-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdkxxtOzgchZENAM2R8euRMds2hGttr//J0zNA2V7ldbVqVAdAj98FjT7++/CSaZ zpB3Z/0zh7tpFYIfvRraGw== 0001047469-99-015095.txt : 19990416 0001047469-99-015095.hdr.sgml : 19990416 ACCESSION NUMBER: 0001047469-99-015095 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELPHI INFORMATION SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000814549 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 770021975 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15946 FILM NUMBER: 99595231 BUSINESS ADDRESS: STREET 1: 3501 ALGONQUIN RD STREET 2: STE 500 CITY: ROLLING MEADOWS STATE: IL ZIP: 60008 BUSINESS PHONE: 7085063100 MAIL ADDRESS: STREET 1: 3501ALGOUQUIN ROAD CITY: ROLLING MEADOWS STATE: IL ZIP: 60008 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K / / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR /X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from April 1, 1998 to December 31, 1998 ------------- ----------------- Commission file number 0-15946 DELPHI INFORMATION SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 77-0021975 (State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number) 3501 Algonquin Road Rolling Meadows, Illinois 60008 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (847) 506-3100 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Title of each class ------------------- Common Stock, par value $0.10 per share Preferred Share Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file 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 the Form 10-K. [ ] As of March 31, 1999, the number of shares of Common Stock outstanding was 8,119,089. As of such date, the aggregate market value of Common Stock held by nonaffiliates, based upon the last sale price of the shares as reported on the NASDAQ SmallCap Market System on such date, was approximately $50,866,000. Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement relating to its 1999 Annual Meeting of Stockholders are incorporated by reference into Part III. DELPHI INFORMATION SYSTEMS, INC. INDEX TO ANNUAL REPORT ON FORM 10-K
Page Reference -------------- PART I Item 1. Business 3 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 6 Item 6. Selected Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 18 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 PART III Item 10. Directors and Executive Officers of the Registrant 40 Item 11. Executive Compensation 41 Item 12. Security Ownership of Certain Beneficial Owners and Management 41 Item 13. Certain Relationships and Related Transactions 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 42
2 PART I ITEM 1. BUSINESS Delphi Information Systems, Inc. ("the Company") was founded in 1976 as Delphi Systems, Inc., a California corporation. In 1983, Delphi Information Systems, Inc., a Delaware corporation, was formed and acquired all of the outstanding shares of Delphi Systems, Inc. in an exchange offer. In June, 1987, Delphi Systems, Inc. was merged into and with Delphi Information Systems, Inc. On July 23, 1996, the Company acquired Complete Broking Systems ("CBS") of Auckland, New Zealand. Delphi is an international provider of software and Internet-based solutions for the insurance industry. The Company's revenue is derived primarily from the licensing and sale of software comprised of internally developed and third-party software and from professional services, maintenance, and support services. Professional services include consulting, implementation, training, and project management provided to the Company's customers with installed systems and those in the process of installing systems. The Company's customer list includes a majority of the largest 100 brokerages and top 200 agencies in the United States and Canada, and many of the largest global brokers. The Company's software operates on approximately 75,000 workstations and terminals at more than 3,000 customer sites. PRODUCTS - The Company's current product strategy is centered on a new generation of products, collectively referred to as the "cd" product line which is comprised of "cd.global", a modular, state of the art, agency management solution providing flexibility and the ability to handle unstructured data and complex risk; "EBIX.COM", an internet browser based product providing electronic transmission between carriers and brokers; and "cd.one", a structured system utilizing many features of the Company's previous products. The Company also has six "legacy" products including INfinity, INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide basic functions such as policy administration, claims handling, accounting, and financial reporting. Legacy products will be maintained and supported as long as there is adequate economic and strategic justification. Customers utilizing legacy products