097 643 146
----------- --------- --------- --------- ---------
(Loss) income before income taxes (22,347) 9,302 7,157 4,961 3,612
(Benefit) provision for income taxes (9,064) 4,960 2,709 1,740 1,460
----------- --------- --------- --------- ---------
Net (loss) income $ (13,283) $ 4,342 $ 4,448 $ 3,221 $ 2,152
=========== ========= ========= ========= =========
Basic (loss) income per share $ (0.57) $ 0.20 $ 0.22 $ 0.16 $ 0.13
=========== ========= ========= ========= =========
Shares used in basic share
computation (2) 23,151 21,324 20,602 19,677 16,867
=========== ========= ========= ========= =========
Diluted (loss) income per share $ (0.57) $ 0.19 $ 0.21 $ 0.16 $ 0.12
=========== ========= ========= ========= =========
Shares used in diluted share
computation (2) 23,151 22,826 21,628 20,575 18,441
=========== ========= ========= ========= =========
</TABLE>
(1) During fiscal 1998 and 1997, the Company incurred non-recurring charges to
operations totaling $47.3 million ($28.6 million, net of $18.7 million tax
benefit) and $3.7 million, respectively, in connection with the write-off
of purchased research and development which had not yet reached
technological feasibility and had no alternative future use. The impact of
these charges on basic and diluted (loss) income per share was $1.24 and
$1.16, respectively, in fiscal 1998, and $.17 and $.16, respectively, in
fiscal 1997. Excluding the effect of these non-recurring, non-cash charges,
basic and diluted income per share would have been $.67 and $.59,
respectively, in fiscal 1998, and $.37 and $.35, respectively, in fiscal
1997.
(2) Gives effect to (i) the issuance of 379,747 shares of Series B Convertible
Preferred Stock on June 7, 1993; and (ii) the automatic conversion of all
outstanding shares of Series A and B Convertible Preferred Stock into
shares of common stock during fiscal 1994.
<TABLE>
<CAPTION>
February 28 or 29,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 95,011 $ 32,499 $ 29,201 $ 30,484 $ 21,274
Total assets 222,501 84,323 60,431 49,759 34,665
Long-term debt, less current portion 235 220 182 337 528
Total stockholders' equity 172,079 53,593 42,942 36,512 24,899
</TABLE>
30
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Manugistics Group, Inc. ("Manugistics" or the "Company") develops,
markets and supports software products for synchronized supply chain management
(TM) and provides related services. Synchronized supply chain management refers
to managing the complex interactions involved in the flows of products through
the supply chain. It involves forecasting product demand and coordinating the
timing of distribution, manufacturing, procurement and transportation
activities to meet this demand, not only across an entire enterprise, but also
among an enterprise and its suppliers and customers. The Company provides an
integrated suite of strategic, tactical and operational supply chain software
planning products, including a high-level optimizer, that address the four key
operational areas of supply chain management: demand planning, supply planning,
manufacturing scheduling and transportation management. The Company derived
approximately 98%, 96% and 91% of its revenues in fiscal 1998, 1997 and 1996,
respectively, from it's supply chain management software and services.
Additionally, the Company markets and supports the STATGRAPHICS personal
systems product, which provides statistical tools for quality management in
manufacturing companies.
RESULTS OF OPERATIONS
REVENUES:
Software products. The Company's software products license revenues
increased to approximately 60% and 54% of total revenues in fiscal 1998 and
1997, respectively, from 47% in fiscal 1996, primarily because the Company's
increased sales and marketing efforts for supply chain management were
effective, because of increased market acceptance of such products, and because
the Company increased its resources devoted to generating software products
license revenues more rapidly than its resources for producing services
revenues. See "Operating Expenses." Although the percentage of total revenues
represented by software products license revenues has varied in the past and is
likely to continue to vary, the Company anticipates that software products
license revenues are likely to represent 55% to 60% of total revenues for
fiscal 1999. See "Forward Looking Statements."
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
------------------------------------------------------
1998 Change 1997 Change 1996
-------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Supply chain management $102,255 112% $ 48,230 92% $ 25,070
Percentage of total revenues 58.2% 50.7% 40.2%
Personal systems and other $2,763 -7% $ 2,956 -33% $ 4,424
Percentage of total revenues 1.6% 3.1% 7.1%
---------- --------- ---------
Total software products revenues $105,018 105% $ 51,186 74% $ 29,494
Percentage of total revenues 59.8% 53.8% 47.3%
</TABLE>
Supply chain management. Software products license revenues increased
in fiscal 1998 and 1997 because of increases in both the number of licenses and
the average license fee per transaction. This growth resulted from increases in
the Company's sales and marketing resources, increases in the Company's sales
productivity, higher contributions from the
31
<PAGE> 32
Company's international operations (which grew to 26% and 24% of total software
revenues in fiscal 1998 and 1997, respectively, from 20% in 1996), and
expansion into new vertical industries. Software products license revenues also
increased because of increased market acceptance of the Company's products,
including its recently introduced products and the latest versions of
established products. This increased acceptance resulted in part from the
recognition by prospects and customers that they could rapidly realize
significant benefits from effective supply chain management, which led some
companies to license more of the Company's products or to amend their existing
licenses to permit a greater number of users.
The Company has historically derived the substantial majority of its
software products license revenues from direct sales. However, the Company has
embarked on a strategy of expanding its product distribution through alliances
with complementary vendors which also led to additional software products
license revenues during fiscal 1998 and 1997. This strategy of developing
alliances is still in its early stages and the number of software license
transactions involving complementary vendors has been relatively small and has
fluctuated. The Company anticipates that software products license revenues
derived from indirect sales by these complementary vendors will continue to
fluctuate. See "Risk Factors" and "Forward Looking Statements."
Personal systems. Software products license revenues decreased
slightly in fiscal 1998 primarily because the Company decreased the resources
dedicated to STATGRAPHICS and because many prospective customers selected
competing products. As a percentage of total revenues, personal systems
software products license revenues decreased to less than 2%. Software
products license revenues decreased in fiscal 1997 primarily because the
Company sold the assets of its APL-PLUS business in fiscal 1996. The Company
believes that demand for STATGRAPHICS will continue to decrease. See "Forward
Looking Statements."
Consulting, maintenance and other services. Revenues from consulting,
maintenance and other services increased in fiscal 1998 and 1997 principally as
a result of increased demand for supply chain management consulting and
maintenance services from a growing base of customers that have licensed the
Company's supply chain management software.
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
----------------------------------------------------
1998 Change 1997 Change 1996
-------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Supply chain management $ 69,911 62% $ 43,120 36% $ 31,629
Percentage of total revenues 39.8% 45.5% 50.8%
Personal systems and other $737 -11% $824 -31% $ 1,199
Percentage of total revenues 0.4% 0.9% 1.9%
-------- --------- ---------
Total consulting, maintenance
and other services revenues $ 70,648 61% $ 43,944 34% $ 32,828
Percentage of total revenues 40.2% 46.4% 52.7%
</TABLE>
Supply chain management. Revenues from consulting and other services
increased in fiscal 1998 and 1997 because of: (1) new clients licensing
increased numbers of products and users, which generally leads to
implementation and other consulting services, and (2) established clients
licensing additional products and users, which also generates further demand
for consulting services. Consulting revenues also increased in fiscal 1998 due
to additional contributions from the Company's international operations,
including consulting services provided by employees who joined the Company in
June 1997 in connection with the Company's acquisition of Synchronology Group
Limited ("SGL"). See Note 4 of Notes to the Consolidated Financial Statements.
32
<PAGE> 33
Maintenance revenues increased in fiscal 1998 and 1997 following the
increase in the installed base of customers that have licensed the Company's
software products and entered into maintenance contracts. Maintenance revenues
tend to track software products sold in prior periods. In the past three fiscal
years, approximately 90% to 95% of customers with maintenance contracts have
renewed these contracts.
Personal systems. Consulting, maintenance and other services revenues
decreased in fiscal 1998 and 1997 because of a decline in maintenance revenues.
This decline followed the erosion of the installed base of STATGRAPHICS users,
which resulted from customers and prospective customers having selected
competing products, and the Company's sale of the assets of its APL-PLUS
business in fiscal 1996.
OPERATING EXPENSES:
General. In fiscal 1999, the Company plans to continue to incur
relatively high levels of both sales and marketing expenditures and product
development expenditures as it pursues its strategies of expanding its business
into new geographic and vertical markets, expanding its distribution through
alliances, and rapidly developing and delivering new product features and
functions. The percentage of revenues represented by these items may vary
because the Company's total quarterly and annual revenues have varied in the
past and are likely to continue to vary. Also, the percentages of revenues
represented by sales and marketing expenses, product development and the cost
of services can be affected by the total amount of expenses associated with new
employees and by the timing delays between the dates that these employees begin
work and the dates they first become productive after training. See "Forward
Looking Statements."
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
-------------------------------------------------------
1998 Change 1997 Change 1996
---------- -------- -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cost of software sold $ 11,031 123% $ 4,940 66% $ 2,974
Percentage of total revenues 6.3% 5.2% 4.8%
Cost of consulting, maintenance
and other services $ 32,652 71% $ 19,101 31% $ 14,614
Percentage of total revenues 18.6% 20.1% 23.4%
Sales and marketing $ 64,194 95% $ 32,909 54% $ 21,365
Percentage of total revenues 36.5% 34.5% 34.3%
Product development $ 31,665 82% $ 17,380 55% $ 11,229
Percentage of total revenues 18.0% 18.3% 18.0%
General and administrative $ 13,959 58% $ 8,817 45% $ 6,080
Percentage of total revenues 7.9% 9.3% 9.8%
---------- ----------- ---------
Total operating expenses excluding
purchased research and development $ 153,501 85% $ 83,147 48% $ 56,262
Percentage of total revenues 87.3% 87.4% 90.3%
--------- ----------- ---------
Purchased research and development $ 47,340 $3,697 $ -
Percentage of total revenues 27.0% 3.9% -
--------- ----------- ---------
Total operating expenses $ 200,841 131% $ 86,844 54% $ 56,262
Percentage of total revenues 114.3% 91.3% 90.3%
</TABLE>
33
<PAGE> 34
Cost of software sold. Cost of software sold includes: 1) amortization
of capitalized software development costs, and 2) cost of goods and other,
which includes royalty fees associated with third-party software included with
Manugistics software that is licensed to customers. The Company amortizes
internal computer software development costs over the product's estimated
economic life, generally two years, commencing when a product is first
available for general commercial release. The Company amortizes purchased
capitalized software development costs over a product's estimated economic
life, generally two to five years.
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
----------------------------------------------------
1998 Change 1997 Change 1996
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Amortization of capitalized software $ 7,560 113% $ 3,543 59% $ 2,228
Percentage of software products license revenues 7.2% 6.9% 7.6%
Cost of goods and other $ 3,471 148% $ 1,397 87% $ 746
Percentage of software products license revenues 3.3% 2.7% 2.5%
--------- --------- ---------
Cost of software sold $ 11,031 123% $ 4,940 66% $ 2,974
Percentage of software products license revenues 10.5% 9.6% 10.1%
</TABLE>
The cost of software sold increased in fiscal 1998 and 1997 because
amortization increased following the general commercial release of additional
supply chain management software products for which costs had previously been
capitalized, and because cost of goods and other increased. The amortization of
capitalized software development costs has increased in recent years as the
Company has increased its gross product development expenditures for supply
chain management software. See "Product Development." Amortization also
increased because the Company wrote off approximately $1.9 million and $.3
million in fiscal 1998 and 1997, repectively, of capitalized costs relating to
the development of certain prior versions of its software products which the
Company determined exceeded the future net realizable value as a result of new
technologies developed by the Company or acquired in connection with
acquisitions. Cost of goods and other expenses increased in fiscal 1998 and
1997 primarily because of the increase in royalty fees as the number of
licenses to customers involving third party software increased.
Cost of consulting, maintenance and other services. The cost of
consulting, maintenance and other services increased in fiscal 1998 and 1997
primarily because the Company added personnel (including SGL employees) to meet
increased demand for its consulting and maintenance services which resulted
from the increased demand for the Company's software products. These additional
employees helped generate the corresponding increase in supply chain management
revenues from consulting, maintenance and other services.
As a percentage of consulting, maintenance and other services
revenues, the cost of consulting, maintenance and other services increased in
fiscal 1998 mainly because of the amount of expenses associated with new
employees and because of the timing delays between the dates that these
employees began work and the dates they first become productive after training.
In fiscal 1997, the cost of consulting, maintenance and other services
decreased as a percentage of consulting, maintenance and other services
revenues largely because a portion of
34
<PAGE> 35
the increase in corresponding revenues was generated by product maintenance and
support, which can be provided more efficiently by serving a larger client
base, and because of improved utilization of the Company's consulting
employees.
Sales and marketing. Sales and marketing expenses increased in fiscal
1998 and 1997 primarily because the Company added sales and marketing resources
in North and South America, Europe and the Asia/Pacific region, and incurred
higher commissions as a result of increased software products license revenues.
In addition, the Company incurred costs to establish new offices or build up
its presence in certain foreign markets, and increased its marketing expenses
in connection with these new foreign markets and with its expanded product
offerings (See "Strategy"). As a percentage of total revenues, sales and
marketing expenses increased in fiscal 1998 and 1997 principally because these
expenses increased at a more rapid rate than total revenues. As it pursues its
strategy of expanding its business into new geographic markets, new industries
and expanded distribution channels, the Company is continuing to hire and train
additional sales and marketing employees and to make other sales and marketing
expenditures. See "Forward Looking Statements."
Product development. The Company records product development expenses
net of capitalized software development costs for products which have reached
technological feasibility.
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
-------------------------------------------------
1998 Change 1997 Change 1996
--------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Gross product development costs $ 41,053 69% $ 24,223 50% $16,144
Percentage of total revenues 23.4% 25.5% 25.9%
Less: Capitalized prod. dev. costs $ 9,388 37% $ 6,843 39% $ 4,915
Percentage of gross prod. dev. costs 22.9% 28.3% 30.4%
--------- --------- --------
Product development expenses $ 31,665 82% $ 17,380 55% $11,229
Percentage of total revenues 18.0% 18.3% 18.0%
</TABLE>
Gross product development costs for fiscal 1998 and 1997 increased
primarily because the Company employed more developers of supply chain
management software. The Company hired these developers to develop new software
products and new versions of existing products, and to incorporate new
technologies into the Company's product offerings. In fiscal 1998 and 1997, as
a percentage of total revenues, gross product development costs decreased
largely because these expenses did not increase as rapidly as total revenues.
The Company plans to continue to make significant product development
expenditures in fiscal 1999 as it pursues its strategy of rapidly developing
and delivering new products, features, functions and integration to software
products of other vendors. See "Forward Looking Statements."
General and administrative. General and administrative expenses
increased in fiscal 1998 and 1997 primarily because of increased expenses
associated with supporting an organization with more employees and a greater
geographic scope. As a percentage of total revenues, general and administrative
expenses decreased in fiscal 1998 and 1997 because these expenses did not
increase as rapidly as total revenues, in part because the Company was able to
leverage its base of administrative resources to support a larger
organizational structure.
35
<PAGE> 36
Purchased research and development. During the fourth quarter of
fiscal 1998, the Company acquired all of the outstanding capital stock of
ProMIRA Software, Inc. ("ProMIRA"), a provider of supply chain planning
software for manufacturers of complex products in industries such as high
technology, electronics and motor vehicles and parts. In that quarter, the
Company recorded a non-recurring charge to operations totaling $47.3 million
($28.6 million, net of an income tax benefit of $18.7 million) to write off
purchased research and development which had not yet reached technological
feasibility and had no alternative future use. The impact on basic and diluted
income per share for fiscal 1998 was $1.24 and $1.16, respectively. In
addition, during the first quarter of fiscal 1997, the Company acquired all of
the outstanding capital stock of Avyx, Inc. ("Avyx"), a developer and services
provider of custom manufacturing scheduling software. The Company recorded a
non-recurring charge to operations of $3.7 million ($.17 and $.16 basic and
diluted income per share, respectively) to write off purchased research and
development which had not yet reached technological feasibility and had no
alternative future use. See Note 4 of Notes to Consolidated Financial
Statements.
(LOSS) INCOME FROM OPERATIONS:
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
-------------------------------------------------------
1998 Change 1997 Change 1996
--------- -------- -------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Income from operations excluding
purchased research and development $ 22,165 85% $ 11,983 98% $6,060
Percentage of total revenues 12.6% 12.6% 9.7%
Purchased research and development $(47,340) $ (3,697) $ -
Percentage of total revenues N/M N/M
---------- ---------- -------
(Loss) income from operations $(25,175) N/M $ 8,286 37% $6,060
Percentage of total revenues N/M 8.7% 9.7%
</TABLE>
OTHER INCOME - NET:
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
-------------------------------------------------
1998 Change 1997 Change 1996
------ -------- -------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Other income - net $2,828 178% $1,016 -7% $1,097
Percentage of total revenues 1.6% 1.1% 1.8%
</TABLE>
Other income-net includes income from short term investments, interest
income and expense, foreign currency exchange gains or losses, and other gains
or losses. Other income increased in fiscal 1998 primarily due to greater
interest income generated from short-term investments following the investment
of the net proceeds of the public offering of common stock completed in August
1997. In future quarters, the investment of these proceeds will continue to
generate income, pending their application to other uses. Other income
decreased slightly in fiscal 1997 over 1996 because of slight changes in the
various components.
36
<PAGE> 37
PROVISION FOR INCOME TAXES:
The Company recorded a loss in fiscal 1998 as a result of the
write-off of purchased research and development associated with the acquisition
of ProMIRA. As a result of this non-recurring charge, the Company recorded an
income tax benefit of $18.7 million. In fiscal 1997, the effective tax rate
represented by the Company's provision for income taxes was approximately 53%,
primarily because the expenses associated with the Company's write-off of
purchased research and development from the purchase of Avyx were not
deductible for tax purposes. Excluding the effect of this write-off on taxable
income, the effective tax rate for fiscal 1997 would have been approximately
38%. Management of the Company believes that, in fiscal 1999, the effective
tax rate of the Company on a consolidated basis is likely to be approximately
39%, excluding non-recurring charges recorded in connection with acquisitions
or other transactions. This estimate is based on current domestic and foreign
tax law and is thus subject to change. See "Forward Looking Statements" and
Note 9 of Notes to Consolidated Financial Statements.
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE:
<TABLE>
<CAPTION>
Fiscal year ended February 28 or 29,
--------------------------------------------------------
1998 Change 1997 Change 1996
---------- ---------- -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net income excluding purchased research
and development $ 15,370 $ 8,039 $ 4,448
Percentage of total revenues 8.7% 91% 8.5% 81% 7.1%
Less: Purchased research and development,
net of tax benefit in 1998 $(28,653) $(3,697) $ -
--------- -------- --------
Net (loss) income $(13,283) N/M $ 4,342 -2% $ 4,448
Percentage of total revenues N/M 4.6% 7.1%
========= ======== ========
Basic income per share, excluding purchased
research and development $ 0.67 81% $ 0.37 68% $ 0.22
Purchased research and development,
per basic share $ (1.24) $ (0.17) $ -
--------- -------- --------
Basic (loss) income per share $ (0.57) N/M $ 0.20 -9% $ 0.22
========= ======== ========
Shares used in basic share computation 23,151 21,324 20,602
========= ======== ========
Diluted (loss) income per share $ ($0.57) N/M $ 0.19 -10% $ 0.21
========= ======== ========
Shares used in diluted share computation 23,151 22,826 21,628
========= ======== ========
</TABLE>
37
<PAGE> 38
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
February 28 or 29,
----------------------------------------------------------------
1998 Change 1997 Change 1996
----------- ---------- ----------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 95,011 192% $ 32,499 11% $ 29,201
Cash, cash equivalents
and marketable securities $ 81,941 270% $ 22,174 -6% $ 23,479
</TABLE>
The Company has historically financed its growth primarily through
funds generated from operations and through proceeds from offerings of capital
stock. The increase in working capital at February 28, 1998 and 1997 resulted
principally from increases in (1) the Company's cash and marketable securities,
largely as a result of the Company's sale of 1.6 million shares of common stock
in August 1997, (2) the Company's cash flows from operations and (3) accounts
receivable, which resulted from the increases in software products and services
revenues, and which more than offset decreases resulting from the Company's
payments in connection with the agreement with IRI in March 1997, the
acquisition of SGL in June 1997 and the acquisition of ProMIRA in February
1998. See Note 4 of Notes to Consolidated Financial Statements.
The Company's operating activities provided cash of $29.6 million,
$14.2 million and $9.4 million in fiscal 1998, 1997 and 1996, respectively.
Operating cash flows increased in fiscal 1998 primarily because the increase in
operating income before non-cash expenses (including the write-off of purchased
research and development in connection with the acquisition of ProMIRA in
February 1998 and depreciation and amortization) and increases in accounts
payable, accrued liabilities and accrued compensation more than offset
increases in accounts receivable, non-cash expenses and deferred income taxes.
Operating cash flows increased in fiscal 1997 largely because the cash flows
resulting from net income were augmented by increases in non-cash expenses and
increases in deferred revenues, accrued compensation, other accrued liabilities
and income taxes payable, and were not fully offset by increases in accounts
receivable.
At February 28, 1998, accounts receivable were $58.2 million, compared
to $37.1 million at February 28, 1997, primarily as a result of increases in
the number and size of software license transactions. Deferred revenue
increased from $13.8 million to $18.0 million, principally because of growth in
deferred maintenance revenue as a result of increased licensing activity. At
February 28,1997, accounts receivable were $37.1 million, compared to $19.3
million at February 29, 1996, primarily as a result of increases in the number
and size of software license transactions. Deferred revenue increased from $6.7
million to $13.8 million because of growth in software licensing activity and
increases in related services and maintenance revenue.
Investing activities used cash of $85.2 million, $13.5 million and
$9.6 million in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998,
investing activities used cash largely as a result of the purchase of
marketable securities using proceeds from the public offering of common stock
completed in August 1997. In fiscal 1998 and 1997, sales of marketable
securities provided cash, but the amounts provided were more than offset by
cash used for purchases of marketable securities, property and equipment,
capitalization of software development costs and acquisitions. The Company had
expenditures for property and equipment of approximately $15.9 million in
fiscal 1998. The Company anticipates expenditures for property and equipment
commensurate with its anticipated growth in fiscal 1999. See "Forward Looking
Statements." The Company also used cash to acquire ProMIRA and SGL, and to
enter into an agreement with IRI.
38
<PAGE> 39
Financing activities provided cash of $66.7 million, $2.4 million and
$0.7 million, in fiscal 1998, 1997 and 1996, respectively. In fiscal 1998, cash
from financing activities was derived primarily from the sale of 1.6 million
shares of common stock in an underwritten public offering in August 1997, from
exercises of employee stock options and from the sale of shares pursuant to the
Company's employee stock purchase program. In fiscal 1997, cash from financing
activities was derived primarily from exercises of employee stock options and
from the sale of shares pursuant to the Company's employee stock purchase
program. See Note 6 of Notes to Consolidated Financial Statements.
In February 1998, the Company issued 1.55 million shares of common
stock, in connection with the acquisition of ProMIRA. The Company also paid
$5.3 million in cash. The Company accounted for the acquisition as a purchase
transaction and recognized a non-recurring, non-cash charge of $47.3 million to
write off purchased research and development. In June 1997, the Company
acquired all of the outstanding stock of SGL for $2.8 million in cash. The
Company accounted for the acquisition as a purchase transaction. In March 1997,
the Company entered into agreements with IRI (the "IRI Agreement") relating to
the Company's possible acquisition of certain assets of IRI and the development
of a solution that will incorporate IRI's point-of-sale scanner data into the
Company's supply chain management software. Under the agreements, the Company
paid $1.5 million to IRI.
Under the IRI Agreements, the Company agreed to market IRI's
point-of-sale data and received 10-year, exclusive rights among supply chain
software vendors in most geographic markets to incorporate these data. The
Company and IRI agreed to resell certain of each other's products, and the
Company might acquire certain additional assets of IRI (subject to the
satisfaction of certain contingencies).
As part of these agreements, the Company committed that it will
generate a minimum of $16.5 million in revenues for IRI from specified products
over several years, beginning after the occurrence of certain events. This
commitment is subject to the satisfaction of significant contingencies
specified in the agreements. Certain issues have arisen between the Company and
IRI relating to the satisfaction of these contingencies. The Company
currently anticipates satisfactory resolution of these issues and believes
that it will be able to produce a sufficient amount of qualifying revenues to
satisfy its commitment. However, if the Company is unable to generate the
minimum annual revenues, to the extent required under the agreements, it will
be obligated to pay to IRI from its own funds an amount equal to the difference
between the qualifying revenues generated and the required minimum, which could
result in a material decrease in working capital. See "Forward Looking
Statements."
39
<PAGE> 40
The Company has an unsecured committed revolving credit facility with
a commercial bank. Under the terms of the facility, the Company may request
advances in the aggregate amount of up to $10 million. The Company may make
borrowings under the facility for short-term working capital purposes or for
acquisitions (acquisition-related borrowings are limited to $7.5 million per
acquisition). The facility contains certain financial covenants that the
Company believes are typical for a facility of this nature and amount. This
facility will expire in September 1998, unless renewed. There were no amounts
outstanding under this facility at February 28, 1998.
The Company is continuing to take steps to ensure its products,
internal systems and infrastructure are Year 2000 compliant. The Company
released an enhancement (as part of its normal product development efforts) to
its supply chain management software products in the quarter ending May 31,
1998 that is the Company's Year 2000 compliant release. In addition, its
efforts have included testing, replacing and updating these systems. Based
upon actual experience to date, the Company continues to evaluate the estimated
costs associated with these efforts. While final cost estimates are not
complete, the Company presently believes that it will be able to manage its
total Year 2000 transition without any material adverse effect on its results
of operations or financial condition. The Company has expensed approximately
$200,000 of Year 2000 costs through fiscal 1998 and estimates that it will
incur $1,000,000 and $300,000 of additional expenses in fiscal 1999 and 2000,
respectively.
The Company investigates potential candidates for acquisition, joint
venture opportunities or other relationships on an ongoing basis. Depending on
certain factors, including the amount, nature, method and timing of the
consideration to be paid by the Company, any such acquisitions, transactions or
relationships might result in a decrease in working capital.
The Company believes that existing cash balances, marketable
securities, funds generated from operations and amounts available under the
revolving credit facility will be sufficient to meet its anticipated liquidity
and working capital requirements for the next 12 to 18 months. If the Company
decides to expand its operations more rapidly, to broaden or enhance its
products more rapidly, to acquire businesses or technologies or to make other
significant expenditures to respond to market opportunities or competitive
pressures, then the Company may need additional funds at an earlier time.
40
<PAGE> 41
The Company believes that inflation did not have a material effect on
its results of operations in fiscal 1998.
FORWARD LOOKING STATEMENTS.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section and the "Business" section of this Annual Report
on Form 10-K contains certain forward looking statements that are subject to a
number of risks and uncertainties. In addition, the Company may publish or make
forward looking statements from time to time relating to such matters as
anticipated financial performance, business prospects and strategies, sales and
marketing strategies, markets, current and potential competition, technological
developments, new products, research and development activities, acquisition
activities, partnerships and alliances and similar matters. The Private
Securities Litigation Reform Act of l995 provides a safe harbor for forward
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward looking statements in
this Annual Report or elsewhere in the future. The risks and uncertainties that
may affect the business, operating results or financial condition of the
Company include those set forth above under "Risk Factors" and the following:
Revenues for any period depend on the volume, timing and size of
license agreements. The Company typically ships software products shortly after
license agreements are signed, and, therefore, does not maintain any material
contract backlog. The timing of license agreements is difficult to forecast
because software sales cycles are affected by the size of transactions and
other external factors such as general domestic and international business or
economic conditions or competitors' actions. A small variation in the timing of
software licensing transactions, particularly near the end of any quarter or
year, can cause significant variations in software products license revenues in
any period.
The Company believes that the market for supply chain management
software is expanding rapidly. However, if market demand for the Company's
products does not continue to grow rapidly, because of such factors as adverse
changes in domestic or international business and economic conditions or
foreign currency exchange rates, the timely availability and acceptance of the
Company's products, technological change or the effect of competitive products
and pricing, software license revenue growth and consulting, maintenance and
other services revenue growth, margins, or both could be adversely affected. If
competitors make acquisitions of other competitors or establish cooperative
relationships among themselves or with third parties to enhance the ability of
their products to address the supply chain management needs of prospects and
customers, or if certain ERP or other software vendors that have announced
plans to develop or incorporate functionality that could compete with the
Company's products successfully develop and market such functionality, software
license revenue growth could be adversely affected.
There can be no assurance that the Company will be able to attract
complementary software vendors, consulting firms or other organizations that
will be able to market the Company's products effectively or that will be
qualified to provide timely and cost-effective customer support and services.
In addition, there can be no assurance that any organization will continue its
involvement with the Company and its products, and the loss of relationships
with important organizations could materially adversely affect the Company's
results of operations.
41
<PAGE> 42
The timing of releases of the Company's software products can be
affected by client needs, marketplace demands and technological advances.
Development plans frequently change, and it is difficult to predict with
accuracy the release dates for products in development, which could materially
adversely affect the Company's results of operations.
The Company has recently hired a significant number of employees. In
order to maintain its ability to grow in the future, the Company will be
required to increase significantly its total number of employees, sometimes in
anticipation of increased revenues. There can be no assurance that it will be
able to do so successfully.
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 97-2, which supercedes SOP
91-1. SOP 97-2 addresses software revenue recognition and is effective for
transactions entered into for fiscal years beginning after December 15, 1997.
The Company believes, based upon its interpretation of SOP 97-2, that its
current revenue recognition policies and practices are materially consistent
with the SOP in all material respects. However, guidelines for implementation
of this SOP have not yet been issued, and the accounting profession is
discussing a wide range of possible interpretations of the requirements of SOP
97-2. Any such guidelines for implementation, if and when issued, could lead to
unanticipated changes in the Company's current revenue recognition policies and
practices. Such changes could materially adversely affect the Company's future
reported revenues and earnings. See Note 1 of Notes to Consolidated Financial
Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and supplementary
data, together with the report of Deloitte & Touche LLP, independent auditors,
are included in Part IV of this Form 10-K. Reference is made to the "Index to
Consolidated Financial Statements" on page 44.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
42
<PAGE> 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information set forth in the definitive Proxy
Statement relating to the 1998 Annual Meeting of Stockholders (to be filed with
the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year ended February 28, 1998) (the "Proxy Statement") under
the caption "Election of Directors," and to the information set forth in Part I
of this Annual Report on Form 10-K regarding executive officers under the
caption "Item 4A. Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information set forth in the Proxy Statement
under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Reference is made to the information set forth in the Proxy Statement
under the caption "Ownership of Manugistics Group, Inc. Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information set forth in the Proxy Statement
under the caption "Certain Business Relationships."
43
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Report:
(1) Financial Statements:
<TABLE>
<CAPTION>
Page Number
In This Report
--------------
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
The financial statements listed above and the financial statement
schedule listed below are filed as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedule:
(A) Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
Schedules other than the one listed above are omitted because they are
not required or are not applicable, or the required information is shown in the
consolidated financial statements or notes thereto contained in this Annual
Report on Form 10-K.
44
<PAGE> 45
(3) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed below
and are filed or incorporated by reference as part of this Annual Report on
Form 10-K. Exhibits 10.1, 10.2, 10.11, 10.12 and 10.15 are compensatory
plans required to be filed as exhibits pursuant to Item 14(c) of this report.
<TABLE>
<CAPTION>
Number Notes Description
- ------ ----- -----------
<S> <C> <C>
3.1(a) (A) Amended and Restated Certificate of Incorporation of the Company.
3.1(b) (B) Certificate of Retirement and Elimination (relating to the Series
A and Series B preferred stock of the Company)
3.1(c) (C) Certificate of Amendment to Amended and Restated Certificate
of Incorporation of the Company (effective July 29, 1997)
3.2 (A) Amended and Restated By-Laws of the Company.
10.1 (I) Employee Incentive Stock Option Plan of the Company, as amended.
10.2 (I) Employee Stock Option Plan of the Company, as amended.
10.3 (A) Form of Notice of Grant of Option pursuant to the Director Stock Option Plan. (previously identified as
Exhibit 10.4)
10.7 (A) Lease Agreement dated May 1, 1992 between the Company and GTE Realty Corporation.
10.7(a) (E) First Amendment to Lease Agreement dated July 19, 1993 between the Company and GTE Realty Corporation.
10.7(b) (E) Second Amendment to Lease Agreement dated April 13, 1994 between the Company and East Jefferson Associates.
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C> <C>
10.7(c) (E) Third Amendment to Lease Agreement dated May 1, 1994 between the Company and East Jefferson Associates.
10.7(d) (E) Fourth Amendment to Lease Agreement dated February 27, 1995 between the Company and East Jefferson Associates.
10.7(e) (K) Fifth Amendment to Lease Agreement dated September 6, 1996 between the State of Maryland
and the Company
10.7(f) (K) Sixth Amendment to Lease Agreement dated October 10, 1996 between the State of Maryland
and the Company
10.7(g) (K) Seventh Amendment to Lease Agreement dated April 25, 1997 between the State of Maryland
and the Company
10.8 Lease Agreement dated March 26, 1998 between Manugistics, Inc. and Washingtonian North Associates
Limited Partnership
10.11 (D) Outside Directors Non-Qualified Stock Option Plan
10.12 (D) Executive Incentive Stock Option Plan
10.15 (F) Employee Stock Purchase Plan of the Company (previously identified as Exhibit
10.14)
10.17 (G) Sublease dated May 5, 1995 between the Company and NationsBank, N.A., as amended
10.18 (H) Agreement and Plan of Merger dated May 24, 1996 between Avyx, Inc., Manugistics
Acquisition, Inc. and the Company
10.19 (H) Consulting Agreement dated May 24, 1996 between The Kendall Group, Inc. and the Company
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C>
10.20 (H) Confidentiality, Non-Competition and Non-Solicitation Agreement dated May 24, 1996 between the Company and
John K. Willoughby and JoAnne Gardner
10.21 (J) Financing Agreement dated as of September 30, 1996 by and among the Company and
NationsBank, N.A.
10.22 (J) Form of Revolving Promissory Note dated September 30, 1996 by the Company in favor of
NationsBank, N.A.
10.23 (K) Sublease Agreement between CTA Incorporated and the Company dated May 23, 1996
10.24 (K)(i) Data Marketing and Guaranteed Revenue Agreement dated March 7, 1997 between the Company
and Information Resources, Inc.
10.25 (K)(i) Asset Purchase Agreement dated March 7, 1997 between Manugistics, Inc., Manugistics
Services, Inc., IRI Logistics, Inc. and Information Resources, Inc.
10.26 (L) Sale and Purchase Agreement dated 7th June 1997 between M.C. Harrison, J.E. Harrison,
Manugistics U.K. Limited and Manugistics Group, Inc.
10.27 (M) Stock Purchase Agreement dated February 13, 1998 between Manugistics Nova Scotia
Company and ProMIRA Software Incorporated, et al.
21 Subsidiaries of the Company
23 Independent Auditors' Consent
27 Financial Data Schedule and Certain Restated Financial Data Schedules
</TABLE>
(A) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 (NO. 33-65312).
(B) INCORPORATED BY REFERENCE TO EXHIBIT 4.1(a) TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-31949)
(C) INCORPORATED BY REFERENCE TO EXHIBIT 4.1(b) TO THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-3 (REG. NO. 333-31949)
(D) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1994.
(E) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995.
(F) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1995.
(G) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 29, 1996.
47
<PAGE> 48
(H) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1996.
(I) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S
DEFINITIVE PROXY STATEMENT RELATING TO THE 1996 ANNUAL MEETING OF
SHAREHOLDERS DATED JUNE 20, 1996.
(J) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1996.
(K) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997.
(L) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MAY 31, 1997.
