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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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: 0-25674
CBT GROUP PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
REPUBLIC OF IRELAND NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1005 HAMILTON COURT
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices)
Registrant's telephone number, including area code (650) 614-5900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None. None.
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares IR37.5p
(Title of class)
Indicate by check mark whether 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 of time that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No____
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [___]
The aggregate market value of the voting shares held by non-affiliates of
Registrant was $1,953,125,184 as of March 10, 1998 (excludes 224,726 shares
which may be deemed to be held by directors, officers and affiliates of
Registrant as of March 10, 1998).
The number of Registrant's equivalent American Depositary Shares outstanding as
of March 10, 1998 was 40,443,532.
Portions of Registrant's definitive proxy statement to be delivered to
shareholders in connection with Registrant's annual general meeting of
shareholders to be held on or about April 28, 1998 in Dublin, Ireland, are
incorporated by reference into Part III of this Form 10-K to the extent stated
herein. Except with respect to information specifically incorporated by
reference to this Form 10-K, the proxy statement is not deemed to be filed as a
part hereof.
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PART I
ITEM 1. BUSINESS
IMPORTANT NOTE ABOUT FORWARD LOOKING STATEMENTS
The following discussion contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements as a result of the risks set forth in the
following discussion, and in particular, the risks discussed below and in Part
II, Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations under the subheading "Additional Risk Factors that Could
Affect Operating Results."
GENERAL
CBT Group PLC ("CBT Group" or the "Company") is a leading provider of
interactive education software designed to meet the information technology
("IT") education and training needs of businesses and organizations worldwide.
The Company develops, publishes and markets a comprehensive library of 558
software titles at the end of 1997 covering a range of client/server, mainframe,
Internet and intranet technologies. CBT Group's products are used by 1,576 of
the world's leading corporations to train employees to develop and apply
mission-critical technologies in the workplace. CBT Group works with leading
software companies, including Cisco Systems, Inc. ("Cisco"), Informix
Corporation ("Informix"), Lotus Development Corporation ("Lotus"), Marimba, Inc.
("Marimba"), Microsoft Corporation ("Microsoft"), Netscape Communications
Corporation ("Netscape"), Novell, Inc. ("Novell"), Oracle Corporation
("Oracle"), SAP America, Inc. ("SAP"), Sybase, Inc. ("Sybase") and the IBM-
Netscape-Sun Microsystems, Inc. collaborative Java education effort to develop
and market vendor-specific training. CBT Group has also formed the Internet
Security Training Consortium with Check Point Software Technologies, Inc.
("Check Point"), Cisco, IBM, Intel Corporation, the Javasoft business unit of
Sun Microsystems, Inc., Lotus, Netscape, Network Associates, Inc. (formerly
McAfee Associates, Inc.) ("Network Associates"), RSA Data Security, Inc. ("RSA
Data Security"), Security Dynamics Technologies, Inc. ("Security Dynamics"), and
VeriSign, Inc. ("VeriSign") to address the Internet security training needs of
enterprises worldwide.
CBT Group, a public limited company incorporated under the laws of the Republic
of Ireland, was initially formed to act as a holding company for investment
purposes and acquired a controlling interest in a number of companies in a
variety of business areas. In November 1990, the Company acquired its U.S.
subsidiary, CBT Systems USA, Ltd. (effective as of April 3, 1995 CBT Systems
USA, Ltd. was merged with and into its parent, Thornton Holdings, Ltd., which
subsequently changed its name to CBT Systems USA, Ltd.) ("CBT USA").
In September 1991, the Company acquired its Irish and U.K. subsidiaries,
including CBT Systems Limited ("CBT Ireland") and CBT Systems UK Limited ("CBT
UK") and sold or dissolved its other unrelated investment businesses. In
January 1994, the Company acquired CBT Systems Africa (Proprietary) Ltd. ("CBT
South Africa") for the purpose of establishing a direct sales presence in
Southern Africa. In August 1995, the Company incorporated CBT Finance Limited
("CBT Finance") under the laws of Grand Cayman for the purpose of investing
certain of the Company's funds.
In November 1995, the Company completed a merger with Personal Training Systems
("PTS"), a provider of end-user and consumer interactive educational software,
for an aggregate of 424,228 of its American Depositary Shares ("ADSs"). On May
31, 1996, the Company acquired CLS Consult, Gesellschaft fur Beratung,
Management und Beteiligung mbH ("CLS"), a German limited liability company, and
New Technology Training Ltd., an Ontario, Canada corporation ("NTT"). CLS is a
developer and marketer of interactive education software for SAP client/server
applications, and NTT's primary business had been to
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act as CBT Group's exclusive distributor in Canada. The Company issued a total
of 72,932 Ordinary Shares to the former shareholders of CLS and NTT in
connection with the acquisitions. On February 28, 1997, the Company completed
the acquisitions of Applied Learning Limited, a company organized under the laws
of Tasmania, Australia ("ALA") and CBT Systems Benelux B.V., a Netherlands
limited liability company ("Benelux"). ALA was an Australian distributor of
interactive education software and had been CBT Group's exclusive distributor in
Australia and New Zealand; and Benelux had been the Company's exclusive
distributor in the Netherlands, Belgium, and Luxembourg. The Company issued the
equivalent of 103,611 Ordinary Shares to the former shareholders of ALA and
Benelux in connection with the acquisitions. On August 31, 1997, CBT Group
completed the acquisition of Ben Watson Associates Ltd., a New Brunswick, Canada
corporation carrying on business under the registered business name Scholars.com
("Scholars"). Scholars is a provider of online IT certification training. The
Company issued a total of 9,408 Ordinary Shares to the sole shareholder of
Scholars in connection with the acquisition. On December 1, 1997, the Company
completed the acquisition of CBT Systems Middle East Limited, a company
organized under the laws of the Commonwealth of the Bahamas ("MidEast"). MidEast
had been the Company's exclusive distributor in the Middle East and a non-
exclusive distributor in India. The Company issued a total of 64,500 ordinary
shares to the former shareholders of MidEast in connection with the acquisition.
The acquisition of each of Scholars, ALA, Benelux, PTS, CLS, NTT and MidEast was
accounted for as a "pooling of interests" in accordance with U.S. generally
accepted accounting principles. In compliance with such principles, the
Company's operating results have been restated to include the results of
Scholars, ALA, Benelux, PTS, CLS, NTT and MidEast as if the acquisitions had
occurred at the beginning of the first period presented.
Since September 1991, substantially all of the Company's revenues and operating
expenses have been attributable to developing and selling interactive IT
education and training software. Unless the context otherwise requires,
references to the "Company" or to "CBT Group" are to CBT Group PLC and its
consolidated subsidiaries.
The Company was incorporated in the Republic of Ireland on August 8, 1989. The
Company's registered office is located at Beech Hill, Clonskeagh, Dublin 4,
Ireland, and its telephone number at that address from the United States is
(011) 353-1-283-0077. The address of CBT USA is 1005 Hamilton Court, Menlo Park,
California 94025 and its telephone number at that address is (650) 614-5900.
For additional information about the Company's business, see the consolidated
financial statements and related notes thereto included herein.
RECENT DEVELOPMENTS
On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront"). In the merger, each share of ForeFront common stock
will be exchanged for 0.3137 ADSs, and the Company will assume outstanding
ForeFront stock options, warrants and other rights to acquire ForeFront common
stock. As a result of the merger, the Company will issue approximately 2.1
million ADSs and assume options, warrants and other rights that may be converted
into up to approximately 1.1 million ADSs. The transaction is intended to be tax
free to shareholders and is intended to be accounted for as a pooling of
interests. Consummation of the transaction is subject to expiration or
termination of the applicable Hart-Scott-Rodino waiting period, approval of the
merger by ForeFront stockholders and other customary closing conditions. The
merger is expected to be completed during the second quarter of 1998.
Consummation of the transaction is subject to a number of risk factors,
including those discussed below and under "Additional Risk Factors that Could
Affect Operating Results."
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The successful combination of CBT Group and ForeFront, including the successful
operation of ForeFront as an autonomous subsidiary of CBT Group, will require
substantial effort from each company. The diversion of the attention of
management and any difficulties encountered in the transition process could have
an adverse impact on CBT Group's ability to realize the full benefits of the
merger. The successful combination of the two companies will also require
coordination of their research and development and sales and marketing efforts.
In addition, the process of combining the two organizations could cause the
interruption of, or loss of momentum in, ForeFront's activities. There can be no
assurance that CBT Group will be able to retain ForeFront's key management,
technical, sales and customer support personnel, or that it will realize any of
the anticipated benefits of the merger.
Certain of ForeFront's existing customers or strategic partners may view
themselves as competitors of CBT Group's, and therefore determine that the
merger is competitively disadvantageous to them. As a consequence, Forefront's
relationships with these customers or strategic partners could be adversely
affected by the merger, which could adversely affect the ability of CBT Group to
continue relationships with such customers after the merger.
On March 9, 1998, the Company effected a two-for-one split of its issued and
outstanding ADSs whereby each issued and outstanding ADS is now represented by
one-fourth of one ordinary share and each issued and outstanding ordinary share
that is deposited with The Bank of New York, as Depositary, is represented by
four ADSs. Unless stated otherwise herein, all references to the Company's ADSs
are on a post-split basis.
In December 1996, CBT Group and Street Technologies, Inc. ("Street
Technologies"), a developer of technology to "stream" multimedia and other large
data files to permit real-time delivery over local and wide area networks,
corporate intranets and the Internet, entered into an agreement pursuant to
which the companies would work together to deploy CBT Group's interactive
education software over corporate intranets and the Internet. As part of the
agreement, CBT Group acquired a 12.5% ownership interest in Street Technologies
and Street Technologies agreed that its license will be exclusive to CBT Group
within a defined group of companies. In December 1997, CBT Group exchanged its
12.5% ownership interest in Street Technologies and $300,000 in cash, for a
perpetual license of Street Technologies' deployment tools.
INDUSTRY BACKGROUND
Business organizations continue to be dependent upon computer systems in order
to remain competitive in their markets. This trend has resulted in significant
growth in IT education and training. According to International Data
Corporation ("IDC"), the 1996 worldwide and U.S. markets for IT education and
training were approximately $16.4 billion and $8.0 billion, respectively,
compared to $11.0 billion and $4.4 billion, respectively, in 1992. According to
IDC, the factors driving these markets include (i) the shift by organizations
from legacy mainframe systems to new client/server technologies, driving
corporate information services ("IS") groups to seek additional IT education and
training; (ii) business requirements that IS staff be certified in certain
technologies in order to assure performance and productivity; (iii) corporate
downsizing, resulting in increased training requirements for employees who
perform multiple job tasks that require knowledge of varied software
applications and technologies; (iv) the proliferation of computers and networks
throughout all levels of organizations, increasing the number of employees who
need training in client/server and Internet/intranet technologies; and (v) the
continuous introduction and evolution of client/server and Internet/intranet
technologies, contributing to the need for continuing education.
Traditionally, organizations have primarily fulfilled their requirements for IT
education and training through instructor-led training from external vendors or
internal training departments. Instructor-led training, however, has a number of
limitations. Instructor-led training typically requires employees to leave their
desks for prolonged periods, often to attend classes at off-site locations. Such
training is also difficult to tailor to individuals' training needs, cannot be
easily reviewed and assessed by IS managers and may not
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offer a cost-effective training solution. The limitations of instructor-led
training, combined with constrained IS budgets, larger numbers of employees
requiring training and the greater breadth of training needed per employee, have
prompted organizations to consider alternative training methodologies. IDC
estimates that the instructor-led training market will see a decline in share
from 79% in 1996 to 62.5% in 2001. IDC also estimates that the technology-based
training will experience a 1996 - 2001 compounded annual growth rate of 30%
versus 7.3% growth for instructor-led training.
The proliferation of computers throughout organizations and the increasing
multimedia capabilities of computers are supporting the emergence of interactive
IT education and training software. According to IDC, the U.S. market for
interactive IT education and training software, including multimedia software
and electronic performance support systems, was $928 million in 1996, compared
to $749 million in 1995, representing a 24% compounded annual growth rate year
over year. The Company believes that as businesses seek out alternative methods
of training employees, there is a significant market opportunity for software
that can meet businesses' needs for productive, flexible and cost-effective IT
education and training.
Although interactive IT education and training software programs have been
available for many years, they currently account for only a small portion of the
overall market for IT training. Accordingly, the Company's future success will
depend upon, among other factors, the extent to which companies continue to
adopt interactive education and training programs. There can be no assurance
that the use of interactive education and training software programs will become
widespread or that the Company's products will achieve commercial success.
THE CBT GROUP SOLUTION
CBT Group's solutions include a comprehensive library of 558 interactive
software titles at the end of 1997 designed to meet business' and organizations'
IT education and training needs. CBT Group's courseware may be used on networked
and standalone PCs and may be deployed over intranets via CBT Group's intranet
deployment product, CBTWeb, and the Internet via CBT Group's Internet deployment
product, CBTWeb Plus. The courseware titles are organized into curricula and
are designed to cover specific aspects of client/server, mainframe, Internet and
intranet technologies. Each curriculum provides comprehensive training in an
area of technology such as client/server concepts, operating systems,
networking, graphical user interfaces and database design. In addition, the
Company has developed network-based administration and assessment tools designed
to allow IS and human resource managers to track employee usage and performance
of CBT Group courseware.
The Company has developed or is developing, both independently and through
development and marketing alliances, titles focused on vendor-specific products
including Microsoft Windows NT, Oracle Database Administrator 7.3 and 8.0 and
Developer 2000, SAP's R/3 3.0, Netscape Navigator, Javascript and LiveWire,
IBM/Lotus Notes, Informix Online Dynamic Server, Cisco Router Configuation
curricula, Novell NetWare, Sybase/Powersoft PowerBuilder, and Marimba Castanet.
In addition, CBT Group has developed courseware titles in conjunction with IBM,
Sun Microsystems and Netscape for the Java Education World Tour and has
developed or is developing titles for COBOL on MVS, AIX, OS/390 and the Internet
Security Courseware Consortium, which titles will include Concept, Platform, Web
Server, and Security Technology curricula.
In September 1997, the Company and Asymetrix Corporation, a leading provider of
online learning solutions, entered into a strategic partnership to provide
organizations with a powerful and easy-to-use tool for creating their own
customized computer-based courseware. The companies are developing Toolbook II
for CBT Group, which will incorporate the CBT Group user interface, navigation,
and overall look and feel with the power and flexibility of ToolBook II. This
will allow companies to create their own new customized courseware with the same
look and feel that distinguishes CBT Group library of interactive education
software. As with CBT Group's standard courseware, content developed using
ToolBook II for CBT Group will be deployable over LANs, WANs, intranets, or on
stand-alone personal computers.
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Also in September 1997, CBT Group announced that it had acquired Scholars.com, a
pioneering leader in Internet-based training, offering the services of online
mentors as a resource for students taking CBT Group courseware to help them pass
vendor certification exams. Scholars focuses on integrating Internet
technologies with proven learning methodologies to deliver Internet-based,
certification-level mentoring services to students worldwide. The company pairs
CBT Group's Microsoft and Novell approved interactive courseware with a team of
vendor-certified mentors, known as Learning Advisors, to provide flexible, self-
paced study via the Internet. This learning model extends the advantages of
online learning by having Learning Advisors available to students twelve hours a
day, seven days a week. This methodology enables students to receive
personalized assistance as they need it through online chats, email, and
newsgroups.
The Company's solutions offer many advantages to both end-users and
administrators over traditional instructor-led training. CBT Group's courseware
allows employees to tailor training to their work schedules, begin training at a
level which is suitable to their needs, integrate training with on-the-job
practice, train in only those topics that are relevant to their needs, and
access training materials on an ongoing basis as reference tools. CBT Group
software is interactive, allowing users to practice and test skills as they
learn. The courseware also incorporates sophisticated graphics and simulation
technologies to demonstrate many of the concepts introduced.
In addition, the Company's products are designed to allow administrators to
leverage their training budgets by tailoring training programs to their
organization's needs and tracking training usage and effectiveness.
Organizations that invest in the CBT Group solution can offer CBT Group's
training software across a network, corporate intranet or the Internet to all
employees. CBT Group licenses its courseware primarily through one, two or
three year license agreements that provide access to its library of titles,
which allows customers to build tailored training solutions. Under these
license agreements, customers are able to exchange and update their courses on
an annual basis as their internal training needs evolve or as technologies
advance. In addition, using the Company's administrative software, IS and human
resource administrators can design and monitor training programs for each
employee.
CBT GROUP'S STRATEGY
CBT Group has entered into alliances with Check Point, Cisco, Informix, Lotus,
Marimba, Microsoft, Netscape, Network Associates, Novell, Oracle, RSA Data
Security, SAP, Security Dynamics, Sybase, VeriSign and the IBM/Sun
Microsystems/Netscape collaborative Java education effort to develop and market
product-specific training. In addition, CBT Group has developed relationships
with Checkpoint Software Technologies, Inc., Network Associates, Inc., RSA Data
Security, Inc., Security Dynamics Technologies, Inc. and VeriSign, Inc. as a
result of its formation of the Internet Security Curriculum Consortium.
The Company markets its software to Fortune 3000 companies and other major U.S.
and international organizations primarily through a direct sales force. The
Company has increased sales to smaller corporate customers through distributors
and its telesales organization.
As of December 31, 1997, the Company had approximately 1,576 corporate customers
worldwide, including the following companies or their affiliates: Alcatel
Business Systems Corporation, American Management Systems, AT&T, The Bear
Stearns Companies, Inc., Bell Atlantic Corporation, Blue Cross Blue Shield
Mutual of Ohio, British Airways, Cambridge Technology Partners, Compaq Computer
Corporation, Computer Sciences Corporation, CTG, Dell Computer Corporation,
Electronic Data Systems Corporation, GTE Data Services, International Business
Machines Corporation, MCI Communications, Inc., MedPartners, Inc., Price
Waterhouse LLP, Reuters plc, Sprint Corporation, Tandem Computers, Unisys
Corporation, The University of California System, the United States Air Force
and Wells Fargo & Company.
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CBT Group's objective is to maintain and expand its market position through the
following strategies:
Offer a Broad Library to its Customers. The Company offers its customers a
broad product library of 558 software titles at the end of 1997 which it
believes has created a competitive barrier to entry. In 1997, CBT Group also
delivered 120 titles in German and French, and plans to deliver more
translated titles in Japanese, Spanish, Portuguese and other languages. The
Company's strategy is to continue to expand its product library to allow the
Company to sign larger initial contracts and support incremental sales to its
customer base over time.
Leverage Proprietary Development Technologies and Processes. The Company has
created a proprietary development engine and a streamlined development process
to assist the Company in bringing its products to market in a relatively short
time-frame and at a relatively low cost. In addition, the Company's
technology generally supports a common product architecture, resulting in
products which have a recognizable and consistent interface and are easier to
support. The Company plans to continue investing significant resources in
research and development to further enhance its underlying development engine
and to accelerate the growth of its product library.
Build Alliances with Key IT Vendors. The Company's strategy is to enter into
development and marketing alliances with key IT vendors to produce and
distribute vendor-specific authorized training programs. To date, the Company
has entered into alliances with Check Point, Cisco, Informix, Lotus, Marimba,
Microsoft, Netscape, Network Associates, Novell, Oracle, RSA Data Security,
SAP, Security Dynamics, Sybase, VeriSign and the IBM/Sun Microsystems/Netscape
collaborative Java education effort. The Company believes these alliances
provide a number of competitive advantages, including access to partners'
product development plans, source material and distribution channels.
Expand Channels of Distribution. The Company has primarily targeted Fortune
3000 companies and other major U.S. and international organizations primarily
through its direct sales force. During 1997, CBT Group began marketing its
software to educational institutions and governmental agencies through a
direct sales force. The Company's strategy is to expand its telesales
organization and its channels of indirect sales in order to reach
organizations which could not otherwise be effectively targeted by its direct
sales force and to accelerate its market penetration worldwide. The Company's
indirect sales channels are currently comprised of distributors, resellers and
training organizations. Over the long term, the Company intends to continue
to explore electronic distribution through on-line services, the Internet and
corporate intranets.
Capitalize on Multimedia Technologies. The Company's current products include
multimedia elements such as rich graphics, interactive text and simulations,
and can be delivered on networked and standalone PCs. The Company's strategy
is to enhance its products over time as its customers adopt enterprise-wide
systems which have the capability to handle the requirements of more advanced
multimedia elements such as sound, video and complex animation. In this
regard, the Company has entered into a licensing and development relationship
with Street Technologies pursuant to which CBT Group will have the ability to
deliver such rich data types over the Internet, corporate intranets and LANs.
Serve Emerging Internet/Intranet Market Opportunity. The Company believes
that Internet technologies, including the Internet itself and the use of these
technologies to create enterprise-wide intranets, is radically altering the
way certain critical computing activities are performed. As the Internet and
intranets emerge as one computing platform, CBT Group believes that new
education and training needs will emerge as well. The Company will seek to
build upon its current activities in order to build a franchise around
Internet and intranet education opportunities.
PRODUCTS
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The Company's product library has grown from 44 titles at December 31, 1992 to
558 titles at December 31, 1997, encompassing over 2,200 hours of IT education
and training. In general, CBT Group's courseware includes a graphically
sophisticated interface that leads students through the subject software,
simulating the technology and requiring students to respond actively to the
course. CBT Group interactive training typically provides the user with anywhere
from 4 to 8 hours of instruction per individual title. Students may also use the
courses to pre-test their capabilities in order to position themselves properly
within the course and to train only in relevant areas. At the end of the course,
students may take a test to measure accurately their mastery of the course
content. The results of this test may be viewed by a central administrator using
CBT Group's administrative program or exported to a standard database or
spreadsheet.
CBT Group has developed an enterprise-wide network-based administrative software
program designed to allow a central administrator to audit the use of each
course, track employee performance and create specialized curricula for
employees by granting access to selected courses.
CBT Group licenses its products primarily through license agreements under which
customers may use the delivered products for a period of one, two or three
years. The license agreement format allows customers to exchange courses on
each anniversary date where the agreement is for more than one year. In order
to increase the number of titles or gain access to the library at a time other
than the specified dates, the customer may enter into a new license agreement or
upgrade the existing license agreement. Volume and multi-year discounts
encourage customers to expand license agreements as their needs grow and as they
become more familiar with the Company's product library. The Company's pricing
varies primarily based on the number of users, the number of titles selected and
the length of the contract.
The Company's strategy is to develop comprehensive curricula, each of which
provides training in areas related to client/server, mainframe and Internet and
intranet technologies. The Company's courses are generally compatible with
Windows-based desktop PCs and netBIOS LANs, and most of the Company's recently
developed courses are based on native Windows implementations. All of the
Company's courses are available for delivery on floppy disk or PC CD-ROM for
installation on servers or standalone workstations.
In addition to its continued support of traditional LAN environments, CBT Group
has developed a number of products which address the emerging Internet and
corporate markets. CBTWeb is an intranet deployment system which allows users
to download CBT Group courseware titles across an intranet. Access to these
titles is gained through a standard browser. CBTWeb enables customers to access
and manage CBT Group courses over an intranet via internally managed web
servers. Using CBTWeb, learners can choose to either download CBT Group
courseware or interact with it in real time over an intranet using CBT Systems'
LivePlay capability. The downloaded courseware contains a utility to send the
student records back to a central administrator so that the student progress may
be monitored. CBTWeb Plus is a turnkey training solution that enables customers
to benefit from Internet-based deployment of CBT Group's entire library of
titles without the need to install server-side software on their own network.
CBTWeb Plus is an externally hosted version of CBTWeb that allows customers to
have their CBT Group courseware managed over the Internet from an external site.
CBTWeb Plus is designed to relieve customers of any network infrastructure or
security issues, and minimizes human resource requirements, while providing the
highest level of deployment flexibility since each student receives CBT Group's
training from his or her preferred location. Additionally, training
administrators and IS managers are assured that students receive the most up-to-
date curricula since the CBTWeb Plus servers are maintained by CBT Group and are
continuously updated with the latest courseware at the Company's centralized
courseware Development Center in Dublin, Ireland.
In July 1997, CBT Group announced the release of CBTCampus, CBT Group's next-
generation training management and deployment architecture. Coupled with CBT
Group's library of titles, CBTCampus provides CBT Group's customers with a
modular, fully integrated, and extensible solution for delivering sophisticated
interactive technology training wherever and however it's needed, whether
running over an
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intranet or across a local area network. CBTCampus features a university campus
metaphor as an easy-to-navigate student interface, which can be accessed either
as a Windows client application or a web browser plug-in. Behind this intuitive
interface is a suite of sophisticated technologies that creates a seamless
integrated learning environment for students and administrators. CBTCampus was
designed to give high-performance results across a full range of environments.
It provides powerful deployment flexibility regardless of an organization's mix
of networked systems, and will enable students to access courses seamlessly over
an intranet or the Internet, over a LAN, or on their stand-alone desktop or
laptop computers.
The market for IT education and training is rapidly evolving. New methods of
delivering interactive education software are being developed and offered in the
marketplace, including intranet and Internet deployment systems. Many of these
new delivery systems will involve new and different business models and
contracting mechanisms. In addition, multimedia and other product functionality
features are being added to the educational software. Accordingly, CBT Group's
future success will depend upon, among other factors, the extent to which CBT
Group is able to develop and implement products which address these emerging
market requirements. There can be no assurance that CBT Group will be successful
in meeting changing market needs. Failure to develop and implement products
which address these emerging market requirements could have a material adverse
affect on CBT Group's business and results of operations.
Moreover, software products as complex as those offered by the Company may
contain undetected errors or fail when first introduced or upon release of new
versions of the Company's products. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in new products after commencement of commercial shipments, resulting
in a loss of or delay in market acceptance.
The subject matter of the Company's courseware is influenced by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
introductions of new products by software vendors. Accordingly, the Company
believes that its future success will depend in large part upon its ability to
meet these changes by enhancing its existing courses and developing and
introducing new courses on a timely basis. There can be no assurance that the
Company will be successful in addressing the changing needs of the marketplace
by developing and marketing new products or enhancing its existing products on a
timely basis. If the Company were unable, due to resource, technological or
other constraints, to anticipate and respond adequately to changes in customers'
software technology and preferences, the Company's business and results of
operations would be materially adversely affected.
RESEARCH AND DEVELOPMENT
CBT Group believes that the development of an effective training product
requires the convergence of source material, instructional design and computer
technology. The first step in developing a new training program is to obtain
content through subject matter experts, existing courses, including self-study
courses, and product reference materials, including product manuals. The CBT
Group development team then writes a script for the program which includes a
structure covering all of the relevant concepts, tasks to be completed,
interactive features and tests to measure achievement and to reinforce the
lesson. During the development of a script for a new program, the Company's
developers, working with animators, simulation programmers and graphic
designers, simultaneously plan and develop the course elements. These elements
are then integrated into a single program. The program is then tested to ensure
that each course delivers the desired education and training.
The core of CBT Group's product development is its product development engine--
an environment comprising CBT Group proprietary software and off-the-shelf
tools--which has been optimized for the creation of interactive software
training programs. The Company believes that its product development engine
provides a competitive advantage by allowing the Company to create modular
courses, identify and change portions of a course without rewriting the entire
course, port courses more easily across operating
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systems and enhance the multimedia content of its courses more quickly and
efficiently. The Company's technology generally supports a common product
architecture, resulting in products that have a recognizable and consistent
interface and are easier to support. The Company's goal is to continue to
enhance its product development engine to meet the Company's future development
needs, including ensuring that its courseware is able to incorporate a wide
variety of multimedia elements.
The Company performs substantially all of its research and development
activities and develops substantially all of its courses at its Dublin, Ireland
development facility. From time to time, the Company subcontracts outside
development services to develop portions of particular courses. In addition, all
products produced using these outside developers remain the sole property of CBT
Group. During 1995, 1996 and 1997, research and development expenses totaled
approximately $6.6 million, $11.5 million and $19.1 million, respectively.
During 1997, the Company's research and development staff grew from 221 to 272
employees. The Company intends to continue to make substantial investments in
research and development.
DEVELOPMENT AND MARKETING ALLIANCES
The Company's strategy is to expand its position in the IT education and
training market by forming development and marketing alliances with leading IT
software vendors. To date, the Company has formed alliances with Check Point,
Cisco, Informix, Lotus, Marimba, Microsoft, Netscape, Network Associates,
Novell, Oracle, RSA Data Security, SAP, Security Dynamics, Sybase, VeriSign and
the IBM/Sun Microsystems/Netscape collaborative Java education effort. The
Company believes its development and marketing alliances offer it a number of
competitive advantages, including early access to the vendor's software
engineers and technical advisors for assistance in developing courses on new
products. With the approval of the development partner, products developed
under the relationship can be identified as "authorized" by that software
vendor, which the Company believes improves the marketability of such courses.
In addition, these alliances may result in additional distribution channels for
the Company, by allowing each party to distribute courses to its respective
customer base. In some of these alliances, the software vendor has contributed
financial resources toward the development of specified courses. The Company
has recognized the revenue from such development payments on a percentage of
completion basis as products are produced or, where required in the contract, as
the Company has met specified milestones. The Company believes that these
alliances also provide significant benefits to the software vendors by allowing
them to achieve additional market penetration generated by increasing the base
of trained users.
The Company believes that an increasing proportion of its revenues in the future
may be attributable to products developed through its alliances. There can be
no assurance that any of these parties will continue to cooperate with the
Company, that the Company will be able to develop successfully courses for its
development and marketing alliances in a timely fashion or at all, or that the
Company will be able to negotiate additional alliances in the future on
acceptable terms or at all. There can be no assurance that the marketing
efforts of the Company's partners will not disrupt the Company's direct sales
efforts. In addition, the Company's development and marketing partners could
pursue their existing or alternative training programs in preference to and in
competition with those being developed with the Company. In the event that the
Company is not able to maintain or expand its current development and marketing
alliances or enter into new development and marketing alliances, the Company's
operating results and financial condition could be materially adversely
affected. Furthermore, the Company is required to pay royalties to its
development and marketing partners on products developed with them, which
reduces the Company's gross margins. The Company expects that cost of revenues
may fluctuate from period to period in the future based upon many factors,
including the mix of titles licensed (between titles developed exclusively by
CBT Group and royalty-bearing titles developed pursuant to development and
marketing alliances) and the timing of expenses associated with development and
marketing alliances. In addition, the collaborative nature of the development
process under these alliances may result in longer development times and less
control over the timing of product introductions than for courses developed
solely by the Company.
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CUSTOMERS
The Company primarily licenses its courses to Fortune 3000 companies and other
major U.S. and international organizations in a wide range of industries,
including manufacturing, transportation, telecommunications, utilities, banking,
healthcare, securities, computers and insurance. CBT Group also licenses its
courseware to educational institutions and governmental agencies. The Company
markets its courseware through its direct sales organization to approximately
1,576 corporate customers worldwide and through its telesales organization to
approximately 2,174 customers worldwide. The Company also distributes its
courses through a number of resellers. No customer accounted for more than 5%
of revenues in 1997.
BACKLOG
The Company generates a substantial portion of its revenue through multi-year
license agreements. The initial annual license fee is generally recognized at
the time of delivery of products. Subsequent annual license fees are recognized
on the anniversary date of such delivery, or if the customer exchanges courses
at the anniversary date, upon delivery of the exchanged courses. Backlog at any
given date represents the amount of all license fees under current agreements
which have not yet been recognized as revenue. Although the Company's license
agreements are noncancellable by their terms, there can be no assurance that any
customer will fulfill the contractual obligations under its agreement.
Cancellation, reduction or delay in orders by or shipments to any of these
customers could have a material adverse effect on the Company's business and
results of operations.
The amount and timing of the recognition of revenue associated with this backlog
can vary depending on the timing of future deliveries of products and amendments
to customers' license agreements. The Company had backlog of approximately $27.1
million, $60.3 million and $110 million as of December 31, 1995, 1996 and 1997,
respectively. Approximately 35% of the Company's backlog as of December 31, 1997
was concentrated among seven customers.
INTELLECTUAL PROPERTY AND LICENSES
The Company regards its software as proprietary and relies primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. Despite these
precautions, it may be possible for a third-party to copy or otherwise obtain
and use the Company's courseware or technology without authorization, or to
develop similar courseware or technology independently. Furthermore, the laws
of certain countries in which the Company sells its products do not protect the
Company's software and intellectual property rights to the same extent as do the
laws of the United States. The Company generally does not include in its
software any mechanisms to prevent or inhibit unauthorized use, but generally
requires the execution of a license agreement which restricts copying and use of
the Company's products. If unauthorized copying or misuse of the Company's
products were to occur to any substantial degree, the Company's business and
results of operations could be materially adversely affected. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology.
There can be no assurance that third parties will not claim that the Company's
current or future products infringe on the proprietary rights of others. The
Company expects that software developers will increasingly be subject to such
claims as the number of products and competitors in the IT education and
training industry grows and the functionality of products in the industry
overlaps. Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to the Company, or at all.
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<PAGE>
COMPETITION
The IT education and training market is highly fragmented and competitive, and
the Company expects this competition to increase. The Company expects that
because of the lack of significant barriers to entry into the IT education and
training market, new competitors may enter the market in the future. In
addition, larger companies are competing with the Company in the IT education
and training market through the acquisition of the Company's competitors, and
the Company expects this trend to continue. Such competitors may also include
publishing companies and vendors of application software, including those
vendors with whom the Company has formed development and marketing alliances.
The Company competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments. To a lesser extent,
the Company also competes with other suppliers of IT education and training,
including several other companies that produce interactive software training,
consultants, value-added resellers and network integrators. Certain of these
value-added resellers also market products competitive with those of the
Company. The Company expects that as organizations increase their dependence on
outside suppliers of training, the Company will face increasing competition from
these other suppliers as IT education and training managers more frequently
compare training products provided by outside suppliers.
Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company. In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from competitors as
IS managers demand more value for their training budgets. Accordingly, there
can be no assurance that the Company will be able to provide products that
compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company to
reduce its prices significantly.
SALES, MARKETING AND CUSTOMER SUPPORT
Direct Sales and Support
At December 31, 1997, the Company employed 286 direct sales and support people
worldwide, of which 151 were located in the United States. The Company's
telesales organization, which the Company established in December 1995 to focus
on sales of CBT Group courseware to smaller corporate customers and end-users as
well as to work with CBT Group's alliance partners' channel efforts, employed 48
people worldwide, of which 39 were located in the United States, at December 31,
1997. The Company plans to continue to build the telesales organization in
1998.
Indirect Sales
In order to accelerate worldwide market penetration, the Company is broadening
its sales strategy by expanding its indirect sales channels, which include
resellers, development partners, and industry catalogs circulated by leading IT
distributors. The indirect sales channels give the Company access to a more
diverse client base which the Company believes cannot be targeted cost-
effectively through its direct sales force.
The Company's marketing partners also generally have the right to resell
products developed under their alliances with the Company.
EMPLOYEES
As of December 31, 1997, the Company had a total of 702 full-time employees, of
whom 334 were engaged in sales, marketing and customer support, 96 in
management, administration and finance and 272 in product development. On
December 31, 1997, 242 employees were located in the United States, 276 in
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the Republic of Ireland, 48 in the United Kingdom, 28 in Germany, 35 in Canada,
49 in Australia, 13 in the Benelux countries, 6 in the Middle East and 10 in
South Africa. None of the Company's employees is subject to a collective
bargaining agreement, and the Company has not experienced any work stoppages.
The Company believes that its employee relations are good.
The Company's future success depends, in large part, on the continued service of
its key management, sales, product development and operational personnel and on
its ability to attract, motivate and retain highly qualified employees,
including management personnel. In particular, the loss of certain senior
management personnel or other key employees could have a material adverse effect
on the Company's business. In addition, the Company depends on writers,
programmers and graphic artists, as well as third-party content providers. The
Company expects to continue to hire additional product development, sales and
marketing, IS and accounting staff. However, there can be no assurance that the
Company will be successful in attracting, retaining or motivating key personnel.
The inability to hire and retain qualified personnel or the loss of the services
of key personnel could have a material adverse effect upon the Company's current
business, new product development efforts and future business prospects.
FOREIGN OPERATIONS
In 1997, the Company's products were marketed in over 20 countries, and sales
outside the United States represented approximately 40%, 33% and 30% of the
Company's revenues in 1995, 1996 and 1997, respectively. The Company expects
that international operations will continue to account for a significant portion
of its revenues and intends to continue to expand its operations outside of the
United States. In addition, the Company's research and development organization
is located outside the United States. Operations outside the United States are
subject to inherent risks, including fluctuations in exchange rates,
difficulties or delays in developing and supporting non-English language
versions of the Company's products, political and economic conditions in various
jurisdictions, unexpected changes in regulatory requirements, tariffs and other
trade barriers, difficulties in staffing and managing foreign subsidiary
operations, longer accounts receivable payment cycles and potentially adverse
tax consequences. There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations outside of the United
States.
The Company's consolidated financial statements are prepared in dollars, while
several of the Company's subsidiaries have functional currencies other than the
dollar, and a significant portion of the Company's revenues, costs and assets
are denominated in currencies other than their respective functional currencies.
Fluctuations in exchange rates may have a material adverse affect on the
Company's results of operations, particularly its operating margins, and could
also result in exchange losses. As a result of currency fluctuations, the
Company recognized exchange loss of $161,000 in 1995, and exchange gains of
$4,000 and $112,000 in 1996 and 1997, respectively. The impact of future
exchange rate fluctuations on the Company's results of operations cannot be
accurately predicted. To date, the Company has not sought to hedge the risks
associated with fluctuations in exchange rates, but may undertake such
transactions in the future. There can be no assurance that any hedging
techniques implemented by the Company will be successful or that the Company's
results of operations will not be materially adversely affected by exchange rate
fluctuations.
Certain of the Company's subsidiaries have significant operations and generate
significant taxable income in Ireland, and certain of the Company's Irish
subsidiaries are taxed at rates substantially lower than tax rates in effect in
the U.S. and in other countries in which the Company has operations. If such
subsidiaries were no longer to qualify for such tax rates or if the tax laws
were rescinded or changed, the Company's operating results could be materially
adversely affected. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase, and its cash flow and results
of operations could be materially adversely affected.
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<PAGE>
ITEM 2. PROPERTIES
The Company conducts its operations primarily out of its facilities in Menlo
Park, California, and Dublin, Ireland. The Company currently leases
approximately 25,000 square feet at its United States headquarters. In Dublin,
Ireland, the Company currently leases two properties, one of which comprises
approximately 25,000 square feet and houses the Company's main product
development center, and the other comprises approximately 8,000 square feet
containing the Company's fulfillment operations, including disk duplication,
packaging and delivery. The Company has also entered into a lease for
approximately 25,000 square feet in Scottsdale, Arizona. This will serve as a
second site for the Company's growing telesales organization as well as serve as
the United States location for Scholars.
The Company also leases sales office space in a number of countries including
the United Kingdom, Australia, the Middle East, the Benelux countries, Canada,
Germany and South Africa and throughout the United States.
ITEM 3. LEGAL PROCEEDINGS
In April 1990, Patrick J. McDonagh, a director of the Company, transferred
certain securities of Datacode Electronics Ltd. ("Datacode") to the Company.
Certain other shareholders of Datacode have alleged that the transfer had the
effect of depriving them of certain benefits and have claimed that they are
owed 21,126 of the Company's ordinary shares. On September 14, 1995, a
complaint was filed with the High Court of Ireland against the Company and
certain of its then officers and former officers. The Company believes that the
plaintiff's allegations are entirely without merit and intends to contest the
complaint vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S SHARE CAPITAL AND RELATED SHAREHOLDER MATTERS
The Company's ADSs have been quoted in the Nasdaq National Market under the
symbol CBTSY since the Company's initial public offering on April 13, 1995.
Prior to the initial public offering, there was no public market for the
Company's securities.