will continue to be encouraged to migrate to newer products. During the second quarter of fiscal 1997, the Company discontinued the sale and marketing of computer hardware in order to focus the Company's resources on the development and sale of software and professional services. Subsequent to the Company's exit from the hardware sector, the Company continues to receive commissions from hardware vendors for product referrals although this is not a material source of revenue for the Company. The software products offered by the Company range in price from $2,000 to $2,200 on a per license basis, but the total contract value for certain multiple-site global brokers is over $1,000,000. In the fiscal year ended March 31, 1998, one domestic customer (including its foreign subsidiaries) accounted for approximately 12.7% of consolidated revenue. The customer is a publicly traded multi-national insurance company listed on the New York Stock Exchange. In the nine-month period ended December 31, 1998 and fiscal 1997, no customer represented more than 10% of total revenue. The decrease in the percentage of revenue attributed to this customer in the nine months ended December 31, 1998 was due to an overall increase in Company revenue. 3 SYSTEM DESIGN AND ARCHITECTURE - The Company's new product offerings utilize the latest technology. "cd.global" is a client/server based system, which supports Oracle relational database software technology. ebix.COM-TM- is an Internet browser-based product, while "cd.one" is operational on Btrieve. PRODUCT DEVELOPMENT - At December 31, 1998, the Company employed 43 full-time employees engaged in product development activities. These activities include research and development of software enhancements such as adding functionality, improving usefulness, adaptation to newer software and hardware technologies, and increasing responsiveness. Product development expenditures including amounts capitalized were $3,716,000, $6,089,000, and $6,016,000 in the nine-month period ended December 31, 1998 and fiscal 1998 and 1997, respectively. Management believes maintenance and enhancement of product technology is critical and expects to continue to invest substantial amounts in product development. The decrease in expenditures in the nine month period ended December 31, 1998 from prior periods results from the Company's efforts to streamline its product development activities to be more efficient. COMPETITION - Management believes its principal competition is represented by two companies which provide software systems that are comparable to those offered by the Company. Both of these companies are larger than the Company and may have greater financial resources. In addition, one of the companies is partially owned by a large insurance carrier. The Company believes that most insurance carriers are in the process of reducing or eliminating their in-house agency and brokerage automation efforts. Nevertheless, some insurance carriers continue to operate subsidiaries which actively compete with the Company. These carriers have much greater financial resources than the Company and have in the past subsidized the automation of independent agencies through various incentives offered to promote the sale of the carriers' insurance products. Accordingly, there can be no assurances that insurance carriers will continue to withdraw from competition with the Company. The Company is not aware of any large hardware company that offers software which specifically addresses the independent agency marketplace. However, certain large hardware suppliers do sell systems and systems' components to independent agencies. The Company, to a much lesser extent, also experiences competition from small, independent or freelance developers and suppliers of software who sometimes work in concert with hardware companies to supply systems to independent agencies. Key competitive factors in the Company's market are product technology, features and functions, ease of use, price, reputation, reliability, and quality of customer support and training. Management believes that overall the Company competes favorably with respect to these factors. PROPRIETARY RIGHTS - The Company regards its applications software as proprietary and attempts to protect it with copyrights, trade secret laws and restrictions on disclosure and transferring title. Despite these precautions, it may be possible for third parties to copy aspects of the Company's products or, without authorization, to obtain and use information which the Company regards as trade secrets. Existing copyright law affords only limited practical protection and the Company's software is unpatented. BACKLOG AND DEFERRED REVENUE - The Company traditionally invoices software maintenance and support on a quarterly and annual basis in advance of