(M) INCORPORATED BY REFERENCE FROM THE EXHIBITS TO THE COMPANY'S CURRENT
REPORT ON FORM 8-K DATED MARCH 2, 1998
(i) CONFIDENTIAL TREATMENT PREVIOUSLY GRANTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT.
(b) Reports on Form 8-K
1. On March 2, 1998, the Company filed a Current Report on Form 8-K,
describing the acquisition of assets resulting from the acquisition of
ProMIRA Software, Inc.
2. On March 19, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on February 12, 1998
announcing that the Company was negotiating the final terms of a
definitive agreement to acquire ProMIRA Software, Inc., and following
its issuance of a press release on February 13, 1998 announcing that
the Company had completed the acquisition of ProMIRA Software, Inc.
3. On March 27, 1998, the Company filed a Current Report on Form 8-K
following its issuance of a press release on March 26, 1998 announcing
the Company's earnings figures for the fourth quarter and the fiscal
year ended February 28, 1998.
4. On May 22, 1998 the Company filed a Current Report on Form 8-K
following its issuance of a press release dated May 21, 1998 which
provided certain information regarding revenues and earnings for the
Company's first quarter.
5. On Friday, May 22, 1998 the Company filed a Current Report on Form 8-K
following its issuance of a press release dated May 22, 1998 which
expanded on information contained in a press release previously issued
by the Company on Thursday, May 21, 1998 regarding anticipated
revenues and earnings for its first fiscal quarter.
(c) Exhibits
See the response to Item 14(a)(3) above.
48
<PAGE> 49
(d) Financial Statement Schedules
The financial statement schedule required to be filed is listed in the
response to Item 14(a)(2) above, and appears on page S-2 of this
report.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on May 29, 1998.
MANUGISTICS GROUP, INC.
(Registrant)
By:/s/William M. Gibson
--------------------
William M. Gibson
President, Chief Executive Officer
and Chairman of the Board of Directors
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 indicated on May 29, 1998.
<TABLE>
<S> <C>
/s/William M. Gibson /s/Peter Q. Repetti
- ---------------------- ---------------------
William M. Gibson Peter Q. Repetti
President, Chief Executive Officer and Senior Vice President and Chief Financial Officer
Chairman of the Board of Directors (Principal financial officer and
(Principal executive officer) principal accounting officer)
/s/Jack A. Arnow /s/Joseph H. Jacovini
- ------------------ -----------------------
Jack A. Arnow Joseph H. Jacovini
Director Director
/s/J. Michael Cline /s/William G. Nelson
- --------------------- ----------------------
J. Michael Cline William G. Nelson
Director Director
/s/ Lynn C. Fritz /s/Thomas A. Skelton
- --------------------- ----------------------
Lynn C. Fritz Thomas A. Skelton
Director Director
</TABLE>
50
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
Manugistics Group, Inc.:
We have audited the accompanying consolidated balance sheets of Manugistics
Group, Inc. (the Company) and its subsidiaries as of February 28, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended February 28, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
February 28, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended February 28, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 24, 1998 (except Note 13 as to which the date is March 26, 1998)
F-1
<PAGE> 52
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
FEBRUARY 28,
ASSETS 1998 1997
---- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $19,695 $8,543
Marketable securities 62,246 13,631
Accounts receivable (net of allowance for
uncollectible accounts - 1998, $2,089;
1997,$1,215) 58,217 37,093
Other current assets 4,882 2,275
--------- --------
Total current assets 145,040 61,542
PROPERTY AND EQUIPMENT - NET 20,909 10,355
NONCURRENT ASSETS:
Software development costs (net of accumulated
amortization - 1998, $14,651; 1997, $6,375) 22,100 9,932
Intangibles (net of accumulated amortization -
1998, $2,971; 1997, $1,943) 14,660 2,130
Deferred tax asset 17,923 -
Other non-current assets 1,869 364
--------- --------
TOTAL $222,501 $84,323
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $8,830 $4,244
Accrued compensation 12,419 6,403
Other accrued liabilities 10,152 3,362
Deferred revenue 17,974 13,808
Income taxes payable 655 1,226
--------- --------
Total current liabilities 50,030 29,043
LONG-TERM LIABILITIES 392 220
DEFERRED TAXES - 1,467
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock - $.002 par value; 100,000,000 shares
authorized; shares issued, 26,407,755 in 1998;
22,429,414 in 1997; shares outstanding,
25,655,245 in 1998; 21,676,904 in 1997 53 44
Additional paid-in capital 170,813 38,837
Retained earnings 1,687 14,970
Translation adjustment 375 459
Unrealized loss on marketable securities (132) -
Treasury stock - 752,510 shares at cost (717) (717)
--------- --------
Total stockholders' equity 172,079 53,593
--------- --------
TOTAL $222,501 $84,323
========= ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 53
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
REVENUES:
Software products $105,018 $ 51,186 $ 29,494
Consulting, maintenance and other services 70,648 43,944 32,828
----------- ---------- ---------
Total revenues 175,666 95,130 62,322
----------- ---------- ---------
OPERATING EXPENSES:
Cost of software sold 11,031 4,940 2,974
Cost of consulting, maintenance and other services 32,652 19,101 14,614
Sales and marketing 64,194 32,909 21,365
Product development 31,665 17,380 11,229
General and administrative 13,959 8,817 6,080
Purchased research and development 47,340 3,697 -
----------- ---------- ---------
Total operating expenses 200,841 86,844 56,262
----------- ---------- ---------
(LOSS) INCOME FROM OPERATIONS (25,175) 8,286 6,060
----------- ---------- ---------
OTHER INCOME - NET 2,828 1,016 1,097
----------- ---------- ---------
(LOSS) INCOME BEFORE INCOME TAXES (22,347) 9,302 7,157
(BENEFIT) PROVISION FOR INCOME TAXES (9,064) 4,960 2,709
----------- ---------- ---------
NET (LOSS) INCOME ($13,283) $ 4,342 $ 4,448
=========== ========== =========
BASIC (LOSS) INCOME PER SHARE ($0.57) $0.20 $0.22
=========== ========== =========
SHARES USED IN BASIC SHARE COMPUTATION 23,151 21,324 20,602
=========== ========== =========
DILUTED (LOSS) INCOME PER SHARE ($0.57) $0.19 $0.21
=========== ========== =========
SHARES USED IN DILUTED SHARE COMPUTATION 23,151 22,826 21,628
=========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 54
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
PAR PAID-IN RETAINED TRANSLATION TREASURY
SHARES VALUE CAPITAL EARNINGS ADJUSTMENT STOCK OTHER TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 1, 1995 10,532 $21 $30,949 $6,180 $145 ($771) ($12) $36,512
Issuance of common stock 42 - 377 - - - - 377
Exercise of stock options 273 1 538 - - - - 539
Tax benefit of options exercised - - 1,056 - - - - 1,056
Issuance of treasury stock - - 211 - - 27 - 238
Amortization of deferred
compensation - - - - - - 12 12
Translation adjustment - - - - (240) - - (240)
Net income - - - 4,448 - - - 4,448
---------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 29, 1996 10,847 22 33,131 10,628 (95) (744) - 42,942
Issuance of common stock 50 - 733 - - - - 733
Exercise of stock options 318 - 1,907 - - - - 1,907
Tax benefit of options exercised - - 2,591 - - - - 2,591
Fair value of options issued - - 217 - - - - 217
Compensation expense - - 69 - - - - 69
Issuance of treasury stock - - 211 - - 27 - 238
Translation adjustment - - - - 554 - - 554
Net income - - - 4,342 - - - 4,342
Two-for-one stock split 11,214 22 (22) - - - - -
---------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1997 22,429 44 38,837 14,970 459 (717) - 53,593
Issuance of common stock, net of
issuance costs of $652 3,131 7 119,883 - - - - 119,890
Issuance of stock options in
connection with acquisition - - 1,081 - - - - 1,081
Exercise of stock options 848 2 3,334 - - - - 3,336
Tax benefit of options exercised - - 7,678 - - - - 7,678
Translation adjustment - - - - (84) - - (84)
Unrealized loss on marketable
securities - - - - - - (132) (132)
Net loss - - - (13,283) - - - (13,283)
---------------------------------------------------------------------------------------------
BALANCE, FEBRUARY 28, 1998 26,408 $53 $170,813 $1,687 $375 ($717) ($132) $172,079
=============================================================================================
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 55
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (13,283) $ 4,342 $ 4,448
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 15,999 7,986 4,543
Write-off of purchased research and development 47,340 3,697 -
Allowances for doubtful accounts 1,510 2,529 732
Deferred income taxes (19,952) 237 340
Tax benefit from stock options exercised 7,678 2,591 1,056
Other (133) 108 126
Changes in assets and liabilities (net of
the effects of acquisitions):
Accounts receivable (20,876) (20,171) (4,828)
Other current assets (1,919) 137 (408)
Other noncurrent assets (497) 97 32
Accounts payable and accrued liabilities 5,567 205 2,641
Accrued compensation 6,016 4,878 (534)
Deferred revenue 2,467 7,047 863
Income taxes payable (280) 504 412
------------ ----------- -----------
Net cash provided by operating activities 29,637 14,187 9,423
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (Note 4) (9,637) (3,582) (1,068)
Sale of marketable securities 46,865 7,933 5,570
Purchase of marketable securities and long-term investments (96,947) (3,006) (3,662)
Purchase of property and equipment (15,880) (7,130) (5,126)
Capitalization of software development costs (9,388) (6,843) (4,915)
Purchase of software licenses (816) (878) (382)
------------ ----------- -----------
Net cash used in investing activities (85,203) (13,506) (9,583)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under long-term obligations (192) (273) (187)
Net proceeds from sale of common stock 63,543 733 377
Proceeds from exercise of stock options 3,334 1,907 538
------------ ----------- -----------
Net cash provided by financing activities 66,685 2,367 728
------------ ----------- -----------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 33 574 (246)
------------ ----------- -----------
NET INCREASE IN CASH 11,152 3,622 322
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,543 4,921 4,599
------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $19,695 $8,543 $4,921
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 56
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED FEBRUARY 28, 1998
Manugistics Group, Inc. (the "Company") develops, markets and supports software
products for synchronized supply chain management(TM) and provides related
services. Synchronized supply chain management refers to managing the complex
interactions involved in the flows of products through the supply chain. It
involves forecasting product demand and coordinating the timing of
distribution, manufacturing, procurement, and transportation activities to meet
this demand, not only across an entire enterprise, but also among an enterprise
and its suppliers and customers. The Company provides an integrated suite of
strategic, tactical and operational supply chain software planning products,
including a high-level optimizer, that address the four key operational areas
of supply chain management: demand planning, supply planning, manufacturing
scheduling and transportation management.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Manugistics Group, Inc. and its subsidiaries, all
of which are wholly-owned. All significant intercompany transactions and
balances have been eliminated. The Company's fiscal year ends on the
last day of February.
Use of Estimates - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results may
differ from these estimates.
Revenue Recognition - The Company's revenues consist primarily of
software license revenues, consulting service revenues and maintenance
revenues. The Company recognizes revenues in accordance with the
provisions of the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 91-1, "Software Revenue
Recognition." Software license revenues from supply chain management
products are recognized upon the customer's execution of a noncancellable
license agreement and shipment of the software, provided that no
significant vendor obligations remain outstanding, the license fee is
fixed and amounts are due within one year and collection is considered
probable by management. Software license revenues from the sale of
personal systems products are recognized upon the Company's shipment of
the software.
Consulting service revenues are recognized when the services are
provided, generally on a time and materials basis. Consulting service
revenues consist primarily of implementation and training services
related to the installation of the Company's products and do not include
significant customization to or development of the underlying software
code. Maintenance revenues are deferred and recognized ratably over the
term of the maintenance contract, typically 12 months.
Amounts received in advance of revenue recognition are classified as
deferred revenues.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue
Recognition," which provides guidance in applying generally accepted
accounting principles in recognizing revenues on software transactions
and supercedes SOP 91-1. The provisions of SOP 97-2 are effective for
the Company for transactions entered into after February 28, 1998. SOP
97-2 requires revenues earned on software arrangements involving multiple
elements to be allocated to each element based on vendor specific
F-6
<PAGE> 57
objective evidence of the relative fair values of the elements. If a
vendor does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered.
In addition, SOP 97-2 requires that the Company have an executed software
license agreement, the license fee be fixed and determinable and
collection deemed probable by management in order to record software
license revenue. The Company currently believes the adoption of SOP 97-2
will not have a material impact on its consolidated results of operations
or financial position; however, because implementation guidelines for
this standard have not yet been issued and a wide range of potential
interpretations are being discussed by the accounting profession, there
can be no assurance that SOP 97-2 will not have a material impact on the
Company's consolidated results of operations or financial position. In
March 1998, the AICPA issued SOP 98-4 which defers the effective date of
a provision of SOP 97-2. This provision currently has no impact to the
Company.
Cash and Cash Equivalents - The Company considers cash on hand, deposits
in banks, and highly liquid overnight investments as cash and cash
equivalents.
Marketable Securities - The Company has classified its short-term
marketable securities as "available-for-sale." These securities are
recorded at fair value, with gross unrealized gains and losses reported
as a component of stockholders' equity. At February 28, 1998 and 1997,
marketable securities consisted of investments in municipal bonds and
other short-term investments which generally mature in one year or less.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
investments in marketable securities and accounts receivable. The
Company has policies that limit investments to investment grade
securities and that limit the amount of credit exposure to any one
issuer. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for potential losses, but does not require
collateral. The Company's credit risk is also further mitigated as its
customer base is diversified, geographically and by industry.
Fair Values of Financial Instruments - The carrying values of cash and
cash equivalents, marketable securities, accounts receivable, and
accounts payable approximate fair value due to the short maturities of
such instruments. The carrying value of long-term debt approximates fair
value based on current rates offered to the Company for debt with similar
collateral and guarantees, if any, and maturities.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, ranging from two to ten years.
Leasehold improvements are amortized over the shorter of the lease term
or the useful life of the asset.
Intangibles - Intangibles include intellectual property, customer lists
and goodwill. Intellectual property and goodwill are amortized on a
straight-line basis and customer lists are amortized using the double
declining balance method. The amortization period for these assets is
five years or less, commencing on the date of acquisition (see Note 4).
Impairment of Long-Lived Assets - The Company reviews its long-lived
assets, including property and equipment and intangibles, for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. In performing an
evaluation of recoverability, the estimated future undiscounted net cash
flows of the assets are compared to the assets' carrying amount to
determine if a write down is required.
Income Taxes - The provision for income taxes is based on income
recognized for financial reporting purposes and includes the effects of
temporary differences between such income and income recognized for
income tax purposes. Deferred income taxes reflect the net tax effects
F-7
<PAGE> 58
of temporary differences between carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
Foreign Currency Translation - Assets and liabilities denominated in
foreign currencies are translated at the exchange rate on the balance
sheet date. The related revenues and expenses are translated at the
prevailing exchange rate during the reporting period. Translation
adjustments related to this process are charged to stockholders' equity.
Net (Loss) Income Per Share - As of February 28, 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 requires the presentation of basic
income per share and, for companies with potentially dilutive securities,
such as options, diluted income per share. Basic income per share is
computed using the weighted average number of shares of common stock
outstanding. Diluted income per share is computed using the weighted
average number of shares of common stock and, when dilutive, common
equivalent shares from options to purchase common stock using the
treasury stock method. The following table sets forth the computation of
basic and diluted income per share:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C>
Weighted average common shares 23,151 21,324 20,602
Dilutive potential common shares - 1,502 1,026
--------- --------- ---------
Shares used in diluted share computation 23,151 22,826 21,628
--------- --------- ---------
Net (loss) income ($13,283) $4,342 $4,448
========= ========= =========
Basic (loss) income per share ($0.57) $0.20 $0.22
========= ========= =========
Diluted (loss) income per share ($0.57) $0.19 $0.21
========= ========= =========
</TABLE>
The dilutive effect of options for approximately 3.8 million shares has
not been considered in the computation of diluted loss per share in
fiscal 1998 because such shares would be anti-dilutive.
Stock-Based Compensation Plans - The Company accounts for its stock-based
compensation plans in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and has made
the pro forma disclosures required by SFAS 123, "Accounting for
Stock-Based Compensation" in Note 6.
New Accounting Pronouncements - In June 1997, SFAS No. 130, "Reporting
Comprehensive Income" was issued and requires that all items which meet
the definition of comprehensive income be reported for the period in
which they are recognized. Comprehensive income includes changes in the
balances of items that are reported directly in a separate component of
stockholders' equity on the consolidated balance sheets, such as foreign
currency translation adjustments and unrealized gains or losses on
available-for-sale securities. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and the Company will make the
disclosures required by SFAS No. 130 in the first quarter of fiscal 1999.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued and requires that a public business
enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is
required to be reported on the basis used internally for evaluating
segment performance and resource allocation. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997; however, disclosure
is not required in interim financial statements in the initial year of
adoption. Accordingly, the Company will make the required disclosures
for the fiscal year ending February 28, 1999. The Company is still
F-8
<PAGE> 59
determining the effect of adopting SFAS No. 131; however, management does
not anticipate that it will have a material impact.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The
provisions of SOP 98-1 require that certain costs to develop or obtain
internal use software be capitalized. SOP 98-1 is effective for fiscal
years beginning after December 1998 and will be effective for the Company
beginning March 1999. The Company is still determining the effect of
adopting SOP 98-1; however, management does not anticipate that it will
have a material impact on the Company's consolidated results of
operations or financial position.
Reclassification of Account Balances - Certain prior year amounts have
been reclassified for comparability with the current year's financial
statement presentation.
2. FINANCIAL STATEMENT DETAILS
Property and Equipment - Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998 1997
-------- ---------
(in thousands)
<S> <C> <C>
Computer equipment and software $21,511 $12,205
Office furniture and equipment 6,569 4,165
Leasehould improvements 6,872 2,192
-------- --------
Total 34,952 18,562
Less accumulated depreciation and
amortization (14,043) (8,207)
-------- --------
Property and equipment - net $20,909 $10,355
======== ========
</TABLE>
Other Income - Net - Other income - net, consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
--------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Interest Income $ 2,772 $ 1,201 $ 1,204
Interest Expense (110) (58) (91)
Other 166 (127) (16)
--------- --------- ----------
Other income - Net $ 2,828 $ 1,016 $ 1,097
========= ========= ==========
</TABLE>
3. SOFTWARE DEVELOPMENT COSTS
The Company capitalizes costs incurred in the development of its software
products. Software development costs include certain internally
developed costs, software costs purchased from third parties in
connection with acquisitions if the related software product under
development has reached technological feasibility or if there are
alternative future uses for the purchased software, provided the
capitalized amounts will be realized over a period not exceeding five
years, and purchased software license costs for products used in the
development of the Company's products. Costs incurred prior to
establishing technological feasibility are charged to product development
expense as incurred. Software development costs are amortized on a
straight line basis over the estimated economic life of the product,
generally two to five years, commencing with the date the product is
first available for general release.
F-9
<PAGE> 60
The Company capitalized internally developed software costs of
$9,388,000, $6,843,000, and $4,915,000, and recorded amortization expense
of $7,560,000, $3,543,000, and $2,228,000 for fiscal 1998, 1997, and
1996, respectively. Fiscal 1998 balances reflect $9,940,000 in purchased
software development costs capitalized in connection with the acquisition
of ProMIRA Software Inc. (see Note 4). The Company capitalized
approximately $1,116,000, $878,000 and $382,000 and recorded amortization
expense of $717,000, $331,000 and $51,000 in fiscal 1998, 1997 and 1996,
respectively, relating to purchased software license product costs.
The amortization expense amounts for fiscal 1998 and 1997 include
write-offs totaling approximately $1,897,000 and $312,000, respectively,
of previously capitalized internal software development costs. These
capitalized costs were deemed to exceed their future net realizable value
as a result of new technologies developed by the Company and acquired in
connection with acquisitions.
4. ACQUISITIONS
During fiscal 1998 and 1997, the Company made three acquisitions which
have been accounted for under the purchase method. Accordingly, the
purchase prices were allocated to certain assets and liabilities based on
their respective fair market values. The excess of the purchase price
over the estimated fair market value of the net assets acquired under
each transaction was accounted for as goodwill. Amounts allocated to
certain intangibles, including goodwill, are being amortized on a
straight-line basis over five years. The consolidated financial
statements include the operating results of each acquisition from the
date of the acquisition.
Fiscal 1998 acquisitions
In February 1998, the Company acquired ProMIRA Software, Inc.
("ProMIRA"), a provider of supply chain planning software for
manufacturers of complex products in industries such as high technology,
electronics and motor vehicles and parts. The total purchase price was
approximately $64,500,000, comprised of cash, 1,550,000 shares of common
stock and options to purchase 78,379 shares of common stock valued at
$57.8 million, and acquisition costs. The purchase price was allocated
based on a fair value appraisal obtained from a nationally recognized
independent appraisal firm, and included allocations to certain
intangible assets, such as existing software products which had reached
technological feasibility, and in-process software development efforts
which had not reached technological feasibility ("purchased research and
development"). The write-off of purchased research and development
resulted in a non-recurring charge to the Company's operating results,
and reduced net income for fiscal 1998 by $28,653,000 ($47,340,000,
inclusive of income tax benefits of $18,687,000), or $1.24 basic and
$1.16 diluted income per share.
In June 1997, the Company acquired Synchronology Group Limited, a
closely-held company which provides manufacturing planning and scheduling
consulting services. In March 1997, the Company entered into a
definitive agreement to acquire certain assets of Information Resources,
Inc. ("IRI"). The total purchase prices of these acquisitions were
approximately $3,200,000 and $1,900,000, respectively, and consisted
primarily of cash, assumed liabilities, and acquisition costs.
Had the acquisitions made in fiscal 1998 been completed as of March 1,
1996, unaudited pro forma results would have been as follows:
F-10
<PAGE> 61
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
1998 1997
------------------ -------------
(in thousands)
<S> <C> <C>
Revenues $184,296 $98,795
Net income before write-off of purchased research and development 10,207 (687)
Write-off of purchased research and development 28,653 28,653
Net (loss) income (18,446) (29,340)
Basic and diluted (loss) income per share (0.80) (1.38)
</TABLE>
Such unaudited pro forma amounts are not necessarily indicative of what
the actual consolidated results of operations might have been had the
acquisitions been effective at the beginning of each period presented.
Fiscal 1997 acquisition
In fiscal 1997, the Company acquired Avyx, Inc. ("Avyx"), a custom
developer and services provider of manufacturing scheduling software.
The total purchase price was approximately $3,799,000, primarily
comprised of cash, assumed liabilities and acquisition costs. The
purchase price allocation included allocations to certain intangible
assets, such as existing software products and in-process software
development efforts which had not reached technological feasibility. The
Company's write-off of the purchased research and development resulted in
a non-recurring charge to the Company's operating results, and reduced
net income for fiscal 1997 by $3,697,000, or $0.17 basic and $0.16
diluted income per share. The fiscal 1997 consolidated financial
statements include the operating results of Avyx from the date of the
acquisition. The results of operations of Avyx prior to the acquisition
were not material to the consolidated financial statements.
In addition, the Company entered into a three-year non-compete agreement
with two of the principals of Avyx, who did not become employees of the
Company, in exchange for an option to purchase 60,000 shares of the
Company's common stock. The agreement was valued at $217,000, which
represented the estimated fair value of the stock options issued, and is
being amortized over the life of the agreement, which is three years.
5. DEBT AND LONG-TERM LIABILITIES
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998 1997
----------------- --------------
(in thousands)
<S> <C> <C>
Notes payable $249 $182
Capital lease obligations (see Note 8) 230 229
----------------- --------------
Total 479 411
Less - current portion (244) (191)
----------------- --------------
Subtotal 235 220
Other long-term liabilities 157 -
----------------- --------------
Total $392 $220
================= ==============
</TABLE>
F-11
<PAGE> 62
Notes Payable - The Company has several outstanding notes payable which
accrue interest at rates ranging from 1.93% to 7.0% at February 28, 1998.
Principal repayment requirements for each of the five succeeding years
beginning March 1, 1998 are as follows: $244,000 for 1998, $187,000 for
1999, $32,000 for 2000, $9,000 for 2001 and $7,000 for 2002.
Line of Credit - The Company has an unsecured committed revolving credit
facility with a commercial bank. Under the terms of the facility, the
Company may request advances in an aggregate amount of up to $10,000,000.
The Company may make borrowings under the facility for short-term working
capital purposes or for acquisitions. (Acquisition-related borrowings
are limited to $7,500,000 per acquisition). For the interest rate on
borrowings, the Company may select either the prime rate of the lender or
either the three-month or six-month London Interbank Offered Rate (LIBOR)
plus one and one-half percent. The facility contains certain financial
covenants that the Company believes are typical for a facility of this
nature and amount, including a covenant not to pay or declare cash
dividends. This facility will expire in September 1998, unless renewed.
There were no outstanding amounts under the credit facility at February
28, 1998.
6. STOCKHOLDERS' EQUITY
Preferred Stock - The Company has authorized 4,620,253 shares of $.01 par
value preferred stock. As of February 28, 1998, no preferred shares were
outstanding.
Common Stock - The Company has authorized 100,000,000 shares of $.002 par
value common stock. No cash dividends on common stock have been declared
or paid in fiscal 1998, 1997, or 1996. On August 18, 1997, the Company
completed an underwritten offering of 1,600,000 newly issued shares of
common stock. The proceeds to the Company were approximately
$61,985,000, net of related offering expenses.
Stock Split - On May 9, 1997, the Board of Directors of the Company
declared a two-for-one stock split on the Company's common stock, which
was paid in the form of a 100% stock dividend on June 11, 1997 to
shareholders of record as of May 23, 1997. The shares outstanding,
weighted average shares, amounts per share, and all other references to
shares of common stock reported have been restated to give effect to the
stock dividend.
Employee Stock Purchase Plan - In October 1994, the Company adopted an
employee stock purchase plan ("ESPP") that authorizes the Company to sell
up to 500,000 shares of common stock to employees through voluntary
payroll withholdings. The stock price to employees is equal to 85% or
95% of the market price on the lower of either the first or last day of
each six-month withholding period. Payroll deductions may not exceed the
lesser of 10% of a participant's compensation or $25,000 per year. The
number of shares purchased under this plan by employees totaled 69,113
shares, 100,818 shares, and 84,404 shares in fiscal 1998, 1997, and 1996,
respectively. The weighted average fair value of shares purchased in
fiscal 1998, 1997, and 1996 was $44.88, $14.09, and $7.13, respectively.
Stock Options
The Company has an employee stock option plan under which non-qualified
options of up to 6,564,238 shares may be granted to employees to
purchase common stock at prices not less than the fair market value at
the time of grant. Under the plan, prior to 1994, options vested and
became exercisable four years from the date of grant. In 1994, the
Company amended the plan such that options granted after the amendment
vest and become exercisable ratably over a four-year period from the date
of grant. The right to exercise the vested options expires upon the
earlier of either ten years (or for options granted prior to 1994, eleven
years) from the date of grant, or within thirty days of termination of
employment. As of February 28, 1998, the Company has granted options on
5,969,260 shares.
F-12
<PAGE> 63
In 1994, the Company adopted the 1994 Outside Directors Non-Qualified
Stock Option Plan, which provides for the grant of stock options of up to
280,000 shares to the Company's non-employee directors. Under this plan,
non-qualified options are granted annually at the fair market value of
the Company's common stock on the date of grant. The number of options
granted annually to each non-employee director is fixed by the plan.
Options become fully exercisable on the first anniversary of the date of
grant. Under this plan, options may be granted over a ten year period
through May 23, 2004. As of February 28, 1998, the Company has granted
options on 192,500 shares.
In January 1996, the Company amended its Employee Incentive Stock Option
Plan, whereby the Company may grant options up to 1,805,950 shares to
certain key executive employees. Options are granted at an exercise
price equal to or greater than the fair market value of the stock on the
date of grant and expire ten years from the date of grant. All options
granted vest in accordance with plan terms. As of February 28, 1998, the
Company has granted options on 1,650,000 shares.
In 1994, the Company adopted the 1994 Executive Incentive Stock Option
Plan, whereby the Company may grant options to certain key executive
officers of the Company up to 1,750,000 shares. Options are granted at
an exercise price equal to or greater than the fair market value of the
stock on the date of grant and expire ten years from the date of grant.
Options will vest ratably over a four-year period. As of February 28,
1998, the Company has granted options on 145,750 shares.
A summary of the status of the Company's stock option plans and changes
during the fiscal years is presented below:
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
Options to Options to Options to
Purchase Wtd. Avg. Purchase Wtd. Avg. Purchase Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------------------------------------------------------------------
(share amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year 3,786 $6.78 3,324 $4.20 2,840 $2.56
Options Granted at Fair Value 1,472 36.64 1,290 11.54 1,182 6.67
Options Granted Greater Than Fair Value 45 26.47 24 8.01 - -
Exercised (767) 4.34 (636) 3.00 (546) 1.00
Cancelled (162) 16.85 (216) 5.19 (152) 4.45
---------- ---------- ----------
Outstanding at end of year 4,374 $16.77 3,786 $6.78 3,324 $4.20
========== ========== ==========
Exercisable at end of year 1,309 1,082 942
========== ========== ==========
</TABLE>
The weighted average fair value of options granted in fiscal 1998, 1997,
and 1996 was $16.48, $5.19, and $3.51 per share, respectively. A summary
of the weighted average remaining contractual life and the weighted
average exercise price of options outstanding as of February 28, 1998 is
presented below:
F-13
<PAGE> 64
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVG. NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING WEIGHTED AVG. EXERCISABLE AVG. EXERCISE
EXERCISE PRICES AT 2/28/98 CONTRACTUAL LIFE EXERCISE PRICE AT 2/28/98 PRICE
---------------- ------------- ---------------- --------------- ------------ ---------------
(share amounts in thousands)
<S> <C> <C> <C> <C> <C>
$0.52-$4.50 879 5.34 $2.84 745 $2.60
4.63-7.56 1,030 7.53 6.53 319 6.74
7.63-17.53 922 8.44 10.82 211 10.36
17.69-42.31 1,335 9.19 33.65 34 21.83
42.63-47.13 208 9.71 44.10 - -
---------------- -------- --------- ---------- --------- ---------
$0.52-$47.13 4,374 7.89 $16.77 1,309 $5.37
======== =========
</TABLE>
Stock-Based Compensation
As permitted under SFAS No. 123, the Company continues to account for
stock-based compensation to employees in accordance with APB Opinion No.
25, under which no compensation expense is recognized, since the exercise
price of options granted is equal to or greater than the fair market
value of the underlying security on the grant date. Pro forma
information regarding net income and income per share is required by SFAS
No. 123, which uses the fair value method. The fair value of the
Company's stock-based awards to employees was estimated as of the date of
grant using the Black-Scholes option pricing model. Limitations on the
effectiveness of the Black-Scholes option valuation model include that it
was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable and that
the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics significantly different from
those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock-based awards.
Had compensation cost for these plans been recorded, the Company's net
income and income per share amounts would have been as follows:
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net (loss) income $(19,301) $2,606 $3,785
Basic (loss) income per share $ (0.83) $ 0.12 $ 0.18
Diluted (loss) income per share $ (0.83) $ 0.11 $ 0.18
</TABLE>
The increase in the fair value of stock options granted in 1998 resulted
primarily from a significant increase in the price of the Company's
common stock during fiscal 1998 from fiscal 1997. Because the SFAS No.
123 method of accounting has not been applied to options granted prior to
March 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. Additionally, the
fiscal 1998, 1997, and 1996 pro forma amounts include $435,000, and
$279,000, and $173,000, respectively, related to the purchase discount
offered under the employee stock purchase plan.
The fair value of options granted was estimated assuming no dividends and
using the following weighted-average assumptions:
F-14
<PAGE> 65
<TABLE>
<CAPTION>
OPTIONS ESPP
------------------------------------------------------ ----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rates 6.20-6.59% 5.44 - 5.73% 6.68-7.08% 5.65% 5.67% 6.44%
Expected term 2.62-7.69 yrs 1.54 - 4.51 yrs 1.54-4.77 yrs 6 mos 6 mos 6 mos
Volatility 0.6038 0.6358 0.6910 0.6044 0.6562 0.6910
</TABLE>
7. RETIREMENT PLANS
The Company has two defined contribution retirement savings plans (one in
the U.S. and another in the U.K.) under the terms of which the Company
matches a percentage of the employees' qualified contributions. New
employees are eligible to participate in the plans upon completing one
month of service. The Company's contribution to the plans totaled
$1,045,000, $535,000 and $337,000 for fiscal 1998, 1997 and 1996,
respectively.
The Company is not obligated under any other post-retirement benefit
plans.
8. COMMITMENTS AND CONTINGENCIES
Commitments - The Company leases office space, office equipment, and
automobiles under operating leases and various computer and other
equipment under capital leases. Property acquired through capital leases
amounted to $884,000 and $830,000 at February 28, 1998 and 1997,
respectively, and has been included in computer equipment and software
(Note 2). Total accumulated amortization relating to these leases was
$716,000 and $576,000 as of February 28, 1998 and 1997, respectively.
Rent expense for operating leases for fiscal 1998, 1997 and 1996 was
approximately $7,448,000, $4,439,000, and $3,610,000, respectively. The
future minimum lease payments under these capital and operating leases
for each of the succeeding years beginning March 1, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
(in thousands)
<S> <C>
1999 $195 $7,798
2000 32 5,982
2001 9 4,079
2002 9 3,336
2003 7 840
------- ---------
Total minimum lease payments $252 $22,035
=========
Less amount representing interest (22)
-------
Present value of net minimum lease payments $230
=======
</TABLE>
The Company has collaborative arrangements with various parties relating
to product development and joint marketing programs. The Company has
also entered into an agreement with a third party under which the Company
has guaranteed certain revenue levels to the third party in the aggregate
amount of $16,500,000 over several years. In the event that the activities
performed by the Company do not meet the minimum amounts, the Company may
be obligated to pay the difference. Certain issues have arisen between
the Company and the third party relating to the satisfaction of these
contingencies. The Company anticipates satisfactory resolution of these
issues and believes it will be able to meet the revenue levels.
Accordingly, the Company does not expect to be obligated to make such
payments.
F-15
<PAGE> 66
Contingencies - In the ordinary course of business, the Company may be a
party to legal proceedings and claims. In addition, from time to time,
the Company may have contractual disagreements with certain customers
concerning the Company's products and services. The Company has
established accruals related to such matters that are probable and
reasonably estimable. In management's opinion, any liability that may
ultimately result from the resolution of these matters in excess of
amounts provided will not have a material adverse effect on the results
of operations, financial condition or cash flows of the Company. The
Company has been in discussions with a customer to resolve a certain
claim under an agreement. While the Company believes there is no merit to
such claim, this matter is subject to various uncertainties and may be
resolved unfavorably to the Company.
9. INCOME TAXES
Income Tax Provision - The components of the (benefit) provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 7,861 $ 3,475 $ 1,433
State 2,069 348 339
Foreign 710 901 597
--------- -------- -------
Total current provision 10,640 4,724 2,369
--------- -------- -------
Deferred:
Federal (20,104) 177 792
State (53) 40 4
Foreign 453 19 (456)
--------- -------- -------
Total deferred (benefit) provision (19,704) 236 340
--------- -------- -------
Total (benefit) provision for income taxes $ (9,064) $ 4,960 $ 2,709
========= ======== =======
</TABLE>
The income tax benefits related to the exercise of stock options reduce
taxes currently payable and are credited to additional paid-in capital.
Such amounts were approximately $7,678,000, $2,591,000, and $1,056,000,
for fiscal 1998, 1997, and 1996, respectively.