The prices per ADS reflected in the table below represent the range of high and
low closing prices reported in the Nasdaq National Market for the periods
indicated and reflects both of the two-for-one splits of the Company's ADSs
effected on each of May 15, 1996 and March 9, 1998.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
----------- ---- ---
<S> <C> <C>
Fourth quarter ended December 31 $41.19 $30.25
Third quarter ended September 30 40.13 28.63
Second quarter ended June 30 31.63 20.00
First quarter ended March 31 35.25 19.07
Fiscal 1996 High Low
----------- ---- ---
Fourth quarter ended December 31 $29.38 $22.38
Third quarter ended September 30 27.13 19.63
Second quarter ended June 30 25.13 17.00
First quarter ended March 31 18.38 10.75
</TABLE>
As of March 10, 1998, there were approximately 24 holders of ordinary shares of
record of the Company.
Dividends
CBT Group has never declared or paid any dividends on its ordinary shares. CBT
Group currently intends to retain all future earnings to finance future
operations and therefore does not anticipate paying any dividends in the
foreseeable future. Moreover, under the Companies Acts of the Republic of
Ireland, dividends may only be paid out of the profits of the Company legally
available for distribution.
Irish Stamp Duty
Stamp duty, which is a tax on certain documents, is payable on all transfers of
ordinary shares in companies registered in Ireland wherever the instrument of
transfer may be executed. In the case of a transfer on sale, stamp duty will be
charged at the rate of IR(Pounds)1 for every IR(Pounds)100 (or part thereof) of
the amount or value of the consideration (i.e., purchase price). Where the
consideration for the sale is expressed in a currency other than Irish pounds,
the duty will be charged on the Irish pound equivalent calculated at the rate of
exchange prevailing on the date of the transfer. In the case of a transfer by
way of gift (subject to certain exceptions) or for considerations less than the
market value of the shares transferred, stamp duty will be charged at the above
rate on such market value.
A transfer or issue of ordinary shares for deposit under the Deposit Agreement
(between CBT Group, The Bank of New York, as Depositary, and the registered
holders and the owners of a beneficial interest in book-entry ADRs) in return
for ADRs will be similarly chargeable with stamp duty as will a transfer of
ordinary shares from the Depositary or the Custodian upon surrender of an ADR
for the purpose of the withdrawal of the underlying ordinary shares in
accordance with the terms of the Deposit Agreement.
The Irish Revenue Commissioners have issued a ruling to the Company that
transfers of ADRs issued in respect of the Company's shares will not be
chargeable with Irish stamp duty for so long as the ADSs are dealt in and quoted
on the Nasdaq National Market. It has been confirmed in Section 207, Finance
Act 1992 that transfers of ADRs will be exempt from stamp duty where the ADRs
are dealt with in a
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recognized stock exchange. The Nasdaq National Market is regarded by the Irish
authorities as a recognized stock exchange.
The person accountable for payment of stamp duty is the transferee or, in the
case of a transfer by way of gift or for a consideration less than the market
value, both parties to the transfer. Stamp duty is normally payable within 30
days after the date of execution of the transfer. Late payment of stamp duty
will result in liability to interest, penalties and fines.
Volatility of Stock Price
The Company's initial public offering of the ADSs (the "IPO") was completed in
April 1995, and there can be no assurance that a viable public market for the
ADSs will be sustained. The market price of the ADSs has fluctuated
significantly since the IPO. The Company believes that factors such as
announcements of developments related to the Company's or its competitors'
business, announcements of new products or enhancements by the Company or its
competitors, sales of the ADSs into the public market, developments in the
Company's relationships with its customers, partners and distributors,
shortfalls or changes in revenues, gross margins, earnings or losses or other
financial results from public market expectations, regulatory developments,
fluctuations in results of operations and general conditions in the Company's
market or the markets served by the Company's customers or the economy could
cause the price of the ADSs to fluctuate, perhaps substantially. In addition,
in recent years the stock market in general, and the market for shares of small
capitalization and technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. Many companies in the software industry, including the
Company, have recently experienced historic highs in the market price of their
equity securities. There can be no assurance that the market price of the ADSs
will not decline substantially from such historic highs, or otherwise continue
to experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five years in
the period ended December 31, 1997 and at December 31, 1997, 1996, 1995, 1994
and 1993 relates to the Company's continuing information technology ("IT")
education and training business and should be read in conjunction with the
consolidated financial statements and related notes thereto in "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
results of operations for each of the three years in the period ended December
31, 1997 and the balance sheets as at December 31, 1997 and 1996 are derived
from the consolidated financial statements of the Company, which have been
prepared in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP") and audited by Ernst & Young, independent auditors. The data at December
31, 1993, 1994 and 1995 and for the years ended December 1993 and 1994 is
derived from audited consolidated financial statements of the Company prepared
in accordance with U.S. GAAP not included herein. The consolidated statements
of operations data for any particular period are not necessarily indicative of
the results of operations for any future period, including the Company's fiscal
year ending December 31, 1998.
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<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
(In thousands, except per share data) 1993 1994 1995 1996 1997
-------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $22,735 $34,500 $ 49,342 $73,566 $118,639
Cost of revenues 5,198 8,424 11,288 12,770 19,475
------- ------- -------- ------- --------
Gross profit 17,537 26,076 38,054 60,796 99,164
Operating Expenses
Research and development 3,148 3,603 6,597 11,481 19,068
Sales and marketing 10,085 14,856 20, 282 30,382 47,035
General and administrative 2,329 2,854 4,325 6,379 8,012
Amortization of acquired intangibles 558 604 -- -- --
Costs of acquisitions -- -- 198 596 1,534
------- ------- -------- ------- --------
Total operating expenses 16,120 21,917 31,402 48,838 75,649
------- ------- -------- ------- --------
Income from operations 1,417 4,159 6,652 11,958 23,515
Other income (expense), net (224) (539) 801 2,300 2,598
------- ------- -------- ------- --------
Income before provision for income taxes 1,193 3,620 7,453 14,258 26,113
Provision for income taxes (737) (1,038) (1,424) (2,419) (3,916)
------- ------- -------- ------- --------
Net income 456 2,582 6,029 11,839 22,197
======= ======= ======== ======= ========
Net income per equivalent ADS - Diluted $0.02 $0.07 $0.17 $0.30 $0.53
======= ======= ======== ======= ========
ADSs used in computing per equivalent ADS amounts 22,452 29,944 35,366 39,912 41,708
======= ======= ======== ======= ========
<CAPTION>
December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and short-term investments $ 3,558 $ 4,656 $ 47,863 $47,819 $ 64,915
Working capital (2,720) (1,798) 43,459 46,248 79,142
Total assets 13,162 19,149 68,722 87,028 131,321
Long-term debt, excluding current portion 2,257 787 787 -- --
Redeemable convertible preferred shares 2,666 4,736 -- -- --
Shareholders' equity (deficit) (4,562) (5,724) 46,299 61,231 100,979
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes thereto contained in Item 8 of this Form
10-K, which have been restated to reflect the acquisitions of Applied Learning
Limited ("ALA"), an Australian limited liability company, CBT Benelux B.V.
("Benelux"), a Dutch limited liability company, Ben Watson and Associates
Limited ("Scholars.com"), a New Brunswick, Canada corporation and CBT Systems
Middle East Limited ("MidEast") a Commonwealth of the Bahamas limited liability
company.
Important Note About Forward Looking Statements
The following discussion contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Predictions of future events are
inherently uncertain. Actual events could differ materially from those predicted
in the forward looking statements as a result of the risks set forth in the
following discussion, and in particular, the risks discussed below under the
caption "Additional Risk Factors that Could Affect Operating Results."
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Overview
CBT ("CBT Group" or the "Company") is a leading provider of interactive software
generally designed to meet businesses' information technology ("IT") education
and training needs. The Company develops, publishes and markets a broad library
of over 558 software titles focused on client/server, Internet and corporate
intranet technologies and delivered on networked and standalone PCs and over
corporate intranets.
The Company derives revenues primarily from license agreements under which
customers license the Company's titles for periods of one, two or three years.
The license agreement format generally allows the customer to exchange titles
for other titles in the Company's library on an annual basis if the agreement is
for more than one year. The initial annual license fee is generally recognized
as revenue at the time of delivery of products, and subsequent annual license
fees are generally recognized on the anniversary of each delivery date.
Although the Company's license agreements are noncancellable by their terms,
there can be no assurance that any customer will fulfill the contractual
obligations under its agreement. Cancellation, reduction or delay in orders by
or shipments to any of these customers could have a material adverse effect on
the Company's business and results of operations. In addition, the Company
derives revenues from sales of its courses, primarily through its direct sales
and telesales organizations and resellers.
In recent years, the Company has entered into several development and marketing
alliances with key vendors of client/server, internet/intranet and enterprise
software, under which the Company develops titles for training on specific
products. Under certain of its development and marketing alliances, the
Company's partners have agreed to fund certain product development costs. The
Company recognizes such funding as revenues on a percentage of completion basis,
and the costs associated with such revenues are reflected as cost of revenues.
These agreements have the effect of shifting expenses associated with developing
certain new products from research and development to cost of revenues. The
Company expects that cost of revenues may fluctuate from period to period in the
future based upon many factors, including, but not limited to, the timing of
expenses associated with development and marketing alliances. The Company does
not expect funding from development partners to contribute significantly to
revenues in future years.
Recent Developments
On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront"). In the merger, each share of ForeFront common
stock will be exchanged for 0.3137 ADSs, and the Company will assume outstanding
ForeFront stock options, warrants and other rights to acquire ForeFront common
stock. As a result of the merger, the Company will issue approximately 2.1
million ADSs and assume options, warrants and other rights that may be converted
into up to approximately 1.1 million ADSs. The transaction is intended to be
tax free to shareholders and is intended to be accounted for as a pooling of
interests. Consummation of the transaction is subject to expiration or
termination of the applicable Hart-Scott-Rodino waiting period, approval of the
merger by ForeFront stockholders and other customary closing conditions. The
merger is expected to be completed during the second quarter of 1998.
Consummation of the transaction is subject to a number of risk factors,
including those discussed below and under "Additional Risk Factors that Could
Affect Operating Results."
On March 9, 1998, the Company effected a two-for-one split of its issued and
outstanding ADSs whereby each issued and outstanding ADS is now represented by
one-fourth of one ordinary share and each issued and outstanding ordinary share
that is deposited with The Bank of New York, as Depositary, is represented by
four ADSs. Unless stated otherwise herein, all references to the Company's ADSs
are on a post-split basis.
The successful combination of CBT Group and ForeFront, including the successful
operation of ForeFront as an autonomous subsidiary of CBT Group, will require
substantial effort from each company. The diversion of the attention of
management and any difficulties encountered in the transition process could
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have an adverse impact on CBT Group's ability to realize the full benefits of
the merger. The successful combination of the two companies will also require
coordination of their research and development and sales and marketing efforts.
In addition, the process of combining the two organizations could cause the
interruption of, or loss of momentum in, ForeFront's activities. There can be no
assurance that CBT Group will be able to retain ForeFront's key management,
technical, sales and customer support personnel, or that it will realize any of
the anticipated benefits of the merger.
Certain of ForeFront's existing customers or strategic partners may view
themselves as competitors of CBT Group's, and therefore determine that the
merger is competitively disadvantageous to them. As a consequence, Forefront's
relationships with these customers or strategic partners could be adversely
affected by the merger, which could adversely affect the ability of CBT Group to
continue relationships with such customers after the merger.
In December 1996, CBT Group and Street Technologies, Inc. ("Street
Technologies"), a developer of technology to "stream" multimedia and other large
data files to permit real-time delivery over local and wide area networks,
corporate intranets and the Internet, entered into an agreement pursuant to
which the companies would work together to deploy CBT Group's interactive
education software over corporate intranets and the Internet. As part of the
agreement, CBT Group acquired a 12.5% ownership interest in Street Technologies
and Street Technologies agreed that its license will be exclusive to CBT Group
within a defined group of companies. In December 1997 CBT Group exchanged its
12.5% ownership interest in Street Technologies, and $300,000 in cash, for a
perpetual license of Street Technologies' deployment tools.
Annual Results of Operations
The following table sets forth certain consolidated statement of operations data
as a percentage of revenues for the three years in the period ended December 31,
1997:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1995 1996 1997
-------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues 100% 100% 100%
Cost of revenues 22.9 17.4 16.4
---- ---- ----
Gross profit 77.1 82.6 83.6
Operating Expenses
Research and development 13.4 15.6 16.1
Sales and marketing 41.1 41.3 39.6
General and administrative 8.7 8.7 6.8
Costs of acquisitions 0.4 0.8 1.3
---- ---- ----
Total operating expenses 63.6 66.4 63.8
---- ---- ----
Income from operations 13.5 16.2 19.8
Other income, net 1.6 3.1 2.2
---- ---- ----
Income before provision for income taxes 15.1 19.3 22.0
Provision for income taxes (2.9) (3.2) (3.3)
---- ---- ----
Net income 12.2% 16.1% 18.7%
==== ==== ====
</TABLE>
Revenues
Revenues increased from $49.3 million in 1995 to $73.6 million in 1996 and to
$118.6 million in 1997. The increases in revenues during these periods were
primarily attributable to an increase in the number of available courses, strong
customer contract renewals and upgrades and expanded marketing and distribution
efforts. Approximately 0.8%, 0.8% and 0.4% of revenues in 1995, 1996 and 1997,
19
<PAGE>
respectively, were attributable to development revenues derived from agreements
with the Company's development partners. The Company does not expect funding
from development partners to contribute significantly to revenues in future
years.
Revenues in the United States increased from $29.4 million (or 60% of revenues)
in 1995 to $49.3 million (or 67% of revenues) in 1996 and to $83.6 million (or
71% of revenues) in 1997. The increases in 1996 and 1997 were primarily the
result of significant increases in the number of sales and related personnel
employed in the United States, an increase in the number of available courses
and an expansion of the Company's customer base. While revenues in the United
States increased significantly in absolute terms over these periods, the
Company's sales and marketing expenses and general and administrative expenses
in the United States also increased rapidly as the Company hired and expanded
its staff to support the U.S. sales growth.
Revenues in Europe were $9.0 million (or 18% of revenues) in 1995, $14.3 million
(or 19% of revenues) in 1996, and $20.3 million (or 17% of revenues) in 1997,
respectively. Revenues from outside the United States and Europe (principally
from Australia, Canada, South Africa and MidEast in 1997) were $10.9 million (or
22% of revenues) in 1995, $10.0 million (or 14% of revenues) in 1996, and $14.7
million (or 12% of revenues) in 1997, respectively. Because a significant
portion of the Company's business is conducted outside the United States, the
Company is subject to numerous risks of doing business in other countries,
including risks related to currency fluctuations.
No customer accounted for more than 5% of revenues in 1995, 1996 or 1997.
However, approximately 35% of the Company's backlog at December 31, 1997 was
concentrated among seven customers, compared to 35% among nine customers at
December 31, 1996. Backlog at any given date represents the amount of all
license fees under current agreements which have not yet been recognized as
revenues. Although the Company's license agreements are noncancellable by their
terms, there can be no assurance that any customer will fulfill the contractual
obligations under its agreement. Cancellation, reduction or delay in orders by
or shipments to any of these or other customers could have a material adverse
effect on the Company's business and results of operations.
Cost of Revenues
Cost of revenues includes the cost of materials (such as CD-ROMs, diskettes,
packaging and documentation), royalties to third parties, the portion of
development costs associated with funded development projects and fulfillment
costs.
Gross margins increased from 77.1% in 1995 to 82.6% in 1996 and to 83.6% in
1997. The increase in gross margins in 1996 and 1997 is primarily due to the
inclusion in cost of revenues for 1995 of certain costs CLS Consult GmbH, the
Company's German subsidiary, had incurred in developing its SAP interactive
training software. CLS, which was in an earlier stage of development in 1995,
outsourced a substantial portion of its product development to third parties,
and the associated expenses had been included in cost of revenues for 1995.
During 1996 and 1997, these activities were conducted at CLS, and no royalties
were therefore payable. Accordingly, these expenses are included in research
and development expenses for 1996 and 1997. The inclusion of these development
costs in cost of revenues had the corresponding effect of reducing research and
development expenses in 1995.
The inclusion of ALA also impacted gross margins in 1995 and 1996. Gross
margins were lower in 1997 principally as a result of royalty payments to third
party providers which were higher than the average royalty payments paid by CBT
Group. In 1997, the previously outsourced products for resale were replaced by
CBT Group product.
The Company expects that cost of revenues may fluctuate from period to period in
the future based upon many factors, including the mix of titles licensed
(between titles developed exclusively by CBT Group and royalty-bearing titles
developed pursuant to development and marketing alliances) and the timing of
expenses associated with development and marketing alliances.
20
<PAGE>
Research and Development Expenses
Research and development expenses consist primarily of salaries and benefits,
occupancy expenses, fees paid to outside consultants and travel expenses.
Research and development expenses increased in absolute terms and as a
percentage of revenues from $6.6 million (or 13.4% of revenues) in 1995 to $11.5
million (or 15.6% of revenues) in 1996 and to $19.1 million (or 16.1% of
revenues) in 1997, principally as a result of an increase in research and
development personnel employed to expand and enhance the Company's library of
software products. In addition, approximately $245,000, $803,000 and $442,000
of development expenses incurred in connection with development and marketing
alliances were charged to cost of revenues in 1995, 1996 and 1997, respectively.
The Company believes that significant investment in research and development is
required to remain competitive in the IT education and training market, and the
Company therefore expects research and development expenses to continue to
increase in future periods.
Software development costs are accounted for in accordance with the Financial
Accounting Standards Board Statement No. 86, under which the Company is required
to capitalize software development costs after technological feasibility has
been established. To date, development costs after establishment of
technological feasibility have been immaterial, and all software development
costs have been expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries and commissions,
occupancy expenses and advertising, promotional expenses and travel expenses.
These expenses increased in absolute terms from $20.3 million (or 41.1% of
revenues) in 1995 to $30.4 million (or 41.3% of revenues) in 1996 and to $47.0
million (or 39.6% of revenues) in 1997. The increase in absolute terms of sales
and marketing expenses is primarily attributable to an increase in the number of
sales and sales support personnel. Commission costs have also increased in
absolute terms along with the increases in revenues during these periods. The
Company also increased significantly advertising and promotional expenses in
each of 1996 and 1997. The decrease in sales and marketing expenses as a
percentage of revenues from 1996 to 1997 was principally due to more rapid
increases in revenues than in associated expenses. The Company expects to
increase sales and marketing expenses in the future to support expansion of its
sales and marketing efforts.
General and Administrative Expenses
General and administrative expenses increased in absolute terms from $4.3
million (or 8.7% of revenues) in 1995 to $6.4 million (or 8.7% of revenues) in
1996 and to $8.0 million (or 6.8% of revenues) in 1997. The increases in
absolute terms were primarily due to increased staffing to support expanding
operations. The decrease as a percentage of revenues from 1996 to 1997 was
principally due to more rapid increases in revenues than in associated expenses.
The Company anticipates that general and administrative expenses will increase
in future periods due to increases in staffing and infrastructure.
Other Income, Net
Other income, net, comprises interest expense, interest income and exchange
gains and losses. The Company recognized other income, net, of approximately $1
million, $2.3 million and $2.5 million in 1995, 1996 and 1997, respectively.
The increases in other income in 1996 and 1997 were primarily the result of
interest received on proceeds deposited from the Company's initial and secondary
public offerings in 1995. In addition, the Company recognized an exchange loss
of $161,000 in 1995, and exchange gains of $4,000 and $112,000 in 1996 and 1997,
respectively.
The Company's consolidated financial statements are prepared in dollars,
although several of the Company's subsidiaries have functional currencies other
than the dollar, and a significant portion of the Company's and its
subsidiaries' revenues, costs and assets are denominated in currencies other
than their respective functional currencies. Fluctuations in exchange rates may
have a material adverse effect on the Company's results of operations,
particularly its operating margins, and could result in exchange losses. The
impact of future exchange rate fluctuations on the Company's results of
operations cannot be accurately predicted. To date, the Company has not sought
to hedge the risks associated with fluctuations
21
<PAGE>
in the exchange rate, but may undertake such transactions in the future. There
can be no assurance that any hedging techniques implemented by the Company would
be successful in eliminating or reducing the effects of currency fluctuations.
Provision for Income Taxes
CBT Group PLC operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Because taxes are incurred at the subsidiary
level, and one subsidiary's tax losses cannot be used to offset the taxable
income of subsidiaries in other tax jurisdictions, the Company's consolidated
effective tax rate may increase to the extent that the Company reports tax
losses in some subsidiaries and taxable income in others.
The Company has significant operations and generates a majority of its taxable
income in the Republic of Ireland, and certain of the Company's Irish operating
subsidiaries are taxed at rates substantially lower than tax rates in effect in
the United States and other countries in which the Company has operations. One
Irish subsidiary currently qualifies for a 10% tax rate and another Irish
subsidiary is income tax exempt. If such subsidiaries were no longer to qualify
for such tax rates or if the tax laws were rescinded or changed, the Company's
operating results could be materially adversely affected. The standard rate of
Irish corporation tax on both trading and non-trading income presently (from
January 1, 1998) is 32%. The 10% incentive rate referred to above applies in
respect of income derived from certain activities carried out in the Republic of
Ireland. The incentive rate will continue up to December 31, 2010. From January
1, 2006 it has been confirmed by the Government of Ireland in an announcement by
the Irish Minister for Finance on December 3, 1997 that the corporation tax rate
will be 12.5% on trading income and 25% on non-trading income. Moreover,
because the Company incurs income tax in several countries, an increase in the
profitability of the Company in one or more of these countries could result in a
higher overall tax rate. In addition, if tax authorities were to challenge
successfully the manner in which profits are recognized among the Company's
subsidiaries, the Company's taxes could increase and its cash flow and net
income could be materially adversely affected.
The Company's provision for income taxes was $1.4 million, $2.4 million and $3.9
million for each of 1995, 1996 and 1997, respectively.
The effective tax rate for the Company was 19.1%, 17.0% and 15.0% in 1995, 1996
and 1997, respectively. The decrease in the effective tax rate from 1995 to
1996 and to 1997 was principally the result of losses incurred by pooled
entities in both 1995 and 1996 which were not available to offset taxable income
earned in other jurisdictions.
22
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited statement of operations data
for each of the Company's last eight quarters. This unaudited quarterly
financial information has been prepared on a basis consistent with the annual
information presented elsewhere in this Annual Report and, in management's
opinion, reflects all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the information presented. The operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30 Dec 31, Mar 31, June 30, Sept 30 Dec 31,
1996 1996 1996 1996 1997 1997 1997 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $15,000 $16,370 $18,755 $23,441 $22,575 $25,589 $30,412 $40,063
Cost of revenues 2,659 2,889 3,160 4,062 3,798 4,351 4,862 6,464
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 12,341 13,481 15,595 19,379 18,777 21,238 25,550 33,599
Operating expenses
Research and development 2,319 2,596 2,914 3,652 3,743 4,227 4,941 6,157
Sales and marketing 6,854 7,136 7,756 8,636 9,435 10,336 12,094 15,170
General and administrative 1,264 1,708 1,374 2,033 1,707 1,837 2,005 2,463
Costs of acquisitions -- 596 -- -- 926 -- 242 366
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 10,437 12,036 12,044 14,321 15,811 16,400 19,282 24,156
------- ------- ------- ------- ------- ------- ------- -------
Income from operations 1,904 1,445 3,551 5,058 2,966 4,838 6,268 9,443
Other income, net 520 549 567 664 488 606 680 824
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes 2,424 1,994 4,118 5,722 3,454 5,444 6,948 10,267
Provision for income taxes (402) (382) (645) (990) (518) (817) (1,042) (1,539)
------- ------- ------- ------- ------- ------- ------- -------
Net income 2,022 1,612 3,473 4,732 2,936 4,627 5,906 8,728
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income per equivalent ADS(1) $0.05 $0.04 $0.09 $0.12 $0.07 $0.11 $0.14 $0.21
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
___________________________________________________
(1) Diluted net income per equivalent ADS gives effect to the two-for-one share
split of the Company's ADSs effected in May 1996 and the two-for-one share
split of the Company's ADSs effected in March 1998. Diluted net income per
ordinary share was $0.21, $0.16, $0.35 and $0.47 for the quarters ended
March 31, 1996, June 30, 1996, September 30, 1996 and December 31, 1996,
respectively, and $0.29, $0.45, $0.56 and $0.82 for the quarters ended
March 31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997,
respectively.
23
<PAGE>
The following table sets forth, as a percentage of revenues, certain line items
in the Company's statement of operations for the periods indicated.
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------------------------------
Mar 31, June 30, Sept 30 Dec 31, Mar 31, June 30, Sept 30 Dec 31,
1996 1996 1996 1996 1997 1997 1997 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 17.7 17.7 16.9 17.3 16.8 17.0 16.0 16.1
---- ---- ---- ---- ---- ---- ---- ----
Gross profit 82.3 82.3 83.1 82.7 83.2 83.0 84.0 83.9
Operating expenses
Research and development 15.5 15.9 15.5 15.6 16.6 16.5 16.2 15.4
Sales and marketing 45.7 43.6 41.4 36.8 41.8 40.4 39.8 37.9
General and administrative 8.4 10.4 7.3 8.7 7.6 7.2 6.6 6.2
Costs of acquisitions -- 3.6 -- -- 4.1 -- 0.8 0.9
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses 69.6 73.5 64.2 61.1 70.1 64.1 63.4 60.4
---- ---- ---- ---- ---- ---- ---- ----
Income from operations 12.7 8.8 18.9 21.6 13.1 18.9 20.6 23.5
Other income, net 3.5 3.4 3.0 2.8 2.2 2.4 2.2 2.1
---- ---- ---- ---- ---- ---- ---- ----
Income before provision for income taxes 16.2 12.2 21.9 24.4 15.3 21.3 22.8 25.6
Provision for income taxes (2.7) (2.4) (3.4) (4.2) (2.3) (3.2) (3.4) (3.8)
---- ---- ---- ---- ---- ---- ---- ----
Net income 13.5% 9.8% 18.5% 20.2% 13.0% 18.1% 19.4% 21.8%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The Company's growth in revenues over the last eight quarters has been primarily
attributable to an increase in the number of available courses in the Company's
library, an increase in the number of customers and increases in sales to
existing customers, as well as the Company's expanded marketing and distribution
efforts in the United States, and to a lesser extent, the United Kingdom. The
Company's revenues historically have been highest in the fourth quarter of each
year. Sales in the fourth quarter represented 32% and 34% of total revenues in
1996 and 1997, respectively. Sales in the fourth quarter increased more rapidly
than expenses and, accordingly, net income in the fourth quarter of 1996 and
1997 represented approximately 40% and 39%, respectively, of total net income
for such years. There can be no assurance that the Company will continue to
experience significant increases in revenues and profitability in the fourth
quarter of future years. Any failure to do so would have a material adverse
effect on the Company's operating results for the year as a whole.
In each quarter of 1996, gross margins were lower than the comparable quarter in
1997 principally as a result of the inclusion in cost of revenues on a quarterly
basis of certain costs which ALA had incurred in outsourcing product for resale.
In 1997, the previously outsourced products for resale were replaced by CBT
Group product and the corresponding cost of revenues was lower.
During 1997, the Company hired a number of employees, particularly sales and
marketing personnel, which resulted in an increase in sales and marketing
expenses for the year. The Company also added a significant number of research
and development personnel. As a result of these increases, as well as continued
hiring in other departments, the Company expects operating expenses in future
periods to be significantly higher than in prior periods. The Company
anticipates that it will continue this hiring in the first half of 1998, which
will reduce operating margins, particularly in the first and second quarters.
Liquidity and Capital Resources
Cash and short-term investments were $47.9 million, $47.8 million and $64.9
million in 1995, 1996 and 1997, respectively. The decrease from 1995 to 1996 was
due to the Company's investment in Street Technologies and a significant
increase in purchases of property and equipment which was partially offset by an
increase in cash provided by operating activities and from the issuance of
ordinary shares. The
24
<PAGE>
increase from 1996 to 1997 was from the exercise of options and by cash provided
by operating activities which was offset by purchases of property, equipment and
fixtures.
Net cash provided by operating activities increased from $4.5 million in 1995
to $11.0 million in 1996 and decreased to $4.6 million in 1997. The increased
cash flow from operations in 1996 was primarily attributable to net income of
$11.8 million in 1996. The decrease in net cash provided by operating
activities in 1997 was primarily due to a significant increase in accounts
receivable in 1997.
Capital expenditures were approximately $1.9 million in 1995, $6.4 million in
1996 and $5.3 million in 1997. Although the Company currently has no material
capital commitments, it expects that it will continue to spend more in 1998,
primarily as a result of setting up new facilities and to continuing to upgrade
the capabilities of its computer equipment as well as improvements to its
information systems.
Cash requirements are expected to continue to increase in order to fund: (i)
personnel and salary costs, (ii) research and development costs, (iii)
investment in additional equipment and facilities and (iv) working capital
requirements.
The Company believes that its existing cash and short-term investments will be
sufficient to meet its cash requirements for at least the next twelve months.
The Company may from time to time consider the acquisition of complementary
businesses, products or technologies, which may require additional financing.
The foregoing statement regarding the Company's expectations for continued
liquidity is a forward-looking statement, and actual results may differ
materially depending on a variety of factors, including variable operating
results or presently unexpected uses of cash such as mergers and acquisitions.
Effects of Recent Accounting Pronouncements
In February 1997, The Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", and Statement No. 129, "Disclosure of Information
about Capital Structure", which have been adopted in the Company's year ended
December 31, 1997. See Note 2 of Notes to the Consolidated Financial Statements
for the effect of Statement No. 128. The introduction of Statement No. 129 had
no impact on the Company in 1997.
Additional Risk Factors that Could Affect Operating Results
In addition to the other factors identified in this Annual Report, the following
risk factors could materially and adversely affect the Company's future
operating results, and could cause actual events to differ materially from those
predicted in the Company's forward looking statements relating to its business.
Fluctuations in Operating Results. The Company has in the past experienced
fluctuations in its quarterly operating results and anticipates that such
fluctuations will continue and could intensify in the future. Fluctuations in
operating results may result in volatility in the price of the Company's ADSs.
Although the Company was profitable in each of the last twelve quarters, there
can be no assurance that such profitability will continue in the future or that
the levels of profitability will not vary significantly among quarterly periods.
The Company's operating results may fluctuate as a result of many factors,
including timing and effect of mergers and acquisitions, size and timing of
orders and shipments, mix of sales between products developed solely by the
Company and products developed through development and marketing alliances,
royalty rates, the announcement, introduction and acceptance of new products,
product enhancements and technologies by the Company and its competitors, mix of
sales between the Company's field sales force, its other direct sales channels
and its indirect sales channels, competitive conditions in the industry, loss of
significant customers, delays in availability of existing or new products,
spending patterns of the Company's customers, currency fluctuations and general
economic conditions.
The Company's expense levels are based in significant part on its expectations
regarding future revenues and are fixed to a large extent in the short term.
Accordingly, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant revenue
shortfall would therefore have a material adverse effect on the Company's
results of operations. In addition, the Company hired additional employees in
1997 and in early 1998. This increase in employee expense could have a negative
impact on the Company's operating margins during 1998.
25
<PAGE>
Foreign Currency Impact. With more than a quarter of the Company's revenues
outside the United States, sales were negatively impacted in 1997 due to the
continued strength of the U.S. dollar against other major currencies. At current
exchange rates, the Company anticipates quarter to quarter comparisons could
continue to be negatively affected by currency adjustments through fiscal 1998.
Competition. The IT education and training market is highly fragmented and
competitive, and the Company expects this competition to increase. The Company
expects that because of the lack of significant barriers to entry into this
market, new competitors may enter the market in the future. In addition, larger
companies are competing with the Company in the IT education and training market
through the acquisition of the Company's competitors, and the Company expects
this trend to continue. Such competitors may also include publishing companies
and vendors of application software, including those vendors with whom the
Company has formed development and marketing alliances.
The Company competes primarily with third-party suppliers of instructor-led IT
education and training and internal training departments and with other
suppliers of IT education and training, including several other companies that
produce interactive software training. To a lesser extent, the Company also
competes with consultants, value-added resellers and network integrators.
Certain of these value-added resellers also market products competitive with
those of the Company. The Company expects that as organizations increase their
dependence on outside suppliers of training, the Company will face increasing
competition from these other suppliers as IT education and training managers
more frequently compare training products provided by outside suppliers.
Many of the Company's current and potential competitors have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition, than the Company. In addition, the IT education and
training market is characterized by significant price competition, and the
Company expects that it will face increasing price pressures from competitors as
IS managers demand more value for their training budgets. Accordingly, there
can be no assurance that the Company will be able to provide products that
compare favorably with new instructor-led techniques or other interactive
training software or that competitive pressures will not require the Company to
reduce its prices significantly.
Developing Market. The market for IT education and training is rapidly evolving.
New methods of delivering interactive education software are being developed and
offered in the marketplace, including intranet and Internet deployment systems.
Many of these new delivery systems will involve new and different business
models and contracting mechanisms. In addition, multimedia and other product
functionality features are being added to the educational software.
Accordingly, CBT Group's future success will depend upon, among other factors,
the extent to which CBT Group is able to develop and implement products which
address these emerging market requirements. There can be no assurance that CBT
Group will be successful in meeting changing market needs. In particular, CBT
Group has announced its next generation education deployment and management
system, CBT Campus. If CBT Campus were to fail to secure market acceptance,
sales of CBT Group courseware, and CBT Group's operating results, could be
materially adversely affected.
Seasonality. The software industry generally, and the Company in particular,
are subject to seasonal revenue fluctuations, based in part on customers' annual
budgetary cycles and in part on the annual nature of sales quotas. These
seasonal trends have in the past caused, and in the future could cause, revenues
in the first quarter of a year to be less, perhaps substantially so, than
revenues for the immediately preceding fourth quarter. In addition, the Company
has in past years (as well as in 1998) added significant headcount in the sales
and marketing and research and development functions in the first quarter, and
to a lesser extent, the second quarter. Because these headcount additions do
not immediately contribute significant revenues, the Company's operating margins
in the earlier part of the year tend to be significantly lower than in the later
parts of the year. It is expected that this factor will affect CBT Group's
operating margins in the first and second quarters of 1998, and to some extent
the third quarter. Many software companies also experience a seasonal downturn
in demand during the summer months. There can be no assurance that these or
other seasonal trends will not have a material adverse effect on the Company's
results of operations.
26
<PAGE>
Management of Expanding Operations and Acquisitions. The Company has recently
experienced rapid expansion of its operations, which has placed, and is expected
to continue to place, significant demands on the Company's administrative,
operational and financial personnel and systems. The Company's future operating
results will substantially depend on the ability of its officers and key
employees to manage changing business conditions and to implement and improve
its operational, financial control and reporting systems. If the Company is
unable to respond to and manage changing business conditions, its business and
results of operations could be materially adversely affected.
As a result of the consummation of the acquisitions of Personal Training
Systems, Inc. ("PTS") in late 1995, CLS and NTT in May 1996, ALA and Benelux on
February 28, 1997, Scholars.com in August 1997 and MidEast on December 1, 1997
the Company's operating expenses have increased. In addition, if the ForeFront
merger is consummated, the Company expects that operating expenses will increase
as a result of such transaction. There can be no assurance that the integration
of these businesses can be successfully completed in a timely fashion, or at
all, or that the revenues from the acquired businesses will be sufficient to
support the costs associated with those businesses, without adversely affecting
the Company's operating margins. Any failure to successfully complete the
integration in a timely fashion or to generate sufficient revenues from the
acquired businesses could have a material adverse effect on the Company's
business and results of operations.
The Company regularly evaluates acquisition opportunities and is likely to make
acquisitions in the future. Future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect the Company's results
of operations. Product and technology acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations, technologies
and products, diversion of management's attention to other business concerns,
risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired companies. The
Company's management has had limited experience in assimilating acquired
organizations and products into the Company's operations. No assurance can be
given as to the ability of the Company to integrate successfully any operations,
personnel or products that have been acquired or that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's results of operations.
Dependence on Key Personnel. The Company's future success depends, in large
part, on the continued service of its key management, sales, product development
and operational personnel and on its ability to attract, motivate and retain
highly qualified employees, including management personnel. In particular, the
loss of certain senior management personnel or other key employees could have a
material adverse effect on the Company's business. In addition, the Company
depends on writers, programmers and graphic artists, as well as third-party
content providers. The Company expects to continue to hire additional product
development, sales and marketing, information services and accounting staff.
However, there can be no assurance that the Company will be successful in
attracting, retaining or motivating key personnel. The inability to hire and
retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon the Company's current business, new product
development efforts and future business prospects.
Risk of Increasing Taxes. Certain of the Company's subsidiaries have
significant operations and generate significant taxable income in Ireland, and
certain of the Company's Irish subsidiaries are taxed at rates substantially
lower than tax rates in effect in the United States and in other countries in
which the Company has operations. The extent of the tax benefit could vary from
period to period, and there can be no assurance that the Company's tax situation
will not change.
Year 2000 Risk. The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium (year 2000)
approaches. The "Year 2000" issue is pervasive and complex, as virtually every
computer operation will be affected in the same way by the rollover of the two
digit year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail.
27
<PAGE>
The Company is assessing both the internal readiness of its computer systems and
the compliance of its software sold to customers for handling the year 2000. The
Company expects to implement successfully the systems and programming changes
necessary to address year 2000 issues, and does not believe that the cost of
such actions will have a material effect on the Company's results of operations
or financial condition. There can be no assurance, however, that there will not
be a delay in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have an
adverse effect on future results of operations. With the exception of CBT
Group's DOS-based courseware and its Wintracs administrative tracking tool, the
Company is satisfied that the software it supplies to its customers is year
2000 compliant and it is not dependent on its customers implementing the
systems and programming changes necessary to handle the year 2000.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for year 2000 compliance. It is
anticipated that all reprogramming, except for CBT Group products which will no
longer be available beginning December 31, 1999, will be complete by June 30,
1999, allowing adequate time for testing. This process includes getting
confirmations from the Company's primary vendors that plans are being
developed or are already in place to address processing transactions in the
year 2000. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be timely converted or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Financial Statements
- ---------------------------------
Report of Ernst & Young, Chartered Accountants 29
Consolidated Balance Sheets 30
Consolidated Statements of Operations 31
Consolidated Statements of Changes in Redeemable Convertible Preferred Shares and
Shareholders' Equity (Deficit) 32-34
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 36-53
</TABLE>
28
<PAGE>
Ernst & Young
Chartered Accountants
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
CBT Group PLC
We have audited the accompanying consolidated balance sheets of CBT Group PLC as
of December 31, 1996 and 1997 and the related consolidated statements of
operations, changes in redeemable convertible preferred shares and shareholders'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1997. 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 United States 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, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CBT Group PLC at December 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with United States generally accepted accounting
principles.