providing the service. The prepaid software maintenance fees are recorded as deferred revenue and recognized ratably over the term of the respective 4 software maintenance agreement. As of December 31, 1998 and March 31, 1998, the backlog of contracted professional services fees sales was not significant. As of December 31, 1998 and March 31, 1998, the backlog of contracted software license fees totaled approximately $1.8 million and zero, respectively. EMPLOYEES - At December 31, 1998, the Company had 191 employees, including 16 employees in sales and marketing, 43 employees in product development, 101 employees in customer service and operations, and 31 employees in general management, administration and finance. None of the Company's employees are presently covered by a collective bargaining agreement. Management believes that employee relations are good. ITEM 2. PROPERTIES The Company's corporate headquarters is in Rolling Meadows (Chicago), Illinois, where it leases approximately 20,000 square feet of office space. Substantially all corporate executive and administrative functions are located in Rolling Meadows. The Rolling Meadows lease expires in October 2003. The Company leases additional office space of approximately 6,800 square feet in Atlanta, Georgia; approximately 12,000 square feet in Billerica, Massachusetts; approximately 15,000 square feet in Walnut Creek (San Francisco), California; approximately 17,500 square feet in Pittsburgh, Pennsylvania; approximately 6,000 square feet in Scarborough, (Toronto) Canada; approximately 1,500 square feet in Auckland, New Zealand; approximately 1,500 square feet in Sydney, Australia; approximately 1,000 square feet in London, England; and approximately 1,500 square feet in Singapore. Management believes its facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed. See Note 9 to the financial statements included in Part II, Item 8, for further information regarding obligations under property leases. ITEM 3. LEGAL PROCEEDINGS The Company is not a party, and none of its property is subject to, any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1998. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The principal market for the Company's Common Stock is the Nasdaq SmallCap Market. The Company's Common Stock trades under the symbol "DLPH". As of March 31, 1999, there were 164 shareholders of record. The Company has not paid dividends on its Common Stock to date. There are no plans in the near future to do so. The following tables set forth the high and low closing bid prices for the Company's Common Stock for each calendar quarter in the nine-month period ended December 31, 1998 and the fiscal year ending March 31, 1998 as restated to reflect the one-for-five reverse stock split effective May 8, 1998.
NINE MONTHS ENDED DECEMBER 31, 1998 HIGH LOW ---------------------------------------------------------------- April-June $ 5.19 $ 3.60 July - September 5.56 2.91 October - December 8.75 2.94 FISCAL 1998 HIGH LOW ---------------------------------------------------------------- First quarter $ 7.50 $ 5.15 Second quarter 9.05 4.70 Third quarter 7.05 4.40 Fourth quarter 4.85 3.15
As of March 31, 1999 there were 8,119,089 shares of Common Stock outstanding and 221 shares of Series D Preferred Stock, par value $.10 per share outstanding. 6 ITEM 6. SELECTED FINANCIAL DATA CONSOLIDATED FINANCIAL HIGHLIGHTS (In thousands, except per share data)
NINE MONTHS ENDED DECEMBER 31, FISCAL YEARS ENDED MARCH 31, 1998 1998 1997 1996 1995 --------------------------------------------------------------------------- RESULTS OF OPERATIONS: Revenue $ 19,221 $ 22,465 $ 27,714 $ 44,081 $ 53,040 Operating income (loss) 835 (3,186) (5,880) (11,120) (597) Net income (loss) $ 501 $ (3,406) $ (5,884) $(11,833) $ (1,681) NET INCOME (LOSS) PER SHARE: (1) Basic EPS $ 0.07 $ (0.46) $ (0.97) $ (6.86) $ (1.15) Diluted EPS $ 0.07 $ (0.46) $ (0.97) $ (6.86) $ (1.15) SHARES USED IN COMPUTING PER SHARE DATA: (1) Basic EPS 7,395 7,347 6,093 1,724 1,461 Diluted EPS 7,419 7,347 6,093 1,724 1,461 FINANCIAL POSITION: Assets $ 16,545 $ 14,782 $ 22,577 $ 20,389 $ 27,547 Short-term debt 4,032 1,923 1,600 3,030 2,486 Long-term debt 210 210 -- 1,500 4,250 Stockholders' equity (deficit) $ 6,067 $ 5,591 $ 8,448 $ (3,346) $ 4,553