Deferred Income Taxes - The components of the Company's deferred tax
assets and liabilities are as follows:
F-16
<PAGE> 67
<TABLE>
<CAPTION>
FEBRUARY 28,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Uncollectible receivables and sales returns $810 $434
Rent accruals 205 207
Operating loss carryforwards:
Domestic 617 657
Foreign 2,507 1,353
Software revenue recognition 41 183
Depreciation and amortization 1,322 691
Accrued commissions 694 -
Purchased research and development write-off 18,774 -
Other temporary differences 515 193
Total deferred tax assets 25,485 3,718
Less: valuation allowance (1,786) (734)
--------- --------
Total deferred tax assets 23,699 2,984
Deferred tax liabilities:
Software development costs (3,800) (3,313)
Deferred revenue (331) -
Other temporary differences (30) (84)
--------- --------
Total deferred tax liabilities (4,161) (3,397)
--------- --------
Net deferred tax assets (liabilities) $19,538 ($413)
========= ========
</TABLE>
At February 28, 1998, the Company had $1,340,400 of federal, $879,700 of
state and $8,120,000 of foreign net operating loss carryforwards ("NOLs")
available to offset future taxable income in those respective taxing
jurisdictions. Federal and state NOLs arose from acquisitions and are
subject to limitations. The federal NOLs expire in the years 2006 and
2011 while the state NOLs expire during fiscal 1999. Approximately
$3,467,100 of the foreign NOLs expire during the fiscal years 2000 to
2003 while the remaining NOLs are available in perpetuity. The Company
considers the earnings of foreign subsidiaries to be permanently
reinvested outside the United States. Accordingly, no United States
income tax on these earnings has been provided.
Effective and Statutory Rate Reconciliation - The difference between the
income tax provision and the amount computed by applying the federal
statutory income tax rate to pretax accounting income is summarized as
follows:
F-17
<PAGE> 68
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
(Benefit) provision computed at federal statutory rate ($7,821) $3,163 $2,434
Increase (reduction) in taxes resulting from:
State and foreign taxes, net of federal benefit (788) 387 417
Change in valuation allowance 1,052 291 (31)
Benefit of net operating loss carry forwards and
tax credits (1,050) - (55)
Foreign items (202) - -
Purchased research and development write-off - 1,257 -
Tax exempt income (349) (163) (257)
Other 94 25 201
--------- -------- -------
(Benefit) Provision for income taxes $ (9,064) $ 4,960 $ 2,709
========= ======== =======
</TABLE>
10. SEGMENT INFORMATION
The Company operates in two industry segments. The Company develops,
markets, and supports software products for synchronized supply chain
management(TM) and provides related services. The Company also markets
and supports the STATGRAPHICS product within its personal systems
segment, which provides statistical tools for quality management in
manufacturing companies.
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
Industry Segments 1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Supply chain management $ 172,166 $ 91,350 $ 56,699
Personal systems 3,500 3,780 5,623
----------- ----------- -----------
$ 175,666 $ 95,130 $ 62,322
=========== =========== ===========
(Loss) Income from operations:
Supply chain management 344 15,156 10,554
Personal systems 1,778 1,032 1,184
Corporate (27,297) (7,902) (5,678)
----------- ----------- -----------
$ (25,175) $ 8,286 $ 6,060
=========== =========== ===========
Identifiable assets:
Supply chain management $132,451 $ 58,052 $ 32,144
Personal systems 848 1,014 1,375
Corporate 89,202 25,257 26,912
----------- ----------- -----------
$ 222,501 $ 84,323 $ 60,431
=========== =========== ===========
</TABLE>
F-18
<PAGE> 69
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
Industry Segments 1998 1997 1996
----------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Capital expenditures:
Supply chain management $10,408 $6,528 $2,756
Personal systems 19 24 172
Corporate 6,269 1,456 2,580
----------- ----------- ---------
$16,696 $8,008 $5,508
=========== =========== =========
Depreciation and amortization:
Supply chain management $14,124 $ 7,077 $ 3,646
Personal systems 16 24 426
Corporate 1,859 885 471
----------- ----------- ---------
$15,999 $ 7,986 $ 4,543
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
Geographic Areas 1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Revenues:
Americas $ 148,366 $ 82,892 $ 56,401
Europe 35,708 18,273 7,625
Asia 4,978 - -
Eliminations (13,386) (6,035) (1,704)
---------- ---------- ----------
$ 175,666 $ 95,130 $ 62,322
========== ========== ==========
(Loss) income from operations:
Americas ($23,341) $ 7,666 $ 9,047
Europe 9,595 6,655 (1,283)
Asia 1,957 - -
Eliminations (13,386) (6,035) (1,704)
---------- ---------- ----------
($25,175) $ 8,286 $ 6,060
========== ========== ==========
Identifiable assets:
Americas $287,231 $ 86,229 $ 56,911
Europe 22,932 12,161 7,421
Asia 2,345 - -
Eliminations (90,007) (14,067) (3,901)
---------- ---------- ----------
$222,501 $ 84,323 $ 60,431
========== ========== ==========
</TABLE>
(1) (Loss) income from operations includes non-recurring write-offs of
purchased research and development of $47,340,000 and $3,697,000 in
fiscal 1998 and 1997, respectively. Such amounts relate to the
supply chain management segment in the Americas.
Domestic and export sales for fiscal 1998, 1997 and 1996 are as follows:
F-19
<PAGE> 70
<TABLE>
<CAPTION>
FEBRUARY 28 OR 29,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
United States $119,619 $69,075 $46,996
Europe 36,170 19,821 9,423
Pacific Rim 6,467 1,359 -
Japan 4,982 - -
Canada 4,682 3,853 3,886
South America 3,537 - -
Other 209 1,022 2,017
---------- --------- --------
$175,666 $95,130 $62,322
========== ========= ========
</TABLE>
No customer accounted for 10% or more of the Company's net sales in
fiscal 1998, 1997 or 1996.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest amounted to approximately $110,000, $55,000 and
$78,000 in fiscal 1998, 1997 and 1996, respectively. Cash paid for
income taxes amounted to approximately $3,428,000, $1,223,000, and
$924,000 in fiscal 1998, 1997 and 1996, respectively.
Supplemental information of non-cash investing and financing activities
is as follows:
During fiscal 1998, 1997 and 1996, the Company received income tax
benefits of $7,678,000, $2,591,000, and $1,056,000, respectively,
relating to the exercise of stock options. The benefits were recorded as
an increase to additional paid-in capital. During fiscal 1997, the fair
value of treasury stock issued was $238,000. Also during fiscal 1997,
options valued at $217,000 were granted under a non-compete agreement and
$345,000 relating to a leased asset and obligation was capitalized.
During fiscal 1996, a $294,000 note receivable was recorded relating to
an asset divestiture, a $714,000 liability was recorded related to the
fair value of stock to be issued, and the fair value of treasury stock
issued was $238,000.
12 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly consolidated financial information for fiscal 1998
and 1997 follows:
F-20
<PAGE> 71
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
Total revenues $34,459 $37,865 $41,268 $62,074
Purchased research and development costs - - - 47,340
Operating income (loss) 2,997 3,911 5,357 (37,439)
Net income (loss) 2,040 2,637 4,005 (21,965)
Basic income (loss) per share $0.09 $0.12 $0.17 ($0.90)
Shares used in basic share computation 21,753 22,657 23,895 24,300
Dilutive income (loss) per share $0.09 $0.11 $0.15 ($0.90)
Shares used in diluted share computation 23,297 24,710 26,608 24,300
1997
Total revenues $18,441 $21,005 $23,688 $31,996
Purchased research and development costs 3,697 - - -
Operating (loss) income (2,070) 2,124 2,890 5,342
Net (loss) income (2,578) 1,447 1,947 3,526
Basic (loss) income per share ($0.12) $0.07 $0.09 $0.16
Shares used in basic share computation 20,979 21,206 21,477 21,633
Diluted (loss) income per share ($0.12) $0.06 $0.08 $0.15
Shares used in diluted share computation 20,979 22,378 23,181 23,350
</TABLE>
Included in the fourth quarter of fiscal 1998 and the first quarter of
fiscal 1997 are non-recurring charges of $47,340,000 and $3,697,000,
respectively, for write-offs of purchased research and development costs
in connection with acquisitions (see Note 4).
13. SUBSEQUENT EVENT
On March 26, 1998, the Company entered into a lease agreement with a
commercial real estate developer to lease a new office building that will
commence in fiscal 2001 with a lease term of 15 years.
* * * * *
F-21
<PAGE> 72
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders and Board of Directors of
Manugistics Group, Inc.:
We have audited the consolidated financial statements of Manugistics Group, Inc.
(the Company) and its subsidiaries as of February 28, 1998 and 1997, and for
each of the three years in the period ended February 28, 1998, and have issued
our report thereon dated March 24, 1998 (except Note 13 as to which the date is
March 26, 1998); such report is included elsewhere in this Form 10-K. Our audit
also included the consolidated financial statement schedule listed in Item 14
of this Form 10-K. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Washington, D.C.
March 24, 1998 (except Note 13 as to which the date is March 26, 1998)
<PAGE> 73
MANUGISTICS GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
-------------- -------------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND SALES RETURNS
Year ended February 28, 1998 $1,215 $1,510 ($636) $2,089
Year ended February 28, 1997 711 2,529 (2,025) 1,215
Year ended February 29, 1996 833 732 (854) 711
</TABLE>
<PAGE> 1
EXHIBIT 10.8
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "LEASE") is made as of the 26th day of March,
1998, by and between WASHINGTONIAN NORTH ASSOCIATES LIMITED PARTNERSHIP, a
Maryland limited partnership (hereinafter referred to as "LANDLORD"), and
MANUGISTICS, INC., a Delaware corporation (hereinafter referred to as "TENANT").
RECITALS:
A. Boston Properties Limited Partnership ("BPLP") and Tenant have entered
into a Memorandum of Agreement dated March 5, 1998 (the "MEMORANDUM"), setting
forth the basic terms and conditions governing the ownership, development and
leasing of a site known as Washingtonian North, located in the City of
Gaithersburg, Maryland, and containing approximately 27.9787 acres of land, as
depicted on the survey attached hereto as Exhibit A (the "LAND"). BPLP's
interest in the Memorandum was assigned to Landlord pursuant to an Assignment
and Assumption of Memorandum of Agreement dated as of March 5, 1998. For
purposes of describing the phased development of the Land, the Land shall be
divided into three (3) parcels, referred to herein as the "PHASE I LAND", the
"PHASE II LAND", and the "PHASE III LAND", respectively, and to be more
particularly identified on the Approved Site Plan (as hereinafter defined).
B. Landlord has acquired the Land pursuant to that certain Contract of Sale
dated February 13, 1998, by and between Washingtonian Associates, L.C., as
Seller ("SELLER"), and Tenant, as Buyer (as amended, the "CONTRACT"), and a
Development Agreement between the same parties, also dated February 13, 1998,
both as assigned to the general partner of BPLP, Boston Properties, Inc.
("BPI"), pursuant to the Memorandum and an Assignment and Assumption of Contract
and Development Agreement between Tenant and BPI dated as of March 5, 1998, as
further assigned to BPLP pursuant to an Assignment and Assumption of Contract
and Development Agreement dated as of March 5, 1998, and as further assigned to
Landlord pursuant to an Assignment and Assumption of Contract and Development
Agreement dated as of March 25, 1998.
C. Pursuant to the Memorandum, Tenant has agreed to lease from Landlord the
Land and certain buildings to be constructed thereon, from time to time,
including, initially, one or more Class A suburban office buildings containing a
minimum of 300,000 square feet of Gross Floor Area (as defined in Section 24.1
of the Zoning Ordinance of the City of Gaithersburg) to be constructed on the
Phase I Land (the building or buildings, any parking deck and associated site
improvements to be constructed on the Phase I Land being referred to herein,
collectively, as the "BUILDING"). Certain terms and conditions governing the
development of the Land, the construction of the Building and additional
buildings on the Phase II Land and the Phase III Land, and Landlord's and
Tenant's respective options with regard to same are set forth in the Agreement
for the Phased Development of Washingtonian North entered into by Landlord and
Tenant concurrently herewith (the "PHASED DEVELOPMENT AGREEMENT"). The
obligations of Landlord thereunder are guaranteed by BPLP pursuant to a Guaranty
of even date herewith. The Building shall be constructed, and construction costs
shall be funded, pursuant to a Development
<PAGE> 2
Management Services Agreement being entered into concurrently herewith by and
among Himes Associates, Ltd., as development manager (the "DEVELOPMENT
MANAGER"), BPLP, Landlord and Tenant (the "PHASE I DEVELOPMENT SERVICES
AGREEMENT"), and in accordance with a site plan to be agreed upon by the parties
pursuant to the Phased Development Agreement. Such site plan, as finally
approved by all necessary governmental authorities, as it may thereafter be
amended from time to time (with all necessary governmental approvals obtained),
is referred to herein as the "APPROVED SITE PLAN". The Land, the Building and
any and all other buildings which may be constructed on the Land, from time to
time, are referred to herein, collectively, as the "COMPLEX".
D. Landlord and Tenant wish to set forth herein the terms and conditions
upon which Landlord shall lease the Land and the Building to Tenant.
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
covenant and agree as follows:
ARTICLE I
THE PREMISES
1.1 Landlord hereby leases and demises to Tenant and Tenant hereby leases
and accepts from Landlord, for the term and upon the terms and conditions
hereinafter set forth, the Land and the Building (collectively, the "PREMISES").
Upon the design of the Building and completion of construction documents, a
diagram of each floor of the Building, which together with the Land, comprise
the Premises, shall be added to this Lease as Exhibit A-1.
1.2 The Lease of the Premises includes the right to use the adjacent
parking areas and structures which shall be generally described on the Approved
Site Plan and the right to use any common areas and facilities (including the
Building's loading docks, doors, platforms, staging areas and freight elevators)
that are located in and adjacent to the Building, but includes no other rights
not specifically set forth herein. For only so long as Tenant continues to lease
the entire Building and Land comprising the initial Premises hereunder (the
"INITIAL PREMISES"), the foregoing right to use common areas shall include the
right to use the Phase II Land and the Phase III Land as a parking area to serve
the Building, as a park or picnic area or for such other ancillary uses as
Tenant may reasonably elect, provided such uses are appropriate ancillary uses
for a Class A suburban office building. The lease of the Premises also is
subject to all covenants, conditions and restrictions of record as of the date
hereof or recorded hereafter with the agreement of Tenant.
1.3 The area of the Building is expected to be not less than 300,000 square
feet of Gross Floor Area, with individual floors ranging between 22,000 and
35,000 square feet of Gross Floor Area. The parameters for the size and design
of the Building, and other terms and conditions upon which the Land will be
developed and the Building will be constructed are set forth in the Phased
Development Agreement. Although rent is payable during the initial Lease Term
hereunder in accordance with the rent formula and other terms and conditions of
Articles III and IV hereof, and is not calculated based upon the number of
square feet of rentable area in the Premises, the rentable area of the Premises
is relevant for certain other purposes under this Lease, as
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expressly provided herein. Accordingly, the number of rentable square feet in
the Building shall be determined by Landlord upon design and construction of the
Building, and shall be confirmed in the declaration described in Section 2.1(c)
below. For the purposes hereof, rentable area shall be calculated in accordance
with the Washington, D.C. Association of Realtors standard method of
measurement, as in effect as of the date of this Lease. Such rentable area
calculation shall be subject to confirmation prior to the Lease Commencement
Date by Tenant's independent architect. In the event the rentable area figure
determined by Tenant's architect differs by no more than one-half of one percent
(.5%) (higher or lower) from Landlord's figure, then Landlord's figure shall be
controlling. In the event the rentable area figure determined by Tenant's
architect differs by more than one-half of one percent (.5%) (higher or lower)
from Landlord's figure, then Landlord and Tenant (in coordination with their
respective architects) shall endeavor in good faith to resolve the discrepancy,
and in the event they are not able to resolve such discrepancy within thirty
(30) days following the Lease Commencement Date, then Landlord and Tenant shall,
within five (5) days after the expiration of such thirty (30) day period,
jointly appoint an independent architect who shall resolve such discrepancy
within ten (10) days following such independent architect's appointment, and the
determination of such independent architect shall be binding on both Landlord
and Tenant. Each party shall be responsible for its own architect's fees, and
the fees of such independent architect shall be shared equally by Landlord and
Tenant.
1.4 Hereafter, during the term of this Lease, the Phase II Land and/or the
Phase III Land may be excluded from the definition of the Land hereunder in the
event that any of several options or rights with respect to the Phase II Land or
the Phase III Land is exercised pursuant to the terms of the Phased Development
Agreement. If any such option or right is exercised, the parties will execute an
amendment to this Lease, removing the excluded land from the definition of the
Land and proportionately reducing the rent payable hereunder on account thereof,
as provided in Section 3.4 hereof. Any land that is excluded from the definition
of the Land hereunder, as aforesaid, shall thereafter cease to be part of the
Land and the Premises for all purposes hereunder. Similarly, if this Lease is
renewed pursuant to Article XXVI hereof, then, effective as of the commencement
of any renewal term hereunder, the Phase II Land and the Phase III Land (to the
extent not previously excluded herefrom pursuant to any of the provisions
hereof) shall be excluded from, and shall cease to be a part of, the Land and
the Premises for all purposes hereunder.
ARTICLE II
TERM
2.1 (a) The term of this Lease (hereinafter referred to as the "LEASE
TERM") shall commence on the Lease Commencement Date, as determined pursuant to
Section 2.1(b) below, and continue for a period of fifteen (15) years
thereafter, unless such Lease Term shall be extended, renewed or terminated
earlier in accordance with the provisions hereof. Notwithstanding the foregoing,
if the Lease Commencement Date shall occur on a day other than the first day of
a month, the Lease Term shall commence on such date and continue for the balance
of such month and for a period of fifteen (15) years thereafter. The term "LEASE
TERM" shall include any and all renewals and extensions of the term of this
Lease.
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(b) The "LEASE COMMENCEMENT DATE" shall be the earlier of (i) sixty
(60) days following the date on which the Building is, or is deemed to be,
substantially complete as determined pursuant to Section 7.3 of the Phase I
Development Services Agreement, (ii) the date on which Tenant commences the
conduct of its business upon any portion of the Premises comprising, in the
aggregate, seventy-five percent (75%) or more of the rentable area of the
Building (it being agreed that entry into the Premises for the installation of
communications equipment and wiring, the establishment of temporary staging
areas, temporary storage use or moving Tenant's furniture and fixtures into the
Premises shall not be considered the conduct of Tenant's business), or (iii)
June 30, 2001. The date specified in clause (iii) above shall be extended by one
(1) day for each day of delay caused by Force Majeure (as defined in Section
30.18 below), but not more than ninety (90) days in the aggregate. If one or
more full floors within the Premises is substantially complete prior to the
Lease Commencement Date, and if Tenant desires to occupy all or a portion of
such full floor(s) for the conduct of its business prior to the Lease
Commencement Date, then, unless and until such early occupancy includes 75% or
more of the rentable area of the Building, such early occupancy shall not cause
the Lease Commencement Date to occur, but all the terms of this Lease
(including, without limitation, the requirement that Tenant pay Annual Base Rent
and additional rent (each, as hereinafter defined) with respect to such full or
partial floors) shall apply with respect to each space thus occupied by Tenant
from the date that Tenant takes occupancy thereof for the conduct of its
business therein. In the case of any such partial occupancy prior to the Lease
Commencement Date, Annual Base Rent shall be determined based on projected Owner
Funded Project Costs as of the time of occupancy and shall be prorated based on
the ratio of the rentable area so occupied to the total rentable area of the
Building.
(c) Promptly after the Lease Commencement Date is ascertained,
Landlord and Tenant shall execute a written declaration setting forth the Lease
Commencement Date, the date upon which the Lease Term will expire, the exact
number of square feet of rentable area in the Premises, and the Annual Base
Rent. The form of such declaration is attached hereto as Exhibit B and made a
part hereof.
(d) Landlord shall take delivery of the Building, and Landlord's
obligations hereunder to operate and maintain the Building shall commence, at
such time as the Building is in fact (and not merely deemed to be) substantially
complete, as determined pursuant to Section 7.3 of the Phase I Development
Services Agreement. Any Expenses (as hereinafter defined) incurred by Landlord
on or after such date but prior to the Lease Commencement Date, shall be
included in Improvements Costs (as defined in Section 3.1(a) below) for purposes
of determining the Annual Base Rent payable hereunder.
2.2 For purposes of this Lease, the term "LEASE YEAR" shall mean either (a)
each period of twelve (12) consecutive calendar months commencing on the first
day of the month immediately following the month in which the Lease Commencement
Date occurs, and on each anniversary of such date, except that the first Lease
Year shall also include the period from the Lease Commencement Date to the first
day of the following month; or (b) if the Lease Commencement Date shall occur on
the first day of a calendar month, each period of twelve (12) consecutive
calendar months commencing on the Lease Commencement Date and on each
anniversary of such date; whichever is applicable.
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2.3 If the parties hereto enter into the Phase II Lease or the Phase III
Lease (as defined in the Phased Development Agreement), Tenant shall have the
right to extend the term of this Lease to be coterminous therewith, subject to
the following terms and conditions:
(a) If Tenant elects to cause improvements to be constructed on the
Phase II Land and enters into the Phase II Lease pursuant to the terms of the
Phased Development Agreement, Tenant shall have the right, at its option, to
extend the term of this Lease to run coterminously with the Phase II Lease, by
giving Landlord written notice thereof (the "EXTENSION OPTION NOTICE") not later
than the date that is twelve (12) months following the lease commencement date
under the Phase II Lease. Promptly after the lease commencement date under the
Phase II Lease has been ascertained or the Extension Option Notice has been
given (whichever is later), the parties hereto shall enter into an amendment to
this Lease setting forth the new expiration date of the term hereof. Tenant
shall have the similar right to extend the term of this Lease to be coterminous
with the Phase III Lease (if it is entered into), subject to the same terms and
conditions.
(b) Notwithstanding any of the foregoing to the contrary, in no event
shall the term of this Lease be extended pursuant to this Section 2.3 (whether
the extension is to render this Lease coterminous with the Phase II Lease, the
Phase III Lease, or both in succession) for a period of more than five (5) years
in the aggregate; however, Tenant's extension rights under this Section 2.3 may
be combined with its right to a Hybrid Renewal Term (pursuant to and as defined
in Section 26.5 below) if necessary in order to render this Lease coterminous
with the Phase II Lease or the Phase III Lease. For example, if this Lease is
extended for three (3) years to run coterminously with the Phase II Lease and
thereafter would need to be extended another four (4) years in order to run
coterminously with the Phase III Lease, then Tenant would be entitled to extend
this Lease pursuant to this Section 2.3 for only two (2) additional years, but
would be entitled to renew this Lease for a two (2) year Hybrid Renewal Term
pursuant to Section 26.5 below. If Tenant wishes to extend the Lease Term
pursuant to this Section 2.3 and a Hybrid Renewal Term is necessary in order to
render the lease coterminous with the Phase II Lease or the Phase III Lease (as
the case may be) then, upon giving the Extension Option Notice, the Lease Term
shall be deemed extended and renewed through the expiration of the Hybrid
Renewal Term; however, the rent payable during the Hybrid Renewal Term shall be
determined twelve (12) months prior to the commencement of such renewal term as
if the renewal right were first being exercised as of such time, as more
particularly provided in Section 26.5. In no event may Tenant extend the Lease
Term pursuant to this Section 2.3 and/or renew the Lease Term pursuant to
Section 26.5 for less than the full period of time necessary to render this
Lease coterminous with the Phase II Lease and/or the Phase III Lease (i.e., in
the example given above, Tenant would not be entitled to extend the Lease Term
for two (2) years pursuant to this Section 2.3 without also committing at the
time Tenant gives the Extension Option Notice to the two (2) year Hybrid Renewal
Term that would be necessary to render this Lease coterminous with the Phase III
Lease). The extension rights set forth in this Section 2.3 are in addition to,
and not in lieu of, the rights of renewal set forth in Article XXVI. Any
extension(s) of the Term pursuant to this Section 2.3 (excluding a Hybrid
Renewal Term) shall be deemed to extend the initial term of this Lease for
purposes of determining when the first Renewal Term would commence pursuant to
Article XXVI.
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(c) Any extension of this Lease pursuant to this Section 2.3 shall be
on the same terms and conditions set forth herein, with Annual Base Rent
continuing to escalate annually during the extension period, in the manner
described in Section 3.2 hereof.
(d) If a material Event of Default shall exist hereunder on the date
any Extension Option Notice is given to Landlord or on the lease commencement
date under the Phase II Lease or the Phase III Lease (as the case may be), then,
at Landlord's option, the Extension Option Notice shall be ineffective and
Tenant's right to extend the Term pursuant to such Extension Option Notice shall
lapse and be of no further force or effect. For purposes hereof, all monetary
defaults shall be deemed material defaults.
ARTICLE III
BASE RENT
3.1 During the first Lease Year, Tenant shall pay to Landlord as annual
base rent, net of all Expenses (which term is defined in Section 4.2 below), for
the Premises, without set off, deduction or demand, an amount equal to the sum
of the Land Rent and the Improvements Rent (each as hereinafter defined). The
"LAND RENT" shall be an amount equal to the product of (i) the Land Costs (as
hereinafter defined), multiplied by (ii) Nine and One-Half Percent (9.5%). The
"IMPROVEMENTS RENT" shall be an amount equal to the product of (x) the
Improvements Costs (as hereinafter defined), multiplied by (y) Nine and One-Half
Percent (9.5%). The Land Rent and the Improvements Rent (collectively, the
"ANNUAL BASE RENT") shall be subject to annual adjustment as provided in Section
3.2 hereof and possible further adjustment at the times and in the manner
described in Sections 3.4, 3.5 and 3.6 below. The Annual Base Rent payable
hereunder during each Lease Year shall be divided into equal monthly
installments and such monthly installments shall be due and payable in advance
on the first day of each month during such Lease Year. If the Lease Commencement
Date (determined pursuant to Section 2.1(b) hereof) occurs prior to a date when
final Land Costs and Improvements Costs (each, as hereinafter defined) are
ascertained, then Annual Base Rent shall initially be determined and payable
based on projections of such costs as of the Lease Commencement Date, as
reasonably determined by the Development Manager, Landlord and Tenant, and shall
thereafter be recalculated when such costs are ascertained. Upon such
recalculation, Landlord shall deliver to Tenant a written notice specifying (i)
the calculation of Annual Base Rent based upon actual Land Costs and
Improvements Costs, (ii) the Annual Base Rent that is payable to Landlord
hereunder for the period commencing on the Lease Commencement Date and
continuing through the date of such notice based on actual Land Costs and
Improvements Costs, and (iii) the Annual Base Rent that was in fact paid to
Landlord for the same time period. If the amount of Annual Base Rent paid by
Tenant for such time period exceeds the amount of Annual Base Rent payable for
such time period based on actual Land Costs and Improvements Costs, Landlord
shall credit the net overpayment against the next monthly installment(s) of
Annual Base Rent and additional rent due hereunder. Conversely, if Tenant's
actual liability for Annual Base Rent for such time period exceeds the sums
theretofore paid by Tenant on account thereof, Tenant shall pay the amount of
the deficiency within fifty (50) days following Tenant's receipt of Landlord's
notice. In either event, there shall be added to the excess that is to be
credited or the deficiency that is to be paid (whichever is applicable) a sum
equal to interest on each monthly component of the amount to be credited or paid
from the date
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each monthly component would have been payable if actual Land Costs and
Improvements Costs had been known on the Lease Commencement Date to the date of
the credit or payment pursuant to the reconciliation statement calculated at the
Interest Rate (as hereinafter defined). Effective as of the date of such notice
(the "RENT RECALCULATION DATE"), Tenant shall begin paying Annual Base Rent at
the recalculated rate. Any dispute between Landlord and Tenant as to the amount
of the Land Costs and Improvements Costs (whether projected or final) or the
allocation of any costs between Land Costs and Improvements Costs shall be
subject to binding arbitration pursuant to the procedures set forth in Article
XXVIII hereof.
(a) For purposes of calculating the Improvements Rent payable
hereunder, the term "IMPROVEMENTS COSTS" shall mean the sum of all direct and
indirect, hard and soft costs incurred (provided the cost incurred is
subsequently paid) or paid by BPLP or Landlord from and after March 26, 1998 in
connection with the design and construction of the Building or other
improvements on the Phase I Land (excluding any such costs that are not payable
by BPLP or Landlord pursuant to the terms of the Phased Development Agreement),
including but not limited to: (i) amounts paid pursuant to the Phase I
Development Services Agreement and construction contracts entered into pursuant
thereto that relate to the design and construction of improvements; (ii) all
costs of contractors, architects, suppliers, materialmen, surveyors and
engineers that relate to the design and construction of improvements, including
costs due to the negligence of third-party contractors and subcontractors which
are not covered by insurance or are not collectible from the party at fault;
(iii) all development fees payable pursuant to the Phase I Development Services
Agreement and the Phased Development Agreement that relate to the design and
construction of improvements; (iv) all costs incurred in connection with
obtaining all city, county and other governmental approvals that relate to the
design and construction of improvements; (v) all third-party legal and other
professional fees incurred by Landlord, BPLP or Tenant from and after the date
hereof in connection with the Approved Site Plan and the design and construction
of the Building, except legal fees incurred in connection with any dispute (as
defined in Section 9.1 of the Phased Development Agreement) or any lawsuit among
such parties (and excluding all legal fees and due diligence costs incurred by
Landlord prior to the date hereof); insurance premiums, Real Estate Taxes and
other Expenses (each as hereinafter defined) accrued prior to the Lease
Commencement Date; (vi) the costs of site-related work that primarily benefits
or serves the Phase I Land or the Building and does not have general application
to the overall development of the Complex ("SITE-SPECIFIC SITE COSTS"), such as
hardscape in and around the Building, landscaping adjacent to the Building, the
costs of extending utilities from the perimeter of the Phase I Land to the
Building, the costs of installing internal roads and pedestrian walkways
exclusively serving the Building and adjacent parking areas and which are not a
part of the primary road network and pedestrian walkways serving the Complex;
(vii) legal fees and expenses and other consultant, due diligence, brokerage and
other fees and expenses (including brokerage fees payable as directed by Tenant
in connection herewith) incurred by Tenant in connection with the acquisition
and development of the Land, all of which, in the aggregate, shall not exceed
the Development Allowance (as defined in the Phased Development Agreement);
(viii) all other costs includable in Owner Funded Project Costs pursuant to the
Phased Development Agreement that either (A) relate to the construction of
improvements or (B) are otherwise allocable to the Building or other
improvements on the Phase I Land; and (ix) interest on all of the foregoing
components of Improvements Costs from the date each such cost was paid to the
Lease Commencement Date hereunder (or to the Rent Recalculation Date, in the
case of any such costs which are not included in
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projected Improvement Costs as of the Lease Commencement Date, but are
subsequently included therein when actual costs are ascertained), calculated
based on a floating annual interest rate (the "INTEREST RATE") equal to one and
one-half (1.5) percentage points in excess of LIBOR (the particular LIBOR period
to be selected by Landlord and subject to change from time to time in Landlord's
sole discretion; provided that Landlord shall make such selections in good
faith, endeavoring to minimize such cost of carry). Landlord shall endeavor to
give Tenant notice of its LIBOR selections from time to time, but shall not be
in default hereunder for failure to do so unless such failure continues for ten
(10) days following Landlord's receipt of written notice of such failure from
Tenant.
(b) For purposes of calculating the Land Rent payable hereunder, the
term "LAND COSTS" shall mean and include the sum of the total acquisition costs
of the Land (including the contribution to the cost of the I-370 interchange),
together with all direct and indirect, hard and soft costs incurred (provided
the cost incurred is subsequently paid) or paid by BPLP or Landlord from and
after March 26, 1998 in connection with general site development work relating
to the development of the Land (excluding any such costs that are not payable by
BPLP or Landlord pursuant to the terms of the Phased Development Agreement and
excluding any Site-Specific Site Costs, which are included in the Improvements
Costs pursuant to subsection (a) above), including but not limited to: (i) road
club contributions, costs of on-site and off-site improvements required pursuant
to the Approved Site Plan, and any other expenditures required to be made as a
condition of site plan approval or other city or county approvals relating to
general site development work; (ii) all costs incurred in connection with
obtaining site plan approval and all other city, county and other governmental
approvals that relate to general site development work; (iii) all costs of
providing the primary road network serving the Complex, and pedestrian walkways
serving the Complex; (iv) all costs of providing storm water facilities to serve
the Complex, regardless of where situated; (v) directional signage and entrance
signage serving the Complex; (vi) the costs of landscaping at the Complex
entrance(s) and in any common areas of the Complex; (vii) all costs of providing
lighting that serves the Complex and bringing utilities to the Complex (e.g.,
electricity, gas, water and sewer, fiber optics, if applicable); (viii) all
costs relating to the I-370 interchange; (ix) amounts paid pursuant to the Phase
I Development Services Agreement and construction contracts entered into
pursuant thereto that relate to general site development work; (x) all costs of
contractors, architects, suppliers, materialmen, surveyors and engineers that
relate to general site development work, including costs due to the negligence
of third-party contractors and subcontractors which are not covered by insurance
or are not collectible from the party at fault; (xi) all development fees
payable pursuant to the Phase I Development Services Agreement and the Phased
Development Agreement that relate to general site development work; (xii) all
other costs includable in Owner Funded Project Costs pursuant to the Phased
Development Agreement that relate to general site development work; (xiii) all
other components of Owner Funded Project Costs that are not includable in
Improvements Costs; and (xiv) interest on all of the foregoing components of
Land Costs from the date each such cost was paid to the Lease Commencement Date
hereunder (or to the Rent Recalculation Date, in the case of any such costs
which are not included in projected Land Costs as of the Lease Commencement
Date, but are subsequently included therein when actual costs are ascertained),
calculated based on the Interest Rate (as defined in subsection (a) above).
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(c) It is understood and agreed that all costs and expenses comprising
Owner Funded Project Costs (as defined in the Phased Development Agreement) are
includable in either the Land Costs or the Improvements Costs, in accordance
with the respective definitions thereof set forth above, to the end that the sum
of the Land Costs and the Improvements Costs shall be equal to the Owner Funded
Project Costs.
3.2 Commencing on the first day of the second (2nd) Lease Year and on the
first day of each and every Lease Year thereafter, the Annual Base Rent payable
for such Lease Year shall be increased over the escalated Annual Base Rent in
effect during the preceding Lease Year by two percent (2%).
3.3 All rent shall be paid to Landlord, without set-off, deduction or
demand, in legal tender of the United States (i) at the address to which notices
to Landlord are to be given or to such other address as Landlord may designate
from time to time by written notice to Tenant, or (ii) by wire transfer in
accordance with wiring instructions to be provided to Tenant by Landlord at
least thirty (30) days prior to the Lease Commencement Date (or such alternative
wiring instructions as Landlord may designate from time to time by written
notice to Tenant). Any failure by Landlord to timely notify Tenant of such
wiring instructions shall not excuse the payment of rent by Tenant; however,
Tenant shall not be obligated to make any rent payment hereunder sooner than
five (5) business days following Tenant's receipt of Landlord's wiring
instructions. If Landlord shall at any time accept rent after it shall come due
and payable, such acceptance shall not excuse a delay upon subsequent occasions,
or constitute or be construed as a waiver of any of Landlord's rights hereunder.