/s/ Ernst & Young
ERNST & YOUNG
Chartered Accountants
Dublin, Ireland
Date: January 20, 1998
29
<PAGE>
CBT GROUP PLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
At December 31 1996 1997
- -------------- ---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $11,037 $ 28,877
Short term investments 36,782 36,038
Accounts receivable, net 19,951 38,985
Inventories 319 446
Deferred tax assets, net 140 140
Prepaid expenses 3,553 3,857
------- --------
Total current assets 71,782 108,343
Intangible assets - 5,297
Property and equipment, net 6,983 9,140
Investments 4,997 200
Deferred tax assets, net 391 342
Other assets 2,875 7,999
------- --------
Total assets $87,028 $131,321
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facility and overdrafts 153 13
Accounts payable 3,770 4,107
Accrued payroll and related expenses 3,297 5,786
Other accrued liabilities 11,401 15,450
Deferred revenues 6,913 3,845
------- --------
Total current liabilities 25,534 29,201
Non Current Liabilities
Minority equity interest 16 622
Other liabilities 247 519
------- --------
Total non current liabilities 263 1,141
Shareholders' equity
Ordinary shares, IR37.5p par value: 30,000,000 shares authorized
at December 31, 1996 and 1997; issued and outstanding: 9,043,943
at December 31, 1996 and 9,910,664 shares at December 31, 1997 5,516 6,058
Additional paid-in capital 58,282 74,958
Accumulated profit (deficit) (2,926) 19,383
Cumulative translation adjustment 359 580
------- --------
Total shareholders' equity 61,231 100,979
------- --------
Total liabilities and shareholders' equity $87,028 $131,321
======= ========
</TABLE>
(see accompanying notes)
30
<PAGE>
CBT GROUP PLC
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31 1995 1996 1997
- ----------------------- ----- ---- ----
<S> <C> <C> <C>
Revenues $49,342 $73,566 $118,639
Cost of revenues 11,288 12,770 19,475
------- ------- --------
Gross profit 38,054 60,796 99,164
Operating expenses:
Research and development 6,597 11,481 19,068
Sales and marketing 20,282 30,382 47,035
General and administrative 4,325 6,379 8,012
Costs of acquisitions 198 596 1,534
------- ------- --------
Total operating expenses 31,402 48,838 75,649
------- ------- --------
Income from operations 6,652 11,958 23,515
Interest income, net 962 2,296 2,486
Net exchange gain (loss) (161) 4 112
------- ------- --------
Income before provision for income taxes 7,453 14,258 26,113
Provision for income taxes (1,424) (2,419) (3,916)
------- ------- --------
Net income $ 6,029 $11,839 $ 22,197
======= ======= ========
Net income per share -Basic $ 0.80 $ 1.34 $ 2.32
======= ======= ========
Net income per share - Diluted $ 0.68 $ 1.19 $ 2.13
======= ======= ========
Net income per equivalent ADS - Basic $ 0.20 $ 0.33 $ 0.58
======= ======= ========
Net income per equivalent ADS - Diluted $ 0.17 $ 0.30 $ 0.53
======= ======= ========
</TABLE>
(see accompanying notes)
31
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED SHARES
AND SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
-----------------------------
Redeemable Accumulated
convertible Additional profit Receivable Cumulative Total
preferred Ordinary paid-in ------ from translation shaeholders'
shares shares capital (deficit) shareholders adjustment equity (deficit)
------ ------ ------- ------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 4,736 $3,678 $12,150 $(20,725) $(396) $(89) $(5,382)
Issuance of 1,150,000 ordinary
shares under initial public
offering, net of issuance
costs of $5,197 -- 702 12,501 -- -- -- 13,203
Redemption of Series A redeemable
convertible preferred shares (2,666) 241 2,425 -- -- -- 2,666
Discount on redemption of Series A
redeemable convertible preferred
shares -- -- 1,316 -- -- -- 1,316
Cancellation of converted
Series A ordinary shares -- (241) (2,425) -- -- -- (2,666)
Conversion of Series B redeemable
convertible preferred shares (2,070) 355 1,715 -- -- -- 2,070
Issuance of 700,000 ordinary shares
under secondary public offering,
net of issuance costs of $2,913 -- 408 27,654 -- -- -- 28,062
Issuance of 170,598 ordinary shares
as a result of option exercises,
net of issuance costs of $58 -- 105 531 -- -- -- 636
Issuance of 17,480 ordinary shares
as a result of pooling Benelux -- 10 11 -- -- -- 21
Received from shareholders -- -- -- -- 217 -- 217
Translation adjustment -- -- -- -- -- 90 90
Exchange adjustment -- -- -- -- (11) -- (11)
Adjustment to record the overlap
in accounting for Personal Training
Systems' net income from January 1,
1995 to June 30, 1995 -- -- -- (69) -- -- (69)
Net income -- -- -- 6,029 -- -- 6,029
-------- ------- -------- --------- ------ ----- --------
Balance at December 31, 1995 $ -- $5,258 $55,878 $(14,765) $(190) $ 1 $46,182
</TABLE>
(see accompanying notes)
32
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED SHARES
AND SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
-----------------------------
Redeemable
convertible Additional Receivable Cumulative Total
preferred Ordinary paid-in Accumulated from translation shareholders'
shares shares capital profit (deficit) shareholders adjustment equity (deficit)
----------- -------- ----------- ---------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $5,258 $55,878 $(14,765) $(190) $ 1 $46,182
Issuance of 9,408 ordinary
shares as a result of
pooling Scholars.com -- 5 (5) -- -- -- --
Issuance of 387,045
ordinary shares as a
result of option exercises
and 34,895 from employee
share purchase plan -- 253 2,409 -- -- -- 2,662
Received from shareholders -- -- -- -- 190 -- 190
Translation adjustment -- -- -- -- -- 358 358
Net income -- -- -- 11,839 -- -- 11,839
---- ------ -------- -------- ----- ---- -------
Balance December 31, 1996 $ -- $5,516 $58,282 $ (2,926) $ -- $359 $61,231
</TABLE>
(see accompanying notes)
33
<PAGE>
CBT GROUP PLC
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED
SHARES AND SHAREHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------
Redeemable
convertible Additional Receivable Cumulative Total
preferred Ordinary paid-in Accumulated from translation shareholders'
shares shares capital profit (deficit) shareholders adjustment equity (deficit)
----------- -------- ---------- ---------------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996 $ -- $5,516 $58,282 $(2,926) $ -- $359 $ 61,231
Issuance of 64,500
ordinary shares as a
result of pooling MidEast -- 37 370 -- -- -- 407
Issuance of 779,348 ordinary
shares as a result of
option exercises and 22,873
from employee share purchase
plan -- 505 15,481 -- -- -- 15,986
Taxation credit as a result
of disqualifying
dispositions -- -- 825 -- -- -- 825
Translation adjustment -- -- -- -- -- 221 221
Adjustment to record the
overlap in accounting for
ALA's net loss from
January 1, 1997 to June 30,
1997 -- -- -- 112 -- -- 112
Net income -- -- -- 22,197 -- -- 22,197
----------- ------ ------- ------- ------------ ----------- --------
Balance at December 31, 1997 $ -- $6,058 $74,958 $19,383 $ -- $580 $100,979
=========== ====== ======= ======= ============ =========== ========
</TABLE>
(see accompanying notes)
34
<PAGE>
<TABLE>
<CAPTION>
CBT GROUP PLC
Consolidated Statements of Cash Flows
(dollars in thousands)
Increase (decrease) in cash
Years ended December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,029 $11,839 $ 22,197
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 874 1,882 3,122
Taxation credit from disqualifying dispositions -- -- 825
Overlap in accounting for ALA net loss, excluding depreciation -- -- (67)
Overlap in accounting for PTS' net income, excluding depreciation (108) --
Accrued interest on short-term investments (469) 221 (465)
Changes in operating assets and liabilities:
Accounts receivable (6,218) (4,753) (19,546)
Inventories 185 45 (170)
Deferred tax assets (64) (132) 49
Prepaid expenses and other assets (777) (3,732) (5,501)
Accounts payable 1,070 1,013 185
Accrued payroll and related expenses and other accrued 2,726 2,780 7,175
liabilities
Deferred revenue 1,234 1,865 (3,195)
-------- ------- --------
Net cash provided by operating activities 4,482 11,028 4,609
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of intangible assets -- -- (5,297)
Purchases of property and equipment (1,894) (6,369) (5,279)
Payments to acquire short -term investments (40,200) (1,334) (2,291)
Proceeds from short-term investments -- 5,000 3,500
Proceeds from investments -- -- 4,997
Payment to acquire investment -- (4,997) (200)
-------- ------- --------
Net cash used in investing activities (42,094) (7,700) (4,570)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of notes payable (1,325) (79) --
Redemption of Series A shares (1,350) -- --
Proceeds (repayments) under bank overdraft facility 671 (1,381) (140)
Repayments of bank loan -- (742) --
Payment of receivables from shareholders 217 190 --
Proceeds from issuance of preferred shares in subsidiary -- -- 606
Proceeds from issuance of ordinary shares, net 41,901 2,662 16,393
-------- ------- --------
Net cash provided by financing activities 40,114 650 16,859
-------- ------- --------
Effect of exchange rate changes on cash 74 (135) 942
-------- ------- --------
Net increase in cash 2,576 3,843 17,840
Cash at beginning of period 4,618 7,194 11,037
-------- ------- --------
Cash at end of period $ 7,194 $11,037 $ 28,877
======== ======= ========
Supplemental disclosure of cash flow information:
Interest paid $ 84 $ 108 $ 43
Taxes paid $ 1,098 $ 847 $ 994
</TABLE>
(see accompanying notes)
35
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
CBT Group PLC is organized as a public limited company under the laws of the
Republic of Ireland. CBT Group PLC and its wholly owned subsidiaries
(collectively, the "Company" or "CBT") develops and markets interactive
information technology ("IT") education and training software. The principal
market for the Company's products comprises major U.S. national and
multinational organizations.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States and include the Company and
its wholly owned subsidiaries in the United States, United Kingdom, Ireland,
South Africa, Canada, Germany, Australia, Netherlands, Sweden, the Commonwealth
of the Bahamas and Grand Cayman after eliminating all material inter-company
accounts and transactions. All acquisitions have been accounted for under the
purchase accounting method, except for the mergers with Personal Training
Systems ("PTS"), CBT Systems Canada Limited (formerly known as New Technology
Training Limited) ("NTT"), CLS Consult Gessellschaft fur Beratung, Management
und Beteiligung mbH ("CLS"), CBT Systems Benelux B.V. ("Benelux"), Applied
Learning Limited ("ALA"), Ben Watson & Associates Limited ("Scholars.com") and
CBT Systems Middle East Limited ("MidEast") which have been included in the
consolidated financial statements under the pooling of interests method (see
note 3).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Translation of Financial Statements of Foreign Entities
The reporting currency for the Company is the U.S. dollar ("dollar"). The
functional currency of the Company's subsidiaries in the United States, United
Kingdom, Republic of South Africa, Canada, Germany, Australia, the Netherlands
and Sweden are the currencies of those countries. The functional currency of
the Company's subsidiaries in Ireland, the Commonwealth of the Bahamas and Grand
Cayman is the dollar.
Balance sheet amounts are translated to the dollar from the local functional
currency at year-end exchange rates, while statements of operations amounts in
local functional currency are translated using average exchange rates.
Translation gains or losses are recorded in a separate component of
shareholders' equity. Currency gains or losses on transactions denominated in a
currency other than an entity's functional currency are recorded in the results
of the operations. The Company has not undertaken hedging transactions to cover
its currency exposures.
Revenue Recognition
The Company derives its revenues primarily pursuant to license agreements under
which customers license usage of delivered products for a period of one, two or
three years. On each anniversary date during the term of multiyear license
agreements, customers are allowed to exchange any or all of the licensed
products for an equivalent amount of new products. The first year license fee
is generally recognized as revenue at the time of delivery of all products,
provided there are no significant vendor obligations remaining. Subsequent
annual license fees are recognized on each anniversary date, provided there are
no remaining significant vendor obligations. The cost of satisfying any
insignificant vendor obligations is accrued at the time revenue is recognized.
In addition, the Company derives revenues from sales of its products, primarily
through resellers.
Revenues from product development arrangements are generally recognized on a
percentage of completion basis as milestones are completed or products produced
under the arrangement.
36
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues from license agreements providing product exchange rights other than
annually during the term of the agreement are deferred and recognized ratably
over the contract period. Such amounts, together with unearned development and
license revenues, are recorded as deferred revenues in the consolidated
financial statements.
Cost of Revenues
Cost of revenues include materials (such as diskettes, packaging and
documentation), royalties paid to third parties, the portion of development
costs associated with product co-development arrangements, fulfillment costs and
the amortization of the cost of purchased products. Approximately $245,000,
$803,000 and $442,000 of development expenses incurred in connection with
development and marketing alliances were charged to cost of revenues in 1995,
1996 and 1997, respectively.
Inventories
Inventories are stated at the lower of cost (first in, first out) or net
realizable value and consist principally of compact discs, diskettes and
manuals. Net realizable value is the estimated selling price less all
applicable selling costs.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Development costs incurred by the Company between completion
of the working model and the point at which the product is ready for general
release have been insignificant. Through December 31, 1997, all research and
development costs have been expensed as incurred.
Intangible Fixed Assets
In December 1997 the Company and Street Technologies, Inc. ("Street") a
developer of technology to "stream" multimedia and other large data files to
permit real-time delivery over local and wide area networks, corporate intranets
and the Internet, entered into an agreement pursuant to which Street granted to
the Company a perpetual license to its software in return for a once off
payment of $5,297,000. As part of the agreement the Company disposed of its
investment in Street for $4,997,000, which was the cost of its original
investment. The Company will commence to amortize this asset, using the
straight line method, over a period of five years commencing January 1, 1998.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of two to
five years. Major classes of property and equipment are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Office and computer equipment $ 8,450 $12,624
Furniture, fixtures and others 2,749 3,171
------- -------
Total property and equipment 11,199 15,795
Accumulated depreciation 4,216 6,655
------- -------
Property and equipment, net $ 6,983 $ 9,140
======= =======
</TABLE>
Depreciation of property and equipment amounted to $874,000, $1,882,000, and
$3,122,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
37
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share," which is
effective for the Company's fiscal 1997 year. Under SFAS 128, the Company will
present two net income per share amounts. Basic net income per share is
computed using the weighted average number of ordinary shares outstanding during
the period. Diluted net income per share will include additional dilution from
potential ordinary shares, such as incremental ordinary shares issuable upon
conversion of the Series A and Series B redeemable convertible preferred shares
and shares issuable pursuant to the exercise of options outstanding (using the
treasury stock method). All prior period net income per share amounts have been
restated to conform with SFAS 128.
On January 20, 1998 the Company announced that its Board of Directors had
authorized a two-for-one split of the company's American Depositary Shares. Each
Ordinary Share is now represented by four (previously two) American Depositary
Shares ("ADSs") which are the Company's securities that are publicly traded. Net
income per Ordinary Share is therefore, within rounding, four times net income
per equivalent ADS.
Basic net income per equivalent ADS is therefore calculated using four times the
weighted average number of ordinary shares outstanding during the period.
Diluted net income per equivalent ADS is similarly calculated using four times
the weighted average number of ordinary and dilutive ordinary equivalent shares
outstanding during the period. All other period net income per equivalent ADS
amounts have been restated to give effect to the ADS split.
Basic net income per share is calculated using the combined weighted average
number of ordinary shares of the Company including the issuance of 106,057
shares of Company ordinary shares in exchange for all of the stock of PTS, the
issuance of 36,401 shares of Company ordinary shares in exchange for all the
stock of CLS, the issuance of 36,531 shares of Company ordinary shares in
exchange for all the stock of NTT, the issuance of 85,771 shares of Company
ordinary shares in exchange for all the stock of ALA, the issuance of 17,840
shares of Company ordinary shares in exchange for all the stock of Benelux, the
issuance of 9,408 shares of Company ordinary shares in exchange for all the
stock of Scholars.com and the issuance of 64,500 shares of Company ordinary
shares in exchange for all the stock of MidEast at the beginning of the earliest
period presented or subsequent date of incorporation of the pooled entity as
applicable.
Diluted net income per share is similarly calculated using the combined weighted
average number of ordinary and dilutive ordinary equivalent shares of the
Company including the issuance of Company ordinary shares as a result of pooling
of interests above.
Defined Contribution Plan
The Company sponsors and contributes to a defined contribution plan for certain
employees and directors. Contribution amounts by the Company are determined by
management and allocated to employees on a pro rata basis based on the
employees' contribution. The Company contributed approximately $164,000,
$232,000 and $270,000 to the Plan in the years ended December 31, 1995, 1996 and
1997, respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock -
Based Compensation" encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25,
38
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
"Accounting for Stock Issued to Employees" ("APB25"), and related
interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Under APB25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. Advertising expenses amounted to $729,000, $1.3 million and $5.1
million for the years ended December 31, 1995, 1996 and 1997 respectively.
Research and Development Grants
Research and development grants are credited to the income statement and offset
against the related expense.
Concentration of Credit Risk
The principal market for the Company's products comprises major U.S. national
and multi-national organizations. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
To date such losses have been within management's expectations. The Company had
an allowance for doubtful accounts of $588,000 and $900,000 at December 31, 1996
and 1997, respectively. The Company generally requires no collateral from its
customers.
The Company maintains its cash with various financial institutions. At December
31, 1996 and 1997 $36,782,000 and $36,038,000 respectively (inclusive of accrued
interest of $248,000 and $713,000 respectively) was held in debt securities
issued by the U.S. Treasury, under the management of a single financial
institution. In addition, at December 31, 1996 and 1997, $927,000 and $213,000
respectively in cash was held with this institution. The Company also maintains
deposits with another financial institution. Cash balance held with this
institution at December 31, 1996 and 1997 was $nil and $11.1 million
respectively. The Company performs periodic evaluations of the relative credit
standing of all the financial institutions dealt with by the Company, and
considers the related credit risk to be minimal.
Accounting for Income Taxes
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws which will be in effect
when the differences are expected to reverse.
Short-Term Investments
Short-term investments at December 31, 1996 and 1997 comprise debt securities
issued by the U.S. Treasury with a maturity of six months or less at the date of
acquisition by the Company. These are included at cost plus accrued interest
which approximates the fair market value of the securities. The Company
classifies available for sale securities as short-term investments.
Other Assets
Other assets at December 31, 1996 and 1997 consist primarily of deferred sales
commissions. Deferred sales commissions are charged to expense when the related
revenue is recognized.
39
<PAGE>
CBT GROUP PLC
Notes to the Consolidated Financial Statements
2. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
1995 1996 1997
- -----------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted
net income per share - income
available to common shareholders $ 6,029 $11,839 $22,197
======= ======= =======
Denominator:
Denominator for basic net income
per share - weighted average shares 7,518 8,848 9,560
Effect of dilutive securities:
Employee stock options 1,059 1,130 867
Equivalent shares attributable to redeemable
convertible preferred shares 265 - -
------- ------- -------
Dilutive potential common shares 1,324 1,130 867
Denominator for diluted net income
per share - adjusted weighted average
shares and assumed conversion 8,842 9,978 10,427
======= ======= =======
Basic net income per share $ 0.80 $ 1.34 $ 2.32
======= ======= =======
Diluted net income per share $ 0.68 $ 1.19 $ 2.13
======= ======= =======
ADS's used in computing net income per equivalent
ADS - Basic 30,070 35,391 38,240
======= ======= =======
ADS's used in computing net income per equivalent
ADS - Diluted 35,366 39,912 41,708
======= ======= =======
</TABLE>
40
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
3. ACQUISITIONS AND MERGERS
On November 30, 1995, a merger occurred between the Company and PTS under which
the Company issued 106,057 ordinary shares in exchange for all the outstanding
stock of PTS.
On May 31, 1996, a merger occurred between the Company and CLS, a distributor of
multimedia training and education software based in Germany, under which the
Company issued 36,401 ordinary shares for all the outstanding stock of CLS. On
the same date a merger occurred between the Company and NTT, the Company's
Canadian distributor, under which the Company issued 36,531 ordinary shares for
all the outstanding stock of NTT.
On February 28, 1997, a merger occurred between the Company and ALA, a
distributor of multimedia training and education software based in Australia,
under which the Company issued 85,771 ordinary shares for all the outstanding
stock of ALA. On the same date a merger occurred between the Company and
Benelux, the Company's Benelux distributor, under which the Company issued
17,840 ordinary shares for all the outstanding stock of Benelux.
On August 31, 1997, a merger occurred between the Company and Scholars.com, a
provider of online mentoring, under which the Company issued 9,408 ordinary
shares for all the outstanding stock of Scholars.com.
On December 1, 1997, a merger occurred between the Company and MidEast, the
Company's Middle Eastern distributor, under which the Company issued 64,500
ordinary shares for all the outstanding stock of MidEast. The financial results
of the Company, PTS, CLS, NTT, ALA, Benelux, Scholars.com and MidEast have been
accounted for using the "pooling-of-interests" method. The "pooling-of-
interests" method gives effect to the mergers as if they had occurred at the
beginning of the earliest period presented or subsequent date of incorporation
of the pooled entity as applicable. The consolidated financial statements as
presented are based on the Company's historical consolidated financial
statements and PTS's, CLS's, NTT's ALA's, Benelux's, Scholars.com's and
MidEast's historical financial statements.
The consolidated financial information for the year ended December 31, 1997
includes the results of the Company and PTS, CLS, NTT, ALA, Benelux,
Scholars.com, and MidEast (from the date of its incorporation), for the period
January 1 to December 31, 1997 and the assets and liabilities of the Company and
PTS, CLS, NTT, ALA, Benelux, Scholars.com, and MidEast as at December 31, 1997.
The comparative figures for the year ended December 31, 1996 comprise the
results of the Company and PTS, CLS, NTT, Benelux and Scholars.com for that
period combined with the results of ALA for the year ended June 30, 1997 and the
assets and liabilities of the Company and PTS, CLS NTT, Benelux, and
Scholars.com as at December 31, 1996 combined with the assets and liabilities of
ALA as at June 30, 1997. The comparative figures for the year ended December
31, 1995 comprise the results of the Company and PTS, CLS, NTT, and Benelux
(from the date of its incorporation) for that period combined with the results
of ALA for the year ended June 30, 1996.
ALA and Benelux, in the two month period ended February 28, 1997 had net
revenues of $1,094,315 and $374,390 respectively. Net income in that period was
$123,642 and $21,190, respectively.
Scholars. com, in the eight month period ended August 31, 1997 had net revenues
of $1,293,518. Net income in that period was $111,418.
MidEast was established in April 1997 and in the period to December 1, 1997 had
net revenues of $225,171. The net loss in the period was $532,046.
PTS's results of operations for the six month period ended June 30, 1995, which
reflected net revenues of $1,470,000, expenses of $1,385,000 and net income of
$69,000, have been duplicated in the accompanying 1995 Financial Statements to
conform operating results to the Company's fiscal year end. The duplicate
periods have been adjusted by including the net income as a decrease to the
Company's accumulated deficit as of December 31,1995.
41
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
3. ACQUISITIONS AND MERGERS (continued)
ALA's results of operations for the six month period ended June 30, 1997 which
reflected net revenues of $2,991,712, expenses of $3,104,193 and a net loss of
$112,481 have been duplicated in the accompanying 1997 Financial Statements to
conform operating results to the Company's fiscal year end. The duplicate
periods have been adjusted by including the net loss as an increase to the
Company's accumulated profit as of December 31,1997.
The results of the operations for the enterprises acquired in 1997 and the
combined amounts presented in the consolidated financial statements are
summarized below (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
CBT Group PLC $40,192 $66,324 $105,239
Pooled entities 9,179 7,817 14,299
Intercompany Sales (29) (575) (899)
------- ------- --------
Combined $49,342 $73,566 $118,639
======= ======= ========
Net income:
CBT Group PLC $ 5,574 $12,573 $ 22,489
Pooled entities 455 (734) (292)
------- ------- --------
Combined $ 6,029 $11,839 $ 22,197
======= ======= ========
</TABLE>
4. BANK OVERDRAFT FACILITY AND OVERDRAFTS
The Company has a bank overdraft facility with AIB Bank PLC. This facility is
renewable on an annual basis at the bank's discretion. Under the facility the
Company may incur overdrafts with the bank up to IR195,000 (approximately
$278,000 at December 31, 1997), with a variable interest rate based on the
Dublin Inter-Bank Overnight Rate ("DIBOR") plus five percent (10.4 percent at
December 31, 1997). This facility is collateralized by the assets of CBT
Systems Limited, a wholly owned subsidiary of CBT Group PLC. The Company's UK
subsidiary also has an arrangement with its bank which allows the subsidiary to
maintain funds in a deposit account and to have the bank transfer the funds as
necessary to pay checks written against a checking account with the same bank.
At December 31, 1996 and 1997 the subsidiary had written no checks in excess of
the balance in the checking account.
PTS had available a $400,000 line of credit which expired on January 12, 1996.
The line bore interest at the bank's prime rate plus 2%. No amount was drawn
against this line of credit during 1996.
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Royalties $ 2,912 $ 3,305
Income and other taxes payable 3,237 6,467
Other 5,252 5,678
------- -------
$11,401 $15,450
======= =======
</TABLE>
42
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
6. OPERATING LEASE COMMITMENTS
The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, (except for CBT Systems Limited's new premises which has
a non-cancellable lease term of 11 years) and generally provide renewal options
for terms of up to 3 additional years. Rent expense under all operating leases
was approximately $1,405,000, $2,012,000 and $2,199,000 in 1995, 1996 and 1997,
respectively. Future minimum lease payments under these non-cancellable
operating leases as of December 31, 1997, are as follows (dollars in thousands):
<TABLE>
<S> <C> <C>
1998 $ 3,164
1999 2,807
2000 2,639
2001 1,685
2002 1,469
Thereafter 3,527
-------
Total minimum lease payments $15,291
=======
</TABLE>
7. CONTINGENCIES
In May 1995, the Company was made aware of the following matter. During 1990,
the Company acquired an interest in Datacode Electronics Limited ("Datacode").
Certain of the remaining shareholders in Datacode have alleged that the
acquisition by the Company had the effect of depriving them of certain benefits
and have claimed 21,126 of the Company's ordinary shares in compensation and
have initiated legal action against the Company. The Company believes that the
action taken against the Company with respect to this matter is without merit
and intends to defend the action vigorously.
A major shareholder in the Company at the time of the acquisition and from whom
the Company acquired its interest in Datacode has agreed to indemnify the
Company against all losses arising from any action against the Company.
In addition, certain claims and litigation have arisen against the Company in
the ordinary course of its business. The Company believes that all claims and
lawsuits against the Company are without merit, and the Company intends to
vigorously contest such disputes. In the opinion of management, the outcome of
such disputes will not have a material effect on its financial position, results
of operations or liquidity, as reported in these financial statements.
Depending on the amount and timing of any unfavorable resolution of these
matters, it is possible that the Company's future results of operations or cash
flows could be materially affected in a particular period.
8. NOTES PAYABLE TO SHAREHOLDERS
In conjunction with the acquisition of certain of its wholly owned subsidiaries
in 1991, the Company assumed non-interest bearing liabilities of certain of the
subsidiaries due to the subsidiaries' former parent. The original terms of the
liability provided for monthly repayments commencing in 1992. The repayment
terms were altered in July 1993. In October 1994, the liability totaled
approximately $1,450,000. At that time, the Company renegotiated the terms of
the liability into a non-interest bearing note payable under which payments of
approximately $250,000 were made during the remainder of 1994 and the balance of
$1,226,000 was repaid in four quarterly installments of approximately $306,000
beginning on March 31, 1995 through December 31, 1995.
43
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY
Prior to 1995, the Company's authorized share capital was divided into three
classes of shares, Series A and Series B redeemable convertible preferred
shares and ordinary shares, each with a par value of IR37.5p.
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. Any dividends, if and
when declared, will be declared and paid in dollars. No reserves are available
for distribution as dividends at December 31, 1997.
Redeemable convertible preferred shares
In November 1994, CBT Systems Limited, a subsidiary of the Company, agreed to
repurchase the Series A redeemable convertible preferred shares ("Series A
shares") for a consideration contingent on the date of repurchase.
At March 31, 1995, CBT Systems Limited exercised its right to purchase the
Series A shares for $1.35 million. The purchase of the shares was paid for from
the proceeds of the initial public offering. The converted Series A shares were
subsequently converted to treasury shares and cancelled in April 1995.
The Series B redeemable convertible preferred shares ("Series B shares")
automatically converted into ordinary shares on a one-for-one basis, on the
closing of the initial public offering on April 21, 1995.
Share Option Plans
The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company has three share option plans, the 1990 Share Option Scheme (the
"1990 Plan"), the 1994 Share Option Plan (the "1994 Plan") and the Supplemental
Share Option Scheme (the "1996 Plan"), (collectively the "Plans").
Under the 1990 Plan, options to acquire ordinary shares in the Company may be
granted to any director or employee of the Company. Under the 1994 Plan, all
employees and directors of the Company and any independent contractor who
performs services for the Company are eligible to receive grants of non
statutory options ("NSO"). Employees are also eligible to receive grants of
incentive share options ("ISO") which are intended to qualify under section 422
of the United States Internal Revenue Code of 1986, as amended. Under the 1996
Plan all employees, with the exception of directors and executive officers, are
eligible to receive grants of NSO's. As of December 31, 1997, approximately
1,175,000, 1,560,751 (which includes an increase in the number of shares
reserved for issuance of 464,905, authorized by a resolution passed at the
Annual General Meeting of the Company on June 17, 1997) and 250,000 ordinary
shares have been reserved for issuance under the 1990 Plan, the 1994 Plan and
1996 Plan, respectively. The Plans are administered by the Stock Option
Committee (the "Committee").
The terms of the options granted are generally determined by the Committee. The
exercise price of options granted under the 1990 Plan and ISO's granted under
the 1994 Plan cannot be less than the fair market value of ordinary shares on
the date of grant. In the case of ISO's granted to holders of more than 10% of
the voting power of the Company the exercise price cannot be less than 110% of
such fair market value. Under the 1994 Plan, the exercise price of NSO's is set
by the Committee at its discretion. The term of an option under the 1994 and
1996 Plans cannot exceed ten years and, generally, the terms of an option under
the 1990 Plan cannot exceed ten years. The term of an ISO granted to a holder
of more than 10% of the voting power of the Company cannot exceed five years.
An option may not be exercised unless the option holder is at the date of
exercise, or within three months of the date of exercise has been, a director,
44
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY (continued)
employee or contractor of the Company. There are certain exceptions for
exercises following retirement or death. Options under the Plans generally
expire not later than 90 days following termination of employment or service or
six months following an optionees' death or disability.
In the event that options under the Plans terminate or expire without having
been exercised in full, the shares subject to those options are available for
additional option grants. Vesting periods of the options are determined by the
Committee and are currently for periods of up to four years. Under the 1990,
1994 and 1996 Plans, options to purchase approximately 122,746, 154,929 and
1,276 shares respectively were exercisable as of December 31, 1997. As of
December 31, 1997, 611,146 options are available for grant under the plans.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995, 1996 and
1997, respectively; risk-free interest rates of approximately 6%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
ordinary shares of .39,.37 and .45 respectively; and a weighted-average
expected life of the option of five years.
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options 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 the management's opinion, the
existing models do not provide a reliable single measure of the fair value of
its stock options.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
Pro forma net income for the years ended December 31, 1995, 1996 and 1997 was
$5.1, $5.9 million and $14.7 million, respectively. Pro forma basic net income
per share was $0.68, $0.67 and $1.54 for the years ended December 31, 1995, 1996
and 1997, respectively. Pro forma diluted net income per share was $0.58, $0.60
and $1.41 for the years ended December 31, 1995, 1996 and 1997, respectively.
Because options vest over several years and additional grants are expected, the
effects of these hypothetical calculations are not likely to be representative
of similar future calculations.
45
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY (continued)
A summary of the Company's stock option activity, and related information for
the years ended December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
Options Outstanding
Price Weighted Average
Number of Shares per Share Exercise Price
---------------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1994 922,932 $ 0.58 - 5.63 $ 1.55
Granted in 1995 397,537 $16.00 - 45.13 $22.72
Exercised in 1995 (131,066) $ 0.58 - 3.37 $ 0.59
Cancelled in 1995 (1,373) $ 3.37 $ 3.37
--------- --------------- ------
Balance at December 31, 1995 1,188,030 $0.58 - 45.13 $ 8.68
Granted in 1996 764,999 $45.25 - 116.00 $61.45
Exercised in 1996 (387,045) $ 0.58 - 110.00 $ 3.90
Cancelled in 1996 (24,525) $ 2.02 - 110.00 $24.61
--------- --------------- ------
Balance at December 31, 1996 1,541,459 $ 0.58 - 116.00 $35.81
Granted in 1997 370,604 $81.00 - 139.00 $95.00
Exercised in 1997 (779,348) $ 0.58 - 114.25 $18.34
Cancelled in 1997 (35,448) $10.71 - 102.50 $51.16
--------- --------------- ------
Balance at December 31, 1997 1,097,267 $ 1.58 - 139.00 $67.95
--------- --------------- ------
</TABLE>
46
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Options Outstanding
At December 31, 1997 Options Exercisable
---------------------------------------------------------------------------------------------------------
Weighted Average
Range of Exercise Shares Remaining Weighted Average Weighted Average
Prices Outstanding Contractual Life Exercise Price Number of Shares Exercise Price
- ----------------- ----------- ------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.58 - 3.37 1,707 6.49 $ 1.67 1,707 $ 1.72
$5.63 - 10.71 16,849 6.46 $ 5.68 3,456 $ 5.80
$16.00 - 16.00 95,431 7.28 $ 16.00 63,183 $ 16.00
$45.13 - 45.13 40,003 7.84 $ 45.13 1,669 $ 45.13
$45.25 - 53.25 264,585 8.04 $ 45.31 134,477 $ 45.28
$68.00 - 77.00 91,120 8.30 $ 68.87 18,497 $ 68.99
$78.50 - 78.50 207,500 8.56 $ 78.50 50,885 $ 78.50
$81.00 - 91.50 261,747 5.40 $ 81.20 1,932 $ 85.18
$102.50-110.00 9,875 9.05 $103.22 1,895 $103.30
$116.00-139.00 108,450 9.64 $131.38 1,250 $116.00
- -------------- --------- ---- ------- ------- -------
$1.58 - 139.00 1,097,267 7.60 $ 67.95 278,951 $ 46.52
- -------------- --------- ---- ------- ------- -------
</TABLE>
At December 31, 1995 and 1996 there were 648,541 and 678,997 options
exercisable, respectively, at a weighted average exercise price of $1.22 and
$12.51 respectively. The weighted average fair value of options granted during
the years ended December 31, 1995, 1996 and 1997 was $9.84, $25.97 and $43.45,
respectively.
<TABLE>
<CAPTION>
Other Options Options Outstanding
Weighted Average Exercise
Number of Shares Share Price Price
---------------- ----------- -----
<S> <C> <C> <C>
Granted in 1994 46,666 $1.58 $1.58
Exercised in 1996 (6,666) $1.58 $1.58
Cancelled in 1996 (13,000) $1.58 $1.58
------- ----- -----
Balance at December 31, 1997 27,000 $1.58 $1.58
------- ----- -----
</TABLE>
In November 1996, the Company granted to Forbairt, in conjunction with their
approval of an employment grant, a rent reduction grant and a management
development grant, an option to purchase 2,500 ordinary shares with an exercise
price equal to the fair market value at the time of exercise. The option expires
at December 31, 1998.
47
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
10. INCOME TAXES
Income before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31
------------
(dollars in thousands) 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Ireland $6,308 $12,264 $22,517
Rest of world 1,145 1,994 3,596
------ ------- -------
Total $7,453 $14,258 $26,113
====== ======= =======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<S> <C> <C> <C>
Current $1,486 $2,161 $3,916
Deferred (62) 258 --
------ ------ ------
Total provision for income tax $1,424 $2,419 $3,916
====== ====== ======
</TABLE>
The current provision for 1997 relates predominantly to provision for income
taxes in Ireland and includes an adjustment at the beginning of the year to
valuation allowance of $402,000.
The provision for income taxes differs from the amount computed by applying the
statutory income tax rate to income before taxes. The sources and tax effects
of the difference are as follows:
<TABLE>
<CAPTION>
December 31,
-----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
(dollars in thousands)
Income taxes computed at the Irish statutory income $ 2,869 $ 5,418 $ 9,531
tax rate of 38.5% for 1995, 38% for 1996, and 36.5%
for 1997
Income from Irish manufacturing operations taxed at
lower rates (1,804) (3,815) (7,143)
Income subject to higher rate of tax 542 1,099 1,780
Operating losses not utilized 129 1,261 347
Operating losses utilized (136) (554) (876)
Intangible asset amortization and other 53 (461) 662
non-deductible expenses
Change in valuation allowance - 242 402
Profits arising not subject to tax (229) (771) (787)
------- ------- -------
$ 1,424 $ 2,419 $ 3,916
======= ======= =======
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following:
48
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
10. INCOME TAXES (continued)
<TABLE>
<CAPTION>
December 31,
1996 1997
---- ----
<S> <C> <C>
(dollars in thousands)
Deferred tax assets
Net operating loss carry forwards $ 3,568 $ 15,151
Valuation allowance (3,037) (14,669)
------- --------
Net deferred tax assets $ 531 $ 482
======= ========
</TABLE>
At January 1, 1996 the valuation allowance was $750,000.
At December 31, 1997, the Company had net operating loss carry forwards in its
UK subsidiary of approximately $1,266,000. The utilization of these net
operating loss carry forwards is limited to the future profitable operations of
the Company in the UK tax jurisdiction where such carry forwards arose. These
losses carry forward indefinitely.
At December 31, 1997, the Company has a net operating loss carry forward of
approximately $37 million for U.S. federal income tax purposes which will expire
in the tax years 2010 through 2012 if not previously utilized. Utilization of
the U.S. net operating loss carry forward may be subject to an annual limitation
due to the change in ownership rules provided by the Internal Revenue Code of
1986. This limitation and other restrictions provided by the Internal Revenue
Code of 1986 may reduce the net operating loss carry forward such that it would
not be available to offset future taxable income of the U.S. subsidiary.
The net operating loss carry forwards in the United States result from
disqualifying dispositions. The tax value of the disqualifying dispositions has
not been recognized in the tax reconciliation note as it is not expected that it
will reverse. At December 31, 1997, $13.7 million of the valuation allowance
related to such disqualifying dispositions. As noted in the tax reconciliation
note the valuation allowance has increased by $402,000 in respect of other net
operating loss carry forwards.
11. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate in one industry segment, the
development and marketing of interactive education and training software.
Operations outside of Ireland consist principally of sales and marketing.
Transfers between geographic areas are accounted for at amounts which are
generally above costs. Such transfers are eliminated in the consolidated
financial statements. Identifiable assets are those assets that can be directly
associated with a particular geographic area. The following is a summary of
operations within geographic areas:
<TABLE>
<CAPTION>
December 31,
-----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
(dollars in thousands)
Revenue from unaffiliated customers
Ireland $ 8 $ 774 $ 1,079
Europe, excluding Ireland 9,051 13,557 19,218
United States 29,380 49,312 83,572
Australia 9,112 6,757 7,897
Other 1,791 3,166 6,873
------- ------- --------
Total revenue $49,342 $73,566 $118,639
======= ======= ========
</TABLE>
49
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
11. INDUSTRY AND GEOGRAPHIC INFORMATION (continued)
<TABLE>
<CAPTION>
December 31,
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
(dollars in thousands)
Transfers between geographic areas (eliminated on
consolidation)
Ireland $18,018 $ 31,732 $ 57,708
Europe, excluding Ireland 29 120 940
United States 450 -- 529
Australia -- -- --
Other -- -- --
------- -------- ---------
Total transfers $18,497 $ 31,852 $ 59,177
======= ======== =========
Income from operations
Ireland $ 6,373 $ 12,266 $ 22,419
Europe, excluding Ireland (1,093) (1,066) (144)
United States 328 1,068 1,793
Australia 1,000 (116) (312)
Other 44 (194) (241)
------- -------- ---------
Income from operations $ 6,652 $ 11,958 $ 23,515
======= ======== =========
Identifiable assets
Ireland $ 88,130 $ 127,786
Europe, excluding Ireland 7,689 13,189
United States 28,648 53,709
Australia 2,627 2,959
Grand Cayman 42,709 50,860
Other 1,999 5,165
Eliminations (84,774) (122,347)
-------- ---------
$ 87,028 $ 131,321
======== =========
</TABLE>
12. GOVERNMENT GRANTS
Under agreements between the Company and Forbairt, the Company has offset
against related salary and rent expense amounts of $nil, $598,000 and $1,021,000
in the years ended December 31, 1995, 1996 and 1997, respectively. Under the
terms of the agreement between the Company and Forbairt, these grants may be
revoked in certain circumstances, principally failure to maintain the related
jobs for a period of five years from the payment of the first installment of the
related grant. The Company has complied with the terms of the grant agreements
through December 31, 1997.
13. RELATED PARTY TRANSACTION
Ownership of CBT Technology
Approximately 9% of the outstanding share capital of CBT (Technology) Limited
("CBT T"), one of the Company's Irish subsidiaries, representing a special non-
voting class, is owned by Stargazer Productions ("Stargazer"), an unlimited
company which is wholly-owned by officers and key employees of the Group. CBT T
has in the past and may in the future declare and pay dividends to Stargazer,
and Stargazer may pay dividends to its shareholders out of such amounts.