(1) Net income (loss) per share and share data restated to reflect the one-for-five reverse stock split effective May 8, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The insurance industry has undergone significant consolidation over the past several years driven by the need for, and benefits from, economies of scale and scope in providing low-cost insurance. Consolidation has involved both insurance brokerages, the Company's primary customers, and insurance companies, and is directly impacting the manner in which insurance products are distributed. Management believes the insurance industry will continue to experience significant changes in the next several years to meet the changing distribution model. Changes in the insurance industry may create opportunities and challenges for the Company. Management believes consolidation will force brokerages to decrease distribution costs and eliminate labor-intensive tasks via automation. Competition will force brokerages to increase service levels via improved automated processes such as quoting and claims processing. Management believes that the Company can partner with customers to provide integrated information management solutions, and fully leverage information technology and services. 7 The consolidation of the industry will create a marketplace of fewer yet more sophisticated customers. In such an environment, the Company could be subject to heightened effects of competition, particularly with respect to product functionality, service and price. RECENT DEVELOPMENTS - On March 23, 1998, the Board of Directors adopted a resolution to change the Company's fiscal year end to December 31 effective in 1998. The Company has filed Form 10-K for the twelve months ended March 31, 1998, Form 10-Q for each of the three-month periods ended June 30, 1998 and September 30, 1998, and is filing this Form 10-K for the nine months ended December 31, 1998. This report encompasses the "1998 transition period", the nine months ended December 31, 1998, "fiscal 1998", the twelve months ended March 31, 1998, and "fiscal 1997", the twelve months ended March 31, 1997. On May 6, 1998, the Company's stockholders adopted and approved a proposal to amend the Company's Certificate of Incorporation to effect the reverse stock split and the authorized shares reduction. The reverse stock split and authorized shares reduction was effective as of the open of the Nasdaq SmallCap Market on May 8, 1998 (the "Effective Time"). At the Effective Time, each share of Common Stock issued and outstanding was automatically reclassified and converted into one-fifth share of Common Stock. Fractional shares of Common Stock resulting from the reverse stock split were not issued and instead holders thereof received cash in lieu of fractional shares. All shares and per share information presented gives effect to the one-for-five reverse stock split and authorized shares reduction. The principal reason for the one-for-five reverse stock split was to increase the trading price per share of the Common Stock in order to comply with the revised standards for continued listing on the Nasdaq SmallCap Market, which went into effect on February 23, 1998. The new Nasdaq listing criteria require, among other things, that the minimum bid price per share of a listed company be $1.00. There is no assurance, however, that the Common Stock will continue to trade above the $1.00 minimum bid price or that the Company will otherwise be able to maintain its listing on the Nasdaq SmallCap Market. 8 RESULTS OF OPERATIONS DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
NINE MONTHS ENDED DECEMBER 31, ---------------------------------- 1997 1998 (UNAUDITED) ---------------------------------- REVENUE: Software $ 6,375 $ 2,497 Services and other 12,846 14,139 -------- -------- TOTAL REVENUE 19,221 16,636 -------- -------- COST OF REVENUE: Software 2,337 2,044 Services and other 7,352 7,136 -------- -------- TOTAL COST OF REVENUE 9,689 9,180 -------- -------- GROSS MARGIN 9,532 7,456 -------- -------- OPERATING EXPENSES: Product development 2,160 3,021 Sales and marketing 2,167 2,682 General and administrative 4,370 3,126 Write-off of software, goodwill and customer lists -- 2,189 -------- -------- TOTAL OPERATING EXPENSES 8,697 11,018 -------- -------- OPERATING INCOME (LOSS) 835 (3,562) Other expense 312 187 -------- -------- Income (loss) before income taxes 523 (3,749) Income tax provision (benefit) 22 (41) -------- -------- Net income (loss) $ 501 $ (3,708) -------- -------- -------- --------
TOTAL REVENUE - The Company's revenue is derived from the licensing and sale of internally-developed and third party software ("Software") and from professional services, maintenance services, and support services ("Services"). Professional services include consulting, implementation, training and project management provided to the Company's customers with installed systems and those in the process of installing systems. Total revenue is comprised of software revenue and service revenue. Total revenue for the 1998 transition period increased $2,585,000 or 15.5% from the comparable period in the prior year. Total fiscal 1998 revenue decreased 18.9% from the fiscal 1997 level. SOFTWARE REVENUE - The Company's current product strategy is centered on a new generation of products, collectively referred to as the "cd" product