3.4 The Land Rent comprising a portion of the Annual Base Rent payable
hereunder is subject to adjustment in the event that any portion of the land
included within the definition of the Land hereunder is excluded therefrom as a
result of the exercise of any of several options with respect to the Phase II
Land or the Phase III Land pursuant to the terms of the Phased Development
Agreement, subject to the terms and conditions set forth below. For purposes of
the foregoing, the Land Rent shall be allocated among the three phases,
according to the following allocation formula. The portion of the Land Rent
hereunder allocable to any one of the three phases at any given time shall be
the product of (i) the total Land Rent then in effect (as escalated pursuant to
Section 3.2 hereof), multiplied by a fraction, the numerator of which shall be
the maximum number of square feet of Gross Floor Area permitted to be
constructed on such phase of the Land (according to the Approved Site Plan), and
the denominator of which shall be the maximum number of square feet of Gross
Floor Area permitted to be constructed on the entire Land (according to the
Approved Site Plan). All rent prorations hereunder (and under the Phase II Lease
and Phase III Lease, if in effect) that are made based upon the foregoing
allocation formula shall be recalculated and adjusted from time to time,
prospectively, in the event that the maximum number of square feet of Gross
Floor Area on any phase changes as a result of an amendment to the Approved Site
Plan, as permitted pursuant to the Phased Development Agreement, effective as of
the date approval of the amendment becomes final (determined in accordance with
Section 1.6 of the Phased Development Agreement). The rent adjustments that
would result from the exercise of the options referred to above shall be made as
follows:
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(a) If Tenant exercises its option pursuant to Section 3.1 of the
Phased Development Agreement to cause the construction of improvements on the
Phase II Land, then the Phase II Land and the improvements constructed thereon
shall be leased to Tenant by Landlord pursuant to the Phase II Lease (as defined
in the Phased Development Agreement). Effective as of the Lease Commencement
Date under the Phase II Lease, the Phase II Land shall be excluded from the Land
hereunder and the Annual Base Rent payable hereunder shall be proportionately
reduced by subtracting therefrom the portion of the Land Rent that is allocable
to the Phase II Land based on the allocation formula set forth above in this
Section 3.4. The Phase III Land shall similarly be excluded from the Land
hereunder and the Land Rent component (including any Supplemental Land Rent) of
the Annual Base Rent hereunder shall be similarly reduced, effective as of the
Lease Commencement Date under the Phase III Lease, if Tenant exercises its
option pursuant to Section 4.1 of the Phased Development Agreement to cause the
construction of improvements on the Phase III Land.
(b) If Landlord exercises its right pursuant to Section 3.8 of the
Phased Development Agreement to terminate Tenant's rights with respect to the
Phase II Land, then, as of the effective date of the exercise of such option (as
specified in the Phased Development Agreement, and provided such exercise is not
nullified pursuant to the terms of the Phased Development Agreement), the Phase
II Land shall be excluded from the Land hereunder and the Annual Base Rent
payable hereunder shall be adjusted in the following manner. The Annual Base
Rent payable hereunder shall be reduced by an amount equal to the greater of (a)
the product of (i) nine and one-half percent (9.5%), multiplied by (ii) the then
fair market value of the Phase II Land, or (b) the portion of the then-current
Land Rent payable hereunder that is allocable to the Phase II Land, based on the
allocation formula set forth above in this Section 3.4; provided that, if the
sum described in clause (a) is greater than the entire then-current Land Rent,
then Landlord may elect, at its option, to reduce the Annual Base Rent by the
entire then-current Land Rent and to pay to Tenant a sum equal to the present
value of the difference between (i) the aggregate rent reduction that would
result over the remainder of the initial Lease Term if Annual Base Rent were
reduced by the amount specified in clause (a), and (ii) the aggregate rent
reduction that results over the remainder of the initial Lease Term due to such
reduction of the Annual Base Rent by the entire then-current Land Rent, applying
an annual discount rate of eight and one-half percent (8.5%). The Phase III Land
shall similarly be excluded from the Land hereunder and the Land Rent component
(including any Supplemental Land Rent) of the Annual Base Rent hereunder shall
be similarly reduced if Landlord exercises its option pursuant to Section 4.8 of
the Phased Development Agreement to terminate Tenant's rights with respect to
the Phase III Land. In addition, the Phase I Land, the Phase II Land and/or the
Phase III Land may be excluded from the Land hereunder following an Event of
Default by Landlord under the Phased Development Agreement, as provided in
Sections 7.5, 7.6 and 7.7 of the Phased Development Agreement. In any such
event, the Land Rent component (including any Supplemental Land Rent) of the
Annual Base Rent hereunder shall be reduced as provided in this Subsection (b).
(c) If Tenant exercises its right pursuant to Section 3.7 of the
Phased Development Agreement to "put" the Phase II Land back to Landlord, then,
as of the effective date of the exercise of such option (as specified in the
Phased Development Agreement, and provided such exercise is not nullified
pursuant to the terms of the Phased Development Agreement), the Phase II Land
shall be excluded from the Land hereunder and the Annual Base Rent payable
hereunder
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shall be adjusted in the following manner. The Annual Base Rent payable
hereunder shall be reduced by an amount equal to the lesser of (a) the product
of (i) nine and one-half percent (9.5%), multiplied by (ii) the then fair market
value of the Phase II Land, or (b) the portion of the Initial Land Rent (as
hereinafter defined) payable hereunder that is allocable to the Phase II Land,
based on the allocation formula set forth above in this Section 3.4. The Phase
III Land shall similarly be excluded from the Land hereunder and the Land Rent
component (including any Supplemental Land Rent) of the Annual Base Rent
hereunder shall be similarly reduced if Tenant exercises its option pursuant to
Section 4.7 of the Phased Development Agreement to "put" the Phase III Land back
to Landlord. As used in this subsection (c) the term "INITIAL LAND RENT" means
the unescalated Land Rent as payable hereunder during the first Lease Year,
plus, if any components of Supplemental Land Rent (as hereinafter defined) are
payable hereunder, the unescalated components of Supplemental Land Rent payable
hereunder during the first Lease Year in which each such component of
Supplemental Land Rent shall have become payable.
(d) Promptly following the effective date of each exercise by Landlord
or Tenant of their respective rights described in subsections (b) and (c) above,
Landlord and Tenant shall commence negotiations concerning the fair market value
of the Phase II Land or the Phase III Land (whichever shall be the subject of
the option so exercised). The parties shall have thirty (30) days after the
effective date of the exercise of the subject right in which to agree on such
fair market value. If, during such negotiation period, the parties are unable to
agree on such fair market value, then Landlord and Tenant shall each, within
seven (7) days from the expiration of the thirty (30) day period described
above, designate an independent, licensed real estate broker or a licensed real
estate professional associated with a licensed real estate broker who shall have
more than eight (8) years' experience as a real estate broker specializing in
the sale of commercial office buildings, and who shall have expertise with the
commercial real estate market in which the Building is located ("independent"
broker or real estate professional having the meaning set forth in Section
26.3(b) hereof). Said brokers shall each determine fair market value within
fifteen (15) days after their appointment. If the lower of the two
determinations is not less than ninety-five percent (95%) of the higher of the
two determinations, then fair market value shall be the average of the two
determinations. If the lower of the two determinations is less than ninety-five
percent (95%) of the higher of the two determinations, then the two brokers
shall render separate written reports of their determinations and within fifteen
(15) days thereafter the two brokers shall appoint a third broker with like
qualifications. Within fifteen (15) days after the appointment of the third
(3rd) broker, the third broker shall make an independent determination of fair
market value (without knowledge of the determinations of the first two brokers).
If three brokers are used to determine fair market value, then, for purposes of
this Section 3.4(d), fair market value shall equal the average of the two
closest determinations; provided, however, that (i) if any one determination is
agreed upon by any two of the brokers, then fair market value shall be such
determination, and (ii) if any one determination is equidistant from the other
two determinations, then fair market value shall be such middle determination.
Landlord and Tenant shall each bear the cost of its broker and shall share
equally the cost of the third broker. In determining fair market value, the
parties and, if applicable, the brokers, shall consider (i) the floor area ratio
capacity for the Phase II Land or the Phase III Land (whichever is applicable),
(ii) the structured parking requirements associated therewith, (iii) location,
highway access and visibility, (iv) proximity to amenities, (v) site design and
aesthetics, and (vi) the condition of the site.
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3.5 It is the intention of the parties that all three land phases bear
their pro rata portion of all costs of the type includable in Land Costs
hereunder that are associated with the initial and any subsequent development of
the Land. Accordingly, in addition to the adjustments to the Land Rent that are
to be made pursuant to Section 3.4, the Land Rent comprising a portion of the
Annual Base Rent payable hereunder is subject to further adjustment in the event
that Supplemental Land Costs (as hereinafter defined) are later incurred in
connection with the development of the Phase II Land or the Phase III Land, as
provided in this Section 3.5. For purposes hereof "SUPPLEMENTAL LAND COSTS"
associated with a subsequent phase of development shall be defined as the sum of
all costs and expenses of the types included in the definition of Land Costs
hereunder that are incurred (provided the cost incurred is subsequently paid) or
paid by Landlord in connection with the further development of the Phase II Land
or the Phase III Land (as the case may be), including, but not limited to, the
costs of extending the primary road network and pedestrian walkways serving the
Complex to serve subsequent phases; the costs of extending utilities to the
perimeter of a subsequent phase; the costs of expanding storm water facilities
to serve subsequent phases; the costs of developing, installing lighting in, and
landscaping entrances to the Complex and other common areas of the Complex; and
the costs of installing directional signage and entrance signage in common areas
situated on subsequent phases; provided that, the interest component thereof
(which is comprised of interest on the other components of the Supplemental Land
Costs) shall be calculated based on the Phase II Cost of Carry Rate (as defined
in the Phased Development Agreement). Supplemental Land Costs shall not include
the incremental site development costs attributable to the removal of any
temporary parking lot or other interim use from the Phase II Land or the Phase
III Land, which incremental costs shall be payable in accordance with the Phased
Development Agreement.
(a) If the Phase II Land is developed, either pursuant to Tenant's
exercise of the Phase II Option, or by Landlord for its own account, then the
Land Rent payable hereunder shall be increased, effective as of the Lease
Commencement Date under the Phase II Lease, if applicable, or, if Landlord is
developing the Phase II Land for its own account, ninety (90) days after
substantial completion of Landlord's work on the Phase II Land, by adding to the
Land Rent then in effect hereunder a sum equal to a pro rata share of the
Supplemental Land Rent II (as hereinafter defined), based on the ratio of (i)
the maximum number of square feet of Gross Floor Area permitted to be
constructed on the Land remaining under this Lease after the Phase II Land is
excluded herefrom (based on the Approved Site Plan), to (ii) the maximum number
of square feet of Gross Floor Area permitted to be constructed on the entire
Land (based on the Approved Site Plan). The "SUPPLEMENTAL LAND RENT II" shall be
equal to the product of (x) the Phase II Interest Rate (as defined in the Phased
Development Agreement), multiplied by (y) the Supplemental Land Costs associated
with the development of the Phase II Land.
(b) The Land Rent payable hereunder shall be similarly increased if
the Phase III Land is developed, either pursuant to Tenant's exercise of the
Phase III Option, or by Landlord for its own account, effective as of the Lease
Commencement Date under the Phase III Lease, if applicable, or if Landlord is
developing the Phase III Land for its own account, ninety (90) days following
substantial completion of Landlord's work on the Phase III Land, by adding to
the Land Rent then in effect hereunder a pro rata share of the Supplemental Land
Rent III (as hereinafter defined), based on the ratio of (i) the maximum number
of square feet of Gross Floor Area per-
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mitted to be constructed on the Land remaining under this Lease after the Phase
III Land is excluded herefrom (based on the Approved Site Plan), to (ii) the
maximum number of square feet of Gross Floor Area permitted to be constructed on
the entire Land (based on the Approved Site Plan). The "SUPPLEMENTAL LAND RENT
III" shall be equal to the product of (x) the Phase III Interest Rate (as
defined in the Phased Development Agreement), multiplied by (y) the Supplemental
Land Costs associated with the development of the Phase III Land.
(c) The Supplemental Land Rent II and the Supplemental Land Rent III
are sometimes referred to herein collectively as the "SUPPLEMENTAL LAND RENT."
3.6 The Improvements Rent comprising a portion of the Annual Base Rent
payable hereunder may be subject to increase in connection with (i) any
construction of a structured parking facility subsequent to the initial
construction of the Building, as provided in Section 6.4 of the Phased
Development Agreement; and (ii) any construction of an Ancillary Structure, as
provided in Section 5.7 of the Phased Development Agreement. The Land Rent
comprising a portion of the Annual Base Rent payable hereunder shall be subject
to increase in the event that an Ancillary Structure is leased pursuant to this
Lease, but is situated on a Phase that ceases to be leased by Tenant, as
provided in Section 5.7 of the Phased Development Agreement.
3.7 At the time that the Annual Base Rent payable hereunder is adjusted
pursuant to Sections 3.4, 3.5 or 3.6 hereof (including any readjustments thereof
on account of any amendments to the Approved Site Plan), the parties shall
execute an amendment to this Lease, setting forth the new Annual Base Rent
payable hereunder.
ARTICLE IV
ADDITIONAL RENT
4.1 An integral part of Landlord's leasing program for the Building
involves the requirement that Tenant bear the costs and expenses incurred each
year in the operation of the Building and the Land. For so long as Tenant is the
sole tenant of the Building, Tenant shall have the right to provide input into
the determination of such annual costs and expenses, as follows. Within sixty
(60) days following the Lease Commencement Date, and on or before November 15 of
the first full calendar year following the Lease Commencement Date and on or
before November 15 annually thereafter, Landlord shall prepare and submit to
Tenant a proposed budget or other form of summary identifying with reasonable
detail the anticipated categories of expenditures to be made, proposed major
vendors to provide services and proposed scope of services (including, but not
limited to, security services) to be provided by Landlord for the ensuing
calendar year in the operation and maintenance of the Building and the Land (the
"OPERATING PLAN"). If Tenant has reasonable additions, deletions or
modifications to any elements of Landlord's proposed Operating Plan , Tenant
shall notify Landlord of same within thirty (30) days following receipt of the
proposed Operating Plan and Landlord shall incorporate Tenant's reasonable
additions, deletions and modifications into Landlord's proposed Operating Plan
and shall operate the Building substantially in accordance therewith; provided
that, in no event shall Landlord be obligated to operate the Building or the
Land in a manner that is inconsistent with the standards of a Class A suburban
office building. The Operating Plan (as it may be revised with Tenant's input as
aforesaid) shall
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<PAGE> 14
serve as a general guide to the scope of services to be provided and
expenditures to be made in the operation and maintenance of the Building and
Land and Landlord shall not deviate therefrom in any material manner without
first obtaining Tenant's prior written consent, which consent shall not be
unreasonably withheld, conditioned or delayed, and shall be deemed given if not
withheld in writing within seven (7) business days following Landlord's notice
thereof to Tenant; provided that, in case of emergency or in any case in which
Landlord reasonably believes delay might cause injury to persons, material
injury to property or a violation of any Legal Requirement, Landlord may act
without Tenant's prior written consent. Any failure of Landlord to timely
provide an annual Operating Plan to Tenant as provided herein shall not relieve
Tenant of its obligation to pay additional rent pursuant to this Article IV.
4.2 The costs and expenses (the "EXPENSES") for which Tenant shall be
responsible are defined as follows:
(a) "OPERATING EXPENSES" shall mean and include those direct
reasonable expenses actually incurred and paid in operating and maintaining the
Building and the Land in a manner consistent with the operating and maintenance
standards observed at similar Class A suburban office buildings located in the
North Bethesda/Rockville/Gaithersburg corridor, including the following: (1)
electricity, gas, water, sewer and other utility charges of every type and
nature; (2) premiums and other charges for insurance (including, but not limited
to, property insurance, rent loss insurance and liability insurance) incurred in
accordance with Section 12.2 hereof; (3) all management fees incurred in the
management of the Building (subject to the limitation set forth below); (4) all
costs incurred in connection with service and maintenance contracts; (5)
maintenance and repair expenses and supplies; (6) amortization (calculated on a
straight-line basis over the useful life of the improvement, with interest at
Landlord's applicable cost of funds or, if the improvement is not financed, at
the prime rate reported in The Wall Street Journal) for capital expenditures
made by Landlord, but only to the extent that they (i) result in a net decrease
in Operating Expenses, or (ii) are made in the last five (5) years of the Lease
Term as a result of Legal Requirements enacted after the date of this Lease; (7)
salaries, wages, benefits and other expenses of Building personnel, together
with the costs of maintaining engineering, maintenance and/or management offices
in the Building (which costs shall not include imputed rent for the space in the
Building occupied for such purposes); (8) legal fees (except as excluded below),
administrative expenses, and accounting, architectural and other professional
fees and expenses, except those that are normally absorbed by the property
manager and not charged separately to Landlord in addition to management fees;
(9) costs of any service not provided to the Building on the Lease Commencement
Date but thereafter provided by Landlord pursuant to the then current Operating
Plan established pursuant to Section 4.1 above, provided pursuant to the request
of Tenant, otherwise provided pursuant to Section 4.1 above, or, during any time
that Tenant is not the sole tenant of the Building, provided in the prudent
management of the Building; (10) charges for concierge, security, janitorial,
char and cleaning services and supplies furnished to the Building (except that
costs of furnishing char and janitorial service to any space in the Building
shall be excluded so long as Tenant is furnishing its own char and janitorial
service to such space pursuant to Section 6.6 below); (11) costs associated with
the provision or operation of any common facilities, including (without
limitation) parking areas, landscaped areas, access roads, and the Building's
loading dock; (12) fees and assessments payable pursuant to any declaration of
covenants recorded against the Land or any property owners' association
affecting the Land; and (13) any
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<PAGE> 15
other reasonable expense incurred by Landlord in maintaining, repairing or
operating the Building or the Complex. Any provision herein to the contrary
notwithstanding, Operating Expenses shall not include the following:
(i) the cost of any work performed (such as preparing a tenant's space for
occupancy, including painting and decorating) or services provided
(such as separately metered electricity) for any tenant (including
Tenant) at such tenant's cost, or provided by Landlord without charge
(such as free rent or improvement allowances);
(ii) salaries, benefits and other compensation of Landlord's officers,
partners, its headquarters staff and personnel above the grade of
superintendent or building manager of Landlord or its managing agent;
(iii) the cost of any work performed or service provided for any tenant of
the Building (other than Tenant, if any) to a materially greater
extent or in a materially more favorable manner than that furnished
generally to the other tenants and occupants;
(iv) the cost of any items for which Landlord is reimbursed by insurance
proceeds (or would have been so reimbursed if Landlord had maintained
the insurance required pursuant to Section 12.2 hereof), condemnation
awards, or otherwise, or for which Landlord is actually reimbursed or
is entitled to be reimbursed by another tenant of the Building;
(v) the cost of any additions, changes, or replacements which under
generally accepted accounting principles are properly classified as
capital expenditures, except to the extent includable pursuant to
clause (6) above and subject to Tenant's obligations with respect to
capital expenditures pursuant to Section(s) 4.8 and 6.2 below;
(vi) the cost of any repair made in response to any fire or casualty damage
(except for the amount of any commercially reasonable "deductible"
under Landlord's property insurance) or any condemnation;
(vii) interest and principal payments on any debt, depreciation, and rental
under any ground lease or other underlying lease;
(viii) any real estate brokerage commissions or other costs incurred in
procuring tenants, or any fee in lieu of commission;
(ix) property management fees in excess of two percent (2%) of the Annual
Base Rent payable hereunder from time to time; provided that, such 2%
maximum fee shall be increased to two and one-quarter percent (2.25%)
if Landlord provides janitorial service to the Premises pursuant to
Section 13.3 below;
(x) any costs representing an amount paid to an entity related to or
affiliated with Landlord to the extent in excess of the amount which
would have been paid in the absence of such a relationship;
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<PAGE> 16
(xi) any expenses for repairs or maintenance which are covered by
warranties, guaranties or service contracts (excluding any mandatory
deductibles);
(xii) legal expenses arising out of the construction, sale, financing or
refinancing of the Land or the Building, or the enforcement of the
provisions of any tenant's lease or organizational matters of
Landlord;
(xiii) insurance premiums to the extent of any refunds thereof;
(xiv) incremental costs necessitated by or resulting from the negligence or
willful misconduct of Landlord, its managing agent, or its employees
or from the gross negligence or willful misconduct of Landlord's
independent contractors or other agents;
(xv) costs arising out of a sale, financing or refinancing of the Land or
the Building;
(xvi) costs associated with the operation of the business entity of
Landlord, including partnership audit, business entity accounting, and
business entity legal matters;
(xvii) interest, fines and penalties associated with Landlord's making any
late payments; and
(xviii) any costs or expenses incurred in connection with the remediation
or removal of Hazardous Materials.
In the event a single expenditure pays for the provision of a good or service to
both the Building and any other building in the Complex or owned by Landlord,
then Expenses shall include only the portion of such payment that is equitably
allocable to the Building, as reasonably determined by Landlord and disclosed in
writing to Tenant. Similarly, if any expenditure (whether in the nature of
Operating Expenses or Real Estate Taxes (as defined below) benefits or otherwise
relates to the Land and/or Building hereunder, as well as other land and/or
buildings (including any land that may have been excluded from the Land
hereunder pursuant to Section 1.4 hereof), then Expenses shall include only the
portion of such expenditure that is equitably allocable to the Land and/or
Building hereunder (as they may be constituted from time to time), as reasonably
determined by Landlord and disclosed in writing to Tenant.
(b) "REAL ESTATE TAXES" shall mean and include (i) all real property
taxes, including general and special assessments, if any, which are imposed upon
Landlord in connection with the Building and/or the Land or assessed against the
Building and/or the Land; (ii) any other present or future taxes or governmental
charges which are imposed upon Landlord in connection with the Building and/or
the Land, or assessed against the Building and/or the Land, including, but not
limited to, any tax levied on or measured by the rents payable by tenants in the
Building which are in the nature of, or in substitution for, real property
taxes; and (iii) all taxes which are imposed upon Landlord, and which are
assessed against the value of any improvements to the Premises made by Tenant or
any machinery, equipment, fixtures or other personal property of Tenant used
therein. In no event shall "Real Estate Taxes" include (A) income or net profit
taxes imposed upon Landlord, except to the extent such taxes are in substitution
for real property taxes, (B) the amount of any special taxes or special
assessments actually paid by Landlord in any calendar year in excess of the
minimum installment of special taxes or special assessments required to
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be paid by Landlord during such calendar year (it being agreed that Landlord
shall elect the longest period of time allowed by the authority imposing the tax
or assessment in which to pay installments of special taxes or special
assessments that are to be prorated over several years), or (C) franchise, stock
and inheritance or estate taxes. Tenant may request that all real estate taxing
authorities, when issuing notices of assessment and real estate tax bills with
respect to the Building or the Land, issue such notices and bills to both
Landlord and Tenant simultaneously, and Landlord shall cooperate with such
request. If any such taxing authority will not agree to same, then Tenant shall
so notify Landlord and Landlord shall thereafter endeavor to furnish to Tenant a
copy of each such notice of assessment or real estate tax bill that Landlord
receives from such taxing authority with respect to the Building and/or the Land
within thirty (30) days following Landlord's receipt thereof and shall be
obligated to furnish to Tenant a copy thereof (if available) within ten (10)
days following Landlord's receipt of Tenant's written request therefor. Landlord
shall make a determination whether or not to challenge or appeal such assessment
based on Landlord's reasonable judgment of which course is in the best interest
of the Building. So long as Tenant is leasing not less than seventy-five percent
(75%) of the rentable area of the Building, Landlord shall inform Tenant of such
determination, and shall make available appropriate personnel to discuss with
Tenant the reasons underlying such determination. In the event Landlord
determines not to challenge or appeal such assessment (or, having undertaken to
appeal or challenge such an assessment, does not pursue the appeal or challenge
with due diligence and continuity), and provided Tenant is leasing the minimum
square footage specified in the preceding sentence, Landlord agrees that Tenant
may appeal or challenge such assessment in Landlord's place and stead and that
Landlord will join in and cooperate with Tenant in prosecuting such appeal or
challenge; provided, however, that such appeal or challenge shall be undertaken
at Tenant's sole cost and at no expense to Landlord (except that, if Tenant's
appeal or challenge is successful, then Tenant may recover its costs out of the
refund or reduction of Real Estate Taxes achieved by Tenant prior to allocating
such reduction to the tenants of the Building).
4.3 Tenant shall pay to Landlord, as additional rent for the Premises, the
Expenses incurred by Landlord in the operation of the Building and the Land
during any calendar year falling entirely or partly within the Lease Term, but
the Expenses for any calendar year during the Lease Term shall be apportioned so
that Tenant shall pay only that portion of such Expenses for such year as fall
within the Lease Term. This provision shall survive the expiration or earlier
termination of this Lease. Tenant shall also pay the Expenses incurred by
Landlord during any period of partial occupancy prior to the Lease Commencement
Date pursuant to Section 2.1(b) hereof.
4.4 If, during any period in which the Building is multi-tenanted, the
occupancy rate for the Building during any calendar year is less than
ninety-five percent (95%), or if any office tenant is separately paying for
electricity or janitorial services furnished to its premises, then Expenses for
such calendar year shall be deemed to include all additional expenses with
respect to those Expenses that vary in accordance with the occupancy of the
Building, as reasonably estimated by Landlord, which would have been incurred
during such calendar year if the occupancy rate for the Building had been
ninety-five percent (95%) and if Landlord paid for electricity and janitorial
services furnished to such premises. This provision shall not operate in a
manner that would permit Landlord to recover from Tenant additional rent on
account of Operating Expenses for any calendar year which, when added to the
total additional rent payable by all tenants of the Building
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on account of Operating Expenses for such year will exceed the actual Operating
Expenses incurred by Landlord for such year.
4.5 Commencing on the Lease Commencement Date and on the first day of each
month thereafter, Tenant shall make estimated monthly payments to Landlord on
account of the Expenses that are reasonably expected to be incurred during each
calendar year falling entirely or partly within the Lease Term. The amount of
such monthly payments shall be determined as follows: Commencing with the Lease
Commencement Date (or such earlier date as of which Expenses may be payable by
Tenant pursuant to Section 4.3) and at the beginning of each calendar year
thereafter, Landlord shall submit to Tenant a statement setting forth Landlord's
reasonable estimate of the Expenses that are expected to be incurred during such
calendar year (and, if the Building is then multi-tenanted, Tenant's
proportionate share thereof). Provided that Tenant receives such statement at
least fifty (50) days in advance, Tenant shall pay to Landlord on the first day
of each month following receipt of such statement during such calendar year an
amount equal to (A) the excess of (i) the anticipated Expenses (or Tenant's
proportionate share thereof, during any period in which the Building is
multi-tenanted) for the full calendar year (or the portion of such calendar year
that falls within the Lease Term) over (ii) the monthly payments made by Tenant
(on the basis of the estimate in effect during the preceding calendar year)
prior to the commencement of payments made on the basis of Landlord's estimate
for the current calendar year, multiplied by (B) a fraction, the numerator of
which is one (1) and the denominator of which is the number of months during
such calendar year which fall within the Lease Term and follow the date of the
foregoing statement. Within approximately ninety (90) days after the expiration
of each calendar year, Landlord shall submit to Tenant a statement certified by
Landlord (the "RECONCILIATION STATEMENT"), showing (i) the Expenses actually
incurred during the preceding calendar year (and, during any period in which the
Building is multi-tenanted, Tenant's proportionate share thereof), and (ii) the
aggregate amount of the estimated payments made by Tenant on account thereof. If
the aggregate amount of such estimated payments exceeds Tenant's actual
liability for such Expenses, then Landlord shall credit the net overpayment
against the next monthly installment(s) of Annual Base Rent and additional rent
coming due under this Lease (or if the Lease Term has ended, shall pay such net
overpayment to Tenant within thirty (30) days after providing such
Reconciliation Statement to Tenant). If Tenant's actual liability for such
Expenses exceeds the estimated payments made by Tenant on account thereof, then
Tenant shall pay to Landlord the total amount of such deficiency within fifty
(50) days after its receipt of the Reconciliation Statement from Landlord. In
the event Landlord has failed to deliver a Reconciliation Statement to Tenant
within ninety (90) days after the expiration of a calendar year, Tenant may
deliver to Landlord a written demand that the Reconciliation Statement be
delivered within sixty (60) days following the date of delivery of Tenant's
demand notice, and if Landlord fails to deliver the Reconciliation Statement to
Tenant within sixty (60) days after the date of delivery of Tenant's demand
notice, then Landlord shall forfeit the right to bill Tenant for any amount on
account of Expenses incurred during such calendar year in excess of the
estimated payments made by Tenant during such calendar year (but Tenant shall
not forfeit the right to be reimbursed for any overpayment if its estimated
payments exceeded the actual Expenses, and Landlord shall not be excused from
its obligation to deliver the Reconciliation Statement). The provisions of this
paragraph shall survive the expiration or earlier termination of this Lease.
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4.6 Tenant or its designee shall have the right, during business hours and
upon reasonable prior notice, from time to time to inspect and make copies of
Landlord's books and records relating to Expenses, and/or to have such books and
records audited at Tenant's expense by an independent certified public
accountant or other qualified consultant designated by Tenant, not more than ten
percent (10%) of the fees of whom shall be determined on a contingent basis,
except that any audit that discloses that annual Expenses have been overstated
by more than five percent (5%) shall be at Landlord's expense. Any discrepancy
shall be corrected by a payment of any shortfall to Landlord by Tenant, or a
refund of any overpayment to Tenant by Landlord, within thirty (30) days after
the applicable audit. In the event Tenant does not contest a statement of
Expenses within three (3) years after the date it receives a Reconciliation
Statement (and provided Landlord has cooperated with Tenant undertaking an audit
of Landlord's books and records, if so requested by Tenant), such Reconciliation
Statement shall become binding and conclusive upon each party.
4.7 So long as Tenant is the sole tenant of the Building, Tenant may
request that electric utility bills be sent directly from the electricity
provider to Tenant, in which event Tenant shall be obligated to pay all charges
for electricity directly to such electricity provider as and when due. If Tenant
ceases to be the sole tenant of the Building, Tenant may request that
electricity furnished to the Premises be separately metered, in which event
Landlord shall, subject to any conditions or limitations imposed by the
electricity provider, install a submeter or checkmeter at Tenant's expense.
Following any such separate metering, Tenant shall timely pay directly to the
appropriate utility all charges for electricity furnished to the Premises (and
the charges for such separately metered electricity shall not be included in
Operating Expenses). Notwithstanding anything contained herein to the contrary,
if Tenant fails to pay any electric bill that is provided directly to Tenant by
the electric utility as and when due, such failure shall constitute a default
hereunder. If any such default is not cured within ten (10) days following
written notice from Landlord, then Landlord shall have the right, but shall not
be obligated, to pay the delinquent amounts, and Tenant shall reimburse Landlord
therefor within five (5) days after receiving notice of such payment by
Landlord; provided that Landlord may act without notice to Tenant if delay would
cause an interruption of utility services, an emergency or similar situation.
4.8 Except as otherwise provided in Sections 4.2(a)(6), Section 6.2 and
this Section 4.8, Landlord shall bear the cost of, and shall not pass through to
Tenant as an Expense hereunder, any necessary or appropriate capital
expenditures constituting additions or changes to, or replacements of, the base
building systems and other base building components of the Building ("BASE
BUILDING CAPITAL EXPENDITURES"); provided that, Landlord shall not be obligated
to make any such capital repair or replacement to specifications that exceed
building standard specifications unless Tenant agrees to pay in full, at the
time the Base Building Capital Expenditure is incurred, the excess cost of such
Tenant-upgraded capital repair or replacement over the cost of making such
capital replacement or repair to building standard specifications. In addition,
any necessary or appropriate capital expenditures constituting additions or
changes to, or replacements of, any of Tenant's tenant improvements shall be
payable in full by Tenant at the time the capital expenditure is incurred. For
purposes hereof, "building standard" specifications shall mean specifications
customary in Class A suburban office buildings in the North
Bethesda/Rockville/Gaithersburg corridor.
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4.9 In addition to all other rent payable hereunder, Tenant shall pay to
Landlord annually, as additional rent hereunder, the Excess Operating Hours Rent
(as defined in Section 13.1 below), if any, payable in accordance with the terms
of Section 13.1.
ARTICLE V
SECURITY DEPOSIT
5.1 (a) Tenant shall be obligated to post, as the "SECURITY DEPOSIT"
hereunder, a sum equal to one-twelfth (1/12) of the initial Annual Base Rent
payable hereunder. Because the Annual Base Rent has not been fixed as of the
date hereof, the parties have agreed that, within three (3) business days
following the execution of this Lease, Tenant shall deliver to Landlord the sum
of Five Hundred Thousand Dollars ($500,000), to serve as the security deposit
until the Annual Base Rent is fixed hereunder. Within fifty (50) days after the
execution of the declaration attached hereto as Exhibit B or such earlier date
as the Annual Base Rent is determined, Tenant shall supplement the amount
previously deposited, or Landlord shall return a portion of the sum previously
deposited, as appropriate to maintain a security deposit in the amount specified
in the first sentence of this Section 5.1(a). The security deposit will be
deposited in a separate, interest-bearing account maintained by Landlord with a
depository selected by Tenant and approved by Landlord, in its reasonable
discretion, with interest accruing to the benefit of Tenant. Interest on the
security deposit (if it is in the form of cash) shall be disbursed to Tenant no
less often than on a quarterly basis. Following an Event of Default, interest
earned on the security deposit shall be added to and become a part of the
security deposit and shall not be disbursed to Tenant, except upon the return of
the security deposit in accordance with the terms hereof. Landlord hereby
approves NationsBank, N.A. as an acceptable depository for the security deposit.
Notwithstanding any of the foregoing to the contrary, at such time as (i) the
Lease Commencement Date shall have occurred hereunder, (ii) Tenant shall have
taken occupancy of the Premises, and (iii) Tenant shall have paid the first full
monthly installment of Annual Base Rent and additional rent due hereunder, and
provided that (x) no uncured Event of Default shall then exist hereunder and no
event shall then exist which with the giving of notice and/or the passage of
time would constitute an Event of Default, and (y) Tenant shall then have a
minimum net worth (defined as net assets less net liabilities, determined in a
manner consistent with the accounting practices followed by Tenant as of the
date hereof, as reflected in the financial statements that were submitted to
Landlord prior to the date of the Memorandum) of Fifty Million Dollars
($50,000,000), which figure shall be escalated from time to time by adding
thereto an amount equal to the product of $50,000,000, multiplied by one-half
(1/2) of the percentage increase in the Consumer Price Index (as hereinafter
defined) between the month in which this Lease is executed and the month in
which the net worth determination is being made (such figure, as escalated from
time to time, being referred to herein as the "MINIMUM NET WORTH AMOUNT"), then
the security deposit shall be reduced to the sum of One Hundred Thousand Dollars
($100,000); provided that, if, at the first time that the events described in
clauses (i), (ii) and (iii) have all occurred, the condition stated in clause
(x) is not satisfied, the security deposit shall be reduced at such later time
as the condition stated in clause (x) is satisfied (unless, in the case of an
Event of Default, Landlord shall not have accepted the cure tendered after the
expiration of the cure period). Tenant shall not have a similar right to a
later reduction in the security deposit if the condition stated in clause (y)
is not satisfied at the first time the events
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described in clauses (i), (ii) and (iii) have all occurred, regardless of any
subsequent increase in Tenant's net worth. Notwithstanding anything contained
herein to the contrary, at any time following the third (3rd) monetary or other
material Event of Default to occur in any twelve (12) month period (whether or
not subsequently cured), in addition to all other rights and remedies available
to Landlord, Landlord shall have the right to permanently increase the security
deposit to an amount equal to one-twelfth (1/12) of the Annual Base Rent then
in effect hereunder.
(b) The security deposit shall be security for the performance by
Tenant of all of Tenant's obligations, covenants, conditions and agreements
under this Lease. Within thirty (30) days after the expiration of the Lease
Term, and provided Tenant has vacated the Premises and is not in default
hereunder, Landlord shall return the security deposit to Tenant, less such
portion thereof as Landlord shall have applied to satisfy any default by Tenant
hereunder. Following an Event of Default by Tenant hereunder, Landlord shall
have the right, but shall not be obligated, to use, apply or retain all or any
portion of the security deposit for (i) the payment of any Annual Base Rent or
additional rent or any other sum as to which Tenant is in default, (ii) the
payment of any amount which Landlord may spend or become obligated to spend to
repair physical damage to the Premises or the Building pursuant to Section 8.3
hereof, or (iii) the payment of any amount Landlord may spend or become
obligated to spend, or for the compensation of Landlord for any losses incurred,
by reason of Tenant's default hereunder, including, but not limited to, any
damage or deficiency arising in connection with the reletting of the Premises.
If any portion of the security deposit is so used or applied (including a draw
under any letter of credit that may serve as the security deposit hereunder),
within three (3) business days after written notice to Tenant of such use or
application, Tenant shall deposit with Landlord cash in an amount sufficient to
restore the security deposit to the full amount required to be maintained
hereunder (or, if the security deposit is in the form of a letter of credit,
replace or restore the letter of credit to the full amount required to be
maintained hereunder), and Tenant's failure to do so shall constitute a default
under this Lease.
(c) Tenant shall have the right to deliver to Landlord an
unconditional, irrevocable letter of credit in substitution for the cash
security deposit, subject to the following terms and conditions. Such letter of
credit shall be (a) substantially in the form attached hereto as Exhibit D or
such other form and substance satisfactory to Landlord in its sole discretion;
(b) at all times in the amount of the security deposit, and shall permit
multiple draws; (c) issued by a commercial bank reasonably acceptable to
Landlord from time to time and located in the Washington, D.C. metropolitan
area; (d) made payable to, and expressly transferable and assignable at no
charge by, the owner from time to time of the Building (which
transfer/assignment shall be conditioned only upon the execution of a written
document in connection therewith); (e) payable at sight upon presentment to a
local branch of the issuer located in the Washington, D.C. metropolitan area of
a simple sight draft or certificate stating that an Event of Default has
occurred under this Lease and that Landlord is entitled to draw upon the letter
of credit in the amount set forth in the sight draft or certificate; (f) of a
term not less than one year; and (g) at least thirty (30) days prior to the
then-current expiration date of such letter of credit, either (1) renewed (or
automatically and unconditionally extended) from time to time through the
ninetieth (90th) day after the expiration of the Lease Term, or (2) replaced
with cash in the amount of the Security Deposit. Notwithstanding anything in
this Lease to the contrary, any cure or grace periods set forth in this Lease
shall not apply to Tenant's obligations under subsection (g) above, and,
specifically, if Tenant fails to
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timely comply with the requirements of subsection (g) above, then Landlord shall
have the right to immediately draw upon the letter of credit without notice to
Tenant and apply the proceeds to the security deposit. Each letter of credit
shall be issued by a commercial bank that has a credit rating with respect to
certificates of deposit, short term deposits or commercial paper of at least P-2
(or equivalent) by Moody's Investor Service, Inc., or at least A-2 (or
equivalent) by Standard & Poor's Corporation, and shall be otherwise acceptable
to Landlord in its reasonable discretion. If the issuer's credit rating is
reduced below P-2 (or equivalent) by Moody's Investors Service, Inc. or below
A-2 (or equivalent) by Standard & Poor's Corporation, or if the financial
condition of such issuer changes in any other materially adverse way, then
Landlord shall have the right the require that Tenant obtain a substitute letter
of credit from a different issuer that complies in all respects with the
requirements of this Section, and Tenant's failure to obtain such substitute
letter of credit within ten (10) business days following Landlord's written
demand therefor (with no other notice or cure or grace period being applicable
thereto, notwithstanding anything in this Lease to the contrary) shall entitle
Landlord to immediately draw upon the then existing letter of credit in whole or
in part, without notice to Tenant. In the event the issuer of any letter of
credit held by Landlord is placed into receivership or conservatorship by the
Federal Deposit Insurance Corporation, or any successor or similar entity, then,
effective as of the date such receivership or conservatorship occurs, said
letter of credit shall be deemed not to meet the requirements of this Section,
and, within ten (10) business days thereafter, Tenant shall replace such letter
of credit with a substitute security deposit meeting the requirements of this
Section (and Tenant's failure to do so shall, notwithstanding anything in this
Lease to the contrary, constitute an Event of Default for which there shall be
no notice or grace or cure periods being applicable thereto other than the
aforesaid ten (10) business day period). Landlord shall return the superseded
letter of credit to Tenant promptly upon receipt of its replacement. Any failure
or refusal of the issuer to honor the letter of credit shall be at Tenant's sole
risk and shall not relieve Tenant of its obligations hereunder with respect to
the security deposit.
(d) Tenant shall have the right, from time to time, to substitute a
letter of credit meeting the requirements of Subparagraph (c) for the cash
security deposit, and vice versa, on one or more occasions, provided that
substitutions may not occur more frequently than one (1) time in any twelve (12)
month period.
5.2 In the event of the sale or transfer of Landlord's interest in the
Building, Landlord shall have the right to transfer the security deposit to the
purchaser or assignee, provided such purchaser or assignee assumes Landlord's
obligations hereunder, as evidenced by the agreement of such purchaser or
assignee, a copy of which Landlord shall furnish to Tenant in accordance with
Section 14.3 hereof. If Landlord transfers the security deposit to a purchaser
or assignee, Tenant shall look only to such purchaser or assignee for the return
of the security deposit, and Landlord shall thereupon be released from all
liability to Tenant for the return of the security deposit. If the security
deposit is in the form of a letter of credit, then Tenant shall, within ten (10)
days after Landlord's request therefor, cause the Letter of Credit to be amended
or reissued by the issuer to indicate the new beneficiary.
5.3 Tenant hereby acknowledges that Tenant will not look to the holder of
any mortgage (as defined in Section 20.1) encumbering the Building for return
of the security deposit if such holder, or its successors or assigns, shall
succeed to the ownership of the Building, whether
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by foreclosure or deed in lieu thereof, except if and to the extent the security
deposit is actually transferred to such holder.
ARTICLE VI
USE OF PREMISES
6.1 Tenant shall use and occupy the Premises solely for general office
purposes, ancillary uses and any other uses that are permitted under the
Approved Site Plan, applicable zoning laws and other Legal Requirements (as
hereinafter defined) and are compatible with a Class A suburban office complex
and the Viable Building Standards attached hereto as Exhibit C (the "VIABLE
BUILDING STANDARDS"), and for no other use or purpose. The parties hereby agree
that the following uses are compatible with a Class A suburban office complex
and the Viable Building Standards: health club/fitness center, outdoor fitness
trail, day care center, sundries/lobby shop, laundry/dry cleaning drop-off
service, and food service operations. Tenant shall not use or occupy the
Premises for any unlawful purpose or in any manner that will constitute waste,
nuisance or unreasonable annoyance. Tenant's use of the Premises shall also
comply with all present and future laws, ordinances (including zoning ordinances
and land use requirements), regulations, and orders of the City of Gaithersburg,
Montgomery County, the State of Maryland and any other public or quasi-public
authority having jurisdiction over the Premises, concerning the use, occupancy
and condition of the Premises and all machinery, equipment and furnishings
therein (together referred to herein as "LEGAL REQUIREMENTS").
6.2 Tenant, through the Development Manager selected by Tenant, shall
obtain the initial non-residential use permit and any other similar governmental
approvals which may be required for Tenant's occupancy of the Premises. It is
expressly understood that if any present or future Legal Requirements require
any other permit(s) for the Premises due to Tenant's particular use thereof, or
Tenant's improvements or future alterations thereto, that Tenant will obtain
such permit(s) at Tenant's own expense. Further, Tenant will comply with all
Legal Requirements which impose on Landlord or Tenant a duty relating to or
arising as a result of Tenant's use or occupancy of the Premises. In particular,
without limiting the generality of the foregoing, any and all alterations or
additions to the Premises (including the base building and tenant improvements)
that are required to be made as a result of Legal Requirements (now existing or
hereafter enacted) shall be made by Tenant at Tenant's sole cost and expense and
in accordance with the requirements of Article IX hereof. Notwithstanding
anything contained herein to the contrary, any alterations or additions to the
base building that are required to be made as a result of Legal Requirements
enacted after the Lease Commencement Date shall be made by Landlord and shall be
amortized on a straight-line basis over the useful life of the improvement, and
the amortized portion for each calendar year shall be includable in Operating
Expenses hereunder for the corresponding calendar year. Tenant shall promptly
pay all fines, penalties and damages that may arise out of or be imposed on
Landlord or Tenant because of Tenant's failure to comply with the provisions of
this Section.
6.3 Tenant shall pay any business, rent or other taxes that are now or
hereafter levied upon Tenant's use or occupancy of the Premises, the conduct of
Tenant's business at the Premises, or Tenant's equipment, fixtures or personal
property. In the event that any such taxes are enacted,
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changed, or altered so that any of such taxes are levied against Landlord, or
the mode of collection of such taxes is changed so that Landlord is responsible
for collection or payment of such taxes, Tenant shall pay any and all such taxes
to Landlord within fifty (50) days following written demand from Landlord.
6.4 Tenant shall not cause or permit any Hazardous Materials to be
generated, used, released, stored or disposed of in or about the Building or the
Complex, provided that Tenant may use and store reasonable quantities of
standard office supplies and cleaning materials as may be reasonably necessary
for Tenant to conduct normal general office use operations in the Premises and
in compliance with all Environmental Laws and other applicable Legal
Requirements. At the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises to Landlord free of Hazardous Materials (except any
that may be Landlord's responsibility pursuant to Section 6.5 hereof and any
that are otherwise not Tenant's responsibility pursuant to the terms of this
Article VI) and, subject to the foregoing parenthetical, in compliance with all
Environmental Laws. "HAZARDOUS MATERIALS" means (a) asbestos and any asbestos
containing material and any substance that is then defined or listed in, or
otherwise classified pursuant to, any Environmental Law or any other applicable
Law as a "hazardous substance," "hazardous material," "hazardous waste," "toxic
substance," "toxic pollutant" or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, or
Toxicity Characteristic Leaching Procedure (TCLP) toxicity, (b) any petroleum
and drilling fluids, produced waters, and other wastes associated with the
exploration, development or production of crude oil, natural gas, or geothermal
resources, and (c) any petroleum product, polychlorinated biphenyls, urea
formaldehyde, radon gas, radioactive material (including any source, special
nuclear, or byproduct material), chlorofluorocarbon, lead or lead-based product,
and any other substance whose presence would be detrimental to the Building or
the Land or hazardous to health or the environment. "ENVIRONMENTAL LAW" means
any present and future Law and any amendments (whether common law, statute,
rule, order, regulation or otherwise), permits and other requirements or
guidelines of governmental authorities applicable to the Building or the Land
and relating to the environment and environmental conditions or to any Hazardous
Material (including, without limitation, CERCLA, 42 U.S.C. Section 9601 et seq.,
the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et
seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et
seq., the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.,
the Clean Air Act, 33 U.S.C. Section 7401 et seq., the Toxic Substances Control
Act, 15 U.S.C. Section 2601 et seq., the Safe Drinking Water Act, 42 U.S.C.
Section 300f et seq., the Emergency Planning and Community Right-To-Know Act, 42
U.S.C. Section 1101 et seq., the Occupational Safety and Health Act, 29 U.S.C.
Section 651 et seq., and any so-called "Super Fund" or "Super Lien" law, any Law
requiring the filing of reports and notices relating to hazardous substances,
environmental laws administered by the Environmental Protection Agency, and any
similar state and local Laws, all amendments thereto and all regulations,
orders, decisions, and decrees now or hereafter promulgated thereunder
concerning the environment, industrial hygiene or public health or safety). At
all times, and notwithstanding any termination of this Lease, Tenant shall
indemnify and hold Landlord, its employees and agents harmless from and against
any damage, injury, loss, liability, charge, demand or claim based on or arising
out of the presence or removal of, or failure to remove, Hazardous Materials
generated, used, released, stored or disposed of by Tenant or its employees,
agents, contractors, licensees or invitees (collectively, "INVITEES") in or
about the Building or the Complex, whether before or after the Lease
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Commencement Date. In addition, Tenant shall give Landlord immediate verbal and
follow-up written notice of any actual or threatened Environmental Default,
which Environmental Default Tenant shall cure in accordance with all
Environmental Laws and to the reasonable satisfaction of Landlord and, except in
the case of an emergency (in which event Tenant may act without Landlord's
consent), only after Tenant has obtained Landlord's prior written consent, which
shall not be unreasonably withheld. An "ENVIRONMENTAL DEFAULT" means any of the
following by Tenant or any Invitee: a violation of an Environmental Law; a
release, spill or discharge of a Hazardous Material on or from the Premises, the
Land or the Building; an environmental condition requiring responsive action; or
an emergency environmental condition. Upon any Environmental Default, in
addition to all other rights available to Landlord under this Lease, at law or
in equity, Landlord shall have the right but not the obligation to immediately
enter the Premises, to supervise and approve any actions taken by Tenant to
address the Environmental Default, and, if Tenant fails to immediately address
same to Landlord's reasonable satisfaction, to perform, at Tenant's sole cost
and expense, any lawful action necessary to address same. If any lender or
governmental agency shall require testing to ascertain whether an Environmental
Default is pending or threatened, then Tenant shall pay the reasonable costs
therefor as additional rent. Promptly upon request, Tenant shall execute from
time to time affidavits, representations and similar documents concerning
Tenant's best knowledge and belief regarding the presence of Hazardous Materials
at or in the Building, the Land or the Premises.
6.5 Landlord shall not cause or permit any Hazardous Materials to be
generated, used, released, stored or disposed of on the Land in violation of
applicable Environmental Laws. Except as otherwise provided below, if Landlord
first becomes aware that any such Hazardous Materials have been generated, used,
released, stored or disposed of on the Land in violation of applicable
Environmental Laws after construction of the Building is substantially complete,
Landlord shall take all reasonable steps necessary to promptly remove such
Hazardous Materials and/or remediate any contamination resulting therefrom to
the extent necessary to bring the Land into compliance with all applicable
Environmental Laws; provided that, Landlord shall have no such obligations with
respect to any Hazardous Materials present as a result, directly or indirectly,
of an Environmental Default by Tenant, which Hazardous Materials, the removal
and the remediation thereof, shall be the responsibility of Tenant pursuant to
Section 6.4 above. If the parties become aware, prior to substantial completion
of the Building, or during any subsequent period of construction on behalf of
Tenant pursuant to the Phased Development Agreement, that any Hazardous
Materials have been generated, used, released, stored or disposed of on the Land
in violation of applicable Environmental Laws, the remediation thereof shall be
conducted by Tenant or the Project Manager pursuant to the Phased Development
Agreement, and the costs thereof shall be included in Land Costs (or
Supplemental Land Costs) hereunder.
ARTICLE VII
ASSIGNMENT AND SUBLETTING
7.1 Tenant shall not have the right to assign, transfer, mortgage or
otherwise encumber this Lease or its interest herein without first complying
with the provisions of subsections (a) and (b) of this Section 7.1.
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(a) No assignment, transfer, mortgage or other encumbrance of this
Lease shall be effected unless Tenant obtains the prior written consent of
Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed by Landlord; provided, however, that Landlord may withhold its consent
to any proposed assignment, transfer, mortgage or other encumbrance of this
Lease, among other reasons, if (i) an Event of Default then exists under this
Lease, or (ii) Landlord reasonably determines that the character of the proposed
assignee or the nature of the activities to be conducted by such proposed
assignee would adversely affect the other tenants of the Building or the Complex
or would physically damage the Building or impair the reputation of the Building
as a Class A suburban office building, or that the financial history or credit
rating of the proposed assignee presents a material risk to Landlord of
non-compliance with this Lease. No assignment or transfer of this Lease or the
right of occupancy hereunder may be effectuated by operation of law or otherwise
without the prior written consent of Landlord, as aforesaid. Any attempted
assignment or transfer by Tenant of this Lease or its interest herein without
Landlord's consent (if Landlord's consent thereto is required) shall, if such
attempted assignment or transfer is not nullified or voided by Tenant within ten
(10) business days following written notice from Landlord to Tenant that the
assignment or transfer was improperly attempted without Landlord's consent, at
the option of Landlord, terminate this Lease; however, in the event of such
termination, Tenant shall remain liable for all rent and other sums due under
this Lease and all damages suffered by Landlord on account of such breach by
Tenant.
(b) Tenant agrees to give Landlord at least ten (10) business days'
advance written notice of Tenant's intention to assign or transfer this Lease,
along with sufficient information about the proposed assignee or transferee to
enable Landlord to make the determination called for by subsection (a) above.
(c) Notwithstanding anything contained herein to the contrary, (i)
Tenant shall not have the right to assign or transfer this Lease prior to the
Lease Commencement Date hereunder, except to an Affiliate of Tenant (as
hereinafter defined) or otherwise pursuant to Section 7.5 hereof; and (ii)
Tenant may not partially assign this Lease.
7.2 Tenant shall not have the right to sublease (which term, as used
herein, shall include any type of subrental arrangement and any type of license
to occupy) all or any part of the Premises without first complying with the
provisions of subsections (a) and (b) of this Section 7.2.
(a) Tenant shall have the right to sublease any portion or portions of
the Premises; provided that, if a proposed sublease, in the aggregate with all
other subleases then in existence, will cause more than fifty percent (50%) of
the rentable area of the Premises to be subject to any sublease, then Tenant
must obtain the prior written consent of Landlord to such proposed sublease,
which consent shall not be unreasonably withheld, conditioned or delayed by
Landlord; provided, however, that Landlord may withhold its consent to any
proposed sublease, among other reasons, if (i) an Event of Default then exists
under this Lease, or (ii) Landlord reasonably determines that the character of
the proposed subtenant or the nature of the activities to be conducted by such
proposed subtenant would adversely affect the other tenants of the Building or
the Complex, or would physically damage the Building or impair the reputation of
the Building as a Class A suburban office building, or that the financial
history or credit rating of the proposed subtenant presents a material risk to
Landlord of non-compliance with this Lease. Notwithstanding anything
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contained herein to the contrary, in the event a proposed sublease will not
cause more than fifty percent (50%) of the rentable area of the Premises to be
subject to any sublease or assignment, then Tenant may enter into such sublease
without Landlord's consent, but upon at least ten (10) business days' prior
written notice to Landlord and provided the sublease document otherwise
satisfies the terms of Section 7.3 below.
(b) Tenant agrees to give Landlord at least ten (10) business days
advance written notice of Tenant's intention to sublease a portion of the
Premises, along with sufficient information about the proposed subtenant to
enable Landlord to make the determination called for by subsection (a) above (if
such sublease is subject to Landlord's consent).
7.3 The consent by Landlord to any assignment or subletting shall not be
construed as a waiver or release of Tenant from any and all liability for the
performance of all covenants and obligations to be performed by Tenant under
this Lease, nor shall the collection or acceptance of rent from any assignee,
transferee or subtenant constitute a waiver or release of Tenant from any of its
liabilities or obligations under this Lease. Landlord's consent to any
assignment or subletting shall not be construed as relieving Tenant from the
obligation of complying with the provisions of Sections 7.1 or 7.2 hereof, as
applicable, with respect to any subsequent assignment or subletting. For any
period during which Tenant is in default hereunder with respect to the payment
of Annual Base Rent or additional rent and such default has continued beyond any
applicable grace or cure period, Tenant hereby assigns to Landlord the rent due
from any subtenant of Tenant and hereby authorizes each subtenant to pay said
rent directly to Landlord. Whether or not Landlord's prior written consent to a
subletting is required pursuant to Section 7.2 above, Tenant further agrees to
submit any and all instruments of assignment and sublease to Landlord prior to
the execution thereof to enable Landlord to determine whether such instrument
complies with the terms hereof. All such instruments shall provide that (i) such
sublease or assignment is subject and subordinate to this Lease in all respects,
and to any amendments, modifications, renewals, extensions or expansions hereof,
(ii) Tenant shall remain primarily liable as Tenant hereunder, (iii) such
assignee or sublessee shall conduct a business in the Premises which is a
permitted use pursuant to Article VI of this Lease, (iv) in the case of an
assignment, such assignee is bound by the terms and conditions of this Lease and
assumes all of the obligations and liabilities of Tenant hereunder, (v) in the
case of a sublease, (A) Landlord is not, and will not become, a party to such
sublease, (B) Landlord's consent to such sublease does not create a contractual
relationship between Landlord and such sublessee, nor does it create any
liability of Landlord to such sublessee, and (C) such sublessee shall not
succeed to, or otherwise have the right to exercise or enforce, any of Tenant's
rights hereunder directly against Landlord (except as otherwise provided in the
last sentence of Section 10.1 hereof), (vi) Landlord's consent to such
assignment or sublease does not affect the obligations of Landlord or Tenant
under this Lease, and (vii) Landlord's consent to such assignment or sublease
shall not be construed to mean that Landlord has approved any plans or
specifications for renovations to the Premises intended by such assignee or
sublessee and that any such work to the Premises must be conducted in accordance
with the terms of this Lease. Any such instrument of assignment or sublease not
approved by Landlord in each instance where Landlord's approval is required, or,
whether or not Landlord's approval is required, which does not include all of
the provisions described in clauses (i) through (vii) above, as required (unless
waived by Landlord in its sole discretion), shall be null and void and of no
force or effect. Any such instrument of assignment or sublease submitted to
Landlord for approval and not approved
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or disapproved by Landlord within ten (10) business days after submission shall
be deemed approved by Landlord for all purposes under this Lease. If Landlord
disapproves any sublease or assignment submitted to Landlord for approval,
Landlord's notice of disapproval shall identify Landlord's reasons therefor.
7.4 [Intentionally deleted.]
7.5 (a) Notwithstanding the above restrictions on subletting and
assignment, and provided that no Event of Default then exists under this Lease,
Tenant shall have the right, upon not less than five (5) business days' prior
written notice to Landlord but without Landlord's prior written consent, to
assign this Lease or to sublet all or any part of the Premises to an Affiliate
of Tenant (as hereinafter defined), provided (i) that no Event of Bankruptcy (as
hereinafter defined) shall have occurred with respect to such assignee or
sublessee, (ii) that the conditions set forth in Section 7.3(i) - (vii) are
fully satisfied and (iii) that the character of such person or entity and the
nature of its activities in the Premises and in the Building would not be
inappropriate for a Class A suburban office building.
(b) For purposes of this Section 7.5, an "AFFILIATE OF TENANT" shall
mean any corporation, association, trust, partnership, limited liability company
or other entity (i) which Controls (as herein defined) Tenant or (ii) which is
under the Control of Tenant through stock ownership or otherwise or (iii) which
is under common Control with Tenant. The terms "CONTROL" or "CONTROLS" as used
in this Section 7.5 shall mean the power to directly or indirectly influence the
direction, management or policies of Tenant or such other entity.
(c) Notwithstanding the above restrictions on assignment, and provided
that no Event of Default then exists under this Lease, Tenant shall have the
right, upon not less than thirty (30) days' prior written notice to Landlord,
but without Landlord's prior written consent, to assign this Lease pursuant to a
merger, consolidation, or other corporate reorganization of Tenant, or the sale
or transfer of all or substantially all of the capital stock of Tenant or all or
substantially all of the assets of Tenant, provided that (i) Tenant, after such
merger, consolidation, reorganization or sale of stock or assets, has a
creditworthiness (e.g. assets and capitalization) and net worth (which shall be
determined on a pro forma basis using generally accepted accounting principles
consistently applied and using the most recent financial statements) equal to or
greater than the then applicable Minimum Net Worth Amount, (ii) Tenant, after
such merger, consolidation, reorganization or sale of stock or assets, agrees in
writing to be bound by the terms and conditions of this Lease and to assume all
of the obligations and liabilities of Tenant under this Lease, (iii) Tenant,
after such merger, consolidation, reorganization or sale of stock or assets,
shall conduct substantially the same business on the Premises as that conducted
by Tenant prior thereto or a related business which is a permitted use pursuant
to Article VI of this Lease, (iv) the character of Tenant after the merger,
consolidation, reorganization or sale of stock or assets, as the case may be,
and the nature of Tenant's activities in the Premises would not be inappropriate
for a Class A suburban office building, (v) the conditions set forth in Section
7.3(i)-(vii) are fully satisfied, and (vi) the assignment is not a so-called
"sham" transaction intended by Tenant to circumvent the provisions of Article
VII of this Lease.
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7.6 Tenant shall use reasonable efforts to notify Landlord in writing of
any intention by Tenant to market the Premises or any portion thereof for
assignment or sublease, and shall furnish to Landlord such information as
Landlord may reasonably request with respect to the economic terms of the
assignment or sublease transaction being sought by Tenant and the actions Tenant
is taking to market the Premises.
7.7 Nothing contained herein shall be construed to permit Tenant to assign
any of its rights pursuant to the Phased Development Agreement, except as may be
permitted according to the terms of the Phased Development Agreement.
ARTICLE VIII
MAINTENANCE AND REPAIRS
8.1 Landlord shall keep, maintain, repair and replace as appropriate, the
foundation, roof, exterior walls, structural portions (including columns within
the Premises and the vertical sprinkler loop through the Building), and exterior
glass and windows of the Building (specifically excluding the interior walls,
doors, partitions, locks, and door jambs in the Premises), as well as all
mechanical, plumbing, heating, air conditioning, sprinkler and electrical
systems and utility service lines therein, the plumbing system to and from the
Premises and core area restrooms within the Premises, and the driveways, parking
areas and grounds adjacent to the Building in good condition and repair, and the
costs incurred by Landlord in maintaining and repairing such items shall be
included in Expenses (unless the cost or expense of any such repair or
maintenance is excluded from Expenses under Section 4.2(a) above).
8.2 Tenant will keep and maintain the Premises and all fixtures and
equipment located in the Premises (specifically including the interior walls,
doors, partitions, locks, door jambs, windows and glass in the Premises, but
excluding those portions of the Premises to be maintained by Landlord pursuant
to Section 8.1 above) in clean, safe and sanitary condition, will take good care
thereof and will maintain and make all required repairs thereto, and will suffer
no waste or injury thereto. If Tenant so requests by written notice to Landlord,
Landlord shall make any repairs and perform any maintenance that are otherwise
Tenant's obligations under this Section 8.2, and the costs of providing such
services shall be included in Operating Expenses and payable by Tenant pursuant
to Article IV hereof; provided that, whether Tenant is the sole tenant of the
Building or the Building is multi-tenanted, Tenant shall be responsible for one
hundred percent (100%) of such costs. In addition, Tenant shall have the right,
but not the obligation, to effect minor repairs and routine maintenance to the
Premises (and, for so long as Tenant is the sole tenant in the Building, the
grounds adjacent to the Building) provided that (i) Landlord shall be given
reasonable prior notice thereof (except in the case of emergency); (ii) once
commenced, such maintenance and repair work shall be completed promptly and in
accordance with standards for a Class A suburban office building; (iii) such
repair or maintenance will not jeopardize compliance with the Viable Building
Standards; and (iv) Tenant shall not be entitled to make structural repairs or
repairs or maintenance that has a material effect on any of the base building
systems, except as permitted pursuant to Section 14.6 hereof. At the expiration
or other termination of the Lease Term, Tenant shall surrender the Premises,
broom clean, in substantially the same order and con-
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dition which they are in on the Lease Commencement Date, as altered by any
improvements (as defined in Section 9.2 hereof) made in accordance with Article
IX hereof that Tenant is not obligated to remove pursuant to Section 9.4 hereof,
ordinary wear and tear, damage by the elements, and casualty damage excepted.
8.3 Subject to the provisions of Section 12.4(b) below, all injury,
breakage and damage to the Premises or to any other part of the Building caused
by any negligent act or omission or willful misconduct of Tenant, or of any
agent, employee, subtenant, contractor, customer or invitee of Tenant, shall be
repaired by and at the sole expense of Tenant, except that Landlord shall have
the right, at its option, after Tenant's failure to cure (or commence to cure,
where applicable) within five (5) business days after notice to Tenant of such
injury, breakage or damage, to make such repairs and to charge Tenant for all
costs and expenses incurred in connection therewith as additional rent
hereunder. The foregoing notwithstanding, should an emergency or similar
situation occur and delay would cause or is likely to cause preventable injury
to persons or material injury to property, Landlord may elect to act without
notice to Tenant.
ARTICLE IX
ALTERATIONS
9.1 Tenant is contracting with the Development Manager, pursuant to the
Phase I Development Services Agreement for the construction of the Building,
including all tenant improvements. Accordingly, Landlord shall have no
construction obligations hereunder, and reference is hereby made to the Phase I
Development Services Agreement for the agreements of the parties with regard to
the construction of the Building. Tenant hereby acknowledges that it has
performed its own due diligence with respect to the Land and the development
potential thereof and agrees to accept the Premises "as is", "where is",
Landlord having made no representations or warranties whatsoever with respect to
the physical condition of the Land or the Building or their suitability for any
particular construction or use. Except as otherwise provided in Section 9.4
below, the remainder of this Article IX shall govern only improvements made
following the initial construction of the Building and tenant build out pursuant
to the Phase I Development Services Agreement.
9.2 Except as otherwise permitted pursuant to the Phase I Development
Services Agreement and Section 9.3 below, Tenant will not make or permit anyone
to make any alterations, additions or improvements (hereinafter referred to
collectively as "IMPROVEMENTS"), structural or otherwise, upon the Land or in or
to the Premises without the prior written consent of Landlord to the proposed
improvement (including the plans and specifications therefor). In the case of
any proposed improvement that is of a major structural nature or any proposed
improvement materially affecting any of the base building systems, Landlord may
grant or withhold its consent in its sole discretion, unless the improvement is
customary in Class A suburban office buildings in the North
Bethesda/Rockville/Gaithersburg corridor, in which case Landlord's consent shall
not be unreasonably withheld, conditioned or delayed. With respect to all other
proposed improvements, Landlord shall not have the right to withhold its consent
thereto unless the proposed improvement does not comply with the
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Viable Building Standards. All improvements made by Tenant, whether Landlord's
approval is required hereunder or not, shall comply with the Viable Building
Standards. In the event Landlord fails to respond to a request for its consent
to an improvement within ten (10) business days following submission of such
request in writing, then Landlord's consent shall be deemed granted. When
granting its consent, Landlord may impose any conditions it reasonably deems
appropriate, including, without limitation, the approval by Landlord of the
contractor or other persons who will perform the work (which consent shall not
be unreasonably withheld), Tenant's obtaining all necessary permits and
approvals for such work, and Tenant's obtaining, and providing Landlord with
certificates of insurance evidencing, reasonably appropriate levels and types of
insurance coverage. In addition, Landlord may condition its approval of any
improvements that are not customarily maintained by landlords in Class A
suburban office buildings on Tenant's agreeing to maintain such improvements. If
Landlord withholds its consent to any proposed improvement and Tenant believes
in good faith that such consent was improperly withheld, given the parameters of
Landlord's consent rights, as set forth herein, then Tenant shall have the right
to submit the matter to binding arbitration in accordance with the terms of
Article XXVIII below. All improvements permitted by Landlord (or allowed
hereunder without Landlord's approval) must conform to all applicable
requirements of the insurers of the Building ("INSURANCE REQUIREMENTS") and to
all applicable Legal Requirements. Landlord's review and approval of any such
plans and specifications and consent to the performance of work described
therein shall not be deemed an agreement by Landlord that such plans,
specifications and work conform with all applicable Legal Requirements and
Insurance Requirements nor be deemed a waiver of Tenant's obligations under this
Lease with respect to Legal Requirements and Insurance Requirements nor impose
any liability or obligation upon Landlord with respect to the completeness,
design sufficiency or compliance with Legal Requirements or Insurance
Requirements of such plans, specifications and work. Upon completion of any
improvements requiring Landlord's approval, Tenant shall provide Landlord with
final release of lien forms executed by Tenant's general contractor. If,
notwithstanding the foregoing, any mechanic's or materialmen's lien is filed
against the Premises, the Building and/or the Land, for work claimed to have
been done for, or materials claimed to have been furnished to, the Premises on
Tenant's account, such lien shall be discharged by Tenant within twenty (20)
days after Tenant has notice thereof, at Tenant's sole cost and expense, by the
payment thereof or by the filing of a surety bond that discharges the lien. If
Tenant shall fail to discharge any such mechanic's or materialmen's lien within
twenty (20) days after receiving written notice thereof from Landlord, Landlord
may, at its option, discharge such lien and treat the cost thereof (including
reasonable attorneys' fees incurred in connection therewith) as additional rent
payable with the next monthly installment of Annual Base Rent falling due. It is
further understood and agreed that in the event Landlord shall give its written
consent to the making of any improvements to the Premises, such written consent
shall not be deemed to be an agreement or consent by Landlord to subject its
interest in the Premises, the Building or the Land to any mechanic's or
materialmen's liens which may be filed in connection therewith. Upon completion
of any structural improvements by Tenant, Tenant shall provide Landlord with
accurate "as-built" plans showing the new work in a "CADD" format; in addition,
if Tenant has made any improvements (structural or otherwise) in the Premises
during the course of any calendar year, then Tenant shall provide Landlord with
such "as-built" plans within thirty (30) days following the end of such calendar
year.
9.3 Notwithstanding the provisions of Section 9.2 hereof to the contrary,
Tenant shall not be required to obtain the consent of Landlord for the making of
alterations that are purely decorative or cosmetic in nature, such as painting
and carpeting, or alterations consisting of minor
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re-partitioning and appurtenant changes to distribution systems (i.e.,
electrical outlets, HVAC vents), and which are not visible from the exterior or
the public areas of the Complex. In the event Tenant intends to make any such
decorative or cosmetic alternations to the Premises, Tenant, not less than ten
(10) days prior to the commencement of such work, shall notify Landlord, in
writing, as to (i) the date on which such work is to commence, (ii) the date on
which such work is scheduled to be completed, and (iii) the name of the
contractor or other person performing such work. In addition, Tenant and
Tenant's contractor shall coordinate the performance of such work with the
on-site property manager of the Complex.
9.4 Tenant shall indemnify and hold Landlord harmless from and against any
and all expenses, liens, claims, liabilities and damages based on or arising,
directly or indirectly, by reason of the making of any improvements to the
Premises, the furnishing of any services to the Premises or the Building or the
repair and maintenance of the Premises or the Building, in each case by Tenant
or its employees, agents or contractors; provided that Tenant's obligations to
indemnify and hold harmless Landlord pursuant to this Section 9.4 shall not
include any costs, damages, claims, liabilities or expenses suffered by or
claimed against Landlord directly based on, arising out of or resulting from
Landlord's breach of, or default as to, any of its covenants or other
obligations under this Lease or Landlord's negligence or willful misconduct. If
any improvements are made without the prior written consent of Landlord (if such
consent is required hereunder) and they are not removed and the Premises
restored within thirty (30) days following Tenant's receipt of written notice
from Landlord requiring such removal and restoration, Landlord shall have the
right to remove and correct such improvements and restore the Premises to their
condition immediately prior thereto, and Tenant shall be liable for all expenses
incurred by Landlord in connection therewith. All improvements affixed to the
Premises or the Building made by either party, including all improvements made
as part of the initial construction of the Building and tenant build-out
pursuant to the Phase I Development Services Agreement, shall remain upon and be
surrendered with the Premises as a part thereof at the end of the Lease Term,
except that (i) Tenant shall have the right to remove, prior to the expiration
of the Lease Term, all furniture, furnishings, fixtures, trade fixtures and
equipment installed in the Premises solely at the expense of Tenant, and (ii)
except with respect to the initial construction of the Building and tenant
build-out pursuant to the Phase I Development Services Agreement, Tenant shall
be required to remove all improvements to the Premises which Landlord designates
in writing for removal at the time Landlord approves installation of such
improvement (provided that Landlord shall have the right to designate for
removal any improvements only if they are of a nature that is materially
different from that typically included in an office build-out). All damage and
injury to the Premises or the Building caused by such removal shall be repaired
by Tenant, at Tenant's sole expense, except any damage or injury to tenant
finishes in individual tenant space that would customarily be replaced by
Landlord in preparation for the next tenant. If any property of Tenant is not
removed by Tenant prior to the expiration or termination of this Lease, the same
shall become the property of Landlord and shall be surrendered with the Premises
as a part thereof.
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ARTICLE X
SIGNS AND FURNISHINGS
10.1 Throughout the Term of this Lease and so long as Tenant is leasing at
least fifty percent (50%) of the rentable area in the Building, and subject to
compliance with any applicable Legal Requirements and the Viable Building
Standards, Tenant shall have the exclusive right to install and maintain, at
Tenant's sole expense, such signage identifying Tenant on the Building facade,
within the Building and in the form of exterior monument signs as Tenant shall
desire; provided that, (i) Tenant shall not have the right to maintain monument
signs or other signage on the Phase II Land or the Phase III Land at any time
after Tenant ceases to lease the entire Initial Premises hereunder, and (ii) if
the Building is multi-tenanted, Tenant's signage rights within the Building
shall be non-exclusive. The size, position, materials, color, style and manner
of installation of such signage shall be determined by Tenant, subject to
compliance with the Viable Building Standards If Tenant is leasing less than
fifty percent (50%) of the rentable area of the Building, then Tenant may
continue to maintain any then-existing signage; however, such right shall
thereafter be non-exclusive, and shall be subject to such changes in the size
and positioning of such signage as Landlord may reasonably require in order to
accommodate dual signage in the event that Landlord grants similar signage
rights to any tenant leasing space in the Building that is comparable to or
greater than the amount of space then leased by Tenant. All of Tenant's signage
shall be removed at the expiration or earlier termination of the Lease Term, and
Tenant shall repair any damage to the Building resulting therefrom, at Tenant's
cost and expense. If any sign, advertisement or notice is exhibited or installed
by Tenant in violation of the terms hereof, Landlord shall have the right to
remove the same at Tenant's expense. If Tenant sublets all or any portion of the
Premises, Tenant may delegate its signage rights hereunder to its sublessee,
without obtaining Landlord's consent thereto, provided the name and logo to be
displayed by such sublessee is compatible with a Class A suburban office
building and the Viable Building Standards.
10.2 So long as Tenant continues to lease the entire Initial Premises,
Tenant shall have the right, in consultation with Landlord, to designate the
name of the Complex, provided the name is appropriate for a Class A suburban
office building. If Tenant ceases at any time to lease the entire Initial
Premises, Landlord shall have the right to rename the Complex "Washingtonian
North" or such other name as may be mutually agreeable to Landlord and Tenant
in their reasonable judgment.
10.3 In addition to the other signage rights provided herein, Tenant shall
have the right to erect temporary signage during the pre-development and
construction periods prior to the Lease Commencement Date, publicizing the names
and roles of the parties participating in the development of the Complex;
provided that, the design and content thereof shall be subject to the mutual
agreement of the parties. The parties agree to act reasonably in attempting to
reach such mutual agreement.
10.4 Tenant shall not place or install in any portion of the Premises any
safes, fixtures or other equipment which will exceed the load factor for which
such portion of the Premises was designed and constructed. Any and all damage or
injury to the Premises or the Building caused by moving the property of Tenant
into or out of the Premises, or due to the same being in or upon
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the Premises, other than damage or injury to tenant finishes in individual
tenant space that would customarily be replaced by Landlord in preparation for
the next tenant shall be repaired at the sole cost of Tenant. Tenant agrees to
remove promptly from the parking areas or sidewalks adjacent to the Building any
of Tenant's furniture, equipment or other material there delivered or deposited.
ARTICLE XI
INSPECTION BY LANDLORD
11.1 Tenant will permit Landlord, or its agents or representatives, to
enter the Premises, without charge therefor to Landlord and without diminution
of the rent payable by Tenant, (i) to examine, inspect and protect the Premises
and the Building, (ii) to make such alterations and/or repairs as in Landlord's
reasonable judgment may be required by law or be necessary to maintain the
Building in good condition and repair, (iii) to comply with and carry out
Landlord's obligations under this Lease, and (iv) to exhibit the same to
prospective tenants (provided that Tenant's consent, which shall not be
unreasonably withheld, shall be required if the Premises are to be exhibited to
a prospective tenant more than eighteen (18) months prior to the expiration of
the term of this Lease). In connection with any such entry, Landlord shall
reasonably endeavor to minimize the disruption to Tenant's use of the Premises,
shall reasonably endeavor to give Tenant at least twenty-four (24) hours advance
notice of such entry or such greater amount of time as may be reasonable under
the circumstances (except in the event of an emergency), shall reasonably
endeavor to conduct such entry only during normal working hours (except in the
event of an emergency), and, except in the event of an emergency, if requested
by Tenant, shall permit a representative of Tenant to escort Landlord (or its
agents or representatives) during its entry in the Premises. In connection with
any alterations or repairs made pursuant to clause (ii) above, (a) Landlord
shall comply with the Viable Building Standards, (b) Landlord shall reasonably
endeavor to minimize the impact thereof on Tenant, both during and following the
period of construction or repair, (c) such alterations and repairs shall not
materially reduce the number of square feet of rentable area in the Premises,
(d) such alterations and repairs shall be performed in a manner that is
reasonably compatible with the then existing architectural design of the
Premises, and (e) Landlord shall restore any tenant finishes that may be
disrupted by such alterations or repairs.
ARTICLE XII
INSURANCE
12.1 Tenant shall not conduct or permit to be conducted any activity, or
place any equipment, inventory or other materials, in or about the Premises or
the Building that will in any way increase the rate of fire insurance or other
insurance on the Building. If any increase in the rate of fire insurance or
other insurance is stated by any insurance company or by the applicable
Insurance Rating Bureau to be due solely to any activity of Tenant or the
placing of any equipment, inventory or other materials by Tenant in or about the
Premises or the Building, such statement shall be conclusive evidence that the
increase in such rate is due to such activity or equipment and, as a result
thereof, Tenant shall be liable for the amount of such increase. Tenant shall
reimburse
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Landlord for such amount upon written demand from Landlord and such sum shall be
considered additional rent payable hereunder.
12.2 Throughout the Lease Term, Landlord shall insure the Building against
loss due to fire and other casualties included in standard, all-risk, extended
coverage insurance policies, in an amount equal to at least ninety-five percent
(95%) of the full replacement cost thereof. Throughout the Lease Term, Landlord
shall obtain and maintain commercial general liability insurance in a company or
companies licensed to do business in the State of Maryland. Such insurance shall
be in minimum amounts of Five Million Dollars ($5,000,000) per occurrence plus a
general aggregate of Five Million Dollars ($5,000,000) for injury to persons and
damage to property and shall be for a minimum term of one (1) year. Throughout
the Lease Term, Landlord shall obtain and maintain a policy of insurance
protecting Landlord from loss of rents and other charges during the period while
the Premises are untenantable due to fire or other insured casualty. The
insurance required to be maintained by Landlord shall be subject to the
foregoing minimum requirements and shall otherwise be in amounts and coverages
that are commercially reasonable. So long as Tenant is leasing the entire
Building, Landlord's commercial general liability insurance policy shall name
Tenant as an additional insured. Receipts or certificates evidencing payment of
the premiums for such insurance shall be delivered by Landlord to Tenant if
requested by Tenant. Landlord's casualty insurance policy shall contain an
endorsement prohibiting cancellation or reduction of coverage without first
giving Tenant at least thirty (30) days' prior written notice of such proposed
action.
12.3 Throughout the Lease Term, Tenant shall insure the contents of the
Premises, including all furnishings, trade fixtures, and equipment used or
installed in the Premises by Tenant, and any other personal property of Tenant
therein, against loss due to fire and other casualties included in standard
extended coverage insurance policies in minimum amounts not less than
ninety-five percent (95%) of the full replacement cost of Tenant's furnishings,
trade fixtures, equipment and other personal property. Throughout the Lease
Term, Tenant shall obtain and maintain commercial general liability insurance in
a company or companies licensed to do business in the State of Maryland and
reasonably approved by Landlord. Such insurance shall be in minimum amounts of
Five Million Dollars ($5,000,000) per occurrence plus a general aggregate of
Five Million Dollars ($5,000,000) for injury to persons and damage to property
and shall be for a minimum term of one (1) year. Such limits may be covered by a
combination of a general liability policy and an umbrella liability policy. In
addition, Tenant's commercial general liability insurance policy shall name
Landlord and Boston Properties, Inc., as managing agent of the Building, as
additional insureds. If requested by the holder of any mortgage or deed of trust
against the Building, the commercial general liability policy referred to above
shall also name such holder as an additional insured thereunder. Receipts or
certificates evidencing payment of the premiums for such insurance shall be
delivered by Tenant if requested by Landlord. Each such policy shall contain an
endorsement prohibiting cancellation or reduction of coverage without first
giving Landlord and the holder of any mortgage or deed of trust on the Building
at least thirty (30) days' prior written notice of such proposed action.
12.4 (a) Tenant hereby waives its right of recovery against Landlord and
releases Landlord from any losses, claims, casualties or other damages for which
Landlord may otherwise be liable to the extent either (i) such loss, claim,
casualty or other damage would have been covered
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under insurance coverage Tenant is required to maintain pursuant to this Article
XII (without regard to any deductible) or (ii) Tenant receives insurance
proceeds on account of any such losses, claims, casualties or other damages.
Each policy of property insurance obtained by Tenant pursuant to the provisions
of this Article XII shall include a waiver of the insurer's right of subrogation
against Landlord, and shall contain an endorsement to the effect that any loss
payable under such policy shall be payable notwithstanding any act or negligence
of Landlord, or any agent, contractor, employee or invitee of Landlord, which
might, absent such agreement, result in the forfeiture of payment for such loss.
(b) Landlord hereby waives its right of recovery against Tenant and
releases Tenant from any losses, claims, casualties or other damages for which
Tenant may otherwise be liable to the extent either (i) such loss, claim,
casualty or other damage would have been covered under insurance coverage
Landlord is required to maintain pursuant to this Article XII (without regard to
any deductible) or (ii) Landlord receives insurance proceeds on account of any
such losses, claims, casualties or other damages. Each policy of property
insurance obtained by Landlord with respect to the Building shall include a
waiver of the insurer's right of subrogation against Tenant, and shall contain
an endorsement to the effect that any loss payable under such policy shall be
payable notwithstanding any act or negligence of Tenant, or any agent,
contractor employee or invitee of Tenant, which might, absent such agreement,
result in the forfeiture of payment for such loss.
ARTICLE XIII
SERVICES AND UTILITIES
13.1 Landlord will furnish to the Premises during the normal hours of
operation of the Building (as set forth hereinbelow) air-conditioning and
heating during the seasons when such utilities are required. Landlord will
provide the following services consistent with the Viable Building Standards:
electricity; elevator service; an access-control system for the Building;
maintenance of the grounds surrounding the Building, including snow removal;
maintenance of interior common areas, including lighting fixtures and bulb
replacements, hot and cold water supply, and furnishing of lavatory supplies;
and exterior window-cleaning service. The normal hours of operation of the
Building will be 7:00 a.m. to 7:00 p.m. on Monday through Friday (except legal
holidays) and 8:00 a.m. to 4:00 p.m. on Saturday (except legal holidays) or such
alternative hours of operation as Tenant may designate so long as Tenant is the
sole tenant of the Building. If Tenant requires air-conditioning or heat beyond
the normal hours of operation, then Landlord will furnish the same. During any
period in which the Building is multi-tenanted, Tenant shall give Landlord
reasonable advance notice of any required after-hours HVAC service and Tenant
shall pay for Tenant requested HVAC service in excess of sixty-eight (68) hours
per week in accordance with Landlord's direct costs for providing such extra
service, which shall compensate Landlord for Landlord's actual costs of
furnishing such extra service, without markup. Notwithstanding anything
contained herein to the contrary, if Tenant's hours of operation exceed four
thousand one hundred sixty (4,160) hours in any Lease Year, Tenant shall pay to
Landlord, as additional rent hereunder, an amount that would compensate Landlord
for the excess wear on those building systems, the useful lives of which are
shortened by such excess hours of operation (collectively, the "BUILDING
SYSTEMS"), as follows. First, the hourly cost of the Building Systems
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(the "HOURLY BUILDING SYSTEMS COST") shall be determined by taking the total
original cost of the Building Systems and dividing that figure by the product of
(i) 4,160, multiplied by (ii) the weighted average of the number of years of
useful life of the Building Systems, based upon the expected useful life thereof
as stated by the manufacturers thereof or, in the absence of such a
determination, based on the expected useful life publicized in the American
Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE)
Handbook - HVAC Applications, or similar industry guidelines. The Hourly
Building Systems Cost shall be subject to adjustment on the first day of the
second Lease Year and annually thereafter based on annual increases in the
Consumer Price Index (as defined in the Phased Development Agreement), as
follows. Such adjustment shall be made by subtracting the Consumer Price Index
for the month in which the Lease Commencement Date falls (the "BEGINNING INDEX")
from the Consumer Price Index for the first month of the Lease Year for which
the adjustment is being made (the "ADJUSTMENT INDEX") and dividing that figure
by the Beginning Index. The amount so determined shall be multiplied by the
initial unescalated Hourly Building Systems Cost to arrive at the adjusted
Hourly Building Systems Cost for the Lease Year for which the adjustment is
being made. The additional rent payable on account of excess wear on the
Building Systems for any Lease Year (the "EXCESS OPERATING HOURS RENT") shall be
equal to the product of (x) the Hourly Building Systems Cost (as escalated),
multiplied by (y) the number of Tenant's hours of operation in that Lease Year
in excess of 4,160. For example, if the original cost of the Building Systems
were $2,000,000 and the average useful life thereof were ten (10) years, then
the Hourly Building Systems Cost would be $48.07 ($2,000,000 / 41,600). If
Tenant's hours of operation in the first Lease Year were 4,420, then the excess
hours over 4,160 would be 260 hours. Multiplying 260 by the Hourly Building
Systems Cost ($48.07) would result in Excess Operating Hours Rent payable with
respect to the first Lease Year equal to $12,498.20. In the same example, if the
percentage increase in the Consumer Price Index between the Lease Commencement
Date and the first day of the second Lease Year were three percent (3%), then
the Hourly Building Systems Cost for the second Lease Year would be $49.51. If
Tenant's hours of operation in the second Lease Year were 4,680, then the excess
number of hours (520), multiplied by the escalated Hourly Building Systems Cost
($49.51), would result in Excess Operating Hours Rent payable with respect to
the second Lease Year equal to $25,745.20. Landlord shall make a determination
as to whether Excess Operating Hours Rent is payable in accordance herewith
following the conclusion of each Lease Year and shall provide notice thereof to
Tenant. The amount due from Tenant pursuant to each such notice from Landlord
shall be payable within fifty (50) days following demand therefor; provided
that, if Tenant disputes Landlord's determination, then the matter shall be
submitted to binding arbitration in accordance with Article XXVIII below.
Landlord agrees to provide an access control system for the Building that will
afford Tenant access to the Premises twenty-four (24) hours per day every day of
the year. At least one (1) elevator serving the Premises shall be in service at
all times. Except as otherwise specified herein, Landlord shall not be required
to furnish services and utilities during hours in excess of 68 hours per week
unless Tenant agrees to compensate Landlord for the costs of such services and
utilities.
13.2 It is understood and agreed that Landlord shall not have any liability
to Tenant whatsoever as a result of Landlord's inability to furnish any of the
utilities or services required to be furnished by Landlord under the terms of
this Lease, whether resulting from breakdown, removal from service for
maintenance or repairs, strikes, scarcity of labor or materials, acts of God,
governmental requirements or from any other cause whatsoever. It is further
agreed that, except
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as provided in this Section 13.2, any such inability to furnish the utilities or
services required hereunder shall not be considered an eviction, actual or
constructive, of Tenant from the Premises, and shall not entitle Tenant to
terminate this Lease or to an abatement of any rent payable hereunder.
Notwithstanding the foregoing or anything else in this Lease, in the event that
Tenant is prevented from using, and does not use, the Premises or any portion
thereof for five (5) consecutive business days or for ten (10) business days in
any twelve (12) month period (the "ELIGIBILITY PERIOD") as a result of any
interruption of utilities or services or access (including elevator access) or
any repair, maintenance or alteration performed by Landlord after the Lease
Commencement Date (other than repairs undertaken pursuant to Article XVI hereof)
which renders the Premises inaccessible or untenantable (the foregoing
circumstances being referred to herein as "SUSPENSION EVENTS"), then all Annual
Base Rent and additional rent payable hereunder shall be reduced after
expiration of the Eligibility Period for such time that Tenant continues to be
so prevented from using, and does not use, the Premises or a portion thereof, in
the proportion that the rentable area of the portion of the Premises that Tenant
is prevented from using, and does not use, bears to the total rentable area of
the Premises; provided that, any interruption of utilities or services resulting
from Tenant's failure to timely pay for any electricity that is billed directly
to Tenant by the electric utility pursuant to Section 4.7 hereof shall not be
deemed a Suspension Event and shall not entitle Tenant to any rent abatement
hereunder. Landlord will repair and restore any such interrupted services or
utilities as soon as reasonably practicable following the interruption thereof.
13.3 Tenant shall employ its own contractor or personnel to furnish char
and janitorial service to the Premises, and shall pay for such services directly
to the contractor employed by Tenant for such purpose. Tenant's janitorial
contractor, and the cleaning specifications incorporated into Tenant's contract
with its janitorial contractor, shall be subject to Landlord's prior written
approval, which shall not be unreasonably withheld, conditioned or delayed. Such
services shall be provided in accordance with cleaning standards customarily
maintained in first-class suburban office buildings in the North
Bethesda/Rockville/Gaithersburg corridor. In the event Landlord reasonably
determines that the Premises are not being kept clean in accordance with such
standards, Tenant agrees to take all measures reasonably required by Landlord
for the proper cleanliness of the Premises in accordance with such standards
upon notice from Landlord. If Tenant fails to institute such measures promptly
after notice from Landlord, Landlord shall have the right, at its option, to
provide cleaning and janitorial services for the Premises in accordance with
such standards and to charge Tenant all reasonable costs and expenses incurred
in connection therewith, together with a fee equal to fifteen percent (15%) of
such costs and expenses so incurred, as additional rent hereunder. Except in
situations posing an emergency or a health hazard or danger to persons or
property, Landlord shall not undertake any action under the preceding sentence
unless such violation or failure shall continue uncured for a period of fifteen
(15) days after Landlord has given notice to Tenant of such violation or
failure; provided that if such violation or failure is not susceptible of being
cured within such fifteen (15) day period, Landlord shall not undertake any
action if Tenant commences curative action within such fifteen (15) day period
and proceeds diligently thereafter to cure such violation or failure until
completion. If Tenant so requests at any time during the Lease Term, Landlord
will arrange for janitorial service to be furnished to the Premises by
Landlord's janitorial contractor; provided that, in such instance, the two
percent (2%) limit on the management fee specified in Section 4.2(a)(ix) hereof
shall be increased to two and one-fourth percent (2.25%).
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13.4 In the event Tenant determines that the services being furnished by
any contractor (excluding the property manager) employed by Landlord are
unsatisfactory, in Tenant's reasonable judgment, Tenant shall deliver written
notice to Landlord specifying in detail the manner in which the services are
deemed deficient. If the deficiencies are not, in Tenant's reasonable judgment,
substantially corrected during the next succeeding thirty (30) days, then Tenant
may deliver a further notice to Landlord advising Landlord of such fact, and,
provided Landlord will not incur any liability to the contractor as a result
thereof, Landlord shall terminate the contract of such deficient contractor and
select a qualified replacement contractor. Landlord shall not be deemed to incur
any such liability if Tenant agrees to assume responsibility for any such
liability. Landlord shall include a thirty-day termination for convenience
clause in any service contracts in which such a clause is customary.
ARTICLE XIV
LIABILITY OF LANDLORD
14.1 Landlord shall not be liable to Tenant, its employees, agents,
business invitees, licensees, customers, clients, family members or guests for
any damage, injury, loss, compensation or claim, including, but not limited to,
claims for the interruption of or loss to Tenant's business, based on, arising
out of or resulting from any cause whatsoever (except as hereinbelow set forth),
including but not limited to the following: (i) repairs to any portion of the
Premises or the Building; (ii) interruption in the use of the Premises; (iii)
any accident or damage resulting from the use or operation (by Landlord, Tenant
or any other person or persons) of elevators, or of the heating, cooling,
electrical or plumbing equipment or apparatus; (iv) the termination of this
Lease by reason of the destruction of the Premises or the Building; (v) any
fire, robbery, theft, mysterious disappearance and/or any other casualty; (vi)
the actions of other tenants in the Building, if any, or of any other person or
persons; and (vii) any leakage in any part or portion of the Premises or the
Building, or from water, rain or snow that may leak into, or flow from, any part
of the Premises or the Building, or from drains, pipes or plumbing fixtures in
the Building; provided, however, that Landlord shall not be released pursuant to
this Section 14.1 from any liability (i) resulting directly from Landlord's
breach of, or default as to, any of its covenants or other obligations under
this Lease, or (ii) subject to Section 12.4(a) above, property damage, personal
injury or death caused directly by Landlord's or its agents' or employees'
negligence or willful misconduct. In no event (notwithstanding anything in the
immediately-preceding sentence to the contrary) shall Landlord have any
liability to Tenant for any claims based on the interruption of or loss to
Tenant's business.
14.2 Tenant hereby agrees to indemnify, defend on request, and hold
Landlord harmless from and against all costs, damages, claims, liabilities and
expenses (including reasonable attorneys' fees and any costs of litigation)
suffered by or claimed against Landlord, directly or indirectly, and not covered
by the property insurance required to be maintained by Landlord hereunder, based
on, arising out of or resulting from (i) Tenant's use and occupancy of the
Premises or the business conducted by Tenant therein, (ii) any accident, injury
or damage whatsoever caused to any person, or to the property of any person,
occurring on or about the Premises during the Lease Term, (iii) the operation of
a food service, health club, daycare center or other Amenity
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(as defined in the Phased Development Agreement) at the Premises, including any
accident, injury or damage whatsoever caused to any person or property arising
therefrom, (iv) any act or omission to act by Tenant or its employees,
contractors, agents, licensees, or invitees, or (v) any breach or default by
Tenant in the performance or observance of its covenants or obligations under
this Lease; provided that Tenant's obligations to indemnify and hold harmless
Landlord pursuant to this Section 14.2 shall not include any costs, damages,
claims, liabilities or expenses suffered by or claimed against Landlord directly
based on, arising out of or resulting from Landlord's breach of, or default as
to, any of its covenants or other obligations under this Lease or the negligence
or willful misconduct of Landlord, its employees or its agents.
14.3 In the event that at any time Landlord shall sell or transfer the
Building, provided the purchaser or transferee assumes the obligations of
Landlord hereunder, the Landlord named herein shall not be liable to Tenant for
any obligations or liabilities based on or arising out of events or conditions
occurring on or after the date of such sale or transfer. If requested by
Tenant, Landlord shall furnish to Tenant a copy of the agreement pursuant to
which any such purchaser or transferee shall have assumed the obligations of
Landlord hereunder. Furthermore, upon such assumption, Tenant agrees to attorn
to any such purchaser or transferee upon all the terms and conditions of this
Lease. Notwithstanding any of the foregoing to the contrary, Landlord agrees
that (i) Landlord will not sell or transfer the Building prior to the Lease
Commencement Date; (ii) Landlord will not sell or transfer the Building to any
person or entity if an Event of Bankruptcy (as hereinafter defined) shall have
occurred and be continuing with respect to such transferee at the time Landlord
contracts to sell or transfer the Building to such transferee; and (iii) so
long as Tenant is the sole tenant of the Building, if Landlord transfers or
sells the Building, then Tenant shall have the right, at its option, to assume
all of Landlord's operation, maintenance and repair obligations hereunder in
lieu of the performance thereof by such successor landlord (in which event no
management fee shall be payable to such successor landlord); provided that if
Tenant elects to assume such obligations, then Tenant shall perform such
obligations to the same extent and in the same manner and to the same standards
required of Landlord hereunder; provided further that, Tenant shall not have
the right to self-manage the Building as aforesaid during the initial twelve
(12) month period following any such transfer unless the transferee is an
institutional investor or other person or entity that is not itself, and is not
affiliated with another entity that is, in the business of managing commercial
real estate.
14.4 In the event that at any time during the Lease Term Tenant shall have
a claim against Landlord, except as otherwise provided in Section 14.6 hereof,
Tenant shall not have the right to deduct the amount allegedly owed to Tenant
from any rent or other sums payable to Landlord hereunder, it being understood
that Tenant's sole remedy for recovering upon such claim shall be to institute
an independent action against Landlord.
14.5 Tenant agrees that in the event Tenant is awarded a money judgment
against Landlord, Tenant's sole recourse for satisfaction of such judgment shall
be limited to execution against Landlord's equity interest in the Building and
the Land at the time of such execution, which, if the Building has been sold
prior to such execution, shall include the net sale proceeds, after payment of
all prior liens, from the sale of the Building. In no event shall Landlord or
any partner or mem-
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ber of Landlord or any other person be held to have any personal liability for
satisfaction of any claims or judgments that Tenant may have against Landlord.
14.6 In the event Landlord shall be in default with respect to any service
or action that Landlord is obligated to furnish or perform under this Lease,
then Tenant shall have the right to obtain such service or perform such act on
Landlord's account subject to the terms and conditions set forth below.
Notwithstanding anything contained herein to the contrary, Tenant shall have the
rights set forth in this Section 14.6 with respect to services and actions that
materially affect the structure of the Building, materially affect any
multi-tenant common area or materially affect any base-building system only if
Tenant gives Landlord and Landlord's lender(s) (whose identity and notice
address shall have been provided to Tenant) written notice of Landlord's alleged
default and Landlord does not in good faith dispute such alleged default in
writing within ten (10) business days following the delivery of Tenant's notice.
Prior to Tenant undertaking any action to cure or remedy any Landlord default
with respect to any service or action that Landlord is obligated to furnish or
perform under this Lease, Tenant shall first give written notice of such default
to Landlord and Landlord's lender(s) (whose identity and notice address shall
have been provided to Tenant) and allow Landlord and such lender(s) ten (10)
business days following receipt by Landlord and such lender(s) of such written
notice to cure or remedy the condition specified in Tenant's notice; provided,
however, that if such condition cannot be cured within the ten (10) business day
period, such period shall be extended for a reasonable additional time, so
long as Landlord or such lender(s) commence to cure such condition within the
ten (10) business day period and proceed diligently thereafter to effect such
cure. Notwithstanding any of the foregoing to the contrary, in the event of a
material failure of, or deficiency in, any of the Essential Building Services
(as hereinafter defined) which renders all or a substantial portion of the
Premises unsafe or unsuitable for the conduct of Tenant's business therein, the
period in which Landlord or such lender(s) must cure such condition prior to
Tenant's having the right to undertake any such action, shall be forty-eight
(48) hours following receipt by Landlord and such lender(s) of such written
notice provided notice is received between the hours of 8:00 a.m. and 5:00 p.m.
Monday through Friday, or between the hours of 8:00 a.m. and 2:00 p.m. on
Saturday, excluding legal holidays; provided that, if the condition cannot be
cured within such 48-hour period, then, provided Landlord or such lender(s)
commence to cure such condition within such 48-hour period and proceed
diligently thereafter to effect such cure, then such 48-hour period shall be
extended for such reasonable period as is necessary to effect such cure using
diligent efforts. For purposes hereof, the term "ESSENTIAL BUILDING SERVICES"
shall mean (i) plumbing systems; (ii) electrical service; (iii) HVAC service;
(iv) life-safety systems; (v) elevator service; and (vi) building access
systems. If Landlord or such lender(s) fail to cure or remedy any such condition
within the applicable time period, as set forth above, then Tenant may cure or
remedy such condition and deliver an invoice to Landlord for such costs and
expenses, and Landlord shall pay to Tenant the amount of such invoice within
thirty (30) days after delivery by Tenant. The amount of such expenses, when
paid by Landlord, shall be included within Expenses, to the extent such costs
and expenses are not excluded from the definition of Expenses. In the event
Landlord fails to pay to Tenant when due any sum which Tenant is entitled to
recover from Landlord pursuant to this Section 14.6, then Tenant shall have the
right to a credit against Annual Base Rent in the amount of any such unpaid
sum, together with interest thereon at the Default Rate (as defined in Section
18.7 below) from the date due until the date paid, if Tenant has obtained a
final, nonappealable court judgment that such sum was due and payable to Tenant
under the terms of this Section 14.6 but was not paid by
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Landlord. In the event Tenant seeks to cure or remedy any condition which gives
rise to Tenant's remedies set forth in this Section 14.6, Tenant shall (i)
proceed in accordance with the applicable provisions of this Lease and all
applicable Legal Requirements and the Viable Building Standards; (ii) use only
such contractors, suppliers, etc. as are duly licensed in the State of Maryland
and insured to effect such repairs and who perform such repairs on first-class
buildings in the normal course of their business; (iii) promptly effect such
repairs in a good workmanlike quality and in a first-class manner; (iv) use new
or other first-quality materials; and (v) be fully responsible for any defects
therein and any liability arising therefrom. Landlord agrees to cooperate with
Tenant in the performance of repairs by Tenant's contractors, including
granting access to portions of the Building outside the Premises and making
available for inspection and copying any plans that might be required by such
contractors.
14.7 Landlord hereby agrees to indemnify, defend on request, and hold
Tenant harmless from and against all costs, damages, claims, liabilities and
expenses (including reasonable attorneys' fees) suffered by or claimed against
Tenant, directly or indirectly, and not to be covered by the insurance required
to be maintained by Tenant hereunder, based on, arising out of or resulting from
any breach or default by Landlord in the performance or observance of its
covenants or obligations under this Lease, including, but not limited to,
Landlord's obligations pursuant to Section 6.5 hereof; provided that Landlord's
obligations to indemnify and hold harmless Tenant pursuant to this Section 14.7
shall not include any costs, damages, claims, liabilities, or expenses suffered
by or claimed against Tenant directly based on, arising out of or resulting from
any negligence or willful misconduct of Tenant or its agents or employees.
ARTICLE XV
RULES AND REGULATIONS
15.1 Tenant agrees to comply with and observe the rules and regulations
pertaining to the use and occupancy of the Premises or the Building set forth in
Exhibit E hereto, together with all reasonable amendments thereto as may be
promulgated hereafter by Landlord (collectively, the "RULES AND REGULATIONS");
provided that (i) any such amendment shall not increase Tenant's monetary
obligations hereunder or cause Tenant to incur significant additional costs or
adversely affect the rights expressly granted to Tenant hereunder or Tenant's
use and enjoyment of the Premises, (ii) Tenant shall be given written notice of
such amendment at least thirty (30) days before it takes effect, (iii) if there
is any inconsistency between this Lease and the Rules and Regulations, this
Lease shall govern; and (iv) while Tenant is the sole tenant of the Building,
Tenant shall not be subject to any of the Rules and Regulations or any
amendments thereto, except those that are necessary to keep the Building in
compliance with the Viable Building Standards. Without limiting the generality
of clause (iii) above, it is understood and agreed that if the Rules and
Regulations with respect to a particular matter call for stricter Landlord
approval rights than those contained herein, or the Rules and Regulations are
otherwise more restrictive than any provision herein governing the same matter,
then this Lease shall govern and control. Any dispute between the parties as to
whether a particular provision of the Rules and Regulations is superseded by
this Lease may be submitted to arbitration pursuant to Article XXVIII hereof.
Tenant's failure to keep and observe said Rules and Regulations after applicable
notice and opportunity to cure shall constitute an Event of Default under this
Lease. Landlord shall use reasonable efforts to enforce the
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Rules and Regulations, including any exceptions thereto, uniformly and shall not
discriminate against Tenant in the enforcement of the Rules and Regulations;
provided that it is understood that Landlord may grant exceptions to the Rules
and Regulations in circumstances in which it reasonably determines that such
exceptions are warranted.
ARTICLE XVI
DAMAGE OR DESTRUCTION
16.1 If, during the Lease Term, the Premises or the Building are totally or
partially damaged or destroyed from any cause, thereby rendering the Premises
totally or partially inaccessible or unusable by Tenant for its business,
Landlord shall diligently (taking into account the time necessary to effectuate
a satisfactory settlement with any insurance company involved) restore, replace
and repair the Premises and the Building to substantially the same condition
they were in prior to such damage; provided, however, if in the reasonable
judgment of an independent architect selected by Landlord the repairs,
replacement and restoration cannot be completed within three hundred sixty-five
(365) days after the occurrence of such damage, including the time needed for
removal of debris, preparation of plans and issuance of all required
governmental permits, then Landlord shall have the right, at its sole option, to
terminate this Lease by giving written notice of termination to Tenant within
sixty (60) days after the occurrence of such damage; provided that, if Tenant
has then exercised its right, pursuant to the Phased Development Agreement, to
cause the construction of improvements upon the Phase II Land or the Phase III
Land or exercises such right within sixty (60) days following the date of the
casualty (provided such rights have not sooner been terminated), then Tenant may
nullify such termination of this Lease by Landlord and Landlord shall then be
obligated to proceed to repair and restore the Premises and the Building in
accordance herewith. If this Lease is terminated pursuant to the preceding
sentence, all rent payable hereunder shall be equitably apportioned and paid to
the date of the occurrence of such damage or destruction, and neither Landlord
nor Tenant shall have any further rights or remedies as against each other
pursuant to this Lease accruing after the date of termination. The judgment by
Landlord's independent architect as to whether it will take more than or less
than 365 days to complete the repairs, replacement and restoration shall be
subject to review and challenge by an independent architect selected by Tenant,
as follows. If Tenant wishes to challenge such determination, an independent
architect selected by Tenant shall have a period of ten (10) business days
following Tenant's receipt of written notice from Landlord of its determination
in which to set forth its determination as to whether it will take more than or
less than 365 days to complete the repairs, replacement and restoration (without
regard to any delay occasioned by such challenge). If Landlord's and Tenant's
architects do not agree, then such architects shall jointly appoint an
independent architect who shall make a determination as to whether it will take
more than or less than 365 days to complete the repairs, replacement and
restoration (without regard to any delay occasioned by Tenant's challenge), and
the determination of such third architect shall be binding on both Landlord and
Tenant. Each party shall be responsible for its own architect's fees, and shall
share jointly in the fees of the third architect.
16.2 If the repairs and restoration cannot be completed within three
hundred and sixty-five (365) days after the date of such damage or destruction
(as determined pursuant to Section 16.1 above), but Landlord does not elect to
terminate this Lease pursuant to Section 16.1, then
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Landlord shall promptly notify Tenant of such determination. For a period
continuing through the tenth (10th) day after receipt of such notice, Tenant
shall have the right to terminate this Lease by providing written notice thereof
to Landlord, in which event the Lease Term shall end on the date of the giving
of such notice as if such date were the date originally provided herein as the
end of the Lease Term. If Tenant does not elect to terminate this Lease within
such period, and provided Landlord does not elect to terminate this Lease, then
Landlord shall proceed to repair and restore the Premises and the Building.
16.3 Notwithstanding anything to the contrary contained herein, in the
event the Premises are damaged during the last two (2) years within the Lease
Term, and if the period of time reasonably projected by Landlord for restoration
of the damage (taking into account the time necessary to effectuate a
satisfactory settlement with any insurance company involved) exceeds one-fourth
(1/4) of the time remaining in the Lease Term as of the date of the damage, then
Landlord and Tenant shall each have the right to terminate this Lease by written
notice delivered to the other party within fifteen (15) days after Landlord
notifies Tenant in writing of the projected restoration period; provided,
however, that if (i) Landlord exercises its right of termination under this
Section 16.3, and (ii) at such time, Tenant has a right to renew the Lease Term
pursuant to Article XXVI hereof, and (iii) Tenant notifies Landlord in writing,
within fifteen (15) days following the delivery of Landlord's termination
notice, that Tenant is exercising its right to renew the Lease Term, and (iv)
pursuant to Article XXVI, Landlord and Tenant either reach agreement concerning
the Market Rent applicable to the Renewal Term or cause such determination to be
made by the means described in Section 26.3(b), then Landlord's termination
notice shall be deemed nullified and this Lease shall continue in full force and
effect through the remainder of the Lease Term (as thus renewed).
16.4 If this Lease is not terminated in accordance with the provisions of
this Article XVI, until the repair and restoration of the Premises is completed,
Tenant shall be required to pay Annual Base Rent and additional rent only for
that part of the Premises that Landlord and Tenant mutually agree, in their
reasonable judgment, that Tenant is able to use (as such use is contemplated by
this Lease) while repairs are being made, based on the ratio that the amount of
usable rentable area bears to the total rentable area in the Premises; provided
that, in no event shall the portion of the Land Rent and additional rent
allocable to the Phase II Land or the Phase III Land be abated. In addition to
any abatement granted pursuant to the previous sentence, Tenant's abatement
period shall continue until Tenant has been given sufficient time, and
sufficient access to the Premises, to (i) rebuild any portion of the Premises it
is required to rebuild, (ii) install its property, furniture, fixtures, and
equipment, and (iii) move in over one (1) weekend. The foregoing additional
abatement period shall extend for a period not to exceed sixty (60) days
following the date Landlord's repair and restoration is substantially complete.
In addition, the Lease Term shall be extended for the period of time during
which all or any portion of the rent is abated pursuant to this Section 16.4. If
the Lease Term shall have been extended pursuant to Section 2.3 hereof to render
this Lease coterminous with the Phase II Lease and/or the Phase III Lease (if
any), then any such coterminous lease may be extended, at Tenant's option, to
render such other lease(s) coterminous with the term hereof (as extended
pursuant to the preceding sentence), as more particularly set forth in the
Phased Development Agreement. Similarly, if this Lease is coterminous with the
Phase II Lease and/or the Phase III Lease and the term of any such coterminous
lease is extended pursuant to the comparable Section 16.4 of such coterminous
lease
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(following a casualty under such other lease), then this Lease may be extended,
at Tenant's option, to render this Lease coterminous with such other lease (as
extended pursuant to Section 16.4 thereof), by Tenant's giving Landlord written
notice thereof within thirty (30) days following the date full, unabated rent
obligations resume under such other lease following the abatement periods
described in such Section 16.4. Subject to the terms of Section 16.5 below,
Landlord shall bear the costs and expenses of repairing and restoring the
Premises. Upon the resumption of payment of full, unabated rent following the
expiration of all abatement periods provided above, the Improvements Rent then
in effect hereunder shall be increased by adding thereto an additional component
of rent which is referred to herein as the Excess Restoration Costs Rent. The
"EXCESS RESTORATION COSTS RENT" shall be equal to the product of (i) the Excess
Restoration Costs (as hereinafter defined), multiplied by (ii) the Excess
Restoration Costs Factor (as hereinafter defined). "EXCESS RESTORATION COSTS"
shall mean the excess of all costs incurred by Landlord to repair and restore
the Building on account of the damage or destruction (including cost of carry),
over and above the insurance proceeds that shall have been paid to or for the
benefit of Landlord (including any insurance proceeds paid to Landlord's lender
to pay down any mortgage or deed of trust encumbering the Building and/or the
Land) on account of such damage or destruction (or that would have been paid had
Landlord maintained the insurance required pursuant to Section 12.2 hereof). The
"EXCESS RESTORATION COSTS FACTOR" shall mean a blended rate equal to that rate
of interest which, when applied to the Excess Restoration Costs, would produce
the same payment stream as the combined payment streams of the following two
hypothetical loans, each bearing interest at the Restoration Costs Interest Rate
(as hereinafter defined): (x) an interest-only loan in the principal amount of
66.67% of the Excess Restoration Costs; and (y) a fully-amortizing loan in the
principal amount of 33.33% of the Excess Restoration Costs, having a term equal
to the number of years remaining in the Lease Term as of the resumption of
payment of full, unabated rent following completion of the restoration. The
"RESTORATION COSTS INTEREST RATE" means the percentage rate that is two and
one-half (2.5) percentage points in excess of the yield on U.S. Treasury
obligations maturing on or about the maturity date of the hypothetical loan
described in clause (y) above, being quoted as of the date the damage shall have
occurred, subject to the 8.5% floor and 12% cap if the damage occurs within five
(5) years following the Lease Commencement Date hereunder. The Excess
Restoration Costs Rent shall be added to the Improvements Rent then in effect
and shall be escalated at the times and in the manner applicable to all other
components of Annual Base Rent, as provided herein.
16.5 If Landlord repairs and restores the Premises as provided in this
Article XVI, Landlord shall not be required to repair or restore any
decorations, alterations or improvements to the Premises previously made by or
at the expense of Tenant or any trade fixtures, furnishings, equipment or
personal property belonging to Tenant. It shall be Tenant's sole responsibility
to repair and restore all such items.
ARTICLE XVII
CONDEMNATION
17.1 If (i) more than twenty percent (20%) of the rentable area of the
portion of the Premises comprised of space leased by Tenant in the Building (the
"BUILDING PREMISES"), or (ii) the use or occupancy of more than twenty percent
(20%) of the rentable area of the Building
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Premises, shall be taken or condemned by any governmental or other authority
having the power of eminent domain for any public or quasi-public use or purpose
(including a sale thereof under threat of such a taking) (each such event being
referred to herein as a "TAKING"), then this Lease shall terminate on the date
title thereto (or the right to use or occupy, as appropriate) vests in such
governmental or quasi-governmental authority, and all Annual Base Rent and
additional rent payable hereunder shall be equitably apportioned as of such
date. This Lease shall similarly terminate if there is a Taking of more than
twenty percent (20%) of the minimum necessary parking for the Building according
to the Approved Site Plan that cannot be replaced by substitute parking spaces
on other portions of the Land or by the construction of structured parking on
the Phase I Land (to the extent it may not already be in place). If less than
twenty percent (20%) of the rentable area of the Building Premises or such
minimum necessary parking area or the use or occupancy thereof is condemned,
then this Lease shall continue in full force and effect as to the part of the
Building Premises and the Land not condemned, except that (i) as of the date
title (or the right to use or occupy, as appropriate) vests in such authority,
Annual Base Rent and Expenses with respect to the part of the Building Premises
and the Land condemned shall be equitably reduced for the balance of the Lease
Term, and (ii) Landlord shall, at its cost, restore the Building Premises to
create, to the extent reasonably possible, a single unit of space, including
(but not limited to) building or moving demising walls, suite entries, heating
and air conditioning equipment, and utility lines.
17.2 All awards, damages and other compensation paid by the condemning
authority on account of such Taking shall belong to Landlord, and Tenant hereby
assigns to Landlord all rights to such awards, damages and compensation. Tenant
agrees not to make any claim against Landlord or the condemning authority for
any portion of such award or compensation attributable to damages to the
Premises, the value of the unexpired term of this Lease, the loss of profits or
goodwill, leasehold improvements or severance damages. Nothing contained herein,
however, shall prevent Tenant from pursuing a separate claim against the
condemning authority for the value of furnishings, equipment and trade fixtures
installed in the Premises at Tenant's expense and for relocation expenses,
provided that such claim does not in any way diminish the award or compensation
payable to or recoverable by Landlord in connection with such taking or
condemnation.
ARTICLE XVIII
DEFAULT
18.1 The occurrence of any of the following shall constitute an Event of
Default by Tenant under this Lease:
(a) If Tenant shall fail to pay any installment of Annual Base Rent or
additional rent or any other payment required by this Lease when due and such
failure shall continue uncured for a period of ten (10) days after Landlord
notifies Tenant of such failure in writing; provided, however, that after
Landlord has given Tenant two (2) such written notices in any twelve (12)- month
period, Tenant shall be in default if any such payment accruing during such
twelve (12)-month period (and after the second of such notices) is not made
within ten (10) days after such payment is due (without the necessity of any
notice being sent by Landlord).
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(b) If Tenant shall violate or fail to perform any other term,
condition, covenant or agreement to be performed or observed by Tenant under
this Lease and such violation or failure shall continue uncured for a period of
thirty (30) days after Landlord notifies Tenant in writing of such failure. If
such violation or failure is not capable of being cured within such thirty
(30)-day period, Tenant shall not be deemed to be in default hereunder if Tenant
commences curative action within such thirty (30)-day period and proceeds
diligently and in good faith thereafter to cure such violation or failure until
completion.
(c) An Event of Bankruptcy as defined in Article XIX hereof.
18.2 If there shall occur an Event of Default under this Lease, including
without limitation an Event of Default prior to the Lease Commencement Date,
Landlord shall have the right, at its sole option, to terminate this Lease. In
addition, with or without terminating this Lease, Landlord may re-enter,
terminate Tenant's right of possession, and take possession of the Premises. The
provisions of this Article XVIII shall operate as a notice to quit, and Tenant
waives any other notice to quit or notice of Landlord's intention to re-enter
the Premises or terminate this Lease. If necessary, Landlord may proceed to
recover possession of the Premises under and by virtue of the laws of the State
of Maryland, or by such other proceedings, including re-entry and possession, as
may be applicable. If Landlord terminates this Lease and/or terminates Tenant's
right of possession, then everything contained in this Lease on the part of
Landlord to be done and performed shall cease without prejudice, however, to the
right of Landlord to recover from Tenant all rent and other sums due under this
Lease. Whether or not this Lease and/or Tenant's right of possession is
terminated by reason of Tenant's default, Landlord shall have the right, after
any Event of Default occurs but only during the continuation thereof, to grant
or withhold any consent or approval pursuant to this Lease in its sole and
absolute discretion. Landlord agrees to use reasonable efforts to relet the
Premises for such rent and upon such terms as are not unreasonable under the
circumstances, and if the full rental provided herein plus the reasonable costs,
expenses and damages hereafter described shall not be realized by Landlord,
Tenant shall be liable for all damages sustained by Landlord, including, without
limitation, deficiency in Annual Base Rent and additional rent, reasonable
attorneys' fees, brokerage fees, and the expenses of placing the Premises in the
condition that would have been required if the date of termination had been the
date of expiration of the Lease Term. Tenant expressly acknowledges that
Landlord's agreement to use reasonable efforts to relet the Premises shall in no
event limit, restrict or prejudice in any way Landlord's and Landlord's
affiliates' and agents' rights to lease other space in the Building, if any, or
the Complex prior to reletting the Premises. Subject to Landlord's obligations
pursuant to the preceding two sentences, Landlord shall in no way be responsible
or liable for any failure to relet the Premises or any part thereof, or any
failure to collect any rent due or accrued upon such reletting, to the end and
intent that Tenant may be liable for the Annual Base Rent, additional rent, and
any and all other items of cost and expense which Tenant shall have been
obligated to pay throughout the remainder of the Lease Term. Any damages or loss
of rent sustained by Landlord may be recovered by Landlord, at Landlord's
option, at the time of the reletting, or in separate actions, from time to time,
as said damage shall have been made more easily ascertainable by successive
relettings, or, at Landlord's option, may be deferred until the expiration of
the Lease Term, in which event Tenant hereby agrees that the cause of action
shall not be deemed to have accrued until the date of expiration of the Lease
Term. The provisions contained in this Section 18.2 shall
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not prevent the enforcement of any claim Landlord may have against Tenant for
anticipatory breach of this Lease.
18.3 As an alternative to recovering damages on account of rental
deficiencies on a periodic basis as set forth in Section 18.2 above, Landlord
may recover as liquidated damages an amount equal to the present value (as of
the date of the termination of this Lease) of the difference between (i) the
Annual Base Rent and additional rent which would have become due during the
remainder of the Lease Term, and (ii) the fair market rental value of the
Premises for the same period, which damages shall be payable to Landlord in one
lump sum on demand. For purpose of this Section, present value shall be computed
by discounting at a rate equal to the "Prime Rate" as published in the Money
Rates section of The Wall Street Journal.
18.4 All rights and remedies of Landlord set forth herein are in addition
to all other rights and remedies available to Landlord pursuant to the Phased
Development Agreement, at law or in equity. All rights and remedies available to
Landlord hereunder, pursuant to the Phased Development Agreement, or at law or
in equity are expressly declared to be cumulative. The exercise by Landlord of
any such right or remedy shall not prevent the concurrent or subsequent exercise
of any other right or remedy; provided that Landlord may not recover more than
once for the same damages. No delay in the enforcement or exercise of any such
right or remedy shall constitute a waiver of any default by Tenant hereunder or
of any of Landlord's rights or remedies in connection therewith. Landlord shall
not be deemed to have waived any default by Tenant hereunder unless such waiver
is set forth in a written instrument signed by Landlord. If Landlord waives in
writing any default by Tenant, such waiver shall not be construed as a waiver of
any covenant, condition or agreement set forth in this Lease except as to
specific circumstances described in such written waiver.
18.5 If Landlord shall institute proceedings against Tenant and a
compromise or settlement thereof shall be made, the same shall not constitute a
waiver of default or of any other covenant, condition or agreement set forth
herein, nor of any of Landlord's rights hereunder, except to the extent agreed
by Landlord in writing in connection with such compromise or settlement. Neither
the payment by Tenant of a lesser amount than the installments of base rent,
additional rent or of any sums due hereunder nor any endorsement or statement on
any check or letter accompanying a check for payment of rent or other sums
payable hereunder shall be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such rent or other sums or to pursue any other remedy available
to Landlord. Notwithstanding any request or designation by Tenant, Landlord may
apply any payment received from Tenant to any payment then due. No re-entry by
Landlord, and no acceptance by Landlord of keys from Tenant, shall be considered
an acceptance of a surrender of this Lease.
18.6 If Tenant defaults in the making of any payment or in the doing of any
act herein required to be made or done by Tenant, then Landlord may (after
giving Tenant the appropriate notice and opportunity to cure specified in
Section 18.1 hereof), but shall not be required to, make such payment or do such
act. If Landlord elects to make such payment or do such act, all reasonable
costs and expenses incurred by Landlord, plus interest thereon at the rate per
annum which is two percent (2%) higher than the prime rate then being quoted in
The Wall Street Journal, from
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the date paid by Landlord to the date of payment thereof by Tenant, shall
constitute additional rent hereunder and shall be immediately paid by Tenant to
Landlord; provided, however, that nothing contained herein shall be construed as
permitting Landlord to charge or receive interest in excess of the maximum rate
then allowed by law. The taking of such action by Landlord shall not be
considered a cure of such default by Tenant prevent Landlord from pursuing any
remedy it is otherwise entitled to in connection with such default.
18.7 If Tenant fails to make any payment of Annual Base Rent or of
additional rent on or before the date such payment is due and payable, Tenant
shall pay to Landlord a late charge of five percent (5%) of the amount of such
payment. In addition, such payment shall bear interest at the rate per annum
which is two percent (2%) higher than the prime rate then being quoted in The
Wall Street Journal (the "DEFAULT RATE"), from the date such payment became due
to the date of payment thereof by Tenant; provided, however, that nothing
contained herein shall be construed as permitting Landlord to charge or receive
interest in excess of the maximum rate then allowed by law. Notwithstanding any
of the foregoing to the contrary, Landlord hereby waives the imposition of such
late charge and the interest payable on late payments with respect to the first
two (2) such late payments to occur in any twelve (12) month period, provided
Tenant in fact cures the default within five (5) business days following
Tenant's receipt of notice of such default. Such late charge and interest shall
constitute additional rent due and payable hereunder with the next installment
of Annual Base Rent due hereunder.
18.8 Notwithstanding anything in this Lease to the contrary, in the event
(i) an Event of Default shall occur under this Lease and (ii) Tenant shall
thereafter tender performance of the obligation that gave rise to such Event of
Default and (iii) Landlord, in its discretion, shall agree to accept such
performance as curing the Event of Default, then, for all purposes of this
Lease, no Event of Default shall thereafter be deemed to exist. Notwithstanding
any of the foregoing to the contrary, Landlord shall be obligated to accept
Tenant's cure of the first (1st) Event of Default to occur and be cured within
any twelve (12) month period provided such cure, when tendered, includes payment
of all interest, late charges, and other costs of enforcement incurred by
Landlord on account of such default (including, but not limited to, reasonable
attorneys' fees).
ARTICLE XIX
BANKRUPTCY
19.1 The following shall be an Event of Bankruptcy under this Lease:
(a) Tenant's becoming insolvent, as that term is defined in Title 11
of the United States Code (the "BANKRUPTCY CODE"), or under the insolvency laws
of any State, District, Commonwealth or territory of the United States that are
applicable to Tenant (the "INSOLVENCY LAWS");
(b) The filing of a voluntary petition under the provisions of the
Bankruptcy Code or Insolvency Laws;
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(c) The filing of an involuntary petition against Tenant as the
subject debtor under the Bankruptcy Code or Insolvency Laws, which either (i) is
not dismissed within ninety (90) days of filing or (ii) results in the issuance
of an order or relief against the debtor; or
(d) Tenant's making or consenting to an assignment for the benefit of
creditors or a common law composition of creditors.
19.2 (a) Upon occurrence of an Event of Bankruptcy, Landlord shall have all
rights and remedies available to Landlord pursuant to Article XVIII, provided
that while a case in which Tenant is the subject debtor under the Bankruptcy
Code is pending and only for so long as Tenant or its Trustee in Bankruptcy
(hereinafter referred to as "TRUSTEE") is in compliance with the provisions of
Section 19.2(b), (c) and (d) below, Landlord shall not exercise its rights and
remedies pursuant to Article XVIII.
(b) In the event Tenant becomes the subject debtor in a case pending
under the Bankruptcy Code, Landlord's right to terminate this Lease pursuant to
Section 19.2(a) shall be subject to the rights of Trustee to assume or assign
this Lease. Trustee shall not have the right to assume or assign this Lease
unless Trustee promptly (i) cures all defaults under this Lease, (ii)
compensates Landlord for monetary damages incurred as a result of such defaults,
and (iii) provides adequate assurance of future performance on the part of
Tenant as debtor in possession or on the part of the assignee tenant.
(c) Landlord and Tenant hereby agree in advance that adequate
assurance of future performance, as used in Section 19.2(b) above, shall mean
that all of the following minimum criteria must be met: (i) Tenant's gross
receipts in the ordinary course of business during the thirty (30) day period
immediately preceding the initiation of the case under the Bankruptcy Code must
be at least two (2) times greater than the next monthly installment of annual
base rent and additional rent due under this Lease; (ii) both the monthly
average and median of Tenant's gross receipts in the ordinary course of business
during the six month period immediately preceding the initiation of the case
under the Bankruptcy Code must be at least two (2) times greater than the next
monthly installment of annual base rent and additional rent due under this
Lease; (iii) Trustee must pay to Landlord at the time the next monthly
installment of Annual Base Rent is due under this Lease, in addition to such
installment of Annual Base Rent, an amount equal to the monthly installments of
Annual Base Rent and additional rent due under this Lease for the next six
months under this Lease, said amount to be held by Landlord in escrow, without
interest, until either Trustee or Tenant defaults in its payment of rent or
other obligations under this Lease (whereupon Landlord shall have the right to
draw on such escrowed funds) or until the expiration of this Lease (whereupon
the funds shall be returned to Trustee or Tenant); (iv) Tenant must pay its
estimated pro rata share of the cost of all services provided by Landlord
(whether or not previously included as a part of the annual base rent) in
advance of the performance or provision of such services; (v) Trustee must agree
that Tenant's business shall be conducted in a first-class manner and that no
liquidating sales, auctions or other non-first-class business operations shall
be conducted on the Premises; (vi) Trustee must agree that the use of the
Premises as stated in this Lease will remain unchanged and that no prohibited
use shall be permitted; and (vii) Tenant or Trustee must agree to pay to
Landlord at any time Landlord is
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authorized to and does draw on the escrow account the amount necessary to
restore such escrow account to the original level required by Section
19.2(c)(iii).
(d) In the event Tenant is unable to (i) cure its defaults, (ii) pay
the rent due under this Lease and all other payments required of Tenant under
this Lease on time (or within five (5) days of the due date), or (iii) meet the
criteria and obligations imposed by Section 19.2(c) above, Tenant agrees in
advance that it has not met its burden to provide adequate assurance of future
performance and this Lease may be terminated by Landlord in accordance with
Section 19.2(a) above.
ARTICLE XX
SUBORDINATION; MORTGAGES
20.1 This Lease is subject and subordinate to the lien of any and all
mortgages (which term "MORTGAGES" shall include both construction and permanent
financing and shall include deeds of trust and similar security instruments)
which may now or hereafter encumber the Building, and to all and any renewals,
extensions, modifications, recastings or refinancings thereof; provided,
however, that the effectiveness of such subordination is subject to the
condition that Landlord obtain from any holder of any such mortgage or deed of
trust on the Building a non-disturbance agreement, to the end and intent that as
long as Tenant pays all rent when due and punctually observes all other
covenants and obligations on its part to be observed under this Lease (subject
to applicable notice and cure provisions), the terms and conditions of this
Lease shall continue in full force and effect and Tenant's rights under this
Lease and its possession, use and occupancy of the Premises shall not be
disturbed during the term of this Lease by the holder of such mortgage or deed
of trust or by any purchaser upon foreclosure of such mortgage or deed of trust.
At any time after the execution of this Lease, the holder of any mortgage to
which this Lease is subordinate shall have the right to declare this Lease to be
superior to the lien of such mortgage, and Tenant agrees to execute all
documents required by such holder in confirmation thereof.
20.2 In confirmation of the foregoing subordination, Tenant shall, at
Landlord's request, promptly execute and deliver any reasonable and appropriate
certificate or other document evidencing such subordination. Tenant agrees that
neither the institution of any suit, action or other proceeding by the holder of
any mortgage on the Building to realize upon such mortgage holder's interest in
the Building, nor any sale of the Building pursuant to the provisions of the
mortgage in favor of such mortgage holder, shall, by operation of law or
otherwise, result in the cancellation or termination of this Lease or of the
obligations of Tenant hereunder, and that Tenant shall attorn to the purchaser
at such foreclosure sale and shall recognize such purchaser as the landlord
under this Lease. Tenant further agrees that for the purposes of this Section
20.2, the term "PURCHASER" or "PURCHASER AT A FORECLOSURE SALE" shall mean,
without limitation, a purchaser at a foreclosure sale affecting the Building or
the holder of any mortgage on the Building. Tenant agrees that upon such
attornment, such purchaser shall not (a) be bound by any rent credits or
payments of Annual Base Rent for more than one (1) month in advance, (b) be
bound by any amendment of this Lease made without the consent of any lender
providing financing for the Building of which Tenant has notice prior to
entering into the amendment (other than an amendment confirming the exercise of
a right of Tenant under this Lease, including, but not limited to, an adjustment
to the
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Land Rent or an increase in the Improvements Rent payable hereunder,
pursuant to Section 3.7 hereof), (c) be liable for damages for any act or
omission of any prior landlord; or (d) be subject to any offsets or defenses
which Tenant might have against any prior landlord; provided, however, that
after succeeding to Landlord's interest under this Lease, such purchaser shall
perform in accordance with the terms of this Lease all obligations of Landlord
arising after the date such purchaser acquires title to the Building. Upon
request by such purchaser, Tenant shall execute and deliver an instrument or
instruments confirming its attornment.
20.3 (a) After Tenant receives notice in writing from any person, firm or
other entity that it holds a mortgage or deed of trust on the Building or the
Land requesting that copies of notices from Tenant to Landlord be sent to it, no
notice from Tenant to Landlord alleging any default by Landlord shall be
effective unless and until a copy of the same is given to such holder or Trustee
at the last address of such holder or Trustee; that shall have been furnished to
Tenant. The curing of any of Landlord's defaults by such holder or Trustee shall
be treated as performance by Landlord.
(b) In addition to the time afforded Landlord for the curing of any
default, any such holder or Trustee shall have an additional thirty (30) days
after the expiration of the period allowed to Landlord for the cure of any such
default within which to commence a cure and such additional time as may be
reasonable necessary to effect the cure using diligent efforts.
20.4 In the event that any lender providing construction or permanent
financing or any refinancing for the Building or the Land requires, as a
condition of such financing, that modifications to this Lease be obtained, and
provided that such modifications (i) are reasonably acceptable to Tenant, (ii)
do not adversely affect in a material manner Tenant's rights or obligations
hereunder, including its use of the Premises as herein permitted, and (iii) do
not increase the rent or other sums to be paid by Tenant hereunder, Landlord may
submit to Tenant a written amendment to this Lease incorporating such required
changes, and Tenant hereby covenants and agrees to execute, acknowledge and
deliver such amendment to Landlord within fifteen (15) days of Tenant's receipt
thereof.
ARTICLE XXI
HOLDING OVER
21.1 In the event that Tenant shall not immediately surrender the Premises
on the date of the expiration of the Lease Term, Tenant shall become a tenant by
the month. During the first sixty (60) days of such holdover period, Tenant
shall pay a rent equal to one hundred twenty-five percent (125%) of the Annual
Base Rent and all additional rent in effect during the last month of the Lease
Term. In the event such holdover period extends beyond sixty (60) days, then the
rent shall be adjusted, retroactively to the first day of the holdover period,
to equal the greater of (i) one hundred ten percent (110%) of fair market rental
value for the Premises in its then-existing condition or (ii) one hundred
twenty-five percent (125%) of the Annual Base Rent and all additional rent in
effect during the last month of the Lease Term. Said monthly tenancy shall
commence on the first day following the expiration of the Lease Term. As a
monthly tenant, (i) Tenant shall be subject to all the terms, conditions,
covenants and agreements of this Lease; (ii)
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Tenant shall give to Landlord at least thirty (30) days' written notice of any
intention to vacate the Premises; and (iii) Tenant shall be entitled to thirty
(30) days' written notice to quit the Premises, unless Tenant is in default
hereunder, in which event Tenant shall not be entitled to any notice to quit,
the usual thirty (30) days' notice to quit being hereby expressly waived.
Notwithstanding the foregoing provisions of this Section 21.1, in the event that
Tenant shall hold over after the expiration of the Lease Term, and if Landlord
shall desire to regain possession of the Premises promptly at the expiration of
the Lease Term, then at any time prior to Landlord's acceptance of rent from
Tenant as a monthly tenant hereunder, Landlord, at its option, may forthwith
re-enter and take possession of the Premises by any legal process in force in
the State of Maryland; provided that, if Tenant gives Landlord written notice
not later than one (1) year prior to the expiration of the Lease Term that it
intends to hold over for a period of up to ninety (90) days, then Landlord shall
not be entitled to re-enter and take possession of the Premises on account of
such holding over until the expiration of the hold over period specified in
Tenant's notice to Landlord (not to exceed ninety days). Rent shall be payable
during any such hold over period as provided in this Section 21.1.
ARTICLE XXII
COVENANTS OF LANDLORD
22.1 Landlord covenants that it has the right to make this Lease for the
term aforesaid, and Landlord covenants that Tenant shall, during the term hereby
created, freely, peaceably and quietly occupy and enjoy the full possession of
the Premises without disturbance, molestation or hindrance by any person or
entity whatever claiming an interest in the Premises prior or superior to
Tenant's. Nothing in this Section 22.1, however, shall prevent Landlord from
exercising any remedy available to it on account of an Event of Default by
Tenant under this Lease. Landlord and Tenant each acknowledge and agree that
Tenant's leasehold estate in and to the Premises vests on the date this Lease is
fully executed by Landlord and Tenant, notwithstanding that the Lease Term will
not commence until a future date.
22.2 Landlord hereby reserves to itself and its successors and assigns the
following rights (all of which are hereby consented to by Tenant): (i) if
required by applicable law in Landlord's reasonable judgment, to change the
street address and/or the arrangement and/or location of entrances, passageways,
doors, doorways, corridors, elevators, stairs, toilets, or other public parts of
the Building (provided that if Landlord changes the street address of the
Building for any reason other than to comply with a Legal Requirement, then
Landlord shall pay Tenant's reasonable costs of replacing its stationery); and
(ii) subject to compliance with Landlord's obligations pursuant to Section 11.1,
to erect, use and maintain pipes and conduits in and through the Premises; and
(iii) to establish and maintain field offices in the Building for site
engineers, property management and maintenance personnel in size, number and
locations that are typical for first-class office buildings; provided that,
subject to the foregoing standard, Tenant shall have approval rights over the
particular size, number and locations of such facilities, which approval shall
not be unreasonably withheld, conditioned or delayed. Provided Landlord acts
reasonably and in a manner not likely to materially, adversely affect Tenant's
business, Landlord may exercise any or all of the foregoing rights without being
deemed to be guilty of an eviction, actual or constructive, or a dis-
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turbance or interruption of the business of Tenant or of Tenant's use or
occupancy of the Premises and without diminishing the rent payable hereunder.
ARTICLE XXIII
PARKING
23.1 The design of the Building will include structured parking appurtenant
to the Building. Parking shall be available in such parking structure and in any
surface parking appurtenant to the Building on a non-exclusive, unassigned,
first-come, first-served basis, at no additional charge to Tenant; provided
that, so long as Tenant is the sole tenant of the Building, Tenant's right to
use all such parking areas on the Phase I Land shall be exclusive. In addition,
so long as Tenant is leasing the entire Initial Premises pursuant hereto, Tenant
may use the Phase II Land and/or the Phase III Land to satisfy its parking
needs, in addition to or in lieu of building structured parking on the Phase I
Land, subject to Tenant's obligation to pay the incremental site development
costs attributable to the removal of any such temporary parking lot pursuant to
Section 3.5 hereof and pursuant to the Phased Development Agreement. From and
after the date either the Phase II Land or the Phase III Land ceases to be
leased to Tenant hereunder, such land shall be unavailable to serve Tenant's
parking needs for the Building, all of which parking shall thereafter be
accommodated on the Phase I Land in the structured parking to be constructed
thereon in order to satisfy all applicable parking requirements. Landlord and
Tenant shall agree upon reasonable access controls and operating policies that
will govern the parking areas, all of which shall be consistent with the
standards of Class A suburban office buildings, shall comply with the Viable
Building Standards and shall comply with all Legal Requirements (including, but
not limited to, those set forth in the Americans with Disabilities Act and
similar such laws in effect from time to time).
23.2 Subject to the provisions of Sections 14.1 and 14.7 hereof, it is
understood and agreed that Landlord does not assume any responsibility for, and
shall not be held liable for, any damage or loss to any automobiles parked in
the parking area or to any personal property located therein, or for any injury
sustained by any person in or about the parking areas.
ARTICLE XXIV
[INTENTIONALLY DELETED]
ARTICLE XXV
REPRESENTATIONS AND WARRANTIES
Landlord hereby warrants and represents to Tenant as follows:
(a) Landlord is a limited partnership, validly existing and in good
standing under the laws of the State of Maryland.
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(b) Landlord has the full capacity, right, power and authority to
execute and deliver this Lease. The individuals signing this Lease and all other
documents executed or to be executed pursuant hereto on behalf of Landlord are
and shall be duly authorized to sign the same on Landlord's behalf and to bind
Landlord thereto.
(c) Landlord has not (i) made a general assignment for the benefit of
creditors, (ii) filed any involuntary petition in bankruptcy or suffered the
filing of any involuntary petition by Landlord's creditors, (iii) suffered the
appointment of a receiver to take possession of all or substantially all of
Landlord's assets, (iv) suffered the attachment or other judicial seizure of
all, or substantially all, of Landlord's assets, (v) admitted in writing its
inability to pay its debts as they come due, or (vi) made an offer of
settlement, extension or composition to its creditors generally.
25.1 Tenant hereby warrants and represents to Landlord as follows:
(a) Tenant is a corporation, validly existing and in good standing
under the laws of Delaware and is authorized to do business as a foreign
corporation in the State of Maryland.
(b) Tenant has the full capacity, right, power and authority to
execute and deliver this Lease. The individuals signing this Lease and all other
documents executed or to be executed pursuant hereto on behalf of Tenant are and
shall be duly authorized to sign the same on Tenant's behalf and to bind Tenant
thereto.
(c) Tenant has not (i) made a general assignment for the benefit of
creditors, (ii) filed any involuntary petition in bankruptcy or suffered the
filing of any involuntary petition by Tenant's creditors, (iii) suffered the
appointment of a receiver to take possession of all or substantially all of
Tenant's assets, (iv) suffered the attachment or other judicial seizure of all,
or substantially all, of Tenant's assets, (v) admitted in writing its inability
to pay its debts as they come due, or (vi) made an offer of settlement,
extension or composition to its creditors generally.
ARTICLE XXVI
RENEWAL
26.1 Landlord hereby grants to Tenant three (3) successive five (5)-year
renewal options, each exercisable at Tenant's option and subject to the
conditions described below (each such five-year term, if exercised, being
referred to herein as a "RENEWAL TERM"). If exercised, and if the conditions
applicable thereto have been satisfied, the first Renewal Term shall commence
immediately following the end of the Lease Term provided in this Lease (as it
may be extended pursuant to Section 2.3 hereof), the second Renewal Term shall
commence immediately following the end of the first Renewal Term, and the third
Renewal Term shall commence immediately following the end of the second Renewal
Term. The right of renewal herein granted to Tenant with respect to each Renewal
Term shall be subject to, and shall be exercised in accordance with, the
following terms and conditions:
(a) Tenant shall exercise its right of renewal with respect to each
Renewal Term by giving Landlord written notice thereof not earlier than
twenty-four (24) months and not later than twelve (12) months prior to the
expiration date of the then-current Lease Term. Ten-
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ant's exercise of its right of renewal shall be irrevocable (except as provided
in Section 26.3(a) below) and shall be binding upon both Landlord and Tenant.
(b) In the event a renewal option notice is not given timely, Tenant's
right of renewal with respect to such Renewal Term shall lapse and be of no
further force or effect.
(c) A renewal option may be exercised either with respect to the
entire Building Premises or with respect to a Divisible Portion of the Building
Premises (as defined below), but may not, in any event, be exercised with
respect to the Phase II Land or the Phase III Land. Tenant's renewal option
notice shall specify whether Tenant is exercising its right of renewal with
respect to the entire Building Premises or with respect to a Divisible Portion
of the Building Premises, and (if applicable) shall identify the Divisible
Portion of the Building Premises with specificity. As used herein, the term
"DIVISIBLE PORTION OF THE BUILDING PREMISES" shall mean a portion of the
Building Premises designated by Tenant, consisting of two (2) or more contiguous
full floors of the Building.
(d) If an Event of Default has occurred hereunder and has continued
for ten (10) business days on the date a renewal option notice is sent or on the
date such Renewal Term is to commence, then, at Landlord's option, such Renewal
Term shall not commence and the Lease Term shall expire on the date the Lease
Term would have expired without such renewal.
(e) In the event this Lease is not renewed for any Renewal Term,
Tenant's right to renew this Lease for any subsequent Renewal Terms shall also
lapse. In the event this Lease is renewed for any Renewal Term with respect to
only a Divisible Portion of the Building Premises, then Tenant's right to renew
this Lease for any subsequent Renewal Terms shall apply only to such Divisible
Portion of the Building Premises. Whether or not this Lease is renewed for any
Renewal Term, if not sooner terminated pursuant to the terms hereof, upon the
expiration of the initial Lease Term, this Lease shall terminate with respect to
the Phase II Land and the Phase III Land.
26.2 During any Renewal Term, all the terms, conditions, covenants and
agreements set forth in this Lease shall continue to apply and be binding upon
Landlord and Tenant, except that: (1) the Annual Base Rent shall be calculated
at the beginning of the Renewal Term so that the Annual Base Rent payable during
each Lease Year of such Renewal Term shall be equal to ninety-five percent (95%)
of Market Rent for the first Renewal Term, and ninety percent (90%) of Market
Rent for the second and third Renewal Terms, in each case including a
market-based formula for adjusting Market Rent for each Lease Year of each
Renewal Term; (2) in no event shall Tenant have the right to renew the Lease
Term beyond the expiration of the third Renewal Term provided for in Section
26.1; and (3) if this Lease is renewed for only a Divisible Portion of the
Premises, then this Lease shall be amended effective as of the commencement of
the Renewal Term, to include alternative lease provisions as would be
appropriate under the circumstances, taking into account a multi-tenant
configuration. If the parties cannot agree upon such alternate lease provisions,
the matter shall be submitted to arbitration pursuant to Article XXVIII hereof.
26.3 "MARKET RENT" shall be the fair market amount of "net" Annual Base
Rent (including escalations) determined as follows:
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(a) Following the giving of the renewal option notice, Landlord and
Tenant shall commence negotiations concerning the amount of Annual Base Rent
that shall constitute Market Rent. The parties shall have thirty (30) days after
the date Tenant delivers its renewal option notice in which to agree on such
Market Rent. If, during such negotiation period, the parties are unable to agree
on such Market Rent, then Tenant shall have the right to rescind its exercise of
the renewal option by notice of rescission delivered to Landlord no later than
the expiration of such thirty (30) day period.
(b) In the event Landlord and Tenant do not reach agreement concerning
the Market Rent, but Tenant does not timely exercise the right of rescission
described in subsection (a) above, then Landlord and Tenant shall each, within
seven (7) days from the expiration of the thirty (30) day period described in
subsection (a) above, designate an independent, licensed real estate broker or a
licensed real estate professional associated with a licensed real estate broker
who shall have more than eight (8) years' experience as a real estate broker
specializing in commercial office leasing, and who shall have expertise with the
commercial real estate market in which the Building is located. For purposes of
this Lease, a broker shall not be deemed "independent" if such broker shall have
been engaged to work on behalf of the party that is appointing such broker at
the time of, or at any time during the three (3) year period preceding, such
broker's appointment. Said brokers shall each determine the Market Rent within
fifteen (15) days after their appointment. If the lower of the two
determinations is not less than ninety-five percent (95%) of the higher of the
two determinations, then the Market Rent shall be the average of the two
determinations. If the lower of the two determinations is less than ninety-five
percent (95%) of the higher of the two determinations, then the two brokers
shall render separate written reports of their determinations and within fifteen
(15) days thereafter the two brokers shall appoint a third broker with like
qualifications. Within fifteen (15) days after the appointment of the third
(3rd) broker, the third broker shall render its independent determination of
Market Rent. If three brokers are used to determine Market Rent, then, for
purposes of this Section 26.3, Market Rent shall equal the average of the two
closest determinations; provided, however, that (i) if any one determination is
agreed upon by any two of the brokers, then the Market Rent shall be such
determination, and (ii) if any one determination is equidistant from the other
two determinations, then the Market Rent shall be such middle determination.
Landlord and Tenant shall each bear the cost of its broker and shall share
equally the cost of the third broker.
26.4 Among the factors to be considered in determining Market Rent shall be
the rental rates then being obtained for leases of similar space, size and terms
in the Building and in other comparable office buildings of a similar class in
the North Bethesda/Rockville/Gaithersburg corridor. For purposes hereof, leases
of one hundred thousand (100,000) square feet of rentable area or greater shall
be deemed to be leases of similar size. All determinations shall reflect market
conditions expected to exist as of the date that Annual Base Rent based on
Market Rent is to commence (including base rents and escalations, rental
abatements, construction allowances, leasing commissions and other tenant
concessions, operating expense and tax pass-through provisions, and other terms
expected to be agreed to in market leases entered into at such time).
26.5 Notwithstanding anything contained herein to the contrary, if Tenant
wishes to extend the Lease Term to be coterminous with the Phase II Lease or the
Phase III Lease pursuant to Section 2.3 hereof, but is prevented from doing so
because the extension would extend the initial
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Lease Term by more than the five (5) year period permitted under Section 2.3,
then Tenant may nevertheless extend the Lease Term to run coterminously with the
Phase II Lease or the Phase III Lease by extending the Lease Term pursuant to,
and to the extent permitted under, Section 2.3, and then renewing this Lease
effective as of the expiration of the initial Lease Term (as extended pursuant
to Section 2.3) for a period equal to the additional time period (not to exceed
five (5) years) necessary to render this Lease coterminous with the Phase II
Lease or the Phase III Lease (as the case may be) (the "HYBRID RENEWAL TERM").
If the Hybrid Renewal Term is for a period of less than three (3) years, it
shall be in addition to the three (3) five (5) year Renewal Terms provided
herein. If the Hybrid Renewal Term is for a period of three (3) years or more
(subject to the 5-year maximum), it shall be in lieu of the first of three (3)
5-year Renewal Terms provided for herein, and Tenant shall thereafter have only
two (2) remaining 5-year Renewal Terms to be exercised. Tenant shall exercise
each right to renew this Lease for a Hybrid Renewal Term at the same time as
Tenant exercises its right to extend the initial Lease Term pursuant to the
Extension Option Notice provided for in Section 2.3 above; provided, however,
the thirty (30) day period described in Section 26.3(a) for agreement on Market
Rent shall, in the case of a Hybrid Renewal Term, commence on the date that is
twelve (12) months prior to the expiration of the initial Lease Term (as
extended pursuant to Section 2.3 hereof). Except as set forth above, all of the
same terms and conditions that are applicable to the first Renewal Term shall
apply equally to the Hybrid Renewal Term, including the determination of the
Annual Base Rent and additional rent payable during such renewal term; provided,
however, that the Hybrid Renewal Term must renew the Lease Term with respect to
the entire Building Premises, and may not be for a Divisible Portion of the
Building Premises.
ARTICLE XXVII
COMMUNICATIONS EQUIPMENT
27.1 Tenant may install, free of charge (with the right to collect and
retain any income that may be derived therefrom), at its sole cost, risk and
expense, satellite dishes and communications equipment (the "COMMUNICATIONS
EQUIPMENT") on the roof of the Building and/or on portions of the Land (for so
long as such portions of the Land remain subject to this Lease), in an amount
and of a type determined by Tenant, subject to Tenant's compliance with the
Viable Building Standards, the Approved Site Plan and all other Legal
Requirements and subject further to Landlord's prior written approval of plans
and specifications for the Communications Equipment and the type and placement
of all cabling and wiring ancillary thereto, all of which Landlord approvals
shall be limited to ensuring compliance with the aforesaid standards. Landlord
makes no representation concerning the suitability of the rooftop or the Land as
a location for the Communications Equipment, and Landlord's approval of Tenant's
plans and specifications shall in no event be construed as constituting such a
representation. Tenant shall be responsible for obtaining and maintaining all
approvals, permits and licenses required by any federal, state or local
government for installation and operation of the Communications Equipment and
for paying all fees attendant thereto and for complying with all other Legal
Requirements relating to the Communications Equipment. If the Communications
Equipment is installed, Tenant shall have sole responsibility for the
maintenance, repair and replacement thereof and of all cabling and wiring
ancillary thereto. Tenant shall coordinate with Landlord's property manager
concerning any penetration of the roof or the exterior facade of the Building,
and shall in no event take any action that
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will void any then-existing roof warranty. All repairs to the Building made
necessary by reason of the furnishing, installation, maintenance, operation or
removal of the Communications Equipment or any replacements thereof shall be at
Tenant's sole cost. Upon expiration or termination of this Lease, Tenant agrees
that it will remove, forthwith, the Communications Equipment (but not the wiring
or accessories) and shall repair any damage to the Building caused by the
installation or removal of the Communications Equipment and related equipment.
In the event Tenant fails to remove the Communications Equipment, Landlord may
remove and dispose of such Communications Equipment and charge Tenant the entire
reasonable cost thereof. Tenant's Communications Equipment shall not interfere
with the structure of the Building, any of the building systems, or, at any time
that Tenant is not the sole tenant of the Building, the equipment (including
airwaves reception and other equipment) of any other tenant in the Building who
shall have similar rights to maintain Communications Equipment and shall have
exercised those rights prior to the exercise thereof by Tenant hereunder. Any
such similar rights granted to any other tenant shall similarly restrict such
other tenant's Communications Equipment from interfering with Tenant's
Communications Equipment. Landlord shall enforce all such restrictions. If
Tenant ceases at any time to be the sole tenant of the Building, Tenant's rights
pursuant to this Section 27.1 shall be non-exclusive. Landlord shall have no
liability on account of any damage to or interference with the operation of the
Communications Equipment by any third party. Notwithstanding the foregoing,
Landlord agrees that it will manage the available space on the rooftop so as to
accommodate Tenant's needs with respect to the Communications Equipment to the
greatest extent reasonably possible, including requesting that other tenants or
rooftop users relocate their equipment if such relocation is necessary to enable
Tenant to operate its Communications Equipment. Landlord shall have the right to
require Tenant to relocate the Communications Equipment at Landlord's cost to
another suitable location on the rooftop reasonably acceptable to Tenant,
provided such relocation can be done at a time and in a manner that only
minimally and temporarily interferes with Tenant's use of the Communications
Equipment.
ARTICLE XXVIII
ARBITRATION
28.1 In the event that any dispute, claim or controversy which, according
to the express terms hereof, is subject to arbitration (a "DISPUTE") shall arise
hereunder, either party may give written notice to the other party that it
wishes to resolve the dispute pursuant to this Article XXVIII. The parties shall
first attempt to resolve such Dispute through negotiation at a meeting of senior
representatives of both parties within ten (10) business days following the
notice described above. If such negotiation shall not result in a resolution
within the allotted time period, either party may initiate arbitration by giving
written notice to the other party.
28.2 All Disputes not resolved by negotiation as contemplated by Section
28.1 hereof shall be resolved by mandatory arbitration before a panel of three
(3) arbitrators pursuant to the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), provided that such arbitration shall not be
conducted by the AAA. Landlord and Tenant shall each select an arbitrator within
fifteen (15) days of the initiation of arbitration, and the two arbitrators so
selected shall select a third arbitrator within fifteen (15) days thereafter.
Each arbitrator shall be a qualified and independent person with at least ten
(10) years of experience in the Washington, D.C. area
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with expertise in the specialty required for understanding and resolving the
specific Dispute in question. If the first two arbitrators are unable to agree
upon a third arbitrator within fifteen (15) days after being selected, then the
AAA shall be requested to appoint the third arbitrator. The arbitrators shall
conduct the arbitration proceeding on an expedited basis. All the filings,
testimony, proceeding and award in the arbitration shall be treated as strictly
CONFIDENTIAL and shall not be publicly disclosed unless required by lawfully
issued subpoena or other court order. The arbitrators shall apply prevailing
legal precedent in any dispute at the time of the hearing. The arbitrators shall
issue their decision with a detailed written explanation of the factual and
legal basis for the decision no later than one month after completion of the
arbitration hearing. Each party shall bear its own legal fees and costs in the
arbitration and the fees and expenses of the arbitrator it has selected. Both
parties shall share equally the cost of the third arbitrator's fees and
expenses. The United States Arbitration Act (Title 9, U.S. Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
The arbitration panel's award shall be final and binding, and judgment upon any
award rendered by the arbitration panel may be entered in any court having
jurisdiction.
ARTICLE XXIX
SITE PLAN CONTINGENCY
29.1 If the Phased Development Agreement is terminated pursuant to Section
1.5 thereof because an Approved Site Plan has not been obtained on or before
February 1, 1999, or for any other reason that entitles a party to terminate
such agreement, then this Lease shall terminate as well, as of the date of
termination of the Phased Development Agreement, and neither party shall have
any further obligations to the other hereunder or under the Phased Development
Agreement.
ARTICLE XXX
GENERAL PROVISIONS
30.1 Tenant acknowledges that neither Landlord nor any broker, agent or
employee of Landlord has made any representations or promises with respect to
the Premises or the Building except as herein expressly set forth, and no
rights, privileges, easements or licenses are being acquired by Tenant except as
herein expressly set forth.
30.2 Nothing contained in this Lease shall be construed as creating a
partnership or joint venture of or between Landlord and Tenant, or to create any
other relationship between the parties hereto other than that of landlord and
tenant.
30.3 Landlord and Tenant each represents and warrants to the other that
neither of them has employed or dealt with any broker, agent or finder in
carrying on the negotiations relating to this Lease other than Cushman &
Wakefield of Maryland, Inc. and the Staubach Company, whose commissions shall be
the responsibility of Tenant, but shall be funded by Landlord at Tenant's
direction in accordance with the terms of the Phased Development Agreement and
included in Owner Funded Project Costs to the extent such commissions do not
exceed the ten dollar ($10) per square foot pre-development cost allowance more
particularly described in the Phased Devel-
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opment Agreement. Each party shall indemnify and hold the other harmless from
and against any claim or claims for brokerage or other commissions asserted by
any other broker, agent or finder engaged by the indemnifying party or with whom
the indemnifying party has dealt in connection with this Lease.
30.4 Tenant agrees, at any time and from time to time, upon not less than
fifteen (15) days' prior written notice by Landlord, to execute, acknowledge and
deliver to Landlord a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect (or if there have been any
modifications, that the Lease is in full force and effect as modified and
stating the modifications); (ii) stating the dates to which the rent and any
other charges hereunder have been paid by Tenant; (iii) stating whether or not,
to the best knowledge of Tenant, Landlord is in default in the performance of
any covenant, agreement or condition contained in this Lease, and if so,
specifying the nature of such default; (iv) stating the address to which notices
to Tenant are to be sent; and (v) stating such other information as Landlord or
any mortgagee or prospective mortgagee of the Building may reasonably request.
Any such statement delivered by Tenant may be relied upon by any landlord of the
Building or the Land, any prospective purchaser of the Building or such land,
any mortgagee or prospective mortgagee of the Building or such land or of
Landlord's interest therein, or any prospective assignee of any such mortgagee.
Landlord agrees, at any time and from time to time, upon not less than fifteen
(15) days' prior written notice by Tenant, to execute, acknowledge and deliver
to Tenant a statement in writing (i) certifying that this Lease is unmodified
and in full force and effect (or if there have been any modifications, that the
Lease is in full force and effect as modified and stating the modifications);
(ii) stating the dates to which the rent and any other charges hereunder have
been paid by Tenant; (iii) stating whether or not, to the best knowledge of
Landlord, Tenant is in default in the performance of any covenant, agreement or
condition contained in this Lease, and if so, specifying the nature of such
default; (iv) stating the address to which notices to Landlord are to be sent;
and (v) stating such other information as Tenant may reasonably request.
30.5 Landlord and Tenant each hereby waives trial by jury in any action,
proceeding or counterclaim brought by either of them against the other in
connection with any matter 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 Premises, and/or any claim of injury or damage. Landlord hereby
waives any statutory or other landlord's lien available under the laws of the
State of Maryland or otherwise.
30.6 All notices or other communications required hereunder shall be in
writing and shall be delivered in person (with receipt therefor), or sent by
certified mail, return receipt requested, postage prepaid, or by facsimile
transmission, to the following addresses or facsimile numbers:
(i) if to Landlord, at:
Boston Properties, Inc.
500 E Street, S.W.
Washington, D.C. 20024
Attn: Senior Vice President/Property Management
Facsimile no.: 202-488-8644 (verify no. 202-646-7600);
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with a copy to:
Boston Properties, Inc.
500 E Street, S.W.
Washington, D.C. 20024
Attn: Regional General Counsel
Facsimile no.: 202-554-4167 (verify no. 202-646-7600);
and a copy to:
Boston Properties, Inc.
8 Arlington Street
Boston, Massachusetts 02116
Attn: General Counsel
Facsimile no.: 617-536-4233 (verify no. 617-859-2600);
(ii) if to Tenant, at:
the Premises
Attn: Director of Operations
(facsimile no. to be designated by Tenant by notice
given to Landlord in accordance herewith);
except that, prior to the Lease Commencement Date,
notices to such Director of Operations shall be given
at:
2115 East Jefferson Street
Rockville, Maryland 20852
Facsimile no.: 301-984-5405 (verify no.: 301-984-5000);
with a copy to:
the Premises
Attn: General Counsel
(facsimile no. to be designated by Tenant by notice
given to Landlord in accordance herewith);
except that, prior to the Lease Commencement Date,
notices to such General Counsel shall be given at:
2115 East Jefferson Street
Rockville, Maryland 20852
facsimile no.: 301-984-5144 (verify no.: 301-984-5000);
and a copy to:
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<PAGE> 63
Philip M. Horowitz, Esq.
Arter & Hadden LLP
1801 K Street, N.W., Suite 400K
Washington, D.C. 20006
facsimile no.: 202-857-0172 (verify no. 202-775-7988).
Notwithstanding anything contained herein to the contrary, all notices given by
Tenant pursuant to Section 14.6 hereof shall be given at the addresses and in
the manner specified above but, in addition, in order to constitute effective
notice to Landlord, shall be given to the on-site building engineer or to such
other person at such other address as Landlord may specify by written notice to
Tenant. Either party may change its address for the giving of notices by notice
given in accordance with this Section. Notices given by any means other than by
facsimile shall be deemed given or received on the date actually received or, if
refused, on the date delivery was attempted and refused. Notices given by
facsimile shall be deemed given or received when confirmation of complete
receipt is obtained by the transmitting party during normal business hours or,
if not confirmed during normal business hours, on the next business day.
30.7 If any 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
enforced to the fullest extent permitted by law.
30.8 Feminine or neuter pronouns shall be substituted for those of the
masculine form, and the plural shall be substituted for the singular number, in
any place or places herein in which the context may require such substitution.
30.9 The provisions of this Lease shall be binding upon, and shall inure to
the benefit of, the parties hereto and each of their respective representatives,
successors and assigns, subject to the provisions hereof restricting assignment
by Landlord or Tenant or subletting by Tenant.
30.10 This Lease, together with the Phased Development Agreement, the Phase
I Development Services Agreement and the other contemporaneous agreements
entered into pursuant thereto, contains and embodies the entire agreement of the
parties hereto and supersedes the Memorandum and all other prior agreements,
negotiations and discussions between the parties hereto, all of which are merged
herein. Any representation, inducement or agreement that is not contained in
this Lease shall not be of any force or effect. This Lease may not be modified
or changed in whole or in part in any manner other than by an instrument in
writing duly signed by both parties hereto.
30.11 This Lease shall be governed by and construed in accordance with the
laws of the State of Maryland, without regard to the principles of conflicts of
law.
30.12 Article and section headings are used herein for the convenience of
reference and shall not be considered when construing or interpreting this
Lease.
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30.13 The submission of an unsigned copy of this document to Tenant for
Tenant's consideration does not constitute an offer to lease the Premises or an
option to or for the Premises. This document shall become effective and binding
only upon the execution and delivery of this Lease by both Landlord and Tenant.
30.14 Time is of the essence of each provision of this Lease.
30.15 This Lease shall not be recorded, except that upon the request of
either party, the parties agree to execute, in recordable form, a short-form
memorandum of this Lease, provided that such memorandum shall not contain any
of the specific rental terms set forth herein and shall otherwise be mutually
acceptable to Landlord and Tenant. Such memorandum may be recorded in the land
records of Montgomery County, Maryland, and the party desiring such recordation
shall pay all recordation costs.
30.16 Except as otherwise specifically provided herein, any additional rent
owed by Tenant to Landlord, and any cost, expense, damage or liability shall be
paid by Tenant to Landlord no later than fifty (50) days after the date Landlord
notifies Tenant in writing of the amount of such additional rent or such cost,
expense, damage or liability; provided that regularly scheduled monthly payments
of additional rent pursuant to Article IV hereof shall be due and payable on the
first day of each month, subject to the terms and conditions of Article IV. If
any payment hereunder is due after the end of the Lease Term, such additional
rent or such cost, expense, damage or liability shall be paid by Tenant to
Landlord not later than fifty (50) days after Landlord notifies Tenant of the
amount of such additional rent or such cost, expense, damage or liability.
30.17 All claims by Landlord with respect to Tenant's duties and
obligations hereunder, including but not limited to Tenant's duties and
obligations to pay Annual Base Rent, additional rent and the costs, expenses,
damages and liabilities incurred by Landlord for which Tenant is liable, shall
survive the termination of this Lease for any reason whatsoever. All claims by
Tenant with respect to Landlord's duties and obligations hereunder shall survive
the termination of this Lease for any reason whatsoever.
30.18 In the event either Tenant or Landlord is in any way delayed,
interrupted or prevented from performing any of its respective obligations under
this Lease (other than Tenant's obligation to pay any rent due hereunder), and
such delay, interruption or prevention is due to fire, act of God, governmental
or quasi-governmental act (including, without limitation, any delay in the
issuance of required permits or in the scheduling or performance of required
inspections), national emergency, strike, labor dispute, unusual delays in
transportation, inability to procure materials or utilities (where such
inability was not reasonably capable of being anticipated), or any other cause
beyond Tenant's or Landlord's reasonable control (whether similar or dissimilar)
(all of which are collectively referred to herein as "FORCE MAJEURE"), then
Tenant or Landlord (as applicable) shall be excused from performing the affected
obligations for the period of such delay, interruption or prevention.
Notwithstanding the foregoing, each party shall use reasonable efforts to
mitigate the delay in such party's performance due to Force Majeure.
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30.19 Tenant and Landlord hereby each represent and warrant to the other
that all necessary corporate and/or partnership action has been taken to enter
into this Lease and that the person signing this Lease on behalf of Tenant and
Landlord, respectively, has been duly authorized to do so.
30.20 Any amounts required to be paid by Tenant under this Lease shall be
considered additional rent. All payments of additional rent shall be paid to
Landlord without diminution, set-off or deduction (except as otherwise provided
in Section 14.6 hereof) in the same manner as Annual Base Rent pursuant to
Section 3.3 hereof or as may otherwise be provided in this Lease.
30.21 If Landlord or Tenant is required or elects to take legal action
against the other party to enforce the provisions of this Lease and a judgment
is rendered in such action by a court of competent jurisdiction, then the
prevailing party in such action shall be entitled to collect from the other
party its costs and expenses incurred in connection with such legal action
(including, but not limited to, reasonable attorneys' fees and court costs).
30.22 This Lease includes and incorporates Exhibits A, B, C, D, E and F
attached hereto.
30.23 The parties hereto acknowledge and agree that this Lease, the Phased
Development Agreement and the Phase I Development Services Agreement shall be
interpreted, to the maximum extent possible, so that they are consistent with
each other and with the view that they are intended to effectuate common and
unified purposes. In the event that there is any conflict or inconsistency
between the terms or conditions in any of these documents, or if the application
of the terms or conditions in these documents to any circumstances may result in
inconsistent treatment, the parties agree that (i) the terms and conditions of
this Lease shall take precedence over the other two documents, and (ii) the
terms and conditions of the Phased Development Agreement shall take precedence
over the Phase I Development Services Agreement; provided, however, that nothing
in this Lease or the Phased Development Agreement shall be deemed to increase
the obligations or duties of Himes or to limit the rights of Himes under the
Phase I Development Services Agreement.
<TABLE>
<CAPTION>
ARTICLE XXXI
DIRECTORY OF DEFINED TERMS
The following terms used herein are defined where indicated below:
Term Definition
---- ----------
<S> <C>
Adjustment Index ........................... Section 13.1
Affiliate of Tenant ........................ Section 7.5
Annual Base Rent ........................... Section 3.1
Approved Site Plan ......................... Recital C
Beginning Index ............................ Section 13.1
Building ................................... Recital C
Building Premises .......................... Section 17.1
Building Systems ........................... Section 13.1
</TABLE>
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<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
Communications Equipment ................... Section 27.1
Complex .................................... Recital C
Default Rate ............................... Section 18.7
Development Manager ........................ Recital C
Divisible Portion of the Building Premises . Section 26.1
Eligibility Period ......................... Section 13.2
Environmental Default ...................... Section 6.4
Environmental Law .......................... Section 6.4
Excess Operating Hours Rent ................ Section 13.1
Excess Restoration Costs ................... Section 16.4
Excess Restoration Costs Factor ............ Section 16.4
Excess Restoration Costs Rent .............. Section 16.4
Expenses ................................... Section 4.2
Extension Option Notice .................... Section 2.3
Hazardous Materials ........................ Section 6.4
Hourly Building Systems Cost ............... Section 13.1
Improvements Costs ......................... Section 3.1
Improvements Rent .......................... Section 3.1
Initial Land Rent .......................... Section 3.4(c)
Initial Premises ........................... Section 1.2
Insolvency Laws ............................ Section 19.1
Insurance Requirements ..................... Section 9.2
Interest Rate .............................. Section 3.1
Invitees ................................... Section 6.4
Land Costs ................................. Section 3.1
Land Rent .................................. Section 3.1
Lease Commencement Date .................... Section 2.1(b)
Lease Term ................................. Section 2.1
Lease Year ................................. Section 2.2
Legal Requirements ......................... Section 6.1
Market Rent ................................ Section 26.3
Minimum Net Worth Amount ................... Section 5.1
mortgages .................................. Section 20.1
Operating Expenses ......................... Section 4.2
Operating Plan ............................. Section 4.1
Phase I Development Services Agreement ..... Recital C
Phase I Land ............................... Recital A
Phase II Land .............................. Recital A
Phase III Land ............................. Recital A
Phased Development Agreement ............... Recital C
Premises ................................... Section 1.1
Real Estate Taxes .......................... Section 4.2
Reconciliation Statement ................... Section 4.5
Renewal Term ............................... Section 26.1
Rent Recalculation Date .................... Section 3.1
Restoration Costs Interest Rate ............ Section 16.4
</TABLE>
-66-
<PAGE> 67
<TABLE>
<CAPTION>
Term Definition
---- ----------
<S> <C>
Rules and Regulations ...................... Section 15.1
security deposit ........................... Section 5.1
Site-Specific Site Costs ................... Section 3.1
Supplemental Land Costs .................... Section 3.5
Supplemental Land Rent ..................... Section 3.5
Supplemental Land Rent III ................. Section 3.5
Suspension Events .......................... Section 13.2
Taking ..................................... Section 17.1
Owner Funded Project Costs ................. Section 3.1
Viable Building Standards .................. Exhibit C
</TABLE>
-67-
<PAGE> 68
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Lease under seal on or as of the day and year first above
written.
WITNESS: LANDLORD:
WASHINGTONIAN NORTH ASSOCIATES LIMITED
PARTNERSHIP, a Maryland limited partnership
By: Boston Properties LLC, General Partner
By: Boston Properties Limited Partnership,
a Delaware limited partnership, Managing
Member
By: Boston Properties, Inc., General
Partner
[SIG] By: /s/ RAYMOND A. RITCHEY (seal)
- -------------------------- ----------------------------
Name: Raymond A. Ritchey
Title: Executive Vice President
WITNESS: TENANT:
MANUGISTICS, INC.,
a Delaware corporation
[SIG] By: /s/ PETER Q. REPETTI (seal)
- ------------------- ------------------------------
Name: Peter Q. Repetti
------------------------------
Title: Chief Financial Officer
------------------------------
-68-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF MANUGISTICS GROUP, INC.
Listed below are the significant subsidiaries of the Company and their
jurisdictions of organization. All of these subsidiaries are wholly owned by
the Company.
<TABLE>
<CAPTION>
State or
Jurisdiction
of Incorporation Name Under Which
Name or Organization Subsidiary Does Business
---- --------------- ------------------------
<S> <C> <C>
Manugistics Colorado, Inc. Delaware Manugistics, Inc.
Manugistics, Inc. Delaware Manugistics, Inc.
Manugistics France S.A. France Manugistics France S.A.
Manugistics, Inc. Foreign Virgin Islands Manugistics, Inc.
Sales Corporation
Manugistics U.K. Ltd. United Kingdom Manugistics U.K. Ltd.
Manugistics Canada Company Nova Scotia Manugistics Canada Company
Manugistics (Deutschland) GmbH Germany Manugistics (Deutschland) GmbH
Manugistics European Holding Netherlands Manugistics European
Company B.V. Holding Company B.V.
Manugistics Services, Inc. Delaware Manugistics, Inc.
Manugistics Japan K.K. Japan Manugistics Japan K.K.
Manugistics do Brasil Limitada Brazil Manugistics do Brasil Limitada
Manugistics Singapore PTE LTD Singapore Manugistics Singapore PTE LTD
Manugistics Australia Pty LTD Australia Manugistics Australia Pty LTD
Manugistics Holdings Delaware, Inc. Delaware Manugistics Holdings Delaware,
Inc.
Synchronized Manufacturing Group, Ltd. United Kingdom Synchronized Manufacturing
Group, Ltd.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Synchronized Manufacturing SA Belgium Synchronized Manufacturing SA
</TABLE>
1
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Manugistics Group, Inc. on Form S-8 (File Nos. 33-67994, 33-67996, 33-89490,
33-89492, 33-98820, 333-09481, and 333-36983) and Form S-3 (File No. 333-47133)
of our reports dated March 24, 1998 (except Note 13 as to which the date is
March 26, 1998), appearing in the Annual Report on Form 10-K of Manugistics
Group, Inc. and subsidiaries for the year ended February 28, 1998.
DELOITTE & TOUCHE LLP
Washington, D.C.
May 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED FEBRUARY 28, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<CASH> 19,695
<SECURITIES> 62,246
<RECEIVABLES> 60,306
<ALLOWANCES> 2,089
<INVENTORY> 332
<CURRENT-ASSETS> 145,040
<PP&E> 34,952
<DEPRECIATION> 14,043
<TOTAL-ASSETS> 222,501
<CURRENT-LIABILITIES> 50,030
<BONDS> 392
0
0
<COMMON> 53
<OTHER-SE> 172,026
<TOTAL-LIABILITY-AND-EQUITY> 222,501
<SALES> 105,018
<TOTAL-REVENUES> 175,666
<CGS> 11,031
<TOTAL-COSTS> 96,846
<OTHER-EXPENSES> 92,964
<LOSS-PROVISION> 1,517
<INTEREST-EXPENSE> 110
<INCOME-PRETAX> (22,347)
<INCOME-TAX> (9,064)
<INCOME-CONTINUING> (13,283)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,283)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED MAY 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> MAY-31-1996
<CASH> 3,919
<SECURITIES> 13,294
<RECEIVABLES> 21,094
<ALLOWANCES> 1,351
<INVENTORY> 309
<CURRENT-ASSETS> 40,132
<PP&E> 13,150
<DEPRECIATION> 5,970
<TOTAL-ASSETS> 57,847
<CURRENT-LIABILITIES> 14,199
<BONDS> 381
0
0
<COMMON> 22
<OTHER-SE> 40,810
<TOTAL-LIABILITY-AND-EQUITY> 57,847
<SALES> 8,732
<TOTAL-REVENUES> 18,441
<CGS> 1,344
<TOTAL-COSTS> 11,520
<OTHER-EXPENSES> 20,511
<LOSS-PROVISION> 383
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (1,854)
<INCOME-TAX> 724
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,578)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED AUGUST 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1996
<CASH> 3,652
<SECURITIES> 15,443
<RECEIVABLES> 22,121
<ALLOWANCES> 1,368
<INVENTORY> 368
<CURRENT-ASSETS> 42,878
<PP&E> 14,462
<DEPRECIATION> 6,595
<TOTAL-ASSETS> 61,848
<CURRENT-LIABILITIES> 15,320
<BONDS> 348
0
0
<COMMON> 22
<OTHER-SE> 43,559
<TOTAL-LIABILITY-AND-EQUITY> 61,848
<SALES> 19,109
<TOTAL-REVENUES> 39,376
<CGS> 2,237
<TOTAL-COSTS> 22,083
<OTHER-EXPENSES> 15,002
<LOSS-PROVISION> 650
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> 515
<INCOME-TAX> 1,646
<INCOME-CONTINUING> (1,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,131)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED NOVEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> NOV-30-1996
<CASH> 5,483
<SECURITIES> 13,593
<RECEIVABLES> 25,862
<ALLOWANCES> 1,615
<INVENTORY> 349
<CURRENT-ASSETS> 46,509
<PP&E> 16,610
<DEPRECIATION> 7,383
<TOTAL-ASSETS> 67,564
<CURRENT-LIABILITIES> 17,410
<BONDS> 254
0
0
<COMMON> 22
<OTHER-SE> 47,644
<TOTAL-LIABILITY-AND-EQUITY> 67,564
<SALES> 31,390
<TOTAL-REVENUES> 63,064
<CGS> 3,290
<TOTAL-COSTS> 35,235
<OTHER-EXPENSES> 21,595
<LOSS-PROVISION> 1,207
<INTEREST-EXPENSE> 738
<INCOME-PRETAX> 3,682
<INCOME-TAX> 2,866
<INCOME-CONTINUING> 816
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 816
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED FEBRUARY 28, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 8,543
<SECURITIES> 13,631
<RECEIVABLES> 38,308
<ALLOWANCES> 1,215
<INVENTORY> 333
<CURRENT-ASSETS> 61,542
<PP&E> 18,562
<DEPRECIATION> 8,207
<TOTAL-ASSETS> 84,323
<CURRENT-LIABILITIES> 29,043
<BONDS> 220
0
0
<COMMON> 44
<OTHER-SE> 53,549
<TOTAL-LIABILITY-AND-EQUITY> 84,323
<SALES> 50,778
<TOTAL-REVENUES> 94,722
<CGS> 4,532
<TOTAL-COSTS> 86,436
<OTHER-EXPENSES> 1,016
<LOSS-PROVISION> 606
<INTEREST-EXPENSE> 1,016
<INCOME-PRETAX> 9,302
<INCOME-TAX> 4,960
<INCOME-CONTINUING> 4,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,342
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED MAY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> MAY-31-1997
<CASH> 7,487
<SECURITIES> 11,262
<RECEIVABLES> 35,500
<ALLOWANCES> 1,182
<INVENTORY> 314
<CURRENT-ASSETS> 55,601
<PP&E> 21,447
<DEPRECIATION> 9,039
<TOTAL-ASSETS> 82,439
<CURRENT-LIABILITIES> 24,751
<BONDS> 188
0
0
<COMMON> 45
<OTHER-SE> 56,427
<TOTAL-LIABILITY-AND-EQUITY> 82,439
<SALES> 19,840
<TOTAL-REVENUES> 34,180
<CGS> 2,181
<TOTAL-COSTS> 19,723
<OTHER-EXPENSES> 9,279
<LOSS-PROVISION> 433
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 3,321
<INCOME-TAX> 1,281
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,040
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED AUGUST 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> AUG-31-1997
<CASH> 10,645
<SECURITIES> 63,658
<RECEIVABLES> 43,004
<ALLOWANCES> 1,644
<INVENTORY> 351
<CURRENT-ASSETS> 120,149
<PP&E> 26,119
<DEPRECIATION> 10,334
<TOTAL-ASSETS> 153,284
<CURRENT-LIABILITIES> 26,461
<BONDS> 295
0
0
<COMMON> 49
<OTHER-SE> 125,794
<TOTAL-LIABILITY-AND-EQUITY> 153,284
<SALES> 40,944
<TOTAL-REVENUES> 71,949
<CGS> 4,703
<TOTAL-COSTS> 41,009
<OTHER-EXPENSES> 19,329
<LOSS-PROVISION> 921
<INTEREST-EXPENSE> 679
<INCOME-PRETAX> 7,611
<INCOME-TAX> 2,934
<INCOME-CONTINUING> 4,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,677
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR THE PERIOD ENDED NOVEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-30-1997
<CASH> 6,288
<SECURITIES> 66,155
<RECEIVABLES> 50,191
<ALLOWANCES> 2,124
<INVENTORY> 359
<CURRENT-ASSETS> 126,405
<PP&E> 29,144
<DEPRECIATION> 11,992
<TOTAL-ASSETS> 161,251
<CURRENT-LIABILITIES> 27,433
<BONDS> 339
0
0
<COMMON> 49
<OTHER-SE> 132,559
<TOTAL-LIABILITY-AND-EQUITY> 161,251
<SALES> 63,919
<TOTAL-REVENUES> 113,592
<CGS> 7,718
<TOTAL-COSTS> 63,518
<OTHER-EXPENSES> 30,091
<LOSS-PROVISION> 1,412
<INTEREST-EXPENSE> 1,797
<INCOME-PRETAX> 14,118
<INCOME-TAX> 5,436
<INCOME-CONTINUING> 8,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,682
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.34
</TABLE>