50
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
13. RELATED PARTY TRANSACTIONS (continued)
Loan to Director
In February 1996, Mr. Priest, a director of the Company and former Vice
President, Finance and Chief Financial Officer of the Company, received an
interest free loan from the Group in the amount of US$125,000 repayable in four
equal annual installments. At December 31, 1996 and 1997 the balance
outstanding on this loan was $125,000 and $93,750, respectively.
14. SUBSEQUENT EVENTS
New Research and Development Facility
On January 6,1998, the Company signed a twenty-five year lease, with a ten year
break clause, for new premises, in Dublin, at an annual rent of $1.4 million.
15. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, The American Institute of Certified Public Accountants issued Statement
of Position 97 -2 ("SOP 97-2"), "Software Revenue Recognition". The Company
has considered SOP 97-2 and concluded that it has no material effect on the
Company's current revenue recognition policy.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131 (SFAS 131) "Disclosures about Segments of
an Enterprise and Related Information." Companies are required to adopt SFAS
131 for fiscal years beginning after December 15, 1997. The Company is not
required to disclose this segment information until its 1998 annual report, at
which time it will restate prior year's segment disclosures to conform with SFAS
131 segment presentation. The Company has not completed its review of SFAS 131,
but anticipates that the adoption of this statement will not have a fundamental
effect on the Company's reported segments.
16. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT - UNAUDITED
On March 16, 1998, the Company entered into a definitive agreement to acquire
The ForeFront Group, Inc., a Houston-based provider of high-quality, cost-
effective, computer-based training products and network utilities for technical
professionals ("ForeFront"). In the merger, each share of ForeFront common
stock will be exchanged for 0.3137 ADSs, and the Company will assume outstanding
ForeFront stock options, warrants and other rights to acquire ForeFront common
stock. As a result of the merger, the Company will issue approximately 2.1
million ADSs and assume options, warrants and other rights that may be converted
into up to approximately 1.1 million ADSs. The transaction is intended to be
tax free to shareholders and is intended to be accounted for as a pooling of
interests. Consummation of the transaction is subject to expiration or
termination of the applicable Hart-Scott-Rodino waiting period, approval of the
merger by ForeFront stockholders and other customary closing conditions. The
merger is expected to be completed during the second quarter of 1998.
51
<PAGE>
CBT Group PLC
Notes to the Consolidated Financial Statements
16. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT - UNAUDITED - CONTINUED
SELECTED PRO FORMA CONSOLIDATED
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Revenue $137.0 million
==============
Net income $18.1 million
=============
Net income per share - Basic $1.80
=====
Net income per share - Diluted $1.64
=====
</TABLE>
52
<PAGE>
ERNST & YOUNG
Chartered Accountants
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
CBT Group PLC
We have audited the consolidated balance sheets of CBT Group PLC as of December
31, 1996 and 1997 and the related consolidated statements of operations, changes
in redeemable convertible preferred shares and shareholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1997, and have issued our report thereon dated January 20, 1998. Our audits also
included the financial statement schedule of the Company listed in Item 14(a).
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, based on our audits, the financial statement schedule referred
to above, when considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
/s/ Ernst & Young
- ----------------------
ERNST & YOUNG
Chartered Accountants
Dublin, Ireland
Date: January 20, 1998
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company's definitive Proxy Statement will be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's Annual General Meeting to be held on or about April 28, 1998 (the
"Proxy Statement"). Information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
captions "Election of Directors" and "Executive Compensation and Other Matters."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Proxy Statement
under the caption "Executive Compensation" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Proxy Statement
under the caption "Certain Transactions" and is incorporated herein by
reference.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K.
(1) Financial Statements. The following CBT Group PLC
--------------------
Consolidated Financial Statements Prepared in Accordance with US GAAP
are incorporated herein by reference to Item 8 of this Form 10-K.
Consolidated Balance Sheets - December 31, 1996 and 1997.
Consolidated Statements of Operations - December 31, 1995, 1996 and
1997.
Consolidated Statements of Changes in Redeemable Convertible
Preferred Shares and Shareholders' Equity (Deficit). Consolidated
Statements of Cash Flows - December 31, 1995, 1996 and 1997.
Notes to Consolidated Financial Statements.
Report of Chartered Accountants.
(2) Financial Statement Schedule. The following financial statement
----------------------------
schedule of CBT Group PLC for the fiscal years ended December 31,
1995, 1996 and 1997 is filed as part of this Form 10-K and should be
read in conjunction with the Company's Consolidated Financial
Statements included in Item 8 of this Form 10-K.
Schedule Page #
-------- ------
II Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
(3) Exhibits. See Exhibit Index at page 56-57 of this Form 10-K.
--------
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on December 12, 1997 with the
Securities and Exchange Commission on December 12, 1997 reporting under
Item 9 Registrant's acquisition of MidEast on December 1, 1997.
55
<PAGE>
(d) Exhibits.
EXHIBIT INDEX
2.1(1) Amended and Restated Agreement and Plan of Reorganization dated November
29, 1995 among Registrant, CBT Acquisition Subsidiary, a Delaware
corporation, and Personal Training Systems, Inc., a California
corporation.
2.2(8) Implementation Deed dated as of November 26, 1996, as amended, by and
among Registrant, Applied Learning Limited and Arie Baalbergen, James
Josephson, Geoffrey Bransbury and Brian Hacker (including schedules
thereto).
2.3(9) Share Purchase Agreement dated August 31, 1997 between CBT Group PLC, Ben
Watson Associates, Ltd. and Ben Watson.
2.4(10)Share Purchase Agreement dated December 1, 1997 between CBT Group PLC,
CBT Systems Middle East Limited, Hamilton Brothers Ltd., and John Todd.
3.1(2) Memorandum and Articles of Association of CBT Group PLC.
4.1(2) Specimen certificate representing the ordinary shares.
4.2(5) Amended and Restated Deposit Agreement (including the form of American
Depositary Receipt), dated as of April 13, 1995 and amended and restated
as of April 11, 1996 and March 9, 1998, among the Company, The Bank of
New York, as Depositary, and each Owner and Beneficial Owner from time to
time of American Depositary Receipts issued thereunder.
4.3(5) Amended and Restated Restricted Deposit Agreement (including the form of
American Depositary Receipt), dated as of November 30, 1995 and amended
and restated as of April 11, 1996 and March 9, 1998, among the Company,
The Bank of New York, as Depositary, and each Owner and Beneficial Owner
from time to time of American Depositary Receipts issued thereunder.
10.1(2)* 1990 Share Option Scheme.
10.2(11)*1994 Share Option Plan.
10.3(2)* 1995 Employee Share Purchase Plan.
10.4(2)* Form of Indemnification Agreement between Thornton Holdings, Ltd. and
its directors and officers dated as of April, 1995.
10.5(2) Supplemental Agreement among Hoskyns, CBT Group PLC and CBT Systems
Limited dated as of March 31, 1995.
10.6(2) Share Purchase Agreement between CBT Systems Limited and CBT Group
PLC dated as of March 31, 1995.
10.7(2) Distribution and License Agreement between CBT Group PLC and CBT
Systems Limited dated as of March 14, 1995 (including form of Amendment
No. 1).
10.8(2) License Agreement dated June 7, 1994 between CBT (Technology) Limited
and CBT Systems Limited.
10.9(2) Cost Sharing Agreement dated January 4, 1994 between CBT (Technology)
Limited and CBT Systems Limited.
10.10(2)* Agreement between CBT Group PLC and Patrick McDonagh dated April 9,
1995.
10.11(3)* Personal Training Systems, Inc. 1991 Stock Plan.
56
<PAGE>
10.12(4) Lease Agreement dated March 8, 1995 between CBT Systems USA, Ltd.
and Lincoln Menlo VIII Limited Partnership for the facility located
at 1005 Hamilton Court , Menlo Park, California 94025.
10.13(4) Lease Agreement dated November 17, 1995 between Yellowknife Limited,
CBT Systems Limited and CBT Group PLC with respect to the lease of
Block 4/5, Phase 2, Beech Hill Office Campus, Dublin, Ireland.
10.14(6)* Employment Agreement effective as of January 2, 1996 between CBT
Group PLC, CBT Systems USA, Ltd. and Gregory M. Priest.
10.15(7)* Letter Agreement effective as of September 3, 1996 between CBT Group
PLC, CBT Systems USA, Ltd. and James J. Buckley.
10.16(11)* 1996 Supplemental Stock Plan.
10.17(12)* Letter Agreement between CBT Systems USA, Ltd. and Jeffrey N.
Newton.
10.18(12)* Letter Agreement between CBT Systems USA, Ltd. and William B. Lewis.
10.19(11) Applied Learning Limited Executive Option Plan.
10.20 Lease Agreement dated December 31, 1997 between CBT Systems USA, Ltd. and
SEOC I Limited Partnership, an Arizona limited partnership, with respect
to the facility located at 16100 North Greenway/Hayden Loop, Suite 800,
Scottsdale, Arizona 85260.
10.21* Agreement dated November 21, 1997 between CBT Systems Limited and Clarion
Worldwide Limited.
22.1 List of Significant Subsidiaries.
23.1 Consent of Ernst & Young, Chartered Accountants.
24.1 Power of Attorney (see page 59).
27.1 Financial Data Schedule.
- ------------
* Denotes management or compensatory plan or arrangement required to be
filed by Registrant pursuant to Item 14(c) of this report on Form 10-K.
(1) Incorporated by reference to exhibit included in Registrant's Report on Form
8-K filed with the Securities and Exchange Commission on December 13, 1995.
(2) Incorporated by reference to exhibit included in Registrant's Registration
Statement on Form F-1 (File No. 33-89904) declared effective with the
Securities and Exchange Commission on April 13, 1995.
(3) Incorporated be reference to exhibit included in Registrant's Registration
Statement on Form S-8 (File No. 333-504) filed with the Securities and
Exchange Commission on January 21, 1996.
(4) Incorporated by reference to exhibit included in Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995 as filed with the
Securities and Exchange Commission on March 30, 1996.
(5) Incorporated by reference to exhibit included in Registrant's Registration
Statement on Form F-6 (File No. 333-8380) filed with the Securities and
Exchange Commission on February 27, 1998.
(6) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 1996 as filed with the Securities and Exchange
Commission on August 14, 1996.
(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the period ended September 30, 1996 as filed with the Securities and
Exchange Commission on November 14, 1996.
57
<PAGE>
(8) Incorporated by reference to exhibit included in Registrant's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on March
14, 1997.
(9) Incorporated by reference to exhibit included in Registrant's Registration
Statement on Form S-3 filed with the Securities and Exchange Commission on
September 18, 1997.
(10)Incorporated by reference to exhibit included in Registrant's Registration
Statement on Form S-3 filed with the Securities and Exchange Commission on
December 22, 1997.
(11)Incorporated be reference to exhibit included in Registrant's Registration
Statement on Form S-8 (File No. 333-25245) filed with the Securities and
Exchange Commission on April 16, 1997.
(12)Incorporated by reference to exhibit included in Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996 as filed with the
Securities and Exchange Commission on March 30, 1997.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 20th day of
March, 1998.
CBT GROUP PUBLIC LIMITED COMPANY
/s/ James J. Buckley
______________________
James J. Buckley,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James J. Buckley and Richard Y. Okumoto jointly
and severally, his attorneys-in-fact, each with full power of substitution, for
him in any and all capacities, to sign any amendments to this Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
conforming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed below by the following persons on behalf of the Company and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ William G. McCabe
_____________________ Chairman of the Board March 20, 1998
William G. McCabe
/s/ James J. Buckley
_____________________ President, Chief Executive Officer March 20, 1998
James J. Buckley and Director (Principal Executive
Officer)
/s/ Richard Y. Okumoto
_____________________ Vice President, Finance and Chief March 20, 1998
Richard Y. Okumoto Financial Officer
(Principal Financial Officer)
/s/ John P. Hayes
_____________________ Group Financial Accountant and March 20, 1998
John P. Hayes and Director (Principal Accounting
Officer)
/s/ Gregory M. Priest
_____________________ Director March 20, 1998
Gregory M. Priest
/s/ John M. Grillos
_____________________ Director March 20, 1998
John M. Grillos
/s/ Patrick J. McDonagh
_____________________ Director March 20, 1998
Patrick J. McDonagh
</TABLE>
59
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1996 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Accounts Accounts Deductions End of Year
Year ended December 31, 1995
<S> <C> <C> <C> <C> <C>
Deducted from asset accounts
Allowance for doubtful accounts 593 (122) -- 79 550
=== ==== == == ===
Year ended December 31, 1996
Deducted from asset accounts
Allowance for doubtful accounts 550 38 -- -- 588
=== == == == ===
Year ended December 31, 1997
Deducted from asset accounts
Allowance for doubtful accounts 588 312 -- -- 900
=== === -- == ===
</TABLE>
60
<PAGE>
EXHIBIT 10.20
OFFICE LEASE
by and between
SEOC I LIMITED PARTNERSHIP,
an Arizona limited partnership,
"LANDLORD"
and
CBT SYSTEMS USA, LTD.,
a Delaware corporation
"TENANT"
December 31, 1997
EXECUTIVE OFFICE CENTER
Scottsdale Airpark
16100 North Greenway/Hayden Loop
Scottsdale, Arizona 85260
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
1. BASIC PROVISIONS................................................ 1
2. LEASED PREMISES; NO ADJUSTMENTS................................. 2
3. LEASE TERM; COMMENCEMENT DATE................................... 3
4. SECURITY DEPOSIT................................................ 3
5. RENT; RENT TAX; ADDITIONAL RENT................................. 4
6. OPERATING COSTS................................................. 4
7. CONDITION, REPAIRS AND ALTERATIONS.............................. 7
8. SERVICES........................................................ 8
9. LIABILITY AND PROPERTY INSURANCE................................ 9
10. RECONSTRUCTION.................................................. 11
11. WAIVER OF SUBROGATION........................................... 12
12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS.................. 13
13. DEFAULT AND REMEDIES............................................ 13
14. LATE PAYMENTS................................................... 15
15. ABANDONMENT AND SURRENDER....................................... 15
16. INDEMNIFICATION AND EXCULPATION................................. 15
17. ENTRY BY LANDLORD............................................... 16
18. RESERVED........................................................ 17
19. ASSIGNMENT AND SUBLETTING....................................... 17
20. USE OF LEASED PREMISES AND RUBBISH REMOVAL...................... 18
21. SUBORDINATION AND ATTORNMENT.................................... 19
22. ESTOPPEL CERTIFICATE............................................ 20
23. SIGNS........................................................... 20
24. PARKING......................................................... 20
25. LIENS........................................................... 21
26. HOLDING OVER.................................................... 21
27. ATTORNEYS' FEES................................................. 21
28. RESERVED RIGHTS OF LANDLORD..................................... 21
29. EMINENT DOMAIN.................................................. 22
30. NOTICES......................................................... 23
31. RULES AND REGULATIONS........................................... 23
32. ACCORD AND SATISFACTION......................................... 23
33. BANKRUPTCY OF TENANT............................................ 23
34. HAZARDOUS MATERIALS............................................. 25
35. MISCELLANEOUS................................................... 27
</TABLE>
i
<PAGE>
OFFICE LEASE
1. BASIC PROVISIONS
----------------
<TABLE>
<CAPTION>
<S> <C>
1.1 Date: December 31, 1997
---- --
1.2 Landlord: SEOC I Limited Partnership, an Arizona limited
-------- partnership
1.3 Landlord's Address: c/o Cavan Investments, Ltd.
------------------- 15880 North Greenway/Hayden Loop, Suite 700
Phoenix, Arizona 85260
Attention: Mr. Steven E. Barger
1.4 Tenant: CBT Systems USA, Ltd., a Delaware corporation
------
1.5 Tenant's Address:
----------------
(a) Prior to Commencement
---------------------
Date: 1005 Hamilton Court
---- Menlo Park, California 94025
Attention: CFO and General Counsel
(b) Subsequent to
-------------
Commencement Date: To the address set forth in Section 1.5(a) and to:
----------------- --------------
16100 North Greenway-Hayden Loop
Suite 800 (Building E)
Scottsdale, Arizona 85260
Attention: General Manager
1.6 Project: The parcel of real estate commonly known as Executive Office
------- Center, located in Scottsdale, Maricopa County,
Arizona, legally described on Exhibit "A"
-----------
attached hereto and incorporated herein by this
reference, together with the office buildings
now or hereafter situated thereon, the
landscaping, parking facilities and all other
improvements and appurtenances thereto.
1.7 Building: That certain office building known as Executive
-------- Office Center located at 16100 North Greenway-
Hayden Loop, Scottsdale Airpark, Scottsdale,
Maricopa County, Arizona 85260, and situated on
the Project.
1.8 Leased Premises: 25,571 rentable square feet of office space commonly
--------------- known as Suite 800 (Building E), as outlined on
the Floor Plan attached hereto as Exhibit "B".
1.9 Permitted Use: General office, warehousing, research and
------------- development, shipping, receiving, and storage.
1.10 Lease Term: 5 years and 1 month.
----------
1.11 Scheduled Commencement Date
---------------------------
and Expiration Date: April 1, 1998 and April 30, 2003.
-------------------
1.12 Annual Basic Rent: LEASE MONTH 1: No charge for Basic Rent.
-----------------
LEASE MONTHS 2-37: $30,898.29 per month based
upon a rental rate of $14.50 per rentable square foot.
LEASE MONTHS 38-61: $32,496.48 per month based
upon a rental rate of $15.25 per rentable square foot.
1.13 Security Deposit: $30,898.29
----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
1.14 Building Hours: 7:00 a.m. to 6:00 p.m., Monday through Friday, and
-------------- 8:00 a.m. to 12:00 p.m. on Saturday,
excluding recognized federal, state and local holidays.
1.15 Parking Spaces: 152 parking spaces, of which, at Tenant's election, up
-------------- to 25 are covered reserved and the balance are uncovered unreserved,
increased to 203 total spaces if the premises currently occupied by
the Mayo Clinic is vacated, and increased pro rata if Tenant leases
additional premises in the Project. Tenant shall make its election
to use the covered reserved parking spaces by executing the Parking
License in the form of Exhibit "D" attached hereto.
----------
1.16 Parking Charge: $25.00 per covered reserved space per month.
--------------
1.17 Guarantors: None.
----------
1.18 Broker: Lee & Associates and CB Commercial.
------
1.19 Exhibits: A = Legal Description of the Project
-------- B = Floor Plan
C = Memorandum of Commencement Date
D = Reserved Covered Parking License
E = Reserved.
F = Unreserved Parking License
G = Work Letter
H = Building Rules and Regulations
I = Loading Zone Site Plan
1.20 Loading Zone: 2 parking spaces designated as loading zone and
------------ depicted on the loading zone exhibit attached hereto
as Exhibit "I".
-----------
1.21 Riders: 1 = Option to Extend
------
2 = Right of First Refusal
</TABLE>
2. LEASED PREMISES; NO ADJUSTMENTS
-------------------------------
2.1 Leased Premises. Landlord hereby leases to Tenant, and Tenant hereby
---------------
leases and accepts from Landlord, the Leased Premises, upon the terms and
conditions set forth in this Lease and any modifications, supplements or addenda
hereto (the "Lease"), including the Basic Provisions of Article 1 which are
----- ---------
incorporated herein by this reference, together with the nonexclusive right to
use, in common with Landlord and others, the Building Common Areas (defined
below) and the Project Common Areas (defined below). For the purposes of this
Lease, the term "Building Common Areas" means common hallways, corridors,
---------------------
walkways and footpaths, foyers and lobbies, bathrooms and janitorial closets,
electrical and telephone closets, landscaped areas, and such other areas within
or adjacent to the Building which are subject to or are designed or intended
solely for the common enjoyment, use and/or benefit of the tenants of the
Building. The term "Project Common Areas" means common walkways, footpaths,
--------------------
driveways, parking areas, service areas, landscaped areas, and such other areas
within or adjacent to the Project which are subject to or are designed or
intended solely for the common enjoyment, use and/or benefit of the tenants of
the Project. The Building Common Areas and Project Common Areas shall consist
of at least those areas that are currently designated as such by Landlord.
Tenant shall have the nonexclusive right to use those spaces depicted on the
Loading Zone Site Plan attached hereto as Exhibit "I".
-----------
2.2 Adjustments. The Annual Basic Rent at the Commencement Date (as
-----------
hereinafter defined) is based on the Leased Premises containing the rentable
square footage set forth in Article 1.8 above. If the actual rentable square
-----------
footage of the Leased Premises is more or less than the square footage set forth
in Article 1.8 above (to be computed in accordance with BOMA standards after
-----------
completion of the Leased Premises, by McCarthy Nordberg), the Annual Basic Rent
shall be increased or decreased in accordance with the rental rate set forth in
Article 1.12 above.
- ------------
2
<PAGE>
3. LEASE TERM; COMMENCEMENT DATE
-----------------------------
3.1 Lease Term. The Lease Term shall begin on the Commencement Date and
----------
shall be for the period set forth in Article 1.10 above, plus any period of less
------------
than one (1) month between the Commencement Date and the first day of the next
succeeding calendar month, unless sooner terminated in accordance with the
further provisions of this Lease.
3.2 Commencement Date. The Commencement Date shall mean the date by which
-----------------
(a) Landlord has Substantially Completed the Tenant Improvements (as defined in
Exhibit "G") in accordance with this Lease, (b) Landlord has delivered
- -----------
possession of the Leased Premises to Tenant in the condition required herein,
and (c) Tenant has had a period of not less than seven (7) business days to
install its fixtures, furniture and equipment. The Expiration Date shall be
adjusted based on the actual Commencement Date.
3.3 Memorandum of Commencement Date. Landlord and Tenant shall, within
-------------------------------
ten (10) days after the Commencement Date, execute a declaration in the form of
Exhibit "C" attached hereto specifying the Commencement Date should the
- -----------
Commencement Date be a date other than the Scheduled Commencement Date.
3.4 Delay in Commencement Date. In the event Landlord shall be unable,
--------------------------
for any reason, to deliver possession of the Leased Premises to Tenant on the
Scheduled Commencement Date, Landlord shall not be liable for any loss or damage
occasioned thereby, nor shall such inability affect the validity of this Lease
or the obligations of Tenant. In such event, Tenant shall not be obligated to
pay Annual Basic Rent or Additional Rent or perform any other obligations
hereunder until the Commencement Date. In the event the Commencement Date has
not occurred for any reason within thirty (30) days after the Scheduled
Commencement Date, other than due to Tenant Delays, then, in addition to
Tenant's other rights or remedies, the date Tenant is otherwise obligated to
commence payment of Rent shall be delayed by one day for each day that the
Commencement Date is delayed beyond such date, or, at Tenant's election, Tenant
shall have the right to terminate this Lease by delivering written notice of
termination to Landlord at any time within thirty (30) days after the expiration
of such thirty (30) day period. Such termination shall be effective thirty (30)
days after receipt by Landlord of Tenant's notice of termination. Upon a
termination of this Lease pursuant to the provisions of this Article 3.4, the
-----------
parties shall have no further obligations or liabilities to the other and
Landlord shall promptly return any monies previously deposited or paid by
Tenant.
3.5 Lease Year. Each "Lease Year" shall be a period of twelve (12)
---------- ----------
consecutive calendar months, the first Lease Year beginning on the Commencement
Date or on the first day of the calendar month next succeeding the Commencement
Date if the Commencement Date is not on the first day of a calendar month. Each
Lease Year after the first Lease Year shall begin on the calendar day next
succeeding the expiration of the immediately preceding Lease Year.
4. SECURITY DEPOSIT
----------------
Tenant shall pay to Landlord, upon the execution of this Lease, the
Security Deposit set forth in Article 1.13 above as security for the performance
------------
by Tenant of its obligations under this Lease, which amount shall be returned to
Tenant after the expiration or earlier termination of this Lease, provided that
Tenant shall have fully performed all of its obligations contained in this
Lease. The Security Deposit, at the election of Landlord, may be retained by
Landlord as and for its full damages or may be applied in reduction of any loss
and/or damage sustained by Landlord by reason of the occurrence of any Event of
Default by Tenant under this Lease without the waiver of any other right or
remedy available to Landlord at law, in equity or under the terms of this Lease.
If any portion of the Security Deposit is so used or applied, Tenant shall,
within five (5) days after written notice from Landlord, deposit with Landlord
immediately available funds in an amount sufficient to restore the Security
Deposit to its original amount, and Tenant's failure to do so shall be a breach
of this Lease. Tenant acknowledges and agrees that in the event Tenant shall
file a voluntary petition pursuant to the Bankruptcy Code or any successor
thereto, or if an involuntary petition is filed against Tenant pursuant to the
Bankruptcy Code or any successor thereto and such involuntary petition is not
dismissed within sixty (60) days, then Landlord may apply the Security Deposit
towards those obligations of Tenant to Landlord which accrued prior to the
filing of such petition. Tenant acknowledges further that the Security Deposit
may be commingled with Landlord's other funds and that Landlord shall be
entitled to retain any interest earnings thereon. In the event of termination
of Landlord's interest in this Lease, Landlord shall transfer the Security
Deposit to Landlord's successor in interest, whereupon Landlord shall be
released from liability by Tenant for the return of such deposit or the
accounting therefore.
3
<PAGE>
5. RENT; RENT TAX; ADDITIONAL RENT
-------------------------------
5.1 Payment of Rent. Tenant shall pay to Landlord the Annual Basic Rent
---------------
set forth in Article 1.12 above, subject to adjustment as provided herein. The
------------
Annual Basic Rent shall be paid in equal monthly installments, on or before the
first day of each and every calendar month during the Lease Term, in advance,
without notice or demand and without abatement, deduction or offset, except as
otherwise set forth herein. If the Commencement Date is other than the first
day of a calendar month, the payment for the partial month following the
Commencement Date shall be prorated and shall be payable on the first day of the
first full calendar month of the Lease Term. The Annual Basic Rent for the
first full month of the Lease Term shall be paid upon the execution of this
Lease. All payments requiring proration shall be prorated on the basis of a
thirty (30) day month. In addition, all payments to be made under this Lease
shall be paid in lawful money of the United States of America to Landlord or its
agent at the address set forth in Article 1.3 above, or to such other person or
-----------
at such other place as Landlord may from time to time designate in writing.
5.2 Rent Tax. In addition to the Annual Basic Rent and Additional Rent,
--------
Tenant shall pay to Landlord, together with the monthly installments of Annual
Basic Rent and payments of Additional Rent, an amount equal to any governmental
taxes, including, without limitation, any sales, rental, occupancy, excise, use
or transactional privilege taxes assessed or levied upon Landlord with respect
to the amounts paid by Tenant to Landlord hereunder, as well as all taxes
assessed or imposed upon Landlord's gross receipts or gross income from leasing
the Leased Premises to Tenant, including, without limitation, transaction
privilege taxes, education excise taxes, any tax now or hereafter imposed by the
City of Scottsdale, the State of Arizona, any other governmental body, and any
taxes assessed or imposed in lieu of or in substitution of any of the foregoing
taxes. Such taxes shall not, however, include any franchise, gift, estate,
inheritance, conveyance, transfer or net income tax assessed against Landlord.
5.3 Additional Rent. In addition to Annual Basic Rent, all other amounts
---------------
to be paid by Tenant to Landlord pursuant to this Lease (including amounts to be
paid by Tenant pursuant to Article 6 below and parking charges to be paid by
---------
Tenant pursuant to Exhibits "D" and "F"), if any, shall be deemed to be
--------------------
Additional Rent, whether or not designated as such, and shall be due and payable
within thirty (30) days after receipt by Tenant of Landlord's statement.
Landlord shall have the same remedies for the failure to pay Additional Rent as
for the nonpayment of Annual Basic Rent.
6. OPERATING COSTS
---------------
6.1 Tenant's Obligation. The Annual Basic Rent does not include amounts
-------------------
attributable to Taxes (defined below) or amounts attributable to the cost of the
use, management, repair, service, insurance, condition, operation and
maintenance of the Building and the Project. Therefore, in order that the
Annual Basic Rent payable throughout the Lease Term shall reflect such amounts,
Tenant shall pay to Landlord, in accordance with the further provisions of this
Article 6, an amount equal to the Operating Costs (as hereinafter defined) per
- ---------
rentable square foot of the Leased Premises.
6.2 Landlord's Estimate. Landlord shall furnish Tenant an estimate of the
-------------------
Operating Costs per rentable square foot for each calendar year. In addition,
Landlord may, from time to time, but no more than twice per year, furnish Tenant
a revised estimate of Operating Costs should Landlord anticipate any increase
in Operating Costs from that set forth in a prior estimate. Commencing with the
first month to which an estimate applies, Tenant shall pay, in addition to the
monthly installments of Annual Basic Rent, an amount equal to one-twelfth
(1/12th) of the Operating Expenses per rentable square foot of the Leased
Premises; provided, however, if less than ninety-five percent (95%) of the
rentable area of the Building shall be occupied by tenants during the period
covered by such estimate, the estimated Operating Costs for such period shall
be, for the purposes of this Article 6, increased to an amount reasonably
---------
determined by Landlord to be equivalent to the Operating Costs that would be
incurred if occupancy would be at least ninety-five percent (95%) during the
entire period. Within one hundred twenty (120) days after the expiration of
each calendar year or such longer period of time as may be necessary to compile
such statement, but in no event longer than one hundred eighty (180) days from
the beginning of the calendar year, Landlord shall deliver to Tenant a
reasonably detailed and itemized statement of the actual Operating Costs for
such calendar year. If the actual Operating Costs for such calendar year are
more or less than the estimated Operating Costs, a proper adjustment shall be
made; provided, however, if less than ninety-five percent (95%) of the rentable
area of the Building shall have been occupied by tenants at any time during such
period, the actual Operating Costs for such period shall be, for the purposes of
this Article 6, increased to an amount reasonably determined by Landlord to be
---------
equivalent to the Operating Costs that would have been incurred had such
occupancy been at least ninety-five (95%) during the entire period. Any excess
4
<PAGE>
amounts paid by Tenant shall be refunded to Tenant with such statement or, at
Landlord's option, may be applied to any amounts then payable by Tenant to
Landlord or to the next maturing monthly installment of Annual Basic Rent or
Additional Rent. Any deficiency between the estimated and actual Operating Costs
shall be paid by Tenant to Landlord within thirty (30) days of delivery of such
statement. Any amount owing for a fractional calendar year in the first or final
Lease Years of the Lease Term shall be prorated.
6.3 Operating Costs - Defined. For the purposes of this Lease, "Operating
------------------------- ---------
Costs" shall mean all commercially reasonable and actual costs and expenses
- -----
accrued, paid or incurred by Landlord, or on Landlord's behalf, in respect of
the use, management, repair, service, insurance, condition, operation and
maintenance of the Project including, but not limited to the following:
(a) Salaries, wages and benefits of all persons who perform duties in
connection with landscaping, parking, janitorial and general cleaning services
for the Project Common Areas and Building Common Areas, security services and
any and all other employees engaged by or on behalf of Landlord, provided to
reflect the actual amount of time spent performing duties in connection with the
Project as opposed to other properties ;
(b) Prorated payroll taxes, workmen's compensation, uniforms and
related expenses for such employees;
(c) The cost of all charges for oil, gas, electricity, any alternate
source of energy, heat, ventilation, air-conditioning, refrigeration, water,
sewer service, trash collection, termite and pest control and all other
utilities, together with any taxes on such utilities provided to the Project
Common Areas or the Building Common Areas;
(d) The cost of painting the Building Common Areas and Project Common
Areas;
(e) The cost of all charges for rent, casualty, liability, fidelity
and other insurance maintained by Landlord, including any deductible amounts
incurred with respect to an insured loss (subject to Section 6.4 hereof);
-----------
(f) The cost of all supplies (including cleaning supplies), tools,
materials, equipment and personal property, the rental thereof and sales,
transaction privilege, excise and other taxes thereon;
(g) Depreciation of hand tools and other moveable equipment;
(h) The cost of all charges for window and other cleaning, janitorial,
security, refuse and lot sweeping;
(i) The cost of charges for independent contractors;
(j) The cost of repairs and replacements made by Landlord at its
expense and the fees and other charges for maintenance and service agreements;
(k) The cost of exterior and interior landscaping;
(l) Costs relating to the operation and maintenance of all real
property and improvements appurtenant to the Project, including, without
limitation, all parking areas, service areas, walkways and landscaping;
(m) The cost of alterations and improvements made by reason of the
laws and requirements of any public authorities or the requirements of insurance
bodies not in effect on the Commencement Date;
(n) All management fees and other charges for management services and
overhead costs (including travel and related expenses), whether provided by an
independent management company, Landlord or an affiliate of Landlord, not to
exceed, however, the then prevailing range of rates charged in comparable office
buildings in the Phoenix, Arizona metropolitan area;
(o) The cost of any capital improvements or additions which improve
the comfort or amenities available to tenants of the Project, provided, however,
that any such costs shall be amortized with interest over the useful life of the
improvement or addition in accordance with generally accepted accounting
principles, consistently applied ("GAAP");
----
5
<PAGE>
(p) The cost of any capital improvements or additions which are
intended to enhance the safety of the Project or reduce (or avoid increases in)
Operating Costs, provided, however, that any such costs shall be amortized in
accordance with GAAP with interest over the useful life of the improvement or
addition;
(q) The cost of licenses and permits, inspection fees and reasonable
legal, accounting and other professional fees and expenses;
(r) Taxes (as hereinafter defined);
(s) Costs relating to the use, management, repair, service, insurance,
condition, operation and maintenance of the Project Common Areas;
(t) Costs of monitoring and maintaining good internal air quality in
the Building and regularly inspecting, monitoring, maintaining and repairing the
Building's air quality systems, hiring outside consultants to investigate and
identify the sources of any suspected internal air quality problems that may be
identified, remedying any such problems, modifying, renovating or encapsulating
any portion of the Building, or systems or components thereof reasonably
required in order to continuously and efficiently maintain reasonably acceptable
internal air quality in the Building and comply with any and all local, state
and federal regulations, or real estate industry standards relating to internal
air quality; and
(u) All other charges properly allocable to the use, management,
repair, service, insurance, condition, operation and maintenance of the Project
in accordance with GAAP.
6.4 Operating Costs - Exclusions. Excluded from Operating Costs shall be
----------------------------
the following: (a) depreciation, except to the extent expressly included
pursuant to Article 6.3(g) above; (b) principal, fees and interest on and
--------------
amortization of debts, except to the extent expressly included pursuant to
Article 6.3(o) and (p) above; (c) leasehold improvements, including redecorating
- ----------------------
made for tenants of the Building; (d) brokerage commissions and advertising
expenses for procuring tenants for the Building; (e) refinancing costs; (f) the
cost of any repair, replacement or addition which would be required to be
capitalized under GAAP, except to the extent expressly included pursuant to
Articles 6.3(o) and 6.3(p) above; (g) the cost of any item included in Operating
- --------------------------
Costs under Article 6.3 above to the extent that such cost is reimbursable or
-----------
payable directly by an insurance company, condemnor, a tenant of the Project or
any other party; (h) the cost of any item included in Operating Costs under
Article 6.3 above to the extent that such cost is attributable to the use,
- -----------
management, repair, service, insurance, condition, operation or maintenance of
other office buildings in the Project; (i) the cost of any item included in
Operating Costs under Article 6.3 above to the extent that such cost is
-----------
attributable to the use, management, repair, service, insurance, condition,
operation or maintenance of the Project Common Areas, to the extent such cost is
payable by tenants of other office buildings in the Project, (j) costs
occasioned by the act, omission or violation of any law by Landlord, or its
agents, employees or contractors; (k) other than the deductible, costs
occasioned by fire or other casualties or by the exercise of the power of
eminent domain; (l) costs to correct any patent construction defect or deferred
maintenance in the project or to comply with any covenant, condition,
restriction, underwriter's requirement or law applicable to the project on the
Commencement Date; (m) costs of any renovation, improvement or redecorating of
any portion of the Project not made available for Tenant's use; (n) fees,
commissions, attorneys' fees, and other costs incurred in connection with
negotiations or disputes with any other occupant (or potential occupant) of the
Project and costs arising from the violation by Landlord or any other occupant
of the Project of the terms and conditions of any lease or other agreement; (o)
costs incurred in connection with the remediation of any Hazardous Material,
except to the extent caused by the release or emission of the Hazardous Material
in question by Tenant; (p) rent under ground leases; (q) expense reserves; (r)
any fee, profit or compensation retained by Landlord or its affiliates for
management and administration of the project in excess of the management fee
described in Article 6.3(n) above; and (s) insurance deductibles in excess of
--------------
$20,000.00.
6.5 Taxes - Defined. For the purposes of this Lease, "Taxes" shall mean
--------------- -----
and include all real property taxes and personal property taxes, general and
special assessments (of which there are none presently), foreseen as well as
unforeseen, which are levied or assessed upon or with respect to the Project,
any improvements, fixtures, equipment and other property of Landlord, real or
personal, located on the Project and used in connection with the operation of
all or any portion of the Project, as well as any tax, surcharge or assessment
which shall be levied or assessed in addition to or in lieu of such real or
personal property taxes and assessments. Taxes shall also include any expenses
incurred by Landlord in contesting the amount or validity of any real or
personal property taxes and assessments. Taxes shall not, however, include any
franchise, gift, estate, inheritance, conveyance, transfer or income tax
assessed against Land-
6
<PAGE>
lord. "Taxes" shall not include and Tenant shall not be required to pay any
portion of any tax or assessment expense or any increase therein or imposed on
land and improvements other than the Project.
6.6 No Waiver. The failure by Landlord to furnish Tenant with a statement
---------
of Operating Costs shall not constitute a waiver by Landlord of its right to
require Tenant to pay excess Operating Costs per rentable square foot.
Notwithstanding anything to the contrary in this Lease, Tenant or its authorized
representative shall have the right to inspect the books of Landlord for the
purpose of verifying the information contained in Landlord's statement of
Operating Costs. If Landlord's statement of Operating Costs exceeds the actual
Operating Costs by more than five percent (5%), the cost of the audit shall be
paid by Landlord. In order to exercise such audit right, Tenant must notify
Landlord within six (6) months after Tenant's receipt of Landlord's statement of
Operating Costs and must furnish to Landlord the audit results not later than
ninety (90) days thereafter.
7. CONDITION, REPAIRS AND ALTERATIONS
----------------------------------
7.1 Condition. The respective obligations of Landlord and Tenant with
---------
respect to the condition of the Leased Premises are set forth on Exhibit G to
---------
this Lease.
7.2 Alterations and Improvements. Tenant may place partitions and
----------------------------
fixtures and may make improvements and other alterations to the interior of the
Leased Premises at Tenant's expense, provided, however, that prior to commencing
any such work, Tenant shall first obtain the written consent of Landlord to the
proposed work, which shall not be unreasonably withheld, including the plans,
specifications, the proposed architect and/or contractor(s) for such alterations
and/or improvements and the materials used in connection with such alterations,
including, without limitation, paint, carpeting, wall or window coverings and
the use of carpet glues and other chemicals for installation of such materials.
At least ten (10) days prior to the commencement of any construction in the
Leased Premises, Tenant shall deliver to Landlord copies of the plans and
specifications for the contemplated work and shall identify the contractor(s)
selected by Tenant to perform such work. Landlord may, as a condition to
consenting to such work, require that Tenant provide security adequate in
Landlord's judgment so that the improvements or other alterations to the Leased
Premises will be completed in a good, workmanlike and lien free manner.
Landlord may also require that any work done to the interior of the Leased
Premises be subject to the supervision of Landlord or its designee. All such
improvements or alterations must conform to and be in substantial accordance in
quality and appearance with the quality and appearance of the improvements in
the remainder of the Leased Premises. All such improvements shall be the
property of Landlord. In the event Landlord consents to the use by Tenant of
its own architect and/or contractor for the installation of any such alterations
or improvements, prior to the commencement of such work, Tenant shall provide
Landlord with evidence that Tenant's contractor has procured worker's
compensation, liability and property damage insurance (naming Landlord as an
additional insured) in a form and in an amount reasonably approved by Landlord,
and evidence that Tenant's architect and/or contractor has procured the
necessary permits, certificates and approvals from the appropriate governmental
authorities. Tenant acknowledges and agrees that any review by Landlord of
Tenant's plans and specifications and/or right of approval exercised by Landlord
with respect to Tenant's architect and/or contractor is for Landlord's benefit
only and Landlord shall not, by virtue of such review or right of approval, be
deemed to make any representation, warranty or acknowledgment to Tenant or to
any other person or entity as to the adequacy of Tenant's plans and
specifications or as to the ability, capability or reputation of Tenant's
architect and/or contractor. Notwithstanding anything to the contrary herein,
Tenant may construct interior nonstructural alterations, additions and
improvements in the Leased Premises without Landlord's prior approval, if the
cost of such work does not exceed in the aggregate Fifty Thousand Dollars
($50,000.00) in any calendar year. All trade fixtures and personal property
installed in the Leased Premises at Tenant's expense ("Tenant's Property") shall
-----------------
at all times remain Tenant's property and Tenant shall be entitled to all
depreciation, amortization and other tax benefits with respect thereto. Except
for alterations and improvements which cannot be removed without structural
injury to the Leased Premises, at any time Tenant may remove Tenant's Property
from the Leased Premises, provided Tenant repairs all damage caused by such
removal.
7.3 Tenant's Obligations. Tenant shall, at Tenant's sole cost and
--------------------
expense, repair, replace and maintain the Leased Premises in a clean, neat and
sanitary condition and shall keep the Leased Premises and every part thereof in
good condition and repair (except where the same is required to be done by
Landlord or is due to ordinary wear and tear, casualties and condemnation)
including, without limitation, the utility meters, pipes and conduits, all
fixtures, air conditioning and heating equipment serving the Leased Premises and
other equipment therein, all of Tenant's signs, locks and closing devices, all
window sachets, casements or frames, doors and door frames, floor coverings,
including carpeting, terrazzo or other special floor covering, and all such
items of repair, maintenance, alteration and improvement or reconstruction as
may at any time or from time to time be required by a governmental authority
having jurisdiction whether or not
7
<PAGE>
presently in effect or anticipated, including, but not limited to, enforcement
of the Americans With Disabilities Act. Notwithstanding anything to the contrary
herein, Landlord shall be solely responsible for, and Tenant shall not have any
responsibility to cause or pay the cost of causing the Leased Premises or the
Project to comply with, any laws, rules or regulations requiring capital
expenditures unless the compliance with any of the foregoing is necessitated
solely due to Tenant's particular use of the Leased Premises. Tenant hereby
waives all rights to make repairs at the expense of Landlord as provided by any
law, statute or ordinance now or hereafter in effect. All of Tenant's
alterations and/or improvements are the property of the Landlord, and Tenant
shall, upon the expiration or earlier termination of the Lease Term, surrender
the Leased Premises, including Tenant's alterations and/or improvements, to
Landlord, janitorial clean and in the same condition as when received, ordinary
wear and tear excepted. Except as set forth in Article 7.4 below, Landlord has
-----------
no obligation to construct, remodel, improve, repair, decorate or paint the
Leased Premises or any improvement thereon or part thereof. Tenant shall pay for
the cost of all repairs to the Leased Premises not required to be made by
Landlord and shall be responsible for any redecorating, remodeling, alteration
and painting during the Lease Term as Tenant deems necessary. Tenant shall pay
for any repairs to the Leased Premises, the Building and/or the Project made
necessary by any negligence or carelessness of Tenant, its employees or
invitees.
7.4 Landlord's Obligations. Landlord shall (a) maintain and make all
----------------------
necessary repairs and replacements to the exterior walls, floors, roof structure
and membrane, structural portions of the Project, including load bearing walls,
at Landlord's sole cost and not as an Operating Cost, (b) maintain and make all
necessary repairs and replacements to the exterior doors, windows and corridors
of the Building, (c) keep the Building, the Building Common Areas and the
Project Common Areas in a clean, neat and attractive condition, (d) maintain as
a component of Operating Expenses the heating, ventilating, air conditioning,
electrical, water, sewer, sprinkler and plumbing systems serving the Leased
Premises, including the pipes and conduits, (e) make repairs necessitated by the
acts or omissions of Landlord or its respective agents, employees or
contractors, (f) make repairs required as a consequence of any construction
defects in the Project, and (g) be responsible for those repairs which would be
treated as a "capital expenditure" under GAAP,
7.5 Removal of Alterations. Upon the expiration or earlier termination of
----------------------
this Lease, Tenant shall remove from the Leased Premises all movable trade
fixtures and other movable personal property, and shall promptly repair any
damage to the Leased Premises, the Building and/or the Project caused by such
removal. All such removal and repair shall be entirely at Tenant's sole cost
and expense. Immediately upon any termination of this Lease, Landlord may
require that Tenant remove from the Leased Premises any alterations, additions,
improvements (other than the Tenant Improvements), trade fixtures, equipment,
shelving, cabinet units or movable furniture (and other personal property)
designated by Landlord to be removed. In such event, Tenant shall, in
accordance with the provisions of Article 7.2 above, complete such removal
-----------
(including the repair of any damage caused thereby) entirely at its own expense
and within fifteen (15) days after notice from Landlord. All repairs required
of tenant pursuant to the provisions of this Article 7.5 shall be performed in a
-----------
manner reasonably satisfactory to Landlord, and shall include, but not be
limited to, repairing plumbing, electrical wiring and holes in walls, restoring
damaged floor and/or ceiling tiles, repairing any other cosmetic damage, and
cleaning the Leased Premises.
7.6 No Abatement. Except as provided herein, Landlord shall have no
------------
liability to Tenant, nor shall Tenant's covenants and obligations under this
Lease, including without limitation, Tenant's obligation to pay Annual Basic
Rent and Additional Rent, be reduced or abated in any manner whatsoever by
reason of any inconvenience, annoyance, interruption or injury to business
arising from Landlord's making any repairs or changes which Landlord is required
or permitted to make pursuant to the terms of this Lease or by any other
tenant's Lease or are required by law to be made in and to any portion of the
Leased Premises, the Building or the Project. Landlord shall, nevertheless, use
reasonable efforts to minimize any interference with Tenant's business in and
access to the Leased Premises and/or Building Common Areas.
8. SERVICES
--------
8.1 Climate Control. Landlord shall provide reasonable climate control to
---------------
the Building Common Areas during the Building Hours as is suitable, in
Landlord's judgment, for the comfortable use and occupation of the Building
Common Areas.
8.2 Janitorial Services. Landlord shall make janitorial and cleaning
-------------------
services available to the Building Common Areas and the Project Common Areas.
Tenant shall be responsible and shall procure janitorial and cleaning services
for the interior of the Leased Premises.
8.3 Electricity. Electricity shall be separately metered and Tenant shall
-----------
be solely responsible
8
<PAGE>
for the cost of all electric current furnished to the Leased Premises. Tenant's
use of electric energy in the Leased Premises shall not at any time exceed the
capacity of any of the risers, piping, electrical conductors and other equipment
in or serving the Leased Premises. In order to insure that such capacity is not
exceeded and to avert any possible adverse effect on the Building's electric
system, Tenant shall not, without Landlord's prior written consent in each
instance, connect appliances, machines using current in excess of 120 volts or
heavy-duty equipment other than equipment normally used in accordance with the
Permitted Use to the Building's electric system or make any alterations or
additions to the Building's electric system. Should Landlord grant such consent,
all additional risers, piping and electrical conductors and other equipment
therefor shall be provided by Landlord and the cost thereof shall be paid by
Tenant within thirty (30) days after receipt of Landlord's bill.
8.4 Water. Landlord shall furnish cold and heated water for drinking and
-----
lavatory purposes to the Building Common Areas.
8.5 Interruptions in Service. Landlord does not warrant that any of the
------------------------
foregoing services or any other services which Landlord may supply will be free
from interruption. Tenant acknowledges that any one or more of such services
may be suspended by reason of accident, repairs, inspections, alterations or
improvements necessary to be made, or by strikes or lockouts, or by reason of
operation of law, or by causes beyond the reasonable control of Landlord.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of Annual Basic Rent or Additional Rent by reason of any
disruption of the services to be provided by Landlord pursuant to this Lease.
Notwithstanding anything to the contrary herein, if the Leased Premises should
become not reasonably suitable for Tenant's use such that Tenant cannot occupy
the Leased Premises as a consequence of a cessation of utilities or other
services which (a) is caused by Landlord or Landlord's agents, contractors or
employees or (b) covered by Landlord's insurance, for a period of seven (7)
consecutive calendar days, then Tenant shall be entitled to an equitable
abatement of Rent to the extent of the interference with Tenant's use of the
Leased Premises occasioned thereby. If the interference persists for more than
one hundred twenty (120) consecutive calendar days, Tenant shall have the right
to terminate this Lease.
9. LIABILITY AND PROPERTY INSURANCE
--------------------------------
9.1 Liability Insurance. Tenant shall, during the Lease Term, keep in
-------------------
full force and effect, a policy or policies of commercial general liability
insurance for personal injury (including wrongful death) and damage to property
covering (a) any occurrence in the Leased Premises, (b) any act or omission by
Tenant, by any subtenant of Tenant, or by any of their respective invitees,
agents, servants or employees anywhere in the Leased Premises or the Project,
(c) the business operated by Tenant and by any subtenant of Tenant in the Leased
Premises, and (d) the contractual liability of Tenant to Landlord pursuant to
the indemnification provisions of Article 1.61 below, which coverage shall not
------------
be less than One Million and No/100 Dollars ($1,000,000.00) per occurrence and
Two Million and No/100 Dollars ($2,000,000.00) combined single limit. The
liability policy or policies shall contain an endorsement naming Landlord, its
partners and any persons, firms or corporations designated by Landlord as
additional insureds, and shall provide that the insurance carrier shall have the
duty to defend and/or settle any legal proceeding filed against Landlord seeking
damages based upon bodily injury or property damage liability even if any of the
allegations of such legal proceedings are groundless, false or fraudulent.
9.2 Property Insurance. Tenant shall, during the Lease Term, keep in full
------------------
force and effect, a policy or policies of insurance with "Special Form
Coverage," including coverage for vandalism or malicious mischief, insuring the
Tenant's alterations and/or improvements made pursuant to Article 7.2 above
-----------
(which is not covered by Landlord's insurance) and Tenant's stock in trade,
furniture, personal property, fixtures, equipment and other items in the Leased
Premises, with coverage in an amount equal to the full replacement cost thereof.
9.3 Worker's Compensation Insurance. Tenant shall, during the Lease Term,
-------------------------------
keep in full force and effect, a policy or policies of worker's compensation
insurance with an insurance carrier and in amounts approved by the Industrial
Commission of the State of Arizona.
9.4 Business Interruption Insurance. Tenant shall, during the Lease Term,
-------------------------------
keep in full force and effect, a policy or policies of business interruption
insurance in an amount equal to twelve (12) monthly installments of Annual Basic
Rent and Additional Rent payable to Landlord, together with the taxes thereon,
insuring Tenant against losses sustained by Tenant as a result of any cessation
or interruption of Tenant's business in the Leased Premises for any reason.
9.5 Insurance Requirements. Each insurance policy and certificate thereof
----------------------
obtained by Tenant
9
<PAGE>
pursuant to this Lease shall contain a clause that the insurer will provide
Landlord, its partners and any persons, firms or corporations designated by
Landlord with at least thirty (30) days prior written notice of any material
reduction, non-renewal or cancellation of the policy. Each such insurance policy
shall be with an insurance company authorized to do business in the State of
Arizona and reasonably acceptable to Landlord. Certified copies of all insurance
policies evidencing the coverage under each such policy, as well as a certified
copy of the required additional insured endorsement(s) shall be delivered to
Landlord prior to commencement of the Lease Term. Each such policy shall provide
that any loss payable thereunder shall be payable notwithstanding (a) any act,
omission or neglect by Tenant or by any subtenant of Tenant, or (b) any
occupation or use of the Leased Premises or any portion thereof by Tenant or by
any subtenant of Tenant for purposes more hazardous than permitted by the terms
of such policy or policies, or (c) any foreclosure or other action or proceeding
taken by any mortgagee or trustee pursuant to any provision of any mortgage or
deed of trust covering the Leased Premises, the Building or the Project, or (d)
any change in title or ownership of the Project. All insurance policies required
pursuant to this Article 9 shall be written as primary policies, not
---------
contributing with or in excess of any coverage which Landlord may carry. Tenant
shall procure and maintain all policies entirely at its own expense and shall,
at least twenty (20) days prior to the expiration of such policies, furnish
Landlord with certified copies of replacement policies or renewal certificates
for existing policies in conformance with Accord Form No. 27 (March 1993).
Tenant shall not do or permit to be done anything which shall invalidate the
insurance policies maintained by Landlord or the insurance policies required
pursuant to this Article 9 or the coverage thereunder. If Tenant or any
---------
subtenant of Tenant does or permits to be done anything which shall increase the
cost of any insurance policies maintained by Landlord (other than the Permitted
Use), then Tenant shall reimburse Landlord for any additional premiums
attributable to any act or omission or operation of Tenant or any subtenant of
Tenant causing such increase in the cost of insurance. Any such amount shall be
payable as Additional Rent within thirty (30) days after receipt by Tenant of a
bill from Landlord. All policies of liability insurance shall name both Landlord
and Tenant (and/or such other party or parties as Landlord may require) as
additional insureds and shall be endorsed to indicate that the coverage provided
shall not be invalid due to any act or omission on the part of Landlord.
9.6 Co-Insurance. If on account of the failure of Tenant to comply with
------------
the provisions of this Article 9, Landlord is deemed a co-insurer by its
---------
insurance carrier, then any loss or damage which Landlord shall sustain by
reason thereof shall be borne by Tenant, and shall be paid by Tenant within
thirty (30) days after receipt of a bill therefor.
9.7 Adequacy of Insurance. Landlord makes no representation or warranty
---------------------
to Tenant that the amount of insurance to be carried by Tenant under the terms
of this Lease is adequate to fully protect Tenant's interests. If Tenant
believes that the amount of any such insurance is insufficient, Tenant is
encouraged to obtain, at its sole cost and expense, such additional insurance as
Tenant may deem desirable or adequate. Tenant acknowledges that Landlord shall
not, by the fact of approving, disapproving, waiving, accepting, or obtaining
any insurance, incur any liability for or with respect to the amount of
insurance carried, the form or legal sufficiency of such insurance, the solvency
of any insurance companies or the payment or defense of any lawsuit in
connection with such insurance coverage, and Tenant hereby expressly assumes
full responsibility therefor and all liability, if any, with respect thereto.
9.8 Self-Insurance. Tenant shall have the right to self-insure for the
--------------
liability insurance, the property insurance and the business interruption
insurance required by Articles 9.1, 9.2 and 9.4, respectively, subject to the
-------------------------
requirements of this Article 9.8.
-----------
(a) For purposes of this Article 98, "self-insurance" shall mean that
----------
Tenant is itself acting as though it were the insurance company providing the
insurance required under the provisions of this Article 9 and Tenant shall pay
---------
any amounts due in lieu of insurance proceeds as required under the provisions
of this Lease, which amounts shall be treated as insurance proceeds for all
purposes under this Lease.
(b) All amounts which Tenant pays or is required to pay and all losses
or damages resulting from risks for which Tenant has elected to self-insure
shall be subject to the waiver of subrogation provisions in Article 11 below and
----------
shall not limit Tenant's indemnification obligations set forth in Article 16.1
------------
below.
(c) Tenant's right to self-insure and to continue to self-insure is
conditioned upon and subject to:
(i) The Tenant having a net worth, calculated in accordance with
generally accepted accounting principles, consistently applied, of at least
One Hundred Million Dollars
10
<PAGE>
($100,000,000.00).
(ii) The Tenant providing an audited financial statement,
prepared in accordance with generally accepted accounting principles,
consistently applied, to Landlord on or before the date which is thirty
(30) days prior to the upcoming annual anniversary of the Commencement Date
which establishes and confirms that Tenant has the required net worth,
unless events occur that make it apparent that such net worth has
diminished below the required level (such as the bankruptcy of Tenant), in
which event Tenant shall not be permitted to continue to self-insure; and
(iii) The Tenant maintaining appropriate loss reserves which are
actuarially derived in accordance with accepted standards of the insurance
industry and accrued (i.e., charged against earnings) or otherwise funded.
(d) In the event that Tenant elects to self-insure and an event or
claim occurs for which a defense and/or coverage would have been available from
the insurance company Tenant shall:
(i) undertake the defense of any such claim, including a defense
of Landlord, at Tenant's sole cost and expense, and
(ii) use its own funds to pay any claim or replace any property
or otherwise provide the funding which would have been available from
insurance proceeds but for such election by Tenant to self-insure.
(e) Tenant shall provide Landlord and Superior Mortgagee (defined
below) or Superior Lessor (defined below) with certificates of self-insurance
specifying the extent of self-insurance coverage hereunder and containing a
waiver of subrogation provision reasonably satisfactory to Landlord. Any
insurance coverage provided by Tenant shall be for the benefit of Landlord, the
Superior Mortgagee and the Superior Lessor as their respective interests may
appear.
9.9 Landlord's Insurance. Landlord shall at all times maintain a "special
--------------------
form coverage" policy of property insurance, insuring the Project in the amount
of the full replacement value thereof.
10. RECONSTRUCTION
--------------
10.1 Insured Damage. In the event the Leased Premises are damaged during
--------------
the Lease Term by fire or other perils covered by insurance required to be
carried by Landlord hereunder, Landlord shall:
(a) Subject to Force Majeure, within a period of ninety (90) days
after receipt by Landlord of insurance proceeds and the adjustment of the loss
with the Superior Mortgagee and/or the Superior Lessor, as the case may be, and
its insurer, but not less than one hundred twenty (120) days after the date of
damage, and provided there is not then in existence of an Event of Default,
commence repair, reconstruction and restoration of the Leased Premises and
prosecute the same diligently to completion, in which event this Lease shall
continue in full force and effect.
(b) In the event of a partial or total destruction of the Leased
Premises during the last one (1) year of the Lease Term, Landlord or Tenant
shall have the option to terminate this Lease upon giving written notice within
sixty (60) days after such destruction. For purposes of this Article 10,
----------
"partial destruction" shall be deemed destruction to an extent of at least
- --------------------
thirty-three and one-third percent (33.33%) of the then full replacement cost of
the Leased Premises, the Building or the Project as of the date of destruction.
(c) Unless the subordination, nondisturbance and attornment agreement
between Superior Mortgagee and Tenant provides otherwise, in the event that
Superior Mortgagee shall require that insurance proceeds be applied against the
principal balance due on the Superior Mortgage (defined below), then Landlord
may, at Landlord's option and upon sixty (60) days written notice to Tenant,
elect to terminate this Lease.
10.2 Uninsured Damage. In the event the Leased Premises shall be damaged
----------------
as a result of any casualty not normally covered by insurance required to be
carried by Landlord hereunder, to any extent whatsoever, Landlord may, subject
to Force Majeure, within one hundred eighty (180) days following the date of the
casualty, commence repair, reconstruction or restoration of the Leased Premises,
in which event this Lease shall continue in full force and effect, or within
such one hundred eighty (180) day period elect
11
<PAGE>
not to so repair, reconstruct or restore the Leased Premises, in which event
this Lease shall cease and terminate. In either event, Landlord shall give
Tenant written notice of Landlord's intention within such one hundred eighty
(180) day period. Notwithstanding anything to the contrary herein, Landlord
shall not have the right to terminate this Lease if the damage is relatively
minor (e.g., repair or restoration would cost less than five percent (5%) of the
replacement cost of the Leased Premises), and Tenant agrees to pay the cost of
repair in excess of five percent (5%) of the replacement cost of the Leased
Premises.
10.3 Reconstruction. In the event of any reconstruction of the Leased
--------------
Premises, the Building or the Project pursuant to this Article 10, such
----------
reconstruction shall be in conformity with all city, county, state and federal
ordinances, rules and regulations then in existence, as the same may be
interpreted and enforced. Notwithstanding that all reconstruction work shall be
performed by Landlord's contractor unless Landlord shall otherwise agree in
writing, Landlord's obligation to reconstruct the Leased Premises shall be only
to the comparable condition of the Leased Premises as of the Commencement Date.
Tenant, at Tenant's sole cost and expense, shall be responsible for the repair
and restoration of all items of the Tenant's improvements and/or alterations
installed pursuant to Article 72. Tenant shall commence the installation of
----------
fixtures promptly upon delivery to Tenant of possession of the Leased Premises
and shall diligently prosecute such installation to completion.
10.4 Termination. Upon any termination of this Lease under any of the
-----------
provisions of this Article 10, Landlord and Tenant each shall be released
----------
without further obligations to the other coincident with the surrender of
possession of the Leased Premises to Landlord, except for items which have
previously accrued and remain unpaid. Notwithstanding anything to the contrary
herein, if the Leased Premises are damaged by any peril and Landlord does not
elect to terminate this Lease or is not entitled to terminate this Lease
pursuant to its terms, then Tenant shall have the option to terminate this Lease
if the Leased Premises cannot be (as determined by Landlord in its commercially
reasonable judgment), or are not in fact, fully restored by Landlord to their
prior condition within one hundred eighty (180) days after the damage.
Notwithstanding anything to the contrary herein, Landlord will not terminate
this Lease if Landlord commences to rebuild the Leased Premises within one
hundred eighty (180) days of the date of casualty.
10.5 Abatement. In the event of repair, reconstruction and restoration of
---------
the Leased Premises, the Minimum Annual Rental and Additional Rent shall be
abated proportionately with the degree to which Tenant's use of the Leased
Premises is impaired commencing from the date of destruction and continuing
during the period of such repair, reconstruction or restoration. Tenant shall
not be entitled to any compensation or damages from Landlord for loss of the use
of the whole or any part of the Leased Premises, or the building of which the
Leased Premises are a part, Tenant's personal property or for any inconvenience
or annoyance occasioned by such damage, repair, reconstruction or restoration.
10.6 Waiver. Tenant hereby waives any statutory and common law rights of
------
termination which may arise by reason of any partial or total destruction of the
Leased Premises which Landlord is obligated to restore or may restore under any
of the provisions of this Lease, including the provisions of A.R.S. (S) 33-343.
11. WAIVER OF SUBROGATION
---------------------
Notwithstanding anything to the contrary herein, Landlord and Tenant each
hereby waive any rights one may have against the other on account of any loss or
damage occasioned to Landlord or Tenant, as the case may be, or their respective
property, the Leased Premises, its contents or to other portions of the Building
and the Project arising from any risk generally covered by fire and extended
insurance and from any risk covered by property insurance then in effect. In
addition, Landlord and Tenant, for themselves and on behalf of their respective
insurance companies, waive any right of subrogation that any such insurance
company may have against Landlord, Landlord's lender, any other tenant of the
Project, or Tenant, as the case may be. The foregoing waivers of subrogation
shall be operative only so long as available in the State where the Project is
situated and provided further that no policy of insurance is invalidated
thereby. Each party shall use its best efforts to cause each property insurance
policy it obtains to provide that the insurer thereunder waives all right of
recovery by way of subrogation as required herein in connection with any injury
or damage covered by the policy. If the insurance policy cannot be obtained
with the waiver of subrogation, or if the waiver of subrogation is available
only at additional cost and the party for whose benefit the waiver is not
obtained does not pay the additional cost, then the party obtaining the
insurance immediately shall notify the other party.
12
<PAGE>
12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS
----------------------------------------------
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of Annual Basic Rent or Additional Rent. If
Tenant shall fail to pay any sum of money, other than Annual Basic Rent,
required to be paid by it hereunder, or shall fail to perform any other act on
its part to be performed hereunder, and such failure shall continue for the
period set forth in section 13 hereof after notice thereof by Landlord (or such
----------
shorter period of time as may be reasonable following oral notice to Tenant's
personnel in the Leased Premises in the case of emergency), Landlord may (but
shall not be obligated to do so) without waiving or releasing Tenant from any
of Tenant's obligations, make any such payment or perform any such other act on
behalf of Tenant. All sums so paid by Landlord and all necessary incidental
costs, together with interest thereon at the greater of (a) fifteen percent
(15%) per annum or (b) the rate of interest per annum publicly announced, quoted
or published, from time to time, by Bank of America, at its Phoenix, Arizona
office as its "reference rate" plus four (4) percentage points, from the date of
such payment by Landlord until reimbursement in full by Tenant (the "Default
-------
Rate"), shall be payable to Landlord as Additional Rent with the next monthly
- ----
installment of Annual Basic Rent; provided, however, in no event shall the
Default Rate exceed the maximum rate (if any) permitted by applicable law.
13. DEFAULT AND REMEDIES
--------------------
13.1 Event of Default. The occurrence of any one or more of the following
----------------
events will constitute an "Event of Default" on the part of Tenant:
----------------
(a) Failure to pay any installment of Annual Basic Rent, any
Additional Rent or any other sum required to be paid by Tenant under this Lease,
and such failure shall continue for five (5) business days after written notice
thereof by Landlord to Tenant;
(b) Failure to perform any of the other covenants or conditions which
Tenant is required to observe and perform (except failure in the payment of
Annual Basic Rent, Additional Rent or any other monetary obligation contained in
this Lease) and such failure shall continue for thirty (30) days after written
notice thereof by Landlord to Tenant, provided that if such default is other
than the payment of money and cannot be cured within such thirty (30) day
period, then an Event of Default shall not have occurred if Tenant, within such
thirty (30) period, commences curing of such failure and diligently in good
faith prosecutes the same to completion and furnishes evidence thereof to
Landlord as soon as is reasonably practical thereafter.
(c) If any warranty, representation or statement made by Tenant to
Landlord in connection with this Lease is or was intentionally and materially
false or misleading when made or furnished;
(d) The levy of a writ of attachment or execution or other judicial
seizure of substantially all of Tenant's assets or its interest in this Lease,
such attachment, execution or other seizure remaining undismissed or discharged
for a period of sixty (60) days after the levy thereof;
(e) The filing of any petition by or against Tenant or any Guarantor
to declare Tenant or any Guarantor a bankrupt or to delay, reduce or modify
Tenant's or any Guarantor's debts or obligations, which petition is not
discharged within sixty (60) days after the date of filing;
(f) The filing of any petition or other action taken to reorganize or
modify Tenant's or any Guarantor's capital structure, which petition is not
discharged within sixty (60) days after the date of filing;
(g) If Tenant or any Guarantor shall be declared insolvent according
to law;
(h) A general assignment by Tenant or any Guarantor for the benefit of
creditors;
(i) The appointment of a receiver or trustee for Tenant or any
Guarantor or all or any of their respective property, which appointment is not
discharged within sixty (60) days after the date of filing; or
(j) The filing by Tenant or any Guarantor of a voluntary petition
pursuant to the Bankruptcy Code or any successor thereto or the filing of an
involuntary petition against Tenant or any Guarantor pursuant to the Bankruptcy
Code or any successor legislation, which petition is not discharged
13
<PAGE>
within sixty (60) days after the date of filing.
13.2 Remedies. Upon the occurrence of an Event of Default under this
--------
Lease by Tenant, Landlord may, without prejudice to any other rights and
remedies available to a landlord at law, in equity or by statute, Landlord may
exercise one or more of the following remedies, all of which shall be construed
and held to be cumulative and non-exclusive: (a) Terminate this Lease and re-
enter and take possession of the Leased Premises, in which event, Landlord is
authorized to make such repairs, redecorating, refurbishments or improvements to
the Leased Premises as may be necessary in the reasonable opinion of Landlord
acting in good faith for the purposes of reletting the Leased Premises and the
costs and expenses incurred in respect of such repairs, redecorating and
refurbishments and the expenses of such reletting (including brokerage
commissions attributable to the remainder of the term hereof) shall be paid by
Tenant to Landlord within five (5) days after receipt of Landlord's statement;
or (b) Without terminating this Lease, re-enter and take possession of the
Leased Premises; or (c) Without such re-entry, recover possession of the Leased
Premises in the manner prescribed by any statute relating to summary process,
and any demand for Annual Basic Rent, re-entry for condition broken, and any
and all notices to quit, or other formalities of any nature to which Tenant may
be entitled, are hereby specifically waived to the extent permitted by law; or
(d) Without terminating this Lease, Landlord may relet the Leased Premises as
Landlord may see fit without thereby avoiding or terminating this Lease, and for
the purposes of such reletting, Landlord is authorized to make such repairs,
redecorating, refurbishments or improvements to the Leased Premises as may be
necessary in the reasonable opinion of Landlord acting in good faith for the
purpose of such reletting, and if a sufficient sum is not realized from such
reletting (after payment of all costs and expenses of such repairs, redecorating
and refurbishments and expenses of such reletting (including brokerage
commissions) and the collection of rent accruing therefrom) each month to equal
the Annual Basic Rent and Additional Rent payable hereunder, then Tenant shall
pay such deficiency each month within five (5) days after receipt of Landlord's
statement; or (e) Landlord may declare immediately due and payable all the
remaining installments of Annual Basic Rent and Additional Rent, and the present
value of such amount, less the present fair rental value of the Leased Premises
for the remainder of the Lease Term shall be paid by Tenant within five (5) days
after receipt of Landlord's statement. Landlord shall not by re-entry or any
other act, be deemed to have terminated this Lease, or the liability of Tenant
for the total Annual Basic Rent and Additional Rent reserved hereunder or for
any installment thereof then due or thereafter accruing, or for damages, unless
Landlord notifies Tenant in writing that Landlord has so elected to terminate
this Lease. After the occurrence of an Event of Default, the acceptance of
Annual Basic Rent or Additional Rent, or the failure to re-enter by Landlord
shall not be deemed to be a waiver of Landlord's right to thereafter terminate
this Lease and exercise any other rights and remedies available to it, and
Landlord may re-enter and take possession of the Leased Premises as if no Annual
Basic Rent or Additional Rent had been accepted after the occurrence of an Event
of Default. Upon an Event of Default, Tenant shall also pay to Landlord all
costs and expenses incurred by Landlord, including court costs and attorneys'
fees, in retaking or otherwise obtaining possession of the Leased Premises,
removing and storing all equipment, fixtures and personal property on the Leased
Premises and otherwise enforcing any of Landlord's rights, remedies or recourses
arising as a result of an Event of Default.
13.3 Additional Remedies. All of the remedies given to Landlord in this
-------------------
Lease in the event Tenant commits an Event of Default are in addition to all
other rights or remedies available to a landlord at law, in equity or by
statute, excluding the right to seize and sell all goods, equipment and personal
property of Tenant located in the Leased Premises and apply the proceeds thereof
to all due and unpaid Annual Basic Rent, Additional Rent and other amounts owing
under the Lease. All rights, options and remedies available to Landlord shall
be construed and held to be cumulative, and no one of them shall be exclusive of
the other. During the continuance of an Event of Default which remains uncured,
Tenant shall not be entitled to exercise its options to renew, extend or expand,
contraction rights and any other rights which may be exercised by Tenant. In
the event that Landlord elects to relet the Leased premises without termination
of the Lease, Tenant shall thereafter be released from all obligations arising
under the Lease accruing after the date of such reletting by Landlord. Landlord
waives any right to exercise Landlord's lien that may arise at law.
13.4 Interest on Past Due Amounts. In addition to the late charge
----------------------------
described in Article 14 below, if any installment of Annual Basic Rent or
----------
Additional Rent is not paid within five (5) business days following notice from
Landlord of a delinquency, it shall bear interest at the Default Rate; provided,
however, this provision shall not relieve Tenant from any default in the making
of any payment at the time and in the manner required by this Lease; and
provided, further, in no event shall the Default Rate exceed the maximum rate
(if any) permitted by applicable law.
13.5 Landlord Default. In the event Landlord should neglect or fail to
----------------
perform or observe any of the covenants, provisions or conditions contained in
this Lease on its part to be performed or observed, and,
14
<PAGE>
except in the case of an emergency, such failure continues for thirty (30) days
after written notice of default (or if more than thirty (30) days shall be
required because of the nature of the default, if Landlord shall fail to
commence the curing of such default within such thirty (30) day period and
proceed diligently thereafter), then Landlord shall be responsible to Tenant for
any actual damages sustained by Tenant as a result of Landlord's breach, but not
special or consequential damages. Should Tenant give written notice to Landlord
to correct any default, Tenant shall give similar notice to the holder of any
mortgages or deeds of trust against the Building or the lessor of any ground
lease (provided Tenant has been provided the appropriate addresses), and prior
to any cancellation of this Lease, the holder of such mortgage or deed of trust
and/or the lessor under such ground lease shall be given a reasonable period of
time to correct or remedy such default. If and when such holder of such mortgage
or deed of trust and/or the lessor under any such ground lease has made
performance on behalf of Landlord, the default of Landlord shall be deemed
cured.
14. LATE PAYMENTS
-------------
Tenant hereby acknowledges that the late payment by Tenant to Landlord of
any monthly installment of Annual Basic Rent, any Additional Rent or any other
sums due hereunder will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult and impracticable
to ascertain. Such costs include but are not limited to processing,
administrative and accounting costs. Accordingly, if any monthly installment of
Annual Basic Rent, any Additional Rent or any other sum due from Tenant shall
not be received by Landlord within five (5) business days after the date when
due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of
such overdue amount or Two Hundred and No/100 Dollars ($200.00), whichever is
greater. Tenant acknowledges that such late charge represents a fair and
reasonable estimate of the costs Landlord will incur by reason of late payments
by Tenant. Neither assessment nor acceptance of a late charge by Landlord shall
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies available
to Landlord. Nothing contained in this Article 14 shall be deemed to condone,
----------
authorize, sanction or grant to Tenant an option for the late payment of Annual
Basic Rent, Additional Rent or any other sum due hereunder. Notwithstanding the
foregoing, prior to assessing a late charge, Landlord shall provide Tenant with
written notice the first time a rental payment is delinquent in a twelve (12)
month period, and no late charge shall be due if Tenant makes the payment within
five (5) days of delivery of such notice.
15. ABANDONMENT AND SURRENDER
-------------------------
15.1 Intentionally Omitted.
---------------------
15.2 Surrender. Tenant shall, upon the expiration or earlier termination
---------
of this Lease, peaceably surrender the Leased Premises, including any Tenant
Improvements or Tenant's improvements and/or alterations installed pursuant to
Article 7.2, in a janitorial clean condition and otherwise in as good condition
- -----------
as when Tenant took possession, except for (i) reasonable wear and tear
subsequent to the last required repair, replacement, restoration, alteration or
renewal; (ii) loss by fire or other casualty, (iii) loss by condemnation; (iv)
Landlord's obligations hereunder; and (v) Hazardous Materials not released,
discharged, brought onto or otherwise disposed of by Tenant or its agents,
invitees, employees or contractors. If Tenant shall surrender the Leased
Premises, or be dispossessed by process of law or otherwise, any personal
property and fixtures belonging to Tenant and left in the Leased Premises shall
be deemed abandoned and, at Landlord's option, title shall pass to Landlord
under this Lease as by a bill of sale. Landlord may, however, if it so elects,
remove all or any part of such personal property from the Leased Premises and
the costs incurred by Landlord in connection with such removal, including
storage costs and the cost of repairing any damage to the Leased Premises, the
Building and/or the Project caused by such removal shall be paid by Tenant
within five (5) days after receipt of Landlord's statement. Upon the expiration
or earlier termination of this Lease, Tenant shall surrender to Landlord all
keys to the Leased Premises and shall inform Landlord of the combination of any
vaults, locks and safes left on the Leased Premises. The obligations of Tenant
under this Article 15.2 shall survive the expiration or earlier termination of
------------
this Lease. Tenant shall indemnify Landlord against any loss or liability
resulting from delay by Tenant in so surrendering the Premises, including,
without limitation, any claims made by any succeeding Tenant founded on such
delay. Landlord and Tenant shall jointly inspect the Leased Premises upon the
termination of this Lease.
15
<PAGE>
16. INDEMNIFICATION AND EXCULPATION
-------------------------------
16.1 Indemnification. Tenant shall indemnify, protect, defend and hold
---------------
Landlord harmless from and against, and shall be responsible for, all claims,
damages, losses, costs, liens, encumbrances, liabilities and expenses, including
reasonable attorneys', accountants' and investigators' fees and court costs (col
lectively, the "Claims"), however caused, arising in whole or in part from
------
Tenant's use of all or any part of the Leased Premises, the Building and/or the
Project or the conduct of Tenant's business or from any activity, work or thing
done by Tenant or by any invitee, servant, agent, employee or subtenant of
Tenant in the Leased Premises, the Building and/or the Project, and shall
further indemnify, protect, defend and hold Landlord harmless from and against,
and shall be responsible for, all Claims to the extent arising from any breach
or default in the performance of any obligation on Tenant's part to be performed
under the terms of this Lease or from any act, neglect, fault or omission by
Tenant or by any invitee, servant, agent, employee or subtenant of Tenant
anywhere in the Leased Premises, the Building and/or the Project. In case any
action or proceeding is brought against Landlord to which this indemnification
shall be applicable, Tenant shall pay all Claims resulting therefrom and shall
defend such action or proceeding, if Landlord shall so request, at Tenant's sole
cost and expense, by counsel reasonably satisfactory to Landlord. The
obligations of Tenant under this Article 16.1 shall survive the expiration or
-----------
earlier termination of this Lease. Notwithstanding anything to the contrary in
this Lease, Landlord shall not be released or indemnified from Claims arising
from the negligence or willful misconduct of Landlord or its agents,
contractors, licensees or invitees or a breach of Landlord's obligations or
representations under this Lease.
16.2 Exculpation. Tenant, as a material part of the consideration to
-----------
Landlord, hereby assumes all risk of damage to property, injury and death to
persons and all claims of any other nature resulting from Tenant's use of all or
any part of the Leased Premises, the Building and/or the Project, and Tenant
hereby waives all claims in respect thereof against Landlord. Neither Landlord
nor its agents or employees shall be liable for any damaged property of Tenant
entrusted to any employee or agent of Landlord or for loss of or damage to any
property of Tenant by theft or otherwise. Landlord shall not be liable for any
injury or damage to persons or property resulting from any cause, including, but
not limited to, fire, explosion, falling plaster, steam, gas, electricity,
sewage, odor, noise, water or rain which may leak from any part of the Building
or from the pipes, appliances or plumbing works therein, or from the roof of any
structure on the Project, or from any streets or subsurfaces on or adjacent to
the Building or the Project, or from any other place or resulting from dampness
or any other causes whatsoever, except to the extent caused by the negligence or
wilful misconduct of Landlord or its agents, employees or contractors, or
Landlord's breach of this Lease. Neither Landlord nor its employees or agents
shall be liable for the criminal acts by maintenance or other personnel or
contractors serving the Leased Premises, the Building and/or the Project, other
tenants or third parties, unless Landlord is negligent or guilty of willful
misconduct. All property of Tenant kept or stored on the Project shall be so
kept or stored at the risk of Tenant only, and Tenant shall indemnify, defend
and hold Landlord harmless from and against, and shall be responsible for, any
Claims arising out of damage to the same, including subrogation claims by
Tenant's insurance carriers, except to the extent such damage shall be caused by
the willful act or neglect of Landlord and through no fault of Tenant. None of
the events or conditions set forth in this Article 16 shall be deemed a
----------
constructive or actual eviction or result in a termination of this Lease, nor
shall Tenant be entitled to any abatement or reduction of Annual Basic Rent or
Additional Rent by reason thereof. Tenant shall give prompt notice to Landlord
with respect to any defects, fires or accidents which Tenant observes in the
Leased Premises, the Building and/or the Project.
16
<PAGE>
17. ENTRY BY LANDLORD
-----------------
Landlord reserves and shall at any and all times have the right to enter
the Leased Premises at reasonable times and upon twenty four (24) hours notice
(except in the case of an emergency), to inspect the same, to supply janitorial
service and other services to be provided by Landlord to Tenant hereunder, to
submit the Leased Premises to prospective purchasers or (during the last six (6)
months of the Lease term only) tenants, to post notices of non-responsibility,
and to alter, improve or repair the Leased Premises and any portion of the
Building of which the Leased Premises are a part, without abatement of Annual
Basic Rent or Additional Rent, and may for that purpose erect scaffolding and
other necessary structures where reasonably required by the character of the
work to be performed, always providing that access into the Leased Premises
shall not be blocked thereby, and further providing that the business of Tenant
shall not be interfered with unreasonably. Tenant hereby waives any claim for
damages for any injury or inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Leased Premises or any
loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at
all times have and retain a key with which to unlock all the doors in, upon or
about the Leased Premises, excluding Tenant's vaults and safes, and Landlord
shall have the right to use any and all means which Landlord may deem proper to
open such doors in an emergency in order to obtain entry to the Leased Premises,
and any entry to the Leased Premises obtained by Landlord by any such means or
otherwise shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Leased Premises or an
eviction of Tenant from all or any portion of the Leased Premises. Nothing in
this Article 17 shall be construed as obligating Landlord to perform any
----------
repairs, alterations or maintenance except as otherwise expressly required
elsewhere in this Lease. Notwithstanding anything to the contrary in this Lease,
any entry by Landlord and Landlord's agents shall not impair Tenant's operations
more than reasonably necessary, and shall comply with Tenant's reasonable
security measures.
18. RESERVED
--------
19. ASSIGNMENT AND SUBLETTING
-------------------------
19.1 Consent of Landlord Required. Tenant shall not transfer or assign
----------------------------
this Lease or any right or interest hereunder, or sublet the Leased Premises or
any part thereof, without first obtaining Landlord's prior written consent,
which consent shall not be unreasonably withheld. No transfer or assignment
(whether voluntary or involuntary, by operation of law or otherwise) or
subletting shall be valid or effective without such prior written consent.
Should Tenant attempt to make or allow to be made any such transfer, assignment
or subletting, except as aforesaid, or should any of Tenant's rights under this
Lease be sold or otherwise transferred by or under court order or legal process
or otherwise, then, and in any of the foregoing events Landlord may, at its
option, treat such act as a default by Tenant. Should Landlord consent to a
transfer, assignment or subletting, such consent shall not constitute a waiver
of any of the restrictions or prohibitions of this Article 19, and such
----------
restrictions or prohibitions shall apply to each successive transfer, assignment
or subletting hereunder, if any. Notwithstanding the foregoing, Landlord's
consent shall not be required for any sublet, assignment or transfer of the
Leased Premises or this Lease to (a) a subsidiary, affiliate or corporation
controlling, controlled by or under common control with Tenant, (b) a successor
corporation related to Tenant by merger, consolidation, nonbankruptcy
reorganization, or government action, or (c) a purchaser of substantially all of
Tenant's assets or stock (collectively, "Permitted Transfers").
-------------------
19.2 Deemed Transfers. For the purposes of this Article 19 and other than
---------------- ----------
Permitted Transfers, an assignment shall be deemed to include the following:
(a) if Tenant is a partnership, a withdrawal or change (voluntary, involuntary,
by operation of law or otherwise) of any of the partners thereof, a purported
assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by
operation of law or otherwise) by any partner thereof of such partner's interest
in Tenant, or the dissolution of the partnership; (b) if Tenant consists of more
than one person, a purported assignment, transfer, mortgage or encumbrance
(voluntary, involuntary, by operation of law or otherwise) from one person unto
the other or others; (c) if Tenant (or a constituent partner of Tenant) is a
corporation, any dissolution, merger, consolidation or reorganization of Tenant
(or such constituent partner), or any change in the ownership (voluntary,
involuntary, by operation of law, creation of new stock or otherwise) of fifty
percent (50%) or more of its capital stock in one or a series of related
transactions; (d) if Tenant is an unincorporated association, a purported
assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by
operation of law or otherwise) of any interest in such unincorporated
association; or (e) if Tenant is a limited liability company, a withdrawal or
change of any of the members thereof, a purported assignment, transfer, mortgage
or encumbrance (voluntary, involuntary, by operation of law or otherwise) by any
member of such member's interest in Tenant, or the dissolution of the limited
liability company.
19.3 Delivery of Information. If Tenant wishes at any time to assign this
-----------------------
Lease or sublet the
17
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Leased Premises or any portion thereof, it shall first notify Landlord of its
desire to do so and shall submit in writing to Landlord: (a) the name of the
proposed subtenant or assignee; (b) the nature of the proposed subtenant's or
assignee's business to be carried on in the Leased Premises; (c) the terms and
the provisions of the proposed sublease or assignment; and (d) such financial
information as Landlord may reasonably request concerning the proposed subtenant
or assignee. Tenant's failure to comply with the provisions of this Article 19.3
------------
shall entitle Landlord to withhold its consent to the proposed assignment or
subletting.
19.4 Recapture. If Tenant proposes to assign its interest in this Lease or
---------
sublet (for the remainder of the term) all or any part of the Leased Premises
for which Landlord's consent is required, Landlord may, at its option, upon
written notice to Tenant within thirty (30) days after Landlord's receipt of the
information specified in Article 19.3 above, elect to recapture the portion of
------------
the Leased Premises to be assigned or sublet, and within sixty (60) days after
notice of such election has been given to Tenant, this Lease shall terminate as
to the portion of the Leased Premises recaptured unless Tenant within such sixty
(60) day period delivers notice to Landlord rescinding its proposal to assign or
sublet. If all or a portion of the Leased Premises is recaptured by Landlord
pursuant to this Article 19.4, Tenant shall promptly execute and deliver to
------------
Landlord a termination agreement setting forth the termination date with respect
to the Leased Premises or the recaptured portion thereof, and prorating the
Annual Basic Rent, Additional Rent and other charges payable hereunder to such
date. If Landlord does not elect to recapture as set forth above, Tenant may
thereafter enter into a valid assignment or sublease with respect to the Leased
Premises, provided that Landlord consents thereto pursuant to this Article 19,
----------
and provided further, that (a) such assignment or sublease is executed within
ninety (90) days after Landlord has given its consent, (b) Tenant pays all
amounts then owed to Landlord under this Lease, (c) there is not in existence
an Event of Default as of the effective date of the assignment or sublease, (d)
there have been no material changes with respect to the financial condition of
the proposed subtenant or assignee or the business such party intends to conduct
in the Leased Premises, and (e) a fully executed original of such assignment or
sublease providing for an express assumption by the assignee or subtenant of all
of the terms, covenants and conditions of this Lease is promptly delivered to
Landlord.
19.5 Adjustment to Rental. In the event Tenant assigns its interest in
--------------------
this Lease or sublets the Leased Premises other than a Permitted Transfer, the
Annual Basic Rent set forth in Article 11.2 above, as adjusted, shall be
------------
increased effective as of the date of such assignment or subletting by fifty
percent (50%) of the rent and other consideration actually paid by any such
assignee or sublessee pursuant to such assignment or sublease if such assignee
or sublessee is paying rent in excess of the Annual Basic Rent as adjusted,
after first deducting therefrom Tenant's reasonable costs of such assignment or
subletting, including brokerage fees, the unamortized value of improvements to
the Leased Premises paid by Tenant, remodeling costs and attorneys' fees.
19.6 No Release from Liability. During the continuance of an Event of
-------------------------
Default, Landlord may collect Annual Basic Rent and Additional Rent from the
assignee, subtenant, occupant or other transferee, and apply the amount so
collected, first to the monthly installments of Annual Basic Rent, then to any
Additional Rent and other sums due and payable to Landlord, and the balance, if
any, to Landlord, but no such assignment, subletting, occupancy, transfer or
collection shall be deemed a waiver of Landlord's rights under this Article 19,
----------
or the acceptance of the proposed assignee, subtenant, occupant or transferee.
Notwithstanding any assignment, sublease or other transfer (with or without the
consent of Landlord), Tenant shall remain primarily liable under this Lease and
shall not be released from performance of any of the terms, covenants and
conditions of this Lease.
19.7 Landlord's Expenses. If Landlord's consent is required to an
-------------------
assignment, sublease or other transfer by Tenant of all or any portion of
Tenant's interest under this Lease, Tenant shall pay or cause to be paid to
Landlord, a transfer fee to reimburse Landlord for administrative expenses and
for reasonable legal, accounting and other out of pocket expenses actually
incurred by Landlord.
19.8 Assumption Agreement. If Landlord consents to an assignment, sublease
--------------------
or other transfer by Tenant of all or any portion of Tenant's interest under
this Lease, Tenant shall execute and deliver to Landlord, and cause the
transferee to execute and deliver to Landlord, an instrument in the form and
substance acceptable to Landlord in which (a) the transferee adopts this Lease
and assumes and agrees to perform, jointly and severally with Tenant, all of the
obligations of Tenant hereunder (as to assignments of this Lease only), (b)
Tenant acknowledges that it remains primarily liable for the payment of Annual
Basic Rent, Additional Rent and other obligations under this Lease, (c) Tenant
subordinates to Landlord's statutory lien, contract lien and security interest,
any liens, security interests or other rights which Tenant may claim with
respect to any property of transferee and (d) the transferee agrees to use and
occupy the Leased Premises solely for the purpose specified in Article 20 and
----------
otherwise in strict accordance with this Lease.
18
<PAGE>
19.9 Withholding Consent. Without limiting the grounds for withholding
-------------------
consent which may be reasonable, it shall be reasonable for Landlord to withhold
consent if the proposed assignee or subtenant is a tenant in default of such
tenant's lease (or the termination by such assignee or subtenant of such lease
to sublease from Tenant will be a default under same) in a building in the
Phoenix metropolitan area owned by Landlord or by an affiliate of Landlord or
any of Landlord's constituent partners or principals; or if the proposed
assignee or subtenant is a governmental or quasi-governmental entity, agency,
department or any subdivision thereof not already a tenant of Landlord or its
affiliates; or if the use by the proposed assignee or subtenant would violate
the terms of this Lease, or any restrictive use covenant or exclusive rights
granted by Landlord at the Project; or if the nature of the proposed assignee or
subtenant or its business would not be consistent with the operation of a
comparable, high quality building; or if the proposed assignee or subtenant does
not intend to occupy the Premises for its own use, or if the proposed assignee
or subtenant is an existing or prospective tenant of the Project with whom
Landlord or its broker are then negotiating leasing space.
20. USE OF LEASED PREMISES AND RUBBISH REMOVAL
------------------------------------------
20.1 Use. The Leased Premises are leased to Tenant solely for the
---
Permitted Use set forth in Article 1.9 above and for no other purpose whatsoever
-----------
without Landlord's prior written consent, which may be withheld by Landlord in
its sole and absolute discretion. Tenant shall not use or occupy or permit the
Leased Premises to be used or occupied, nor shall Tenant do or permit anything
to be done in or about the Leased Premises nor bring or keep anything therein
which will in any way increase the existing rate of or affect any casualty or
other insurance on the Building, the Project or any of their respective contents
other than the Permitted Use (unless Tenant pays such increase), or make void or
voidable or cause a cancellation of any insurance policy covering the Building,
the Project or any part thereof or any of their respective contents. Tenant
shall not do or permit anything to be done in or about the Leased Premises, the
Building and/or the Project which will in any way obstruct or interfere with the
rights of other tenants or occupants of the Building or the Project or injure or
annoy them. Tenant shall not use or allow the Leased Premises to be used for
any improper, immoral, unlawful or objectionable purpose, nor shall Tenant
cause, maintain or permit any nuisance in, on or about the Leased Premises, the
Building and/or the Project. In addition, Tenant shall not commit any waste in
or upon the Leased Premises, the Building and/or the Project. Tenant shall not
use the Leased Premises, the Building and/or the Project or permit anything to
be done in or about the Leased Premises, the Building and/or the Project which
will in any way conflict with any matters of record, or any law, statute,
ordinance or governmental rule or regulation now in force or which may hereafter
be enacted or promulgated, and shall, at its sole cost and expense, promptly
comply with all matters of record and all laws, statutes, ordinances and
governmental rules, regulations and requirements now in force or which may
hereafter be in force and with the requirements of any Board of Fire
Underwriters or other similar body now or hereafter constituted, foreseen or
unforeseen, ordinary as well as extraordinary, relating to or affecting the
condition, use or occupancy of the Project, excluding capital changes not
relating to or affected by Tenant's improvements or acts. The judgment of any
court of competent jurisdiction or the admission by Tenant in any action against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated any
matters of record, or any law, statute, ordinance or governmental rule,
regulation or requirement, shall be conclusive of that fact between Landlord and
Tenant. In addition, Tenant shall not place a load upon any floor of the Leased
Premises which exceeds the load per square foot which the floor was designed to
carry, nor shall Tenant install business machines or other mechanical equipment
in the Leased Premises which cause noise or vibration that may be transmitted to
the structure of the Building.
20.2 Rubbish Removal. Tenant shall keep the Leased Premises clean. Tenant
---------------
shall not burn any materials or rubbish of any description upon the Leased
Premises. Tenant shall keep all accumulated rubbish in covered containers. In
the event Tenant fails to keep the Leased Premises in the proper condition after
reasonable notice to Tenant, Landlord may cause the same to be done for Tenant
and Tenant shall pay the expenses incurred by Landlord on demand, together with
interest at the Default Rate, as Additional Rent. Tenant shall, at its sole
cost and expense, comply with all present and future laws, orders and
regulations of all state, county, federal, municipal governments, departments,
commissions and boards regarding the collection, sorting, separation, and
recycling of waste products, garbage, refuse and trash. Tenant shall sort and
separate such waste products, garbage, refuse and trash into such categories as
provided by law. Each separately sorted category of waste products, garbage,
refuse and trash shall be placed in separate receptacles reasonably approved by
Landlord. Such separate receptacles may, at Landlord's option, be removed from
the Leased Premises in accordance with a collection schedule prescribed by law.
Landlord reserves the right to refuse to collect or accept from Tenant any waste
products, garbage, refuse or trash that is not separated and sorted as required
by law, and to require Tenant to arrange for such collection at Tenant's sole
cost and expense using a contractor reasonably satisfactory to
19
<PAGE>
Landlord. Tenant shall pay all costs, expenses, fines, penalties or damages that
may be imposed on Landlord or Tenant by reason of Tenant's failure to comply
with the provisions of this Article 20.2, and, at Tenant's sole cost and
------------
expense, Tenant shall indemnify, defend and hold Landlord and Landlord's agents
and employees harmless (including reasonable legal fees and expenses) from and
against, and shall be responsible for, all actions, claims, liabilities and
suits arising from such noncompliance, utilizing counsel reasonably satisfactory
to Landlord.
21. SUBORDINATION AND ATTORNMENT
----------------------------
21.1 Subordination. This Lease and all rights of Tenant hereunder shall
-------------
be, at the option of Landlord, subordinate to (a) all matters of record, (b)
all ground leases, overriding leases and underlying leases (collectively
referred to as the "leases") of the Building or the Project now or hereafter
------
existing, (c) all mortgages and deeds of trust (collectively referred to as the
"mortgages") which may now or hereafter encumber or affect the Building or the
---------
Project, and (d) all renewals, modifications, amendments, replacements and
extensions of leases and mortgages and to spreaders and consolidations of the
mortgages, whether or not leases or mortgages shall also cover other lands,
buildings or leases. In confirmation of such subordination, Tenant shall
promptly execute, acknowledge and deliver any instrument that Landlord, Superior
Lessor or Superior Mortgagee or any of their respective assigns or successors in
interest may reasonably request to evidence such subordination, provided such
instrument contains nondisturbance language reasonably satisfactory to Tenant.
Prior to the Commencement Date, Landlord will obtain from its existing lender a
subordination, nondisturbance and attornment agreement in form reasonably
acceptable to Tenant and such lender. Any lease to which this Lease is subject
and subordinate is called a "Superior Lease" and the lessor under a Superior
--------------
Lease or its assigns or successors in interest is called a "Superior Lessor".
---------------
Any mortgage to which this Lease is subject and subordinate is called a
"Superior Mortgage" and the holder of a Superior Mortgage is called a
- -------------------
"Superior Mortgagee". If Landlord, a Superior Lessor or a Superior Mortgagee
------------------
requires that such instruments be executed by Tenant, Tenant's failure to do so
within ten (10) business days after request therefor shall be deemed a breach
under this Lease. Tenant waives any right to terminate this Lease because of any
foreclosure proceedings. Notwithstanding anything to the contrary herein, as a
condition to the subordination of Tenant's leasehold interest to a Superior
Lessor or Superior Mortgagee, Landlord shall obtain from any such Superior
Lessor or Superior Mortgagee a subordination, nondisturbance and attornment
agreement in form reasonably satisfactory to Tenant.
21.2 Attornment. If any Superior Lessor or Superior Mortgagee (or any
----------
purchaser at a foreclosure sale) succeeds to the rights of Landlord under this
Lease, whether through possession or foreclosure action, or the delivery of a
new lease or deed (a "Successor Landlord"), Tenant shall attorn to and recognize
------------------
such Successor Landlord as Tenant's landlord under this Lease and shall promptly
execute and deliver any instrument that such Successor Landlord may reasonably
request to evidence such attornment.
22. ESTOPPEL CERTIFICATE
--------------------
Tenant shall, whenever requested by Landlord, within twenty (20) days after
written request by Landlord, execute, acknowledge and deliver to Landlord a
statement in writing certifying: (a) that this Lease is unmodified and in full
force and effect, (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect); (b)
the dates to which Annual Basic Rent, Additional Rent and other charges are paid
in advance, if any; (c) that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder or specifying such defaults if any
are claimed; (d) that Tenant has paid Landlord the Security Deposit, (e) the
Commencement Date and the scheduled expiration date of the Lease Term, (f) the
rights (if any) of Tenant to extend or renew this Lease or to expand the Leased
Premises and (g) the amount of Annual Basic Rent, Additional Rent and other
charges currently payable under this Lease. In addition, such statement shall
provide such other information and facts Landlord may reasonably require. Any
such statement may be relied upon by any prospective or existing purchaser,
ground lessee or mortgagee of all or any portion of the Project, as well as by
any other assignee of Landlord's interest in this Lease. Tenant's failure to
deliver such statement within such time shall be conclusive upon Tenant (i) that
this Lease is in full force and effect, without modification except as may be
represented by Landlord; (ii) that there are no uncured defaults in Landlord's
performance hereunder; (iii) that Tenant has paid to Landlord the Security
Deposit; (iv) that not more than one month's installment of Annual Basic Rent or
Additional Rent has been paid in advance; (v) that the Commencement Date and the
scheduled expiration date of the Lease Term are as stated therein, (vii) that
the Annual Basic Rent, Additional Rent and other charges are as set forth
therein, and (viii) that the other information and facts set forth therein are
true and correct.
20
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23. SIGNS
-----
Landlord shall retain absolute control over the exterior appearance of the
Building and the exterior appearance of the Leased Premises as viewed from the
public halls. Tenant shall not install, or permit to be installed, any signs,
lettering, advertising, or any items that will in any way, in the reasonable
opinion of Landlord, adversely alter the exterior appearance of the Building or
the exterior appearance of the Leased Premises as viewed from the exterior of
the Building. Notwithstanding the foregoing, Landlord shall install, at
Tenant's sole cost and expense, letters or numerals at or near the entryway to
the Leased Premises provided Tenant obtains Landlord's prior written consent,
which shall not be unreasonably withheld, as to size, color, design and
location. All such letters or numerals shall be in accordance with the criteria
reasonably established by Landlord for the Building and uniformly enforced.
Notwithstanding the foregoing, Tenant shall have the right to install the
maximum signage permitted by law on the exterior of the building facing the
Greenway-Hayden loop and the parking lot, subject to the approval of the City of
Scottsdale and Landlord, which consent by Landlord shall not be unreasonably
withheld. Landlord hereby approves of Tenant's installation of signage as
described in Exhibit "K" hereto.
-----------
24. PARKING
-------
24.1 Parking Facility. Landlord shall provide, operate and maintain
----------------
parking accommodations (the "Parking Accommodations"), together with necessary
----------------------
access, having a capacity adequate in Landlord's opinion to accommodate the
requirements of the Building and the Project. No storage of vehicles or parking
for more than twenty-four (24) hours shall be allowed without Landlord's prior
written consent. Tenant acknowledges and agrees that Landlord shall not be
liable for damage, loss or theft of property or injury to persons in, upon or
about the Parking Accommodations from any cause whatsoever. Landlord shall have
the right to establish, and from time to time change, alter and amend, and to
enforce against all users of the Parking Accommodations, such reasonable
requirements and restrictions as Landlord deems necessary and advisable for the
proper operation and maintenance of the Parking Accommodations, including,
without limitation, designation of particular areas for reserved, visitor and/or
employee parking as a part of the Rules and Regulations of the Building
referenced in Article 31 hereof.
----------
24.2 Parking Spaces. Tenant is hereby allocated the number of reserved
--------------
covered, reserved uncovered and unreserved parking spaces designated in Article
-------
11.5 hereof, entitling holders to park in either reserved covered, reserved
- ----
uncovered or unreserved parking spaces, as the case may be, located in the
Parking Accommodations located on the Project adjacent to the Leased Premises as
designated by Landlord from time to time for use by Tenant, its employees and
licensees, and for which Tenant shall pay the monthly charges set forth in
Article 11.6 hereof. Landlord and Tenant shall execute, prior to the
- ------------
Commencement Date a Reserved Covered Parking License in the form attached hereto
as Exhibit "D", and an Unreserved Parking License in the form attached as
-----------
Exhibit "F", as applicable. The unreserved parking spaces shall be available to
- -----------
Tenant, its employees and licensees on a "first come, first serve" basis.
Holders of parking passes shall not be entitled to park in visitor parking
spaces so designated by Landlord, or in any other parking spaces other than
those designated by Landlord for use by holders of parking passes.
25. LIENS
-----
Tenant shall keep the Leased Premises free and clear of all mechanic's and
materialmen's liens. If, because of any act or omission (or alleged act or
omission) of Tenant, any mechanics', materialmen's or other lien, charge or
order for the payment of money shall be filed or recorded against the Leased
Premises, the Project or the Building, or against any other property of Landlord
(whether or not such lien, charge or order is valid or enforceable as such),
Tenant shall, at its own expense, cause the same to be canceled or discharged of
record within thirty (30) days after Tenant shall have received written notice
of the filing thereof, or Tenant may, within such thirty (30) day period,
furnish to Landlord, a bond pursuant to A.R.S. (S)33-1004 (or any successor
statute) and satisfactory to Landlord and all Superior Lessors and Superior
Mortgagees against the lien, charge or order, in which case Tenant shall have
the right to contest, in good faith, the validity or amount thereof.
21
<PAGE>
26. HOLDING OVER
------------
It is agreed that the date of termination of this Lease and the right of
Landlord to recover immediate possession of the Leased Premises thereupon is an
important and material matter affecting the parties hereto and the rights of
third parties, all of which have been specifically considered by Landlord and
Tenant. In the event of any continued occupancy or holding over of the Leased
Premises without the express written consent of Landlord (which may be withheld
by Landlord in its sole and absolute discretion) beyond the expiration or
earlier termination of this Lease or of Tenants right to occupy the Leased
Premises, whether in whole or in part, or by leaving property on the Leased
Premises or otherwise, this Lease shall be deemed a monthly tenancy and Tenant
shall pay one and one half (1 1/2) times the Annual Basic Rent then in effect,
in advance at the beginning of the hold-over month(s), plus any Additional Rent
or other charges or payments contemplated in this Lease, and any other
reasonable costs, expenses, damages, liabilities and attorneys' fees incurred by
Landlord on account of Tenant's holding over. Landlord shall promptly notify
Tenant of any letter of intent and lease for the Leased Premises.
27. ATTORNEYS' FEES
---------------
Tenant shall pay to Landlord all reasonable amounts for costs (including
reasonable attorneys' fees) incurred by Landlord in connection with any breach
or default by Tenant under this Lease. Such amounts shall be payable within
five (5) days after receipt by Tenant of Landlord's statement. In addition, if
any action shall be instituted by either of the parties hereto for the
enforcement or interpretation of any of their respective rights or remedies in
or under this Lease, the prevailing party shall be entitled to recover from the
losing party all costs incurred by the prevailing party in such action and any
appeal therefrom, including reasonable attorneys' fees to be fixed by the court.
Further, should Landlord be made a party to any litigation between Tenant and
any third party, then Tenant shall pay all costs and attorneys' fees incurred by
or imposed upon Landlord in connection with such litigation.
28. RESERVED RIGHTS OF LANDLORD
---------------------------
Landlord reserves the following rights, exercisable without liability to
Tenant for damage or injury to property, persons or business and without
effecting an eviction, constructive or actual, or disturbance of Tenant's use or
possession or giving rise to any claim:
(a) To name the Building and the Project and to change the name or street
address of the Building or the Project (provided Landlord provides reasonable
notice thereof to Tenant and pays all of Tenant's reasonable costs in connection
therewith);
(b) To install and maintain all signs, except the Tenant's signs, on the
exterior and interior of the Building and the Project;
(c) To designate all sources furnishing sign painting and lettering;
(d) To have pass keys to the Leased Premises and all doors therein,
excluding Tenant's vaults and safes;
(e) On reasonable prior notice to Tenant, to exhibit the Leased Premises to
any prospective purchaser, mortgagee, or assignee of any mortgage on the
Building or the Project and to others having interest therein at any time during
the Lease Term, and to prospective Tenants during the last six (6) months of the
Lease Term;
(f) To take any and all measures, including entering the Leased Premises
for the purposes of making inspections, repairs, alterations, additions and
improvements to the Leased Premises or to the Building (including, for the
purposes of checking, calibrating, adjusting and balancing controls and other
parts of the Building systems) as may be necessary or desirable for the
operation, improvement, safety, protection or preservation of the Leased
Premises or the Building, or in order to comply with all laws, orders and
requirements of governmental or other authorities, or as may otherwise be
permitted or required by this Lease; provided, however, that Landlord shall
endeavor (except in an emergency) to minimize interference with Tenant's
business in the Leased Premises;
(g) To relocate various facilities within the Building and/or the Project
if Landlord shall determine such relocation to be in the best interest of the
development of the Building and/or the Project, provided, that such relocation
shall not materially restrict access to the Leased Premises;
22
<PAGE>
(h) To change the nature, extent, arrangement, use and location of the
Building Common Areas and the Project Common Areas;
(i) To make alterations or additions to (but not to build additional
stories on) the Building and to build additional buildings or improvements on
the Project; and
(j) To install vending machines of all kinds in the Leased Premises and the
Building, and to receive all of the revenue derived therefrom, provided,
however, that no vending machines shall be installed by Landlord in the Leased
Premises unless Tenant so requests.
Landlord further reserves the exclusive right to the roof of the Building. No
easement for light, air, or view is included in the leasing of the Leased
Premises to Tenant. Accordingly, any diminution or shutting off of light, air or
view by any structure which may be erected on the Project or other properties in
the vicinity of the Building shall in no way affect this Lease or impose any
liability upon Landlord. Notwithstanding anything to the contrary herein,
Landlord shall not exercise any of the foregoing rights to the extent such
exercise would apply discriminatorily to Tenant, unreasonably interfere with
Tenant's use of the Leased Premises or Tenant's parking rights or materially
increase the obligations or decrease the rights of Tenant under this Lease.
29. EMINENT DOMAIN
--------------
29.1 Taking. If the whole of the Building is lawfully and permanently
------
taken by condemnation or any other manner for any public or quasi-public
purpose, or by deed in lieu thereof, this Lease shall terminate as of the date
of vesting of title in such condemning authority and the Annual Basic Rent and
Additional Rent shall be pro rated to such date. If any part of the Building is
so taken, or if the whole of the Building is taken, but not permanently, then
this Lease shall be unaffected thereby, except that (a) Landlord may terminate
this Lease by notice to Tenant within ninety (90) days after the date of vesting
of title in the condemning authority, and (b) if any portion of the Leased
Premises shall be permanently taken and the remaining portion of the Leased
Premises shall not be reasonably sufficient for Tenant to continue operation of
its business, Tenant may terminate this Lease by notice to Landlord within
ninety (90) days after the date of vesting of title in such condemning
authority. This Lease shall terminate on the thirtieth (30th) day after receipt
by Landlord of such notice, by which date Tenant shall vacate and surrender the
Leased Premises to Landlord. The Annual Basic Rent and Additional Rent shall be
pro rated to the earlier of the termination of this Lease or such date as Tenant
is required to vacate the Leased Premises by reason of the taking. If this Lease
is not terminated as a result of a partial taking of the Leased Premises, the
Annual Basic Rent and Additional Rent shall be equitably adjusted according to
the rentable area of the Leased Premises and Building remaining.
29.2 Award. In the event of a taking of all or any part of the Building or
-----
the Project, all of the proceeds or the award, judgment, settlement or damages
payable by the condemning authority shall be and remain the sole and exclusive
property of Landlord, and Tenant hereby assigns all of its right, title and
interest in and to any such award, judgment, settlement or damages to Landlord.
Tenant shall, however, have the right, to the extent that the same shall not
reduce or prejudice amounts properly payable to Landlord, to claim from the
condemning authority, but not from Landlord, such compensation as may be
recoverable by Tenant in its own right for relocation benefits, moving expenses,
and damage to Tenant's personal property and trade fixtures.
30. NOTICES
-------
Any notice or communication given under the terms of this Lease shall be in
writing and shall be delivered in person, sent by any public or private express
delivery service or deposited with the United States Postal Service or a
successor agency, certified or registered mail, return receipt requested,
postage pre-paid, addressed as set forth in the Basic Provisions, or at such
other address as a party may from time to time designate by notice hereunder.
Notice shall be effective upon delivery. The inability to deliver a notice
because of a changed address of which no notice was given or a rejection or
other refusal to accept any notice shall be deemed to be the receipt of the
notice as of the date of such inability to deliver or rejection or refusal to
accept. Any notice to be given by Landlord may be given by the legal counsel
and/or the authorized agent of Landlord.
23
<PAGE>
31. RULES AND REGULATIONS
---------------------
Tenant shall abide by all rules and regulations (the "Rules and
---------
Regulations") of the Building and the Project imposed by Landlord, as attached
hereto as Exhibit "I" or as may hereafter be issued by Landlord. Such Rules and
-----------
Regulations are imposed to enhance the cleanliness, appearance, maintenance,
order and use of the Leased Premises, the Building and the Project, and the
proper enjoyment of the Building and the Project by all tenants and their
clients, customers and employees. The Rules and Regulations may be changed from
time to time upon ten (10) days notice to Tenant. Breach of the Rules and
Regulations, by Tenant shall constitute an Event of Default if such breach is
not fully cured within the applicable cure period after written notice to Tenant
by Landlord. Landlord shall not be responsible to Tenant for nonperformance by
any other tenant, occupant or invitee of the Building or the Project of any
Rules or Regulations. Notwithstanding the foregoing, Tenant shall not be
required to comply with any new rule or regulation unless the same applies non-
discriminatorily to all occupants of the Project, does not unreasonably
interfere with Tenant's use of the Leased Premises or Tenant's parking rights
and does not materially increase the obligations or decrease the rights of
Tenant under this Lease.
32. ACCORD AND SATISFACTION
-----------------------
No payment by Tenant or receipt by Landlord of a lesser amount than the
monthly installment of Annual Base Rent and Additional Rent (jointly called
"Rent" in this Article 32), shall be deemed to be other than on account of the
- ----- ----------
earliest stipulated Rent due and not yet paid, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment as Rent
be deemed an accord and satisfaction. Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Rent or to
pursue any other remedy in this Lease. No receipt of money by Landlord from
Tenant after the termination of this Lease, after the service of any notice
relating to the termination of this Lease, after the commencement of any suit,
or after final judgment for possession of the Leased Premises, shall reinstate,
continue or extend the Lease Term or affect any such notice, demand, suit or
judgment.
33. BANKRUPTCY OF TENANT
--------------------
33.1 Chapter 7. If a petition is filed by, or an order for relief is
---------
entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of
Tenant elects to assume this Lease for the purpose of assigning it, the election
or assignment, or both, may be made only if all of the terms and conditions of
Articles 33.2 and 33.4 below are satisfied. If the trustee fails to elect to
- ----------------------
assume this Lease for the purpose of assigning it within sixty (60) days after
appointment, this Lease will be deemed to have been rejected. To be effective,
an election to assume this Lease must be in writing and addressed to Landlord
and, in Landlord's business judgment, all of the conditions hereinafter stated,
which Landlord and Tenant acknowledge to be commercially reasonable, must have
been satisfied. Landlord shall then immediately be entitled to possession of the
Premises without further obligation to Tenant or the trustee, and this Lease
will be terminated. Landlord's right to be compensated for damages in the
bankruptcy proceeding, however, shall survive.
33.2 Chapters 11 and 13. If Tenant files a petition for reorganization
------------------
under Chapters 11 or 13 of the Bankruptcy Code or a proceeding that is filed by
or against Tenant under any other chapter of the Bankruptcy Code is converted to
a Chapter 11 or 13 proceeding and Tenant's trustee or Tenant as a debtor-in-
possession fails to assume this Lease within sixty (60) days from the date of
the filing of the petition or the conversion, the trustee or the debtor-in-
possession will be deemed to have rejected this Lease. To be effective, an
election to assume this Lease must be in writing and addressed to Landlord and,
in Landlord's business judgment, all of the following conditions, which Landlord
and Tenant acknowledge to be commercially reasonable, must have been satisfied:
(a) The trustee or the debtor-in-possession has cured or has provided
to Landlord adequate assurance, as defined in this Article 33.2, that;
------------
(1) The trustee will cure all monetary defaults under this Lease
within a reasonable period from the date of the assumption; and
(2) The trustee will cure all non-monetary defaults under this
Lease within a reasonable period from the date of the assumption.
(b) The trustee or the debtor-in-possession has compensated Landlord,
or has provided to Landlord adequate assurance, as defined in this Article 33.2,
------------
that within a reasonable period from the date of
24
<PAGE>
the assumption Landlord will be compensated for any pecuniary loss it incurred
arising from the default of Tenant, the trustee, or the debtor-in-possession as
recited in Landlord's written statement of pecuniary loss sent to the trustee or
the debtor-in-possession. For purposes of this Lease, pecuniary loss shall
include all reasonable attorneys' fees and court costs incurred by Landlord in
connection with any bankruptcy proceeding filed by or against Tenant.
(c) The trustee or the debtor-in-possession has provided Landlord with
adequate assurance of the future performance of each of Tenant's obligations
under the Lease; provided, however, that:
(1) The trustee or debtor-in-possession will also deposit with
Landlord as security for the timely payment of Annual Basic Rent and Additional
Rent, an amount equal to three months Annual Basic Rent and Additional Rent
accruing under this Lease.
(2) If not otherwise required by the terms of this Lease, the
trustee or the debtor-in-possession will also pay in advance, on each day that
the Annual Basic Rent is payable, one-twelfth of Tenant's estimated annual
obligations under the Lease for the Additional Rent.
(3) From and after the date of the assumption of this Lease, the
trustee or the debtor-in-possession will pay the Annual Basic Rent and
Additional Rent as provided in Article 5 above.
---------
(4) The obligations imposed upon the trustee or the debtor-in-
possession will continue for Tenant after the completion of bankruptcy
proceedings.
(d) Landlord has determined that the assumption of the Lease will not:
(1) Breach any provisions in any other lease, mortgage,
financing agreement, or other agreement by which Landlord is bound relating to
the Project; or
(2) Disrupt, in Landlord's judgment, the tenant mix of the
Building or the Project or any other attempt by Landlord to provide a specific
variety of Tenants in the Building or the Project that, in Landlord's judgment,
would be most beneficial to all of the tenants of the Building and the Project
and would enhance the image, reputation, and profitability of the Building and
the Project.
(e) For purposes of this Article 33.2 "adequate assurance" means that:
------------ ------------------
(1) Landlord will determine that the trustee or the debtor-in-
possession has, and will continue to have, sufficient unencumbered assets after
the payment of all secured obligations and administrative expenses to assure
Landlord that the trustee or the debtor-in-possession will have sufficient funds
to fulfill Tenant's obligations under this Lease and to keep the Leased Premises
properly staffed with sufficient employees to conduct a fully operational,
actively promoted business on the Leased Premises; and
(2) An order will have been entered segregating sufficient cash
payable to Landlord and/or a valid and perfected first lien and security
interest will have been granted in property of Tenant, trustee, or debtor-in-
possession that is acceptable for value and kind to Landlord, to secure to
Landlord the obligation of the trustee or debtor-in-possession to cure the
monetary or non-monetary defaults under this Lease within the time periods set
forth above.
33.3 Landlord's Right to Terminate. In the event that this Lease is
-----------------------------
assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession
under the provisions of Article 33.2 above and, thereafter, Tenant is either
------------
adjudicated a bankrupt or files a subsequent petition for arrangement under
chapter 11 of the Bankruptcy Code, then Landlord may terminate, at its option,
this Lease and all Tenant's rights under it, by giving written notice of
Landlord's election to terminate.
33.4 Assignment by Trustee. If the trustee or the debtor-in-possession has
---------------------
assumed the Lease, under the terms of Article 33.1 or 33.2 above, and elects to
--------------------
assign Tenant's interest under this Lease or the estate created by that interest
to any other person, that interest or estate may be assigned only if Landlord
acknowledges in writing that the intended assignee has provided adequate
assurance, as defined in this Article 33.4, of future performance of all of the
------------
terms, covenants, and conditions of this Lease to be performed by Tenant.
33.5 Adequate Assurance. For the purposes of this Article 33 "adequate
------------------ ---------- --------
assurance of future performance" means that Landlord has ascertained that each
- -------------------------------
of the following conditions has been satisfied:
25
<PAGE>
(1) The assignee has submitted a current financial statement, audited
by a certified public accountant, that shows a net worth and working capital in
amounts determined by Landlord to be sufficient to assure the future performance
by the assignee of Tenant's obligations under this Lease;
(2) If requested by Landlord, the assignee will obtain guarantees, in
form and substance satisfactory to Landlord from one or more persons who satisfy
Landlord's standards of creditworthiness;
(3) Landlord has obtained all consents or waivers from any third party
required under any lease, mortgage, financing arrangement or other agreement by
which Landlord is bound, to enable Landlord to permit the assignment;
(4) When, pursuant to the Bankruptcy Code, the trustee or the debtor-
in-possession is obligated to pay reasonable use and occupancy charges for the
use of all or part of the Leased Premises, the charges will not be less than the
Annual Basic Rent and Additional Rent.
33.6 Consent of Landlord. Neither Tenant's interest in the Lease nor any
-------------------
estate of Tenant created in the Lease will pass to any trustee, receiver,
assignee for the benefit of creditors, or any other person or entity, or
otherwise by operation of law under the laws of any state having jurisdiction of
the person or property of Tenant unless Landlord consents in writing to the
transfer. Landlord's acceptance of Annual Basic Rent or Additional Rent or any
other payments from any trustee, receiver, assignee, person, or other entity
will not be deemed to have waived, or waive, the need to obtain Landlord's
consent or Landlord's right to terminate this Lease for any transfer of Tenant's
interest under this Lease without that consent.
34. HAZARDOUS MATERIALS
-------------------
34.1 Hazardous Materials Laws. "Hazardous Materials Laws" means any and
------------------------ ------------------------
all federal, state or local laws, ordinances, rules, decrees, orders,
regulations or court decisions (including the so-called "common-law") relating
----------
to hazardous substances, hazardous materials, hazardous waste, toxic substances,
environmental conditions on, under or about the Premises, or soil and ground
water conditions, including, but not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, 42
------
U.S.C. (S)9601, et seq., the Resource Conversation and Recovery Act ("RCRA"), 42
----
U.S.C. (S)6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C.
(S)1801, et seq., any amendments to the foregoing, and any similar federal,
state or local laws, ordinances, rules, decrees, orders or regulations.
34.2 Hazardous Materials. "Hazardous Materials" means any chemical,
------------------- -------------------
compound, material, substance or other matter that: (i) is a flammable
explosive, asbestos, radioactive material, nuclear medicine material, drug,
vaccine, bacteria, virus, hazardous waste, toxic substance, petroleum product,
or related injurious or potentially injurious material, whether injurious or
potentially injurious by itself or in combination with other materials; (ii) is
controlled, designated in or governed by any Hazardous Materials Law; (iii)
gives rise to any reporting, notice or publication requirements under any
Hazardous Materials Law; or (iv) gives rise to any liability, responsibility or
duty on the part of Tenant or Landlord with respect to any third person under
any Hazardous Materials Law.
34.3 Use. Tenant and its agents, employees, contractors and invitees shall
---
not use, generate, release, store, bring onto or otherwise dispose of, on, under
or about, or transport from, the Leased Premises, the Building or the Project,
any Hazardous Materials unless: (a) such use is specifically disclosed to and
approved by Landlord in writing prior to such use, (b) such use is conducted in
compliance with the provisions of this Article 34, or (c) such use is of normal
----------
amounts of Hazardous Materials normally found in general office uses and used in
accordance with all Hazardous Materials Laws. Landlord may approve such use
subject to reasonable conditions to protect the Leased Premises, the Building or
the Project, and Landlord's interests. Landlord may withhold approval if
Landlord determines that such proposed use involves a material risk of a release
or discharge of Hazardous Materials or a violation of any Hazardous Materials
Laws or that Tenant has not provided reasonable assurances of its ability to
remedy such a violation and fulfill its obligations under this Article 34.
----------
34.4 Compliance With Laws. Tenant shall strictly comply with all Hazardous
--------------------
Materials Laws. Tenant shall obtain and maintain in full force and effect all
permits, licenses and other governmental approvals required for Tenant's
operations on the Leased Premises under any Hazardous Materials Laws and shall
comply with all terms and conditions thereof. At Landlord's request, Tenant
shall deliver copies
26
<PAGE>
of, or allow Landlord to inspect, all such permits, licenses and approvals.
Tenant shall perform any monitoring, investigation, clean-up, removal and other
remedial work (collectively, "Remedial Work") required as a result of any
-------------
release or discharge of Hazardous Materials affecting the Leased Premises, the
Building or the Project, or any violation of Hazardous Materials Laws in any
such case by Tenant or any assignee or sublessee of Tenant or their respective
agents, contractors, employees, licensees, or invitees. Landlord shall have the
right to intervene in any governmental action or proceeding involving any
Remedial Work, and to approve performance of the work, in order to protect
Landlord's interests.
34.5 Compliance With Insurance Requirements. Tenant shall comply with the
--------------------------------------
requirements of Landlord's and Tenant's respective insurers regarding Tenant's
use of Hazardous Materials and with such insurers' recommendations based upon
prudent industry practices regarding management of Hazardous Materials.
34.6 Notice; Reporting. Tenant shall notify Landlord, in writing, within
-----------------
two (2) days after any of the following: (a) Tenant's knowledge of a release or
discharge of any Hazardous Material, whether or not the release or discharge is
in quantities that would otherwise be reportable to a public agency; (b)
Tenant's receipt of any order of a governmental agency requiring any Remedial
Work pursuant to any Hazardous Materials Laws; (c) Tenant's receipt of any
warning, notice of inspection, notice of violation or alleged violation, or
Tenant's receipt of notice or knowledge of any proceeding, investigation of
enforcement action, pursuant to any Hazardous Materials Laws; or (d) Tenant's
receipt of notice or knowledge of any claims made or threatened by any third
party against Tenant or the Leased Premises, the Building or the Project,
relating to any loss or injury resulting from Hazardous Materials. Tenant shall
deliver to Landlord copies of all test results, reports and business or
management plans required to be filed with any governmental agency pursuant to
any Hazardous Materials Laws.
34.7 Termination; Expiration. Upon the termination or expiration of this
-----------------------
Lease, Tenant shall remove any equipment, improvements or storage facilities
utilized by Tenant in connection with any Hazardous Materials used by Tenant and
shall, clean up, detoxify, repair and otherwise restore the Leased Premises to a
condition free of Hazardous Materials used by Tenant, to the extent required by
Hazardous Materials Laws.
34.8 Indemnity. Tenant shall protect, indemnify, defend and hold Landlord
---------
harmless from and against, and shall be responsible for, any and all claims,
costs, expenses, suits, judgments, actions, investigations, proceedings and
liabilities arising out of or in connection with any breach of any provisions of
this Article 34 or directly or indirectly arising out of the use, generation,
----------
storage, release, disposal or transportation of Hazardous Materials by Tenant or
any sublessee or assignee of Tenant, or their respective agents, contractors,
employees, licensees, or invitees, on, under or about the Leased Premises, the
Building or the Project during the Lease Term or Tenant's occupancy of the
Leased Premises in violation of applicable laws or this Lease, including, but
not limited to, all foreseeable and unforeseeable consequential damages and the
cost of any Remedial Work. The consent by Landlord to the use, generation,
storage, release, disposal or transportation of Hazardous Materials shall not
excuse Tenant from Tenant's indemnification obligations pursuant to this Article
-------
34. The foregoing indemnity, as to Hazardous Materials only, shall be in lieu of
- --
the indemnification provisions of Article 16 of this Lease. Tenant's and
----------
Landlord's obligations pursuant to this Article 34 shall survive the termination
----------
or expiration of this Lease. To the actual knowledge of Landlord, without
inquiry or the duty to inquire, (a) no Hazardous Material is present on the
Project or the soil, surface water or groundwater thereof, (b) no underground
storage tanks are present on the Project, and (c) no action, proceeding or claim
is pending or threatened regarding the Project concerning any Hazardous Material
or pursuant to any Hazardous Materials Laws. Under no circumstance shall Tenant
be liable for, and Landlord shall release Tenant, its agents, contractors,
stockholders, directors, successors, representatives, and assigns for, from and
against all losses, costs, claims, liabilities and damages (including attorneys'
fees and consultants' fees) of every type and nature, directly or indirectly
arising out of or in connection with any Hazardous Material present at any time
on or about the Project, or the soil, air, improvements, groundwater or surface
water thereof, or in violation of any laws, orders or regulations, relating to
any such Hazardous Material, except to the extent that any of the foregoing
results from Tenant's or its agents', employees', contractors' or invitees'
discharge, release, use, transporting or disposal of Hazardous Materials. The
indemnity in this Article 34 constitutes the entire agreement of Landlord and
----------
Tenant regarding indemnification for Hazardous Materials. No other provision of
this Lease shall be deemed to apply thereto.
34.9 Assignment; Subletting. If Landlord's consent is required for an
----------------------
assignment of this Lease or a subletting of the Leased Premises, Landlord shall
have the right to refuse such consent if the possibility of a release of
Hazardous Materials is substantial as a result of the assignment or sublease or
if Landlord does not receive reasonable assurances that the new tenant has the
experience and the financial ability to
27
<PAGE>
remedy a violation of the Hazardous Materials Laws and fulfill its obligations
under this Article 34.
----------
34.10 Entry and Inspection; Cure. Landlord and its agents, employees and
--------------------------
contractors, shall have the right, but not the obligation, to enter the Leased
Premises at all reasonable times to inspect the Leased Premises and Tenant's
compliance with the terms and conditions of this Article 34, or to conduct
----------
investigations and tests. No prior notice to Tenant shall be required in the
event of an emergency, or if Landlord has reasonable cause to believe that
violations of this Article 34 have occurred, or if Tenant consents at the time
----------
of entry. In all other cases, Landlord shall give at least twenty-four (24)
hours prior notice to Tenant. Landlord shall have the right, but not the
obligation, to remedy any violation by Tenant of the provisions of this Article
-------
34 or to perform any Remedial Work related to Tenant's or its agents',
- --
employees', contractors' or invitees' use of Hazardous Materials which is
necessary or appropriate as a result of any governmental order, investigation or
proceeding. Tenant shall pay, upon demand, as Additional Rent, all costs
incurred by Landlord in remedying such violations or performing all such
Remedial Work, plus interest thereon at the Default Rate from the date of demand
until the date received by Landlord.
34.11 Event of Default. The release or discharge of any Hazardous
----------------
Material or the violation of any Hazardous Materials Law shall constitute a
default by Tenant under this Lease. In addition to and not in lieu of the
remedies available under this Lease as a result of such Event of Default,
Landlord shall have the right, without terminating this Lease, to require Tenant
to suspend its operations and activities on the Leased Premises until Landlord
is satisfied that appropriate Remedial Work has been or is being adequately
performed and Landlord's election of this remedy shall not constitute a waiver
of Landlord's right thereafter to pursue the other remedies set forth in this
Lease.
35. MISCELLANEOUS
-------------
35.1 Entire Agreement, Amendments. This Lease and any Exhibits and Riders
----------------------------
attached hereto and forming a part hereof, set forth all of the covenants,
promises, agreements, conditions and understandings between Landlord and Tenant
concerning the Leased Premises and there are no covenants, promises, agreements,
representations, warranties, conditions or understandings either oral or written
between them other than as contained in this Lease. Except as otherwise
provided in this Lease, no subsequent alteration, amendment, change or addition
to this Lease shall be binding unless it is in writing and signed by both
Landlord and Tenant.
35.2 Time of the Essence. Time is of the essence of each and every term,
-------------------
covenant and condition of this Lease.
35.3 Binding Effect. The covenants and conditions of this Lease shall,
--------------
subject to the restrictions on assignment and subletting, apply to and bind the
heirs, executors, administrators, personal representatives, successors and
assigns of the parties hereto.
35.4 Recordation. Neither this Lease nor any memorandum hereof shall be
-----------
recorded by Tenant. At the sole option of Landlord, Tenant and Landlord shall
execute, and Landlord may record, a short form memorandum of this Lease in form
and substance satisfactory to Landlord.
35.5 Governing Law. This Lease and all the terms and conditions thereof
-------------
shall be governed by and construed in accordance with the laws of the State of
Arizona.
35.6 Defined Terms and Paragraph Headings. The words "Landlord" and
------------------------------------ --------
"Tenant" as used in this Lease shall include the plural as well as the singular.
- -------
Words used in masculine gender include the feminine and neuter. If there is
more than one Tenant, the obligations in this Lease imposed upon Tenant shall be
joint and several. The paragraph headings and titles to the paragraphs of this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof.
35.7 Representations and Warranties of Tenant. Tenant represents and
----------------------------------------
warrants to Landlord as follows:
(a) Tenant has been duly organized, is validly existing, and is in
good standing under the laws of its State of Delaware and is qualified to
transact business in Arizona. All necessary action on the part of Tenant has
been taken to authorize the execution, delivery and performance of this Lease
and of the other documents, instruments and agreements, if any, provided for
herein. The persons who have executed this Lease on behalf of Tenant are duly
authorized to do so;
(b) This Lease constitutes the legal, valid and binding obligation of
Tenant,
28
<PAGE>
enforceable against Tenant in accordance with its terms, subject, however, to
bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar
laws relating to or affecting the rights of creditors generally, general
principles of equity, whether enforceability is considered in a proceeding in
equity or at law, and to the qualification that certain waivers, procedures,
remedies and other provisions of this Lease may be unenforceable under or
limited by applicable law, however, none of the foregoing shall prevent the
practical realization to Landlord of the benefits intended by this Lease; and
(c) To the best of its knowledge, Tenant is not, and the execution,
delivery and performance of this Lease and the documents, instruments and
agreements, if any, provided for herein will not result in any breach of or
default under any other document, instrument or agreement to which Tenant is a
party or by which Tenant is subject or bound, that would have a material adverse
effect on Tenant's ability to perform its obligations hereunder.
35.8 No Waiver. The failure of either party to insist in any one or more
---------
instances upon the strict performance of any one or more of the obligations of
this Lease, or to exercise any election herein contained, shall not be construed
as a waiver or relinquishment for the future of the performance of such one or
more obligations of this Lease or the right to exercise such election, but the
same shall continue and remain in full force and effect with respect to any
subsequent breach, act or omission.
35.9 Severability. If any clause or provision of this Lease is or becomes
------------
illegal or unenforceable because of any present or future law or regulation of
any governmental body or entity effective during the Lease Term, the intention
of the parties is that the remaining provisions of this Lease shall not be
affected thereby.
35.10 Exhibits. If any provision contained in an Exhibit, Rider or
--------
Addenda to this Lease is inconsistent with any other provision of this Lease,
the provision contained in this Lease shall supersede the provisions contained
in such Exhibit, Rider or Addenda, unless otherwise provided.
35.11 Fair Meaning. The language of this Lease shall be construed to its
------------
normal and usual meaning and not strictly for or against either Landlord or
Tenant. Landlord and Tenant acknowledge and agree that each party has reviewed
and revised this Lease and that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not apply to the
interpretation of this Lease, or any Exhibits, Riders or amendments hereto.
35.12 No Merger. The voluntary or other surrender of this Lease by Tenant
---------
or a mutual cancellation of this Lease shall not work as a merger and shall, at
Landlord's option, either terminate any or all existing subleases or
subtenancies, or operate as an assignment to Landlord of any or all of such
subleases or subtenancies.
35.13 Force Majeure. Any prevention, delay or stoppage due to strikes,
-------------
lockouts, labor disputes, acts of God, inability to obtain labor or materials
for reasonable substitutes therefor, governmental restrictions, regulations or
controls, judicial orders, enemy or hostile government actions, civil commotion,
fire or other casualty and other causes beyond the reasonable control of
Landlord shall excuse the Landlord's performance hereunder for the period of any
such prevention, delay, or stoppage.
35.14 Government Energy or Utility Controls. In the event of the
-------------------------------------
imposition of federal, state or local governmental controls, rules, regulations
or restrictions on the use or consumption of energy or other utilities during
the Lease Term, both Landlord and Tenant shall be bound thereby. In the event
of a difference in interpretation of any governmental control, rule, regulation
or restriction between Landlord and Tenant, the interpretation of Landlord shall
prevail, and Landlord shall have the right to enforce compliance, including the
right of entry into the Leased Premises to effect compliance.
35.15 Shoring. If any excavation or construction is made adjacent to,
-------
upon or within the Building, or any part thereof, Tenant shall afford to any and
all persons causing or authorized to cause such excavation or construction
license to enter onto the Leased Premises for the purpose of doing such work as
such persons shall deem necessary to preserve the Building or any portion
thereof from injury or damage and to support the same by proper foundations,
braces and supports without any claim for damages, indemnity or abatement of
Annual Basic Rent or Additional Rent or for a constructive or actual eviction of
Tenant. Such entry shall be subject to the provisions of Article 17 hereof.
----------
35.16 Transfer of Landlord's Interest. The term "Landlord" as used in
------------------------------- --------
this Lease, insofar as the covenants or agreements on the part of the Landlord
are concerned, shall be limited to mean and include only the owner or owners of
Landlord's interest in this Lease at the time in question. Upon any transfer or
29
<PAGE>
transfers of such interest, the Landlord herein named (and in the case of any
subsequent transfer, the then transferor) shall thereafter be relieved of all
liability for the performance of any covenants or agreements on the part of the
Landlord contained in this Lease to be performed thereafter, provided any
transferees assume in writing future obligations of Landlord hereunder.
35.17 Limitation on Landlord's Liability. If Landlord becomes obligated
----------------------------------
to pay Tenant any judgment arising out of any failure by the Landlord to perform
or observe any of the terms, covenants, conditions or provisions to be performed
or observed by Landlord under this Lease, Tenant shall be limited in the
satisfaction of such judgment solely to Landlord's interest in the Building and
the Project or any proceeds arising from the sale thereof and no other property
or assets of Landlord or the individual partners, directors, officers or
shareholders of Landlord or its constituent partners shall be subject to levy,
execution or other enforcement procedure whatsoever for the satisfaction of any
such money judgment.
35.18 Brokerage Fees. Tenant warrants and represents that it has not
--------------
dealt with any realtor, broker or agent in connection with this Lease except the
Broker identified in Article 11.8 above. Tenant shall indemnify, defend and hold
------------
Landlord harmless from and against, and shall be responsible for, any cost,
expense or liability (including the cost of suit and reasonable attorneys' fees)
for any compensation, commission or charges claimed by any other realtor, broker
or agent in connection with this Lease or by reason of any act of Tenant.
35.19 Continuing Obligations. All obligations of Landlord and Tenant
----------------------
hereunder not fully performed as of the expiration or earlier termination of
this Lease shall survive the expiration or earlier termination of this Lease,
including, without limitation, all payment obligations with respect to Annual
Basic Rent, Additional Rent and all obligations concerning the condition of the
Premises.
35.20 Reasonable Consents. Whenever this Lease requires an approval,
-------------------
consent, determination or judgment by either Landlord or Tenant, unless another
standard is expressly set forth, such approval, consent, determination or
judgment shall be reasonable and shall not be unreasonably withheld or delayed.
Any expenditure by a party permitted or required under this Lease, for which
such party demands reimbursement, shall be reasonably incurred, and shall be
substantiated by documentary evidence available for inspection and review by the
other party.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
date and year first above written.
LANDLORD:
SEOC I Limited Partnership, an Arizona limited
partnership
By: Cavan Investments, Ltd., an Arizona
corporation, its General Partner
By: /s/ David V. Cavan
--------------------------------------
Name: David V. Cavan
--------------------------------------
Its: President
--------------------------------------
30
<PAGE>
TENANT:
CBT SYSTEMS USA, LTD., a Delaware corporation
By: /s/ James J. Buckley
----------------------------------------
Name: James J. Buckley
--------------------------------------
Its: President & CEO
---------------------------------------
Witness for purposes of
Power of Attorney:
By: /s/ Gregory M. Priest
Witness /s/ Greg Porto ----------------------------------------
Name: Greg Porto Name: Gregory M. Priest
--------------------------------------
Its: VP, Finance, CFO & Assistant Secretary
---------------------------------------
If Tenant is a CORPORATION, the
-----------
authorized officers must sign on
behalf of the corporation and
indicate the capacity in which
they are signing. The Lease must
be executed by the president or
vice president and the secretary
---
or assistant secretary, unless the
------
bylaws or a resolution of the
board of directors shall otherwise
provide, in which event, the bylaws
or a certified copy of the resolution,
as the case may be, must be attached
to this Lease.
31
<PAGE>
RIDER "1"
---------
Rider 1 to Lease dated December 31, 1997, between SEOC I LIMITED
PARTNERSHIP, an Arizona limited partnership ("Landlord"), and CBT SYSTEMS
--------
USA, LTD., a Delaware corporation ("Tenant").
------
1. Option to Extend. Provided that an Event of Default does not then
----------------
exist at the time of exercise, then Tenant shall have, and is hereby granted,
the option to extend the Initial Term for one (1) additional period of five (5)
years. Except as set forth in Section 2 of this Rider, Tenant's occupancy of
---------
the Leased Premises during the Renewal Term shall be governed by all of the
terms, conditions, covenants and provisions of the Lease to which this Rider is
attached except that Tenant shall have no further option to extend the Initial
Term after the expiration of the Renewal Term. If Tenant desires to exercise
its option to extend the Initial Term, it must give Landlord notice in writing
("Option Notice") of its intent to do so at least nine (9) months, but not more
-------------
than twenty-four (24) months prior to the expiration of the Initial Term. For
the purposes of the Lease to which this Rider is attached, the phrase "Lease
-----
Term" shall be deemed to refer to the Initial Term and the Renewal Term to the
- ----
extent applicable.
2. Amendment to Basic Provisions. In the event Tenant exercises such
-----------------------------
option to extend, the following terms shall apply:
(a) Lease Term. Article 1.10 of the Lease entitled "Lease Term" is
---------- ------------ ----------
hereby deleted and replaced with the following:
1.10 Lease Term.
----------
(a) Initial Term: Five (5) years and one (1) month;
------------
(b) Renewal Term: Five (5) years.
------------
(b) Annual Basic Rent. Article 1.12 of the Lease entitled "Annual
----------------- ------------ ------
Basic Rent" is hereby deleted and replaced with the following:
- ----------
1.12 Annual Basic Rent.
-----------------
(a) Initial Term: LEASE MONTH 1: No charge for Basic Rent;
LEASE MONTHS 2-37: $30,898.29 per month based upon a rental rate of $14.50 per
rentable square foot; LEASE MONTHS 38-61: $32,496.48 per month based upon a
rental rate of $15.25 per rentable square foot. Landlord and Tenant shall have
fifteen (15) business days after Landlord receives the Option Notice within
which to agree on the Annual Basic Rental for the Renewal Term based upon the
"THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" as defined below. If the
- ----------------------------------------------
parties agree on the Annual Basic Rental for the Renewal Term within fifteen
(15) business days, they shall amend this Lease by stating the Annual Basic
Rental for the Renewal Term.
(b) If they are unable to agree on the Annual Basic Rental
for the Renewal Term within the fifteen (15) business day period, then the
Annual Basic Rental shall be the "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES"
---------------------------------------------
as determined in accordance with this Rider.
(c) The "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES"
---------------------------------------------
means what a landlord under no compulsion to lease the Premises and a tenant
under no compulsion to lease the Premises, would determine as rent for the
Renewal Term, as of the commencement of the Renewal Term, taking into
consideration the use permitted under the Lease, the quality, size, shape,
design and location of the Premises within the Building and the location of the
Building.
(d) Within seven (7) business days after the expiration of
the fifteen (15) business day period set forth in Subsection 1.13 above,
Landlord and Tenant shall each appoint a real estate appraiser with at least
five (5) full years full-time commercial appraisal experience in the area in
which the Premises are located to appraise the then fair market rental value of
the Premises. If either the Landlord or the Tenant does not appoint an appraiser
within ten (10) days after the other has given notice of the name of its
appraiser, the single appraiser appointed shall be the sole appraiser and shall
set the then fair market rental value of the Premises. If two (2) appraisers are
appointed pursuant to this paragraph, they shall meet promptly and attempt to
set the then fair market rental value of the Premises. If they are unable to
agree within the thirty (30) days after the second appraiser has been appointed,
they shall attempt to elect
Rider 1-1
<PAGE>
a third appraiser meeting the qualifications stated in this paragraph within ten
(10) days after the last day the two (2) appraisers are given to set the then
fair market rental value of the Premises. If they are unable to agree on the
third appraiser, either the Landlord or Tenant may petition the presiding civil
court judge of the Maricopa County Superior Court for the selection of a third
appraiser who meets the qualifications stated in this paragraph. Each party
shall pay the cost of its own appraiser and one half (1/2) of the cost of the
third appraiser.
Within thirty (30) days after the selection of the third appraiser, a
majority of the appraisers shall set the then fair market rental value of the
Premises. If a majority of the appraisers are unable to set the then fair
market rental value of the Premises within thirty (30) days after selection of
the third appraiser, the three (3) appraisals shall be averaged and the average
shall be the then fair market rental value of the Premises.
3. Definitions. Capitalized terms used in this Rider without definition
-----------
shall have the definition assigned to such terms in the Lease to which this
Rider is attached, unless the context requires otherwise.
4. Full Force and Effect. Except as specifically modified by this Rider,
---------------------
the Lease to which this Rider is attached remains in full force and effect.
- --------------------------------- ---------------------------------
Landlord's Initials Tenant's Initials
Rider 1-2
<PAGE>
RIDER "2"
---------
Rider 2 to Lease dated December ____, 1997, between SEOC I LIMITED
PARTNERSHIP, an Arizona limited partnership ("Landlord"), and CBT SYSTEMS
--------
USA, LTD., a Delaware corporation ("Tenant").
------
1. Right of First Refusal to Lease. Provided that any Event of Default
-------------------------------
does not exist at the time of exercise, then at such time as Landlord receives a
lease proposal (the "Proposal") from a specific bona fide prospective tenant to
--------
lease all or any portion of the office space in the Project that is currently
leased (or negotiated to be leased) to Safe Ride or Mayo Clinic or any other
space in the Building (the "Refusal Space"), which Proposal Landlord is willing
-------------
to accept (except for the portions of Building E which are vacant as of the date
of this Lease, as to the initial leasing of such space, in which case Landlord
will notify Tenant of the Proposal, whether Landlord is willing to accept such
Proposal or not, Landlord shall notify Tenant of the Proposal (the "Proposal
--------
Notice") and Tenant shall have an option (the "Option"), exercisable by written
- ------ ------
notice to Landlord within ten (10) business days (the (3) business days in case
of Building E space) after receipt of the Proposal Notice to lease all of the
Refusal Space upon the same terms and conditions as are contained in the
Proposal, except that the term shall be continuous with the term of this Lease
and otherwise be substantially the same as the terms and conditions of this
Lease. Promptly after Tenant exercises the Option, Landlord and Tenant shall
execute a supplemental agreement to this Lease, in a form satisfactory to
Landlord and Tenant, incorporating the Refusal Space as part of the Leased
Premises. If Tenant does not timely exercise the Option, or if Tenant does not
execute a supplemental agreement to this Lease within thirty (30) days (seven
(7) business days in case of portions of Building E which are vacant, as of the
date of this Lease as to the initial leasing of such space) after notice by
Tenant to Landlord of its election to exercise the Option (and both Landlord and
Tenant agree to use all reasonable efforts to accomplish same), the Option shall
be deemed waived and Landlord may enter into an agreement with the specific bona
fide prospective tenant who submitted the Proposal without liability to Tenant,
provided that such lease is on terms not materially more favorable to such party
than those contained in the Proposal and provided that such lease is consummated
within ninety (90) days after the waiver of the Option. If Landlord does not
lease the Refusal Space within ninety (90) days after the expiration of said ten
(10) business day period, any further transaction shall be deemed a new
determination by Landlord to lease such space and the provisions of this
paragraph shall again be applicable. Tenant's right of first refusal shall be
continuous during the entire Term. Tenant's rejection of any particular offer
shall not relieve Landlord of its obligation to again offer any Refusal Space to
Tenant at any time that the Refusal Space subsequently becomes available.
Landlord represents that the Refusal Space is currently subject only to the
following leases and other rights, and agrees that Landlord shall not grant any
such rights in the Refusal Space except such rights that are expressly subject
to Tenant's right hereunder: Landlord's lease with Mayo Clinic and Landlord's
lease with Safe Ride Services, Inc.
2. Rights Personal to Tenant. The rights granted to Tenant pursuant to
-------------------------
this Rider "2" are personal to the originally named Tenant, except for a
Permitted Transfer, and shall automatically terminate upon the assignment of the
Lease or upon a sublease of the entire Leased Premises for the balance of the
Term.
3. Definitions. Capitalized terms used in this Rider without definition
-----------
shall have the definition assigned to such terms in the Lease to which this
Rider is attached, unless the context requires otherwise.
4. Full Force and Effect. Except as specifically modified by this Rider,
---------------------
the Lease to which this Rider is attached remains in full force and effect.
Landlord's Initials Tenant's Initials for CBT Systems USA Ltd
Rider 2-1
<PAGE>
EXHIBIT "A"
-----------
LEGAL DESCRIPTION OF THE PROJECT
--------------------------------
A-1
<PAGE>
EXHIBIT "B"
-----------
FLOOR PLAN
----------
B-1
<PAGE>
EXHIBIT "C"
-----------
MEMORANDUM OF COMMENCEMENT DATE
-------------------------------
THIS MEMORANDUM OF COMMENCEMENT DATE is entered into this ___ day of
December, 1997 by SEOC I LIMITED PARTNERSHIP, an Arizona limited partnership
("Landlord"), and CBT SYSTEMS USA, LTD., a Delaware corporation ("Tenant").
- ---------- ------
RECITALS
--------
A. Landlord and Tenant have previously executed that certain Office Lease
dated December ____, 1997 ("Lease"), pursuant to which Tenant has leased from
-----
Landlord certain premises more particularly described therein.
B. Pursuant to the provisions of Article 34 of the Lease, Landlord and
----------
Tenant have agreed to execute this Memorandum of Commencement Date to specify
the Commencement Date of the Lease Term.
NOW, THEREFORE, in consideration of the foregoing recitals, the execution
and delivery of the Lease and other good and valuable considerations, the
receipt, sufficiency and validity which is hereby acknowledged, Landlord and
Tenant agree as follows:
1. Commencement Date. The Commencement Date is ______________________,
-----------------
and the expiration date of the Lease is ________________________________.
2. Definitions. Capitalized terms used in this Memorandum of
-----------
Commencement Date without definition shall have the meanings assigned to such
terms in the Lease, unless the context requires otherwise.
3. Full Force and Effect. Except as specifically modified by this
---------------------
Memorandum of Commencement Date, the Lease remains in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Memorandum of
Commencement Date as of the date and year first above written.
TENANT: LANDLORD:
CBT SYSTEMS USA, LTD., a Delaware SEOC I LIMITED PARTNERSHIP, an
corporation Arizona limited partnership
By: Cavan Investments, Ltd., an
Arizona corporation, its General
By: Partner
-----------------------------
Name:
---------------------------
Its:
----------------------------
By:
-----------------------------
Name:
---------------------------
Its:
----------------------------
C-1
<PAGE>
EXHIBIT "D"
-----------
RESERVED COVERED PARKING LICENSE
--------------------------------
THIS RESERVED COVERED PARKING LICENSE (this "License") is made as of the
-------
____ day of December, 1997, between SEOC I LIMITED PARTNERSHIP, an Arizona
limited partnership ("Licensor"), and CBT SYSTEMS USA, LTD., a Delaware
--------
corporation ("Licensee"), whose address is 1005 Hamilton Court, Menlo Park,
--------
California 94025.
1. LICENSE. Licensor hereby grants Licensee a license to use
-------
________________ (____) reserved covered parking spaces (the "Spaces") in the
------
parking accommodations (the "Parking Accommodations") of the project (the
----------------------
"Project") located at 16100 North Greenway-Hayden Loop, Scottsdale, Arizona
- --------
85260, as cross-hatched on the site plan attached hereto as Exhibit "A", for a
-----------
term the same as the term of the Lease referred to in Paragraph 2 hereof. Each
-----------
Space shall be used solely for the parking of one automobile therein by Licensee
in accordance with the terms of this License.
2. THE LEASE. Anything herein to the contrary notwithstanding, this
---------
License shall terminate no later than the date of termination of the Lease (the
"Lease") between Licensor, as Landlord, and Licensee, as Tenant, for space in
-----
the Project of even date herewith, whether such termination occurs at the end of
the scheduled Lease term or prior thereto. A breach of this License by Tenant
shall be deemed a breach of the Lease by Tenant and after notice given in
accordance with the terms of the Lease and the failure of Tenant to cure within
fifteen (15) days of such notice, Landlord shall have all remedies available
herein, under the Lease, and at law or in equity. In the event the term of the
Lease is extended, the term of this License shall also be extended to correspond
with the Lease Term.
3. MONTHLY FEE. Licensee agrees to pay as a monthly fee for this License
-----------
Licensor's current fee for each Space licensed, payable on or before the first
day of each month in advance. The monthly fee which Licensee shall pay is
$25.00 per space.
4. DESIGNATION OF SPACES. This License is for ______________ (____)
---------------------
reserved covered parking Spaces in the area of the Parking Accommodations cross-
hatched on Exhibit "B" attached hereto, which area may be redesignated from time
-----------
to time by Licensor. The initial Spaces designated for Licensee are cross-
hatched on Exhibit "B" attached hereto.
-----------
5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to
-------------------------
Licensor may be parked or stored in the Spaces, provided, however, that Licensee
may change its automobile designations at any time upon written notice to
Licensor or for temporary use upon notification given to the garage attendant,
if any. No more than one (1) automobile per Space licensed hereunder shall be
parked or stored under Licensee's rights hereunder at any one time.
6. NO ADDITIONAL SERVICES. This License is for self-service storage or
----------------------
parking only and does not include the rights to any additional services, which
services may be made available by Licensor from time to time at an additional
charge.
7. INDEMNITY. Licensor and its agents and employees shall not be liable
---------
for loss or damage to any vehicle parked or stored by Licensee or under
Licensee's rights herein and/or to the contents thereof caused by fire, theft,
vandalism, collision, explosion, earthquake, storms, natural disasters, strikes,
riots or by any other causes, unless caused by the gross negligence or willful
misconduct of Licensor or its agents, employees or contractors, or Licensor's
breach of this License, and Licensee (a) waives and agrees to hold Licensor
harmless from any claim against Licensor, its agents and employees for and in
respect thereto, and (b) hereby agrees to indemnify and defend Licensor, its
agents and employees against all claims for any damage to any such vehicle or
its contents from any cause whatsoever, unless caused by the gross negligence or
willful misconduct of Licensor, or its agents, employees or contractors, or
Licensor's breach of this License.
8. RELATIONSHIP OF PARTIES. The relationship between Licensor and
-----------------------
Licensee constitutes a license to use the Parking Accommodations subject to the
terms and conditions of this License only and neither such relationship nor the
storage or parking of any automobile thereunder shall constitute a bailment nor
create the relationship of bailor and bailee.
9. NOTICES. All notices hereunder shall be given in accordance with the
-------
terms of the Lease.
D-1
<PAGE>
10. SUBORDINATION AND ATTORNMENT. This License shall be subject and
----------------------------
subordinate to any mortgage, deed of trust or ground lease now or hereafter
placed on the Project, or any portion thereof, and to replacements, renewals and
extensions thereof, and Licensee, upon request by Licensor, shall execute
instruments (in form satisfactory to Licensor) acknowledging such subordination.
11. NO WASTE. Licensee covenants not to cause any waste or damage or
--------
disfigurement or injury to the Project.
12. CLOSURE OF FACILITY. Licensor shall have the right to close any
-------------------
portion of the Parking Accommodations and deny access thereto in connection with
any repairs or in an emergency, as it may require, without liability, cost or
abatement of fee.
13. RULES. Licensee shall perform, observe and comply with such rules of
-----
the Project as may be reasonably adopted by Licensor in respect of the use and
operation of said Parking Accommodations.
14. REGULATIONS. Licensee shall, when using the Parking Accommodations,
-----------
observe and obey all signs regarding fire lanes and no parking zones, and when
parking always park between designated lines. Licensor reserves the right to
tow away, or otherwise impound, at the expense of the owner or operator, any
vehicle which is improperly parked or parked in a no parking zone. No overnight
parking shall be allowed in the Parking Accommodations.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year first above written.
LICENSOR: LICENSEE:
SEOC I LIMITED PARTNERSHIP, an CBT SYSTEMS USA, LTD., a Delaware
Arizona limited partnership corporation
By: Cavan Investments, Ltd., an
Arizona corporation, its General
Partner
By:
-------------------------------
Name:
-----------------------------
Its:
------------------------------
By:
-------------------------------
Name:
-----------------------------
Its:
------------------------------
D-2
<PAGE>
EXHIBIT "E"
-----------
RESERVED
--------
E-1
<PAGE>
EXHIBIT "F"
-----------
UNRESERVED PARKING LICENSE
--------------------------
THIS UNRESERVED PARKING LICENSE (this "License") is made as of the ____ day
-------
of December, 1997, between SEOC I LIMITED PARTNERSHIP, an Arizona limited
partnership ("Licensor"), and CBT SYSTEMS USA, LTD., a Delaware corporation
--------
("Licensee"), whose address is 1005 Hamilton Court, Menlo Park, California
- ----------
94025.
1. LICENSE. Licensor hereby grants Licensee a license to use ___________
-------
(____) unreserved uncovered parking spaces (the "Spaces") in the parking
------
accommodations (the "Parking Accommodations") of the project (the "Project")
---------------------- -------
located at 16100 North Greenway-Hayden Loop, Scottsdale, Arizona 85260, as
cross-hatched on the site plan attached hereto as Exhibit "A", for a term the
-----------
same as the term of the Lease referred to in Paragraph 2 hereof. Each Space
-----------
shall be used solely for the parking of one automobile therein by Licensee in
accordance with the terms of this License.
2. THE LEASE. Anything herein to the contrary notwithstanding, this
---------
License shall terminate no later than the date of termination of the Lease (the
"Lease") between Licensor, as Landlord, and Licensee, as Tenant, for space in
-----
the Project of even date herewith, whether such termination occurs at the end of
the scheduled Lease term or prior thereto. A breach of this License by Tenant
shall be deemed a breach of the Lease by Tenant and after notice given in
accordance with the terms of the Lease and the failure of Tenant to cure within
the applicable period under the Lease after such notice, Landlord shall have all
remedies available herein, under the Lease, and at law or in equity. In the
event the term of the Lease is extended, the term of this License shall also be
extended to correspond with the Lease Term.
3. MONTHLY FEE. No charge.
-----------
4. DESIGNATION OF SPACES. This License is for ______________ (____)
---------------------
unreserved uncovered parking Spaces in the area of the Parking Accommodations
cross-hatched on Exhibit "B" attached hereto; provided, however, Licensor may
-----------
designate specific Spaces in such location.
5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to
-------------------------
Licensor may be parked or stored in the Spaces, provided, however, that Licensee
may change its automobile designations at any time upon written notice to
Licensor or for temporary use upon notification given to the garage attendant,
if any. No more than one (1) automobile per Space licensed hereunder shall be
parked or stored under Licensee's rights hereunder at any one time.
6. NO ADDITIONAL SERVICES. This License is for self-service storage or
----------------------
parking only and does not include the rights to any additional services, which
services may be made available by Licensor from time to time at an additional
charge.
7. INDEMNITY. Licensor and its agents and employees shall not be liable
---------
for loss or damage to any vehicle parked or stored by Licensee or under
Licensee's rights herein and/or to the contents thereof caused by fire, theft,
vandalism, collision, explosion, earthquake, storms, natural disasters, strikes,
riots or by any other causes, unless caused by the negligence or willful
misconduct of Licensor or its agents, employees or contractors, or Licensor's
breach of this License, and Licensee (a) waives and agrees to hold Licensor
harmless from any claim against Licensor, its agents and employees for and in
respect thereto, and (b) hereby agrees to indemnify and defend Licensor, its
agents and employees against all claims for any damage to any such vehicle or
its contents from any cause whatsoever, unless caused by the negligence or
willful misconduct of Licensor, or its agents, employees or contractors, or
Licensor's breach of this License.
8. RELATIONSHIP OF PARTIES. The relationship between Licensor and
-----------------------
Licensee constitutes a license to use the Parking Accommodations subject to the
terms and conditions of this License only and neither such relationship nor the
storage or parking of any automobile thereunder shall constitute a bailment nor
create the relationship of bailor and bailee.
9. NOTICES. All notices hereunder shall be given in accordance with the
-------
terms of the Lease.
10. SUBORDINATION AND ATTORNMENT. This License shall be subject and
----------------------------
subordinate to any mortgage, deed of trust or ground lease now or hereafter
placed on the Project, or any portion thereof, and to replacements, renewals and
extensions thereof, and Licensee, upon request by Licensor, shall execute
instruments (in form satisfactory to Licensor) acknowledging such subordination.
F-1
<PAGE>
11. NO WASTE. Licensee covenants not to cause any waste or damage or
--------
disfigurement or injury to the Project.
12. CLOSURE OF FACILITY. Licensor shall have the right to close any
-------------------
portion of the Parking Accommodations and deny access thereto in connection with
any repairs or in an emergency, as it may require, without liability, cost or
abatement of fee.
13. RULES. Licensee shall perform, observe and comply with such rules of
-----
the Project as may be reasonably adopted by Licensor in respect of the use and
operation of said Parking Accommodations.
14. REGULATIONS. Licensee shall, when using the Parking Accommodations,
-----------
observe and obey all signs regarding fire lanes and no parking zones, and when
parking always park between designated lines. Licensor reserves the right to
tow away, or otherwise impound, at the expense of the owner or operator, any
vehicle which is improperly parked or parked in a no parking zone. No overnight
parking shall be allowed in the Parking Accommodations.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year first above written.
LICENSOR: LICENSEE:
SEOC I LIMITED PARTNERSHIP, an CBT SYSTEMS USA, LTD., a Delaware
Arizona limited partnership corporation
By: Cavan Investments, Ltd., an
Arizona corporation, its General
Partner
By:
---------------------------
Name:
-------------------------
Its:
--------------------------
By:
---------------------------
Name:
-------------------------
Its:
--------------------------
F-2
<PAGE>
EXHIBIT "G"
-----------
WORK LETTER
-----------
In order to induce Tenant to enter into the Lease (which is incorporated
herein by reference to the extent that the provisions of this Work Letter may
apply thereto) and in consideration of the mutual covenants hereinafter
contained, Landlord and Tenant agree as follows:
1. COMPLETION SCHEDULE. Attached to this Work Letter is a schedule (the
-------------------
"Work Schedule") setting forth the time table for the planning and completion of
-------------
the installation of the tenant improvements to be constructed in the Leased
Premises (the "Tenant Improvements"). The Work Schedule sets forth each of the
-------------------
various items of work to be done in connection with the completion of the Tenant
Improvements and shall become the basis for completing the Tenant Improvements.
Landlord and Tenant acknowledge and agree that time is of the essence with
respect to their respective obligations as set forth in this Work Letter.
2. TENANT IMPROVEMENTS. The Tenant Improvements shall include the work
-------------------
described on Annex I to this Exhibit "G", which work shall be done in the Leased
------- -----------
Premises pursuant to the Tenant Improvements Plans described in Paragraph 3
-----------
below. Landlord hereby approves of Tenant's construction of the improvements
described in Annex I.
-------
3. TENANT IMPROVEMENT PLANS. Tenant has selected and Landlord has
------------------------
approved McCarthy Nordberg as Tenant's architect. Tenant's architect shall
prepare space plans and final working drawings and specifications for the Tenant
Improvements. Such final working drawings and specifications are referred to in
this Work Letter as the "Tenant Improvement Plans." Landlord and Tenant have
------------------------
approved Jokake as Landlord's contractor ("Contractor").
----------
4. PREPARATION OF TENANT IMPROVEMENT PLANS AND FINAL PRICING. After the
---------------------------------------------------------
preparation of the space plan and after Tenant's approval thereof in accordance
with the Work Schedule, Tenant shall cause its architect to prepare and submit
to Landlord for its reasonable approval the Tenant Improvement Plans. Promptly
after the approval of the Tenant Improvement Plans by Landlord and Tenant in
accordance with the Work Schedule, the Tenant Improvement Plans shall be
submitted by Landlord to the appropriate governmental body for plan checking and
building permits. Tenant shall cause to be made such changes in the Tenant
Improvement Plans necessary to obtain required permits. Tenant acknowledges
that after final approval of the Tenant Improvement Plans, no further changes to
the Tenant Improvement Plans may be made without the prior written consent of
Landlord, which consent shall not be unreasonably withheld but may be
conditioned on the agreement by Tenant to pay all additional costs and expenses
resulting from such requested changes that exceed the Allowance (defined below).
5. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement
-----------------------------------
Plans have been prepared and approved, and building permits for the Tenant
Improvements have been issued, Landlord shall enter into a construction contract
with its contractor for the installation of the Tenant Improvements in
accordance with the Tenant Improvement Plans. The Tenant Improvements shall be
constructed in a good, workmanlike and lien free manner, and in conformance with
applicable building codes. Landlord shall supervise the completion of the
Tenant Improvements at no charge to Tenant. Landlord shall cause the Tenant
Improvements to be completed in accordance with the Work Schedule. The cost of
the Tenant Improvements shall be paid as provided in Paragraph 6 below.
-----------
Landlord shall cause to be prepared and delivered to Tenant, as quickly as
possible upon Landlord's approval of the Tenant Improvement Plans, an estimate
of the total cost for the Tenant Improvements ("Cost Estimate"). Within ten
-------------
(10) days after receipt thereof, at its election (i) Tenant may approve the Cost
Estimate, or (ii) Tenant may make changes to the Tenant Improvement Plans that
are necessary, in Tenant's opinion, to reduce costs. Notwithstanding anything
to the contrary herein, Landlord shall not unreasonably withhold its approval of
the Tenant Improvement Plans or changes to the Tenant Improvement Plans, and
Landlord and Tenant shall confer and negotiate in good faith to reach agreement
upon the Tenant Improvement Plans, modifications to the Tenant Improvement
Plans, and the Cost Estimate as a consequence of such modifications. The Tenant
Improvement Plans shall be bid by the Contractor to at least three (3) mutually
approved subcontractors, if requested by Tenant. Landlord and Tenant shall have
the right to receive the bids and Landlord agrees to permit Tenant to assist in
negotiating subcontractor fees and bid costs for labor and materials and to
designate the lowest bidding subcontractor to be selected. Tenant shall have
the right to reasonably approve the contract between Landlord and Contractor and
to have copies of all contracts between the Contractor and the subcontracts.
The construction agreement between Landlord and Contractor shall provide that
Contractor shall (a) provide and pay for all labor, materials, equipment, tools,
construction equipment and machinery, water, heat and utilities, transportation
and other facilities and services
necessary for proper
G-1
<PAGE>
execution and completion of the Tenant Improvements; (b) supervise and direct
the construction of the Tenant Improvements using contractor's best skills and
attention and be fully responsible for and have control over construction means,
methods, techniques, sequences and procedures for coordinating all portions of
the work under the contract; (c) review, approve and submit to Tenant's
architect shop drawings, product data, samples and submittals required by the
contract documents with promptness and in sequence as to cause no delay in the
construction schedule; (d) take appropriate field measurements and verify field
conditions before commencing construction of Tenant Improvements; and (e) take
reasonable precautions for safety and provide reasonable protection to prevent
damage, injury or loss.
6. PAYMENT OF THE COST OF THE TENANT IMPROVEMENTS.
----------------------------------------------
a. TENANT IMPROVEMENT ALLOWANCE. Landlord hereby grants to Tenant a
----------------------------
Tenant Improvement allowance (the "Allowance") based upon a calculation of
Twenty Five and No/100 Dollars ($25.00) per usable square foot of the Leased
Premises. Landlord and Tenant agree that the usable square footage of the
Leased Premises is twenty five thousand five hundred seventy one (25,571) usable
square feet. The Allowance shall be used only for:
(i) Payment of the cost preparing the space plan and the final
working drawings and specifications, including mechanical, electrical and
structural drawings and of all other aspects of the Tenant Improvement Plans,
including the charges of Tenant's space planner and architect, design consultant
and project manager.
(ii) The payment of permit and license fees relating to
construction of the Tenant Improvements; and
(iii) Construction of the Tenant Improvements, including without
limitation the following:
(1) Installation within the Leased Premises of all
partitioning, doors, floor coverings, finishes, ceilings, wall coverings and
paintings, millwork and similar items;
(2) All electrical wiring, lighting fixtures, outlets
and switches, and other electrical work to be installed within the Leased
Premises;
(3) The furnishing and installation of all duct work,
terminal boxes, defusers and accessories required for the completion of the
heating, ventilation and air conditioning systems within the Leased Premises.
(4) Any additional Tenant requirements including, but
not limited to odor control, special heating, ventilation and air conditioning,
noise or vibration control or other special systems;
(5) All fire and life safety control systems such as
fire walls, sprinklers, halon, fire alarms, including piping, wiring and
accessories installed within the Leased Premises; and
(6) All plumbing, fixtures, pipes and accessories to be
installed within the Leased Premises;
(7) All monument and directory signage; and
(8) All computer, data and voice cabling.
Notwithstanding the foregoing, the cost of the Tenant Improvements shall not
include (and Tenant shall have no responsibility for and the Allowance shall not
be used for) the following: (a) costs of improvements which are not shown on or
described in the Tenant Improvement Plans unless otherwise approved by Tenant;
(b) costs incurred to remove Hazardous Materials from the Leased Premises or the
surrounding area; (c) attorneys' fees incurred in connection with negotiation of
construction contracts, and attorneys' fees, experts' fees and other costs in
connection with disputes with third parties; (d) interest and other costs of
financing construction costs; (e) costs incurred as a consequence of delay
(except for Tenant Delay and Force Majeure), construction defects or default by
a contractor; (f) costs recoverable by landlord upon account of warranties and
insurance; (g) restoration costs in excess of insurance proceeds as a
consequence of casualties; (h) penalties and late charges attributable to
Landlord's failure to pay construction costs; (i) costs to bring the Leased
Premises into compliance with applicable laws and
G-2
<PAGE>
restrictions, including, without limitation, the Americans With Disabilities Act
and environmental laws beyond those required due to the nature of the Tenant
Improvement Plans; (j) wages, labor and overhead for overtime and premium time
unless part of the contract or authorized by Tenant; (k) offsite management or
other general overhead costs incurred by Landlord; (l) construction management,
profit and overhead charges of Landlord; and (m) costs in excess of the approved
Cost Estimate unless such costs are approved or caused by changes requested by
Tenant.
b. ADDITIONAL COSTS. The cost of each of the items set forth in
----------------
Paragraph 6(a) above shall be charged against the Allowance. In the event the
- --------------
cost of installing the Tenant Improvements, as established by the mutually
approved pricing schedule, shall exceed the Allowance, or in the event any of
the Tenant Improvements are not to be paid for from the Allowance, the excess
shall be paid by Tenant within thirty (30) days after the Commencement Date.
c. CHANGES TO TENANT IMPROVEMENT PLANS. In the event that Tenant
-----------------------------------
shall request any changes or substitutions to the Tenant Improvement Plans,
after the Tenant Improvement Plans have been prepared and the final pricing
established by Landlord and Tenant, any additional costs attributable thereto
shall be paid by Tenant to Landlord prior to the commencement of the work
represented by such changes, unless covered under the Allowance.
d. UNUSED ALLOWANCE. Any unused part of the Allowance shall be
----------------
credited toward the first payments due from Tenant for the Annual Basic Rent and
Additional Rent.
7. EARLY ENTRY. Landlord shall permit Tenant and Tenant's agents to
-----------
enter the Leased Premises prior to the Commencement Date in order that Tenant
may do such work as may be required by Tenant to make the Leased Premises ready
for Tenant's use and occupancy. If Landlord permits such entry prior to the
Commencement Date, such permission is conditioned upon Tenant and its agents,
contractors, employees and invitees working in harmony and not interfering with
Landlord and its agents, contractors and employees in the installation of the
Tenant Improvements or in the performance of work for other tenants and
occupants of the Building. If at any time such entry shall cause or threaten to
cause disharmony or interference, Landlord shall have the right to withdraw such
permission upon twenty-four (24) hours notice to Tenant. Any entry into the
Leased Premises by Tenant prior to the Commencement Date shall be subject to all
of the terms, covenants, conditions and provisions of the Lease, other than with
respect to Tenant's obligation to pay Annual Basic Rent or Additional Rent.
Tenant acknowledges and agrees that Landlord shall not be liable in any way for
any injury, loss or damage which may occur to Tenant, its agents, contractors
and employees or to Tenant's work and installations made in the Leased Premises
or to property placed therein prior to the Commencement Date, all of the same
being at Tenant's sole risk, provided, however, that Landlord shall be liable to
Tenant for the negligence of Landlord, its agents, contractors and employees.
8. SUBSTANTIAL COMPLETION. As soon as the Tenant Improvements are
----------------------
Substantially Complete, Landlord shall deliver possession of the Leased Premises
to Tenant. "Substantial Completion" shall mean the date when (a) the Tenant
----------------------
Improvements are completed and available for Tenant's occupancy in broom clean
condition subject only to completion of punch list items, (b) a Certificate of
Occupancy for permanent occupancy or its equivalent has been issued by the City
or other applicable government agency for the Leased Premises for the permitted
use, (c) all Building systems (including, but not limited to, electrical,
plumbing, heat, air conditioning systems and their distribution into the Leased
Premises) are operational to the extent necessary to service the Leased
Premises, (d) Tenant has been provided with the number of parking spaces to
which it is entitled under the parking licenses attached to the Lease as
Exhibits "D" and "F", and (e) Tenant has been provided a nondisturbance
- --------------------
agreement as provided under the Lease.
9. TENANT DELAY. As used in the Lease, a "Tenant Delay" shall mean any
------------ ------------
delay by Tenant which affects the construction schedule set forth herein,
provided that (a) Tenant shall be allowed to review the Contractor's schedule
and reasonably approve it, (b) such delays are not beyond Tenant's control
(i.e., Force Majeure and Landlord delays), and (c) Tenant is provided three (3)
business days prior written notice that it is in danger of causing delay (in
which event Tenant may elect to incur premium costs to the extent required
and/or available to prevent or minimize a Tenant Delay). Claims of delay or
otherwise by either party shall be made within seven (7) business days after the
occurrence of the event giving rise to such claims.
10. ASSIGNMENT OF WARRANTIES. Landlord shall assign to Tenant the non-
------------------------
exclusive right to enforce any and all warranties which Landlord may receive
from any contractor, supplier or other person or entity involved with
construction of the Tenant Improvements, which assignment shall continue until
the expiration or sooner termination of the Lease or the expiration of the
warranty, whichever occurs first.
G-3
<PAGE>
11. CONSTRUCTION OF TENANT IMPROVEMENTS. Notwithstanding anything to the
-----------------------------------
contrary in the Lease, effective upon delivery of the Leased Premises to Tenant,
Landlord does hereby warrant that, to the best of its knowledge, (a) the
construction of the Tenant Improvements was performed in accordance with all
rules, regulations, codes, statutes, ordinances, and laws of all governmental
and quasi-governmental authorities, in accordance with the Tenant Improvement
Plans, and in a good and workmanlike manner, (b) all material and equipment
installed therein substantially conformed to the Tenant Improvement Plans and
was new and otherwise of good quality, provided, however, if certain materials
specified in the Tenant Improvement Plans are not available, Landlord may
substitute for such materials, materials of equal quality, subject to Tenant's
prior written approval, (c) all building systems are in good working order; (d)
the roof is in good condition; and (e) the Leased Premises are (and will be)
vacant and will after completion of the Tenant Improvements be in the condition
required by this Lease.
12. PUNCH LIST PROCEDURE. Not later than the day prior to the
--------------------
Commencement Date, Tenant shall prepare a list (the "Punch List") of any
----------
deficiencies or incompleted work regarding any Tenant Improvements. Provided
that such items are Landlord's responsibility pursuant to the Tenant Improvement
Plans, subject to Force Majeure, Landlord shall correct such deficiencies or
incompleted work within a reasonable period of time, but in no event later than
thirty (30) days after receipt of the Punch List, after which Landlord shall
have no further obligation to alter, change, decorate or improve the Leased
Premises, except as provided in the Lease, whether to adapt the same for the use
for which it is leased or for any other purpose. The existence of such
deficiencies or incompleted work shall not effect Tenant's obligation to accept
the Leased Premises as otherwise required hereunder.
G-4
<PAGE>
ANNEX I
-------
TO
--
EXHIBIT "G"
-----------
TENANT IMPROVEMENTS
-------------------
ANNEX I-1
<PAGE>
EXHIBIT "H"
-----------
RULES AND REGULATIONS
---------------------
1. Unless otherwise specifically defined herein, all capitalized terms in
these Rules and Regulations shall have the meaning set forth in the Lease to
which these Rules and Regulations are attached.
2. The sidewalks, driveways, entrances, passages, courts, elevators,
vestibules, stairways, corridors or halls of the Building and the Project shall
not be obstructed or encumbered or used for any purpose other than ingress and
egress to and from the premises demised to any tenant or occupant.
3. No awnings or other projection shall be attached to the outside walls
or windows of the Building. No curtains, blinds, shades, or screens shall be
attached to or hung in, or used in connection with, any window or door of the
premises demised to any tenant or occupant, without the prior written consent of
Landlord. All electrical fixtures hung in any premises demised to any tenant or
occupant must be of a type, quality, design, color, size and general appearance
approved by Landlord.
4. No tenant shall place objects against glass partitions, doors or
windows which would be in sight from the Building corridors or from the exterior
of the Building and such tenant will promptly remove any such objects when
requested to do so by Landlord.
5. The windows and doors that reflect or admit light and air into the
halls, passageways or other public places in the Building shall not be covered
or obstructed, nor shall any bottles, parcels, or other articles be placed on
any window sills.
6. No show cases or other articles shall be put in front of or affixed to
any part of the exterior of the Building or the other buildings in the Project,
nor placed in the halls, corridors, walkways, landscaped areas, vestibules or
other public parts of the Building or the Project.
7. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags or other substances shall be thrown therein.
8. Other than for the purpose of normal office decorations, no tenant or
occupant shall mark, paint, drill into, or in any way deface any part of the
Project, the Building or the premises demised to such tenant or occupant. No
boring, cutting or strings of wires shall be permitted, except with the prior
consent of Landlord, and as Landlord may direct. No tenant or occupant shall
install any resilient tile or similar floor covering in the premises demised to
such tenant or occupant except in a manner approved by Landlord.
9. Any carpeting cemented down by a tenant shall be installed with a
releasable adhesive. In the event of a violation of the foregoing by a tenant,
Landlord may charge the expense incurred in such removal to such tenant.
10. No bicycles, vehicles or animals of any kind (except seeing eye dogs)
shall be brought into or kept in or about the premises demised to any tenant.
No cooking shall be done or permitted in the Building by any tenant without the
written approval of Landlord other than the preparation of beverages, microwave
oven use and vending machines. No tenant shall cause or permit any unusual or
objectionable odors to emanate from the premises demised to such tenant.
11. Except as permitted under the Lease, no space in the Building or the
Project shall be used for manufacturing, for the storage of merchandise, or for
the sale of merchandise, goods or property of any kind at auction.
12. No tenant shall make, or permit to be made, any unseemly or disturbing
noises or vibrations or disturb or interfere with other tenants or occupants of
the Building, the Project or neighboring buildings or premises whether by the
use of any musical instrument, radio, television set broadcasting equipment or
other audio device, unmusical noise, whistling, singing, or in any other way.
Nothing shall be thrown out of any doors.
13. No additional locks or bolts of any kind shall be placed upon any of
the doors, nor shall any
H-1
<PAGE>
changes be made in locks or the mechanism thereof without the prior consent of
Landlord, which shall not be unreasonably withheld. Each tenant must, upon the
termination of its tenancy, return to Landlord all keys of stores, offices and
toilet rooms, either furnished to, or otherwise procured by, such Tenant.
14. All removals from the Building, or the carrying in or out of the
Building or from the premised demised to any tenant, of any safes, freight,
furniture or bulky matter of any description must take place at such time and in
such manner as Landlord or its agents may determine, from time to time.
Landlord reserves the right to inspect all freight to be brought into the
Building and to exclude from the Building all freight which violates any of the
Rules and Regulations or the provisions of such tenant's lease.
15. No tenant or occupant shall engage or pay any employees in the
Building or the Project, except those actually working for such tenant or
occupant in the Building or the Project, nor advertise for day laborers giving
an address at the Building or the Project.
16. No tenant or occupant shall purchase lighting maintenance, cleaning
towels or other like service, from any company or person not reasonably approved
in writing by Landlord.
17. Landlord shall have the right to prohibit any advertising by any
tenant or occupant which, in Landlord's reasonable opinion, tends to impair the
reputation of the Building or the Project or its desirability as a building for
offices, and upon notice from Landlord, such tenant or occupant shall refrain
from or discontinue such advertising.
18. Each tenant, before closing and leaving the premises demised to such
tenant at any time, shall see that all entrance doors are locked and all
electrical equipment and lighting fixtures are turned off. Corridor doors, when
not in use, shall be kept closed.
19. Each tenant shall, at its expense, provide artificial light in the
premises demised to such tenant for Landlord's agents, contractors and employees
while performing janitorial or other cleaning services and making repairs or
alterations in said premises.
20. No premises shall be used, or permitted to be used for lodging or
sleeping, or for any immoral or illegal purposes.
21. The requirements of tenants will be attended to only upon application
at the management office of Landlord. Building employees shall not be required
to perform, and shall not be requested by any tenant or occupant to perform, and
work outside of their regular duties, unless under specific instructions from
the office of Landlord.
22. Canvassing, soliciting and peddling in the Building or the Project are
prohibited and each tenant and occupant shall cooperate in seeking their
prevention.
23. There shall not be used in the Building, either by any tenant or
occupant or by their agents or contractors, in the delivery or receipt of
merchandise, freight or other matter, any hand trucks or other means of
conveyance except those equipped with rubber tires, rubber side guards and such
other safeguards as Landlord may require.
24. If the premises demised to any tenant become infested with vermin,
such tenant, at its sole cost and expense, shall cause its premises to be
exterminated, from time to time, to the satisfaction of Landlord, and shall
employ such exterminators therefor as shall be approved in writing by Landlord.
25. No premises shall be used, or permitted to be used, at any time, as a
store for the sale or display of goods, wares or merchandise of any kind, or as
a restaurant, shop, booth, bootblack or other stand, or for the conduct of any
business or occupation which predominantly involves direct patronage of the
general public in the premises demised to such tenant, or for manufacturing or
for other similar purposes.
26. No tenant shall clean any window of the Building from the outside.
27. No tenant shall move, or permit to be moved, into or out of the
Building or the premises demised to such tenant, any heavy or bulky matter,
without the specific approval of Landlord. If any such matter requires special
handling, only a qualified person shall be employed to perform such special
handling. No tenant shall place or permit to be placed, on any part of the
floor or floors of the premises demised to such tenant, a load exceeding the
floor load per square foot which such floor was designed to
H-2
<PAGE>
carry and which is allowed by law. Landlord reserves the right to prescribe
the weight and position of safes and other heavy objects, which must be placed
so as to distribute the weight.
28. With respect to work being performed by a tenant in its premises with
the approval of Landlord, the tenant shall refer all contractors, contractors'
representatives and installation technicians to Landlord for its supervision,
approval and control prior to the performance of any work or services. This
provision shall apply to all work performed in the Building and the Project
including installation of telephones, telegraph equipment, electrical devices
and attachments, and installations of every nature affecting floors, walls,
woodwork, trim, ceilings, equipment and any other physical portion of the
Building and the Project. Such supervision shall be without charge to Tenant.
29. Landlord shall not be responsible for lost or stolen personal
property, equipment, money, or jewelry from the premises of tenants or public
rooms whether or not such loss occurs when the Building or the premises are
locked against entry.
30. Landlord may permit entrance to the premises of tenants by use of pass
keys controlled by Landlord employees, contractors, or service personnel
directly supervised by Landlord and employees of the United States Postal
Service.
31. Each tenant and all of tenant's representatives, shall observe and
comply with the directional and parking signs on the property surrounding the
Building, and Landlord shall not be responsible for any damage to any vehicle
towed because of non-compliance with parking regulations.
32. No tenant shall install any radio, telephone, television, microwave or
satellite antenna, loudspeaker, music system or other device on the roof or
exterior walls of the Building or on common walls with adjacent tenants or in
the Project Common Areas.
33. Each tenant shall store all trash and garbage within its premises. No
material shall be placed in the trash boxes or receptacles in the Building or
the Project unless such material may be disposed of in the ordinary and
customary manner of removing and disposing of trash and garbage and will not
result in a violation of any law or ordinance governing such disposal. All
garbage and refuse disposal shall be made only through entryways and elevators
provided for such purposes and at such times as Landlord shall designate.
34. Each tenant shall give prompt notice to landlord of any accidents to
or defects of which Tenant has actual notice in plumbing, electrical or heating
apparatus so that same may be attended to properly.
35. Landlord reserves the right to restrict access to and from the
Building between the hours of 6:00 P.M. and 7:00 A.M. on business days, 12:00
P.M. to 8:00 A.M. on Saturdays, and at all hours on Sundays and holidays.
Notwithstanding the foregoing, Tenant and its employees shall have access to the
Premises 24 hours per day all year.
36. All tenant and Tenants; servants, employees, agents, visitors,
invitees and licensees shall observe faithfully and comply strictly with the
foregoing Rules and Regulations and such other and further appropriate Rules and
Regulations as Landlord or Landlord's agent from time to time adopt.
37. Landlord shall furnish each tenant, at Landlord's expense, with
________ (____) keys to unlock the entry level doors and _________ (____) keys
to unlock each corridor door entry to each tenant's premises and, at such
tenant's expense, with such additional keys as such tenant may request. No
tenant shall install or permit to be installed any additional lock on any door
into or inside of the premises demised to that tenant or make or permit to be
made any duplicate of keys to the entry level doors or the doors to such
premises. Landlord shall be entitled at all times to possession of a duplicate
of all keys to all doors into or inside of the premises demised to tenants of
the Building. All keys shall remain the property of Landlord. Upon the
expiration of the Lease Term, each tenant shall surrender all such keys to
Landlord and shall deliver to Landlord the combination to all locks on all
safes, cabinets and vaults which will remain in the premises demised to that
tenant. Landlord shall be entitled to install, operate and maintain security
systems in or about the Project which monitor, by computer, close circuit
television or otherwise, persons entering or leaving the Project, the Building.
For the purposes of this rule the term "keys" shall mean traditional metallic
----
keys, plastic or other key cards and other lock opening devices.
38. Each person using the Parking Accommodations or other areas designated
by Landlord where parking will be permitted shall comply with all Rules and
Regulations adopted by Landlord with
H-3
<PAGE>
respect to the Parking Accommodations or other areas, including any employee or
visitor parking restrictions, and any sticker or other identification system
established by Landlord. Landlord may refuse to permit any person who violates
any parking rule or regulation to park in the Parking Accommodations or other
areas, and may remove any vehicle which is parked in the Parking Accommodations
or other areas in violation of the parking Rules and Regulations. The Rules and
Regulations applicable to the Parking Accommodations and the outside parking
areas are as follows:
(a) The maximum speed limit within the Parking Accommodations shall
be 5 miles per hour, the maximum speed limit in other parking
areas shall be 15 miles per hour.
(b) All directional signs and arrows must be strictly observed.
(c) All vehicles must be parked entirely within painted stall lines.
(d) No vehicle may be parked (i) in an area not striped for parking,
(ii) in a space which has been reserved for visitors or for
another person or firm, (iii) in an aisle or on a ramp, (iv)
where a "no parking" sign is posted or which has otherwise
designated as a no parking area, (v) in a cross hatched area,
(vi) in an area bearing a "handicapped parking only" or similar
designation unless the vehicle bears an appropriate handicapped
designation, (vii) in an area bearing a "loading zone" or similar
designation unless the vehicle is then engaged in a loading or
unloading function and (viii) in an area with a posted height
limitation if the vehicle exceeds the limitation.
(e) Parking passes, stickers or other identification devices that may
be supplied by Landlord shall remain the property of Landlord and
shall not be transferable. A replacement charge determined by
Landlord will be payable by each tenant for loss of any magnetic
parking card or parking pass or sticker.
(f) Garage managers or attendants shall not be authorized to make or
allow any exceptions to these Rules and Regulations.
(g) Each operator shall be required to park and lock his or her own
vehicle, shall use the Parking Facilities at his or her own risk
and shall bear full responsibility for all damage to or loss of
his or her vehicle, and for all injury to persons and damage to
property caused by his or her operation of the vehicle.
(h) Landlord reserves the right to tow away, at the expense of the
owner, any vehicle which is inappropriately parked or parked in
violation of these Rules and Regulations.
39. Landlord reserves the right at any time and from time to time to
rescind, alter or waive, in whole or in part, any of the Building Rules and
Regulations when it is deemed necessary, desirable or proper, in Landlord's
judgment for its best interest or of the best of the tenants of the Project. In
the event of a contradiction between the Lease and these Rules and Regulations,
the terms of the Lease shall govern.
40. No smoking is permitted within the premises or in the Building
pursuant to Scottsdale Revised Code, (S) 19-16, Smoking Pollution Control
Ordinance.
Tenant hereby acknowledges receipt of the Building Rules and Regulations.
TENANT:
CBT SYSTEMS USA, LTD., a Delaware corporation
By:
----------------------------------
Name:
--------------------------------
Its:
---------------------------------
Date:
--------------------------------
H-4
<PAGE>
EXHIBIT "I"
-----------
LOADING ZONE SITE PLAN
----------------------
I-1
<PAGE>
EXHIBIT 10.21
Dated: 24th November 1997
CBT SYSTEMS LIMITED (1)
- and -
CLARION WORLDWIDE LIMITED (2)
-----------------------------
AGREEMENT
-----------------------------
Binchys
Solicitors
43 Fitzwilliam Place,
Dublin 2
(906G.38)
Tel: Dublin (01) 661 6144
Fax: Dublin (01) 676 0189
<PAGE>
THIS AGREEMENT is made the 21st day of November 1997
- --------------
BETWEEN:
- -------
(1) CBT SYSTEMS LIMITED whose registered office is situate at Beech Hill,
-------------------
Clonskeagh, Dublin 4 ("CBT" which expression where the context so permits
shall include its successors); and
(2) CLARION WORLDWIDE LIMITED whose registered office is situate at P.O. Box
-------------------------
146, Road Town, Tortola in the British Virgin Isles, ("Clarion" which
expression where the context so permits shall include its successors)
WHEREAS
- -------
(A) CBT carries on the business of computer based training
(B) CBT has agreed to engage the services of Clarion and Clarion has agreed
to make available to CBT the knowledge and expertise of certain employees
of Clarion on a consultancy basis on the terms and subject to the
conditions hereinafter contained.
NOW IT IS HEREBY AGREED as follows:
- -----------------------
<TABLE>
<S> <C>
1. DEFINITIONS
-----------
The following terms shall have the following meanings:
1.1 "Board" the Board of Directors of CBT
1.2 "Commencement Date" 6th April, 1997
1.3 "Employees" those persons listed in the
schedule annexed hereto
</TABLE>
2. APPOINTMENT
-----------
2.1 CBT appoints Clarion as a consultant to CBT's business with effect from
the Commencement Date and Clarion accepts such appointment.
2.2 Clarion has agreed to procure that during the continuance of this
Agreement the services of the Employees will be provided to CBT, such
services to be performed at the premises of CBT at Beech Hill, Clonskeagh,
Dublin 4, or at such other premises as may be agreed between Clarion and
CBT from time to time.
2.3 Clarion hereby warrants to CBT that it employ's each of the Employees and
that it is entitled to furnish the services of each of the Employees to
CBT in the manner provided in this Agreement and that the copy of the
Employment Agreement relating to each Employee as furnished to CBT is
true, accurate, complete and up to date.
3. THE CONSULTANCY SERVICES
------------------------
Clarion hereby agrees to act as a consultant to CBT and
-1-
<PAGE>
to provide, through the services of the Employees in their respective
capacities shown in the Schedule hereto:
3.1 advice and assistance with regard to all aspects of the business,
finances and affairs of CBT;
3.2 marketing, management and commercial consultancy expertise in the field
of expanding CBT's general activities worldwide; and
3.3 such other matters as CBT may determine and Clarion may from time to time
agree.
4. CLARION'S DUTIES
----------------
During the continuance of this Agreement Clarion shall procure that the
Employees shall:
4.1 unless prevented by ill-health or accident, devote so much of their time,
attention and abilities to CBT's business as may be necessary for the
proper exercise of their duties in he respective capacities set out in
the Schedule hereto provided that nothing contained in this Agreement
shall require any of the Employees to devote to the business of CBT more
than 300 hours in any one calendar month or preclude Clarion or the
Employees from acting in a similar or any other capacity for any other
person, firm or company;
4.2 advise and assist CBT as required in all branches of its business
including in particular but without prejudice to the generality of the
above the specific duties of each of the Employees in their respective
capacities as set out in the Schedule hereto;
4.3 keep the Board adequately informed as to the progress and status of any
projects on which Clarion is engaged for CBT by reporting in such manner
and at such intervals as Clarion may from time to time agree with CBT;
and
4.4 comply with the reasonable requests of the Board and use their reasonable
endeavours to promote the interests of CBT.
5. DELEGATION
----------
Clarion shall not delegate any of its duties or obligations under this
Agreement otherwise than as may be expressly permitted under the terms
hereof.
6. REMUNERATION OF CLARION
-----------------------
6.1 In consideration of the services to be rendered by Clarion hereunder CBT
shall pay to Clarion such fees as may be agreed between CBT and Clarion
from time to time.
6.2 Clarion shall be entitled to a rateable proportion of the monthly sum
payable under this Agreement for any broken portion of any month during
which its engagement hereunder subsists.
6.3 CBT shall reimburse to Clarion all reasonable out-of-pocket expenses
incurred by the Employees in
-2-
<PAGE>
connection with the business of CBT in the performance of Clarion's duties
hereunder provided that Clarion provides reasonable evidence of the
expenditure in respect of which reimbursement is claimed.
7. SECRECY
-------
7.1 Clarion shall not at any time during or after the Term disclosure or
divulge or allow to be disclosed or divulged to any person any
confidential information relating to CBT, its business, trade secrets or
affairs other than to persons who have signed a secrecy undertaking in the
form approved by CBT.
7.2 Clarion shall not permit the Employees or any other person to assist in
the provision of the services under this Agreement unless that person has
signed such an undertaking.
8. DELIVERY UP OF DOCUMENTS ON TERMINATION
---------------------------------------
Upon the termination of Clarion's engagement Clarion shall, and Clarion
shall procure that each of the Employees shall, forthwith deliver up to
CBT all correspondence, documents, papers and property belonging to CBT
which may be in its or his or her possession or under its or his or her
control.
9. TERMINATION
-----------
9.1 The following obligations are conditions of this Agreement and any breach
of them shall be deemed a fundamental breach which shall terminate this
Agreement immediately and the rights and liabilities of the parties shall
thereafter be determined:
9.1.1 Clarion or any one or more of the Employees being guilty of any
serious misconduct or any serious breach or non-observance of any
of the obligations of Clarion under this Agreement;
9.1.2 Clarion becoming bankrupt or making any arrangement or composition
with its creditors or entering into liquidation (other than
voluntarily and without insolvency for the purposes of
reconstruction and/or amalgamation);
9.1.3 CBT failing to make punctual payment of all sums due to Clarion
under the terms of this Agreement; or
9.1.4 the doing or permitting of any act by Clarion by which CBT's
business may be prejudiced or put in jeopardy.
9.2 This agreement may be terminated at any time by either party serving on
the other not less than three (3) months notice in writing expiring at any
time.
9.3 The obligations of Clarion to provide the services of a particular
Employee under this Agreement shall automatically terminate in respect of
that Employee in the event of:
-3-
<PAGE>
9.3.1 that Employee's death; or
9.3.2 in the event of the disability of that Employee and for the
purposes of this Agreement, the term "disability" shall mean
inability of that Employee to perform his or her regular
services by reason of physical or mental incapacity for a
continuous period of ninety (90) days or a total of one hundred
and fifty (150) days during any twelve (12) month period.
10. DISPUTE
-------
Any dispute between CBT and Clarion relating to any matter arising out
of this Agreement upon which the parties are unable to reach agreement
shall be referred for a decision to two arbitrators who shall be
experts in the matter in dispute, one to be nominated by CBT and the
one by Clarion. Such arbitrators shall have the power in case of
disagreement between them to appoint an umpire who shall likewise be
an expert in the matter in dispute and the decision of such
arbitrators or such umpire, as the case may be, shall be final and
binding upon the parties. Each party shall be responsible for payment
of the fees of the arbitrator nominated by such party. The proper
charges of the umpire shall be paid by CBT and Clarion in such
proportions as the umpire shall direct.
11. FORBEARANCE OR WAIVER
---------------------
The rights which each of the parties have under this Agreement shall
not be prejudiced or restricted by any indulgence or forbearance
extended to any other party. No waiver by any party in respect of a
breach shall operate as a waiver in respect of any subsequent breach.
12. NOTICES
-------
Any written notice required to be served under this Agreement shall
be deemed duly served if, in the case of CBT, it is sent by ordinary
prepaid letter post addressed to CBT at or delivered to its registered
office for the time being and if, in the case of Clarion, it is sent
by ordinary prepaid letter post addressed to Clarion at or delivered
to Mr. Gethin Taylor, Director, Peregrine Corporate Services Limited,
Burleigh Manor, Peel Road, Douglas, Isle of Man IM1 5EP. Any such
notice shall if so posted be deemed to be served on the second
business day after posting and if delivered at the time of delivery.
13. INVALIDITY
----------
The invalidity or unenforceability of any part of this Agreement shall
not affect the validity or enforceability of the remainder.
14. STATUS OF CLARION
-----------------
14.1 During the continuance of this Agreement Clarion shall be an
independent contractor and not the servant of CBT.
-4-
<PAGE>
14.2 Clarion shall bear the exclusive responsibility for the payment of
remuneration to the Employees and all expenses in relation to the
Employees for which Clarion is liable as their employer.
14.3 Notwithstanding the provisions of this clause 14 Clarion hereby
undertakes that if at any time hereafter the relationship between CBT
and any one or more of the Employees is determined whether by the
Revenue Inspector or otherwise to be one of employment then Clarion
will indemnify and hold CBT harmless from and against any and all
losses, costs, liabilities and expenses incurred by CBT:
14.3.1 arising out of or connected in any way with such a
determination including but not limited to claims for PAYE,
Income Tax and National Insurance Contributions; or
14.3.2 arising out of or connected in any way with any and all
actions, suits, proceedings, claims, demands, assessments and
judgments with respect to any of the foregoing;
CBT shall be entitled to set all sums due to it under this indemnity
against the monthly sum payable to Clarion pursuant to the provisions
of clause 6 above.
15. SUPERSEDES PRIOR AGREEMENTS
---------------------------
This Agreement supersedes any prior agreements between the parties
whether written or oral and any such prior agreements are cancelled as
at the Commencement Date but without prejudice to any rights which have
already accrued to either of the parties.
16. HEADINGS
--------
Headings contained in this Agreement are for reference purposes only
and shall not be incorporated into this Agreement and shall not be
deemed to be any indication of the meaning of the clauses to which they
relate.
17. WARRANTY
--------
Each of the parties warrants its power to enter into this Agreement.
18. WHOLE AGREEMENT
---------------
Each party acknowledges that this Agreement contains the whole
agreement between the parties and that it has not relied upon any oral
or written representation made to it by the other or its employees or
agents.
19. CBT'S RIGHT TO ASSIGN
---------------------
This Agreement and the rights under it may be assigned or transferred
by CBT.
-5-
<PAGE>
20. NO ASSIGNMENT OR SUB-CONTRACTING
--------------------------------
Clarion shall not assign or sub-contract any of its rights or duties under
this Agreement without the prior written consent of CBT.
21. GOVERNING LAW
-------------
This Agreement shall be governed by and construed in all respects in
accordance with the laws of the Republic of Ireland which shall be the
proper law of this Agreement and the parties hereto hereby agree to submit
to the non-exclusive jurisdiction of the Courts of the Republic of Ireland
in regard to any proceedings arising out of or in connection with this
Agreement.
22. COSTS
-----
Each of the parties shall pay any costs and expenses incurred by it in
connection with this Agreement.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed
- ------------------
in duplicate on the day and in the year first above written in the presence of
the undersigned witnesses:
-6-
<PAGE>
SCHEDULE
--------
EMPLOYEES: CAPACITY
--------- --------
Lorraine Kennedy Personal Assistant
Bill Beamish Product Development
and Design
Bill McCabe Strategy and Planning
Jack Hayes Financial Services
-7-
<PAGE>
The Common Seal of )
CLARION WORLDWIDE )
- ----------------- ) [SEAL]
LIMITED was hereunto )
- ------- )
affixed in the presence )
of: )
^^ Director
Bank of Ireland Trust Company ^^
Secretary
the Common Seal of )
CBT SYSTEMS LIMITED )
- ------------------- )
was hereunto affixed )
in the presence of: )
Director ^^
/Secretary
-8-
<PAGE>
EXHIBIT 22.1
SIGNIFICANT SUBSIDIARIES OF REGISTRANT
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
CBT Systems USA, Ltd. Delaware
Personal Training Systems, Inc. California
Fidalco Limited Ireland
CBT Systems Limited Ireland
CBT Systems UK Limited England
CBT Systems Africa (Proprietary) Limited South Africa
CBT Finance Limited Grand Cayman
CBT (Technology) Limited Ireland
CBT Systems Canada Limited Canada
CBT Systems Deutscheland GMbH Germany
Applied Learning Ltd. Australia
CBT Systems Benelux, B.V. The Netherlands
Ben Watson Associates Ltd. Canada
CBT Systems Middle East Limited Bahamas
CBT Systems Scandinavia Limited Sweden
S-2
<PAGE>
EXHIBIT 23.1
ERNST & YOUNG
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Forms S3 (Nos. 333-35855 and 333-42929) as filed with the Securities and
Exchange Commission, on September 18, 1997 pertaining to the shares issued in
conjunction with the acquisition of Ben Watson Associates Limited, on December
22, 1997 pertaining to the shares issued in conjunction with the acquisition
of CBT Systems Middle East Limited and the Registration Statements on Forms S-8
(Nos. 333-06409, 333-25245, and 333-35745) pertaining to the 1994 Share Option
Plan filed with Securities and Exchange Commission on June 20, 1996, the 1996
Supplemental Stock Plan and Applied Learning Limited Executive Stock Plan
filed with the Securities and Exchange Commission on April 16, 1997 and the
1994 Share Option Plan filed with the Securities and Exchange Commission on
September 16, 1997, of our reports dated January 20, 1998, with respect to the
consolidated financial statements and schedule included in this annual report
on Form 10-K for the year ended December 31, 1997.
Ernst & Young
Chartered Accountants
Dublin, Ireland
January 20, 1998
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