line and are comprised of "cd.global", a modular, state of the art, agency management solution providing flexibility and the ability to handle unstructured 9 data and complex risk; "EBIX.COM-TM-" an internet browser-based product, providing electronic transmission between carriers and brokers; and "cd.one", a structured system utilizing many features of the Company's previous products. The Company also has six "legacy" products including INfinity, INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide basic functions such as policy administration, claims handling, accounting, and financial reporting. Current legacy products will be maintained and supported as long as there is adequate economic and strategic justification. Customers utilizing legacy products will continue to be encouraged to migrate to newer products. Software revenue is comprised of revenue from the sale of "cd" products, current legacy products, hardware, and other software. During the second quarter of fiscal 1997 the Company discontinued the sale and marketing of computer hardware. The sale of hardware was ceased in order to focus the Company's resources on the development and sale of software and services. Subsequent to the Company's exit from the hardware sector, the Company continues to receive commissions from hardware vendors for product referrals although this is not a material source of revenue for the Company. Accordingly, during the first quarter of fiscal 1997, software revenue includes revenue from the sale of computer hardware; subsequently software revenue includes hardware commissions. 1998 transition period software revenue of $6,375,000 was $3,878,000 or 155% greater than software revenue of $2,497,000 for the same period in the prior year due primarily to the introduction of "cd.global" during the period. Fiscal 1998 Software revenue of $3,509,000 was $2,580,000 or 42.4% less than fiscal 1997 revenue of $6,089,000. Although sales of "cd" products in fiscal 1998 were $545,000 greater than fiscal 1997, this increase was offset primarily by a $1.0 million decrease in discontinued legacy products and a $1.9 million decrease in hardware revenue and commissions. SERVICES REVENUE - The 1998 transition period Services revenue was $12,846,000 compared to $14,139,000 in the similar period in 1997, a decrease of 9.1% due primarily to a lower customer support base. Fiscal 1998 Services revenues of $18,956,000 were $2,669,000 or 12.3% less than fiscal 1997 Services revenue of $21,625,000. The revenue decrease in fiscal 1998 from fiscal 1997 is primarily attributable to decreased support revenue associated with the Company's exit from the hardware business and declining legacy support revenue partially offset by support price increases and new support contracts associated with "cd" products. COST OF SOFTWARE REVENUE - Cost of Software revenue includes the cost of third party software and computer hardware and the amortization of capitalized software development cost. Cost of Software revenue, as a percentage of Software revenue, was 36.7%, 81.9%, 69.5%, and 87.4% in the 1998 transition period, the nine months ended December 31, 1997 and fiscal 1998 and 1997, respectively. The downward trend of cost of Software revenue as a percentage of Software revenue from fiscal 1997 to the 1998 transition period is due to higher software sales and also the write-off of intangible assets in prior periods. COST OF SERVICES REVENUE - Cost of Services revenue includes costs associated with support, consulting and training services, and provisions for doubtful accounts. Cost of Services revenue as a percentage of Services revenue was 57.2%, 50.5%, 50.2%, and 62.3% in the 1998 transition period, the nine months ended December 31, 1997 and fiscal 1998 and 1997, respectively. The decrease from fiscal 1997 to fiscal 1998 is primarily due to direct labor efficiencies gained through headcount reductions. The increase from the nine months ended December 31, 1997 and fiscal 1998 to the 1998 transition period is due to higher personnel levels to support "cd.global" sales. 10 PRODUCT DEVELOPMENT EXPENSES - Product development expenses, net of capitalized software cost were $2,160,000 in the 1998 transition period compared to $3,021,000 in the same period in 1997. Product development expenses, net of capitalized software costs, were $3,510,000 and $4,255,000 in fiscal 1998 and 1997, respectively. Product development expenditures, including those which were capitalized, were $3,716,000 in the 1998 transition period compared to $4,399,000 in the same period in 1997. Product development expenditures, including those which were capitalized, were $6,089,000 and $6,016,000, respectively, in fiscal years 1998 and 1997. The decrease in the transition period expenditures from prior periods results from the Company's efforts to streamline its product development activities to be more efficient. Management believes maintenance and enhancement of product technology is critical and expects to continue to invest substantial amounts in product development. Product development activities generally may be accelerated or deferred based on resource availability. SALES AND MARKETING EXPENSES - Sales and marketing expenses as a percent of total revenue were 11.3% in the 1998 transition period and approximately 16% in the same period in 1997, fiscal 1998 and fiscal 1997. The decrease in the transition period is due to lower average personnel levels in the transition period. GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses increased 39.8% in the 1998 transition period from the same period in 1997. General and administrative expenses as a percentage of total revenue were 22.7%, 18.8%, 19.6% and 15.7% for the 1998 transition period, the nine months ended December 31, 1997 and fiscal 1998 and fiscal 1997, respectively. The increase in the transition period from prior periods primarily relates to higher expenditures for personnel, facilities and information technology. General and administrative expenses increased 1.4% in fiscal 1998 from fiscal 1997. AMORTIZATION OF GOODWILL, CUSTOMER LISTS AND NONCOMPETE AGREEMENTS - Amortization of goodwill, customer lists, and noncompete agreements was $136,000 and $496,000 in fiscal 1998 and 1997, respectively. As further discussed in Note 3 to the financial statements included in Part II, Item 8, during fiscal 1998, all unamortized goodwill and customer lists of $770,000 were written off to reflect impairment. OTHER INCOME/EXPENSE - Other income/expense consists of minority interest, interest income and interest expense. Minority interest is relatively insignificant. The Company had net interest expense of $359,000 in the 1998 transition period compared to $143,000 for the same period in 1997. The Company had net interest expense of $272,000 in fiscal 1998, compared to net interest income of $23,000 in fiscal 1997. As further detailed in Note 6 to the financial statements included in Part II, Item 8, the increase in net interest in the 1998 transition period and fiscal 1998 was due to higher average borrowings. RESTRUCTURING CHARGES - The Company's product strategy is centered on a new generation of products, collectively referred to as the "cd" product line. Consistent with the Company's product strategy, the development of enhanced versions of legacy products has been limited. As new products are introduced to the market, existing customers utilizing legacy products are encouraged to migrate to the Company's new generation of products. During the first two quarters of fiscal 1998 the Company experienced some customer attrition related to certain legacy support price increases effective in April 1997. During the second quarter of fiscal 1998, in response to changes in the Company's markets and technology trends, the product strategy was altered requiring modification of a portion of the underlying technology of "cd" products. As a result of the decrease in legacy maintenance revenue and the requirement to modify a portion of the underlying technology of "cd" products, the recoverability of a portion of intangible assets was deemed 11 impaired. Accordingly, during the second quarter of fiscal 1998, the carrying value of capitalized and purchased software was reduced $1,283,000 and goodwill and customer lists of $770,000 were written off. During the first two quarters of fiscal 1997 the Company generated significant operating losses. In response to the losses, the Company was restructured resulting in significant reductions in payroll expense and other operating expenses. In addition, as the Company transitioned out of the hardware business, a portion of the inventory on hand was deemed obsolete. As a result, the Company incurred a restructuring charge in fiscal 1997 of $1,297,000. LIQUIDITY AND CAPITAL RESOURCES During the 1998 transition period the Company achieved positive operating cash flow of $190,000, due principally to profitable operations, which were partially offset by an increase in accounts receivable of $1,571,000 and a decrease in deferred revenue of $878,000. The Company funded investments in capital expenditures of $537,000 and capitalized software of $1,556,000 primarily through line of credit borrowings of $2,109,000. Despite the improved financial results during the 1998 transition period, the Company is currently faced with liquidity concerns. Subsequent to January 1, 1999, the Company received approximately $4.9 million in cash related to proceeds from the exercise of outstanding stock warrants. These proceeds were used to fund operations, pay aged accounts payable and reduce borrowings under the Company's bank line of credit, which was designed to provide up to $4.0 million, subject to certain borrowing base limits. The amount borrowed under the line of credit was reduced from approximately $3.7 million at December 31, 1998 to approximately $1.4 million as of March 31, 1999. As of April 15, 1999, the total amount that the bank has made available, and that the Company is borrowing, under the bank line of credit is approximately $1.4 million. The Company believes the amount that should be available under the terms of the line of credit is substantially higher. Based on the Company's projections, the borrowing requirements of the business at certain times during 1999 will exceed $1.4 million but not the higher Company calculated maximum borrowing capacity under the existing line of credit. The cash requirements are, in great part, affected by the extended payment terms offered to customers on new software sales. In order to meet the projected cash requirements of the business, it will be necessary for the Company to secure financing sources, beyond those currently available, in order to continue as a going concern. Management believes that the required financing sources to operate the business as a going concern will be secured, although there can be no assurances that such financing will be available or that it will be available on terms satisfactory to the Company. As of April 15, 1999, management is having ongoing discussions with its bank in order to come to an agreement as to the available borrowing base under its line of credit agreement. Management believes that the borrowing base will be expanded, however, to date, no agreement has been reached, and there can be no assurance that such lender calculated maximum borrowing capacity will be adequate. Management also believes that there may be additional infusions of cash from the further exercise of outstanding stock warrants, which would supplement any cash made available through successful bank negotiations. In late March, 1999, the expiration date of warrants to purchase approximately 1.5 million shares of common stock at $7.50 per share was extended from April 19, 1999 to June 18, 1999. Finally, if the Company is unable to successfully renegotiate its available borrowings under its current line-of-credit agreement, management will endeavor to secure the necessary financing from other sources. Such sources could include a different bank, a "mezzanine lender", or an equity investor. Again, although management believes the Company will be able to secure financing on terms satisfactory to the Company and on a timely basis, there can be no assurances that this will happen. Management intends to aggressively seek the required financing sources that are necessary in order to continue to operate the business. DEFERRED REVENUE - The Company traditionally invoices software maintenance and support in advance of providing the service. The prepaid software maintenance fees are recorded as deferred revenue and recognized ratably over the term of the respective software maintenance agreement. A significant component of the Company's current liabilities at December 31, 1998, consists of deferred revenues of 12 $3,418,000. The liability is satisfied through normal ongoing operations of the Company's service organization and generally does not require payment to third parties. PRODUCT DEVELOPMENT - At December 31, 1998, the Company employed 43 full-time employees engaged in product development and activities. These activities include research and development of software enhancements, improving usefulness, adaptation to newer software and hardware technologies, and increasing responsiveness. Product development expenditures, including amounts capitalized, were $3,716,000 for the nine-months ended December 31, 1998 and $6,089,000 and $6,016,000 in fiscal 1998, and 1997, respectively. Management believes maintenance and enhancement of product technology is critical and expects to continue to invest substantial amounts in product development. The decrease in the transition period expenditures from prior periods results from the Company's efforts to streamline its product development activities to be more efficient. Product development activities generally may be accelerated or deferred based on resource availability. BANK LINE-OF-CREDIT - Effective January 1997, the Company established a line of credit up to $4,000,000 subject to borrowing base limits. The agreement provides for a minimum monthly interest at the bank's prime lending rate plus two and one-half percent (2.5%) on the greater of the actual amount outstanding or $1,600,000. The agreement contains certain covenants including the maintenance of a minimum net worth of $2,000,000 and restrictions upon certain activities by the Company without the approval of the bank including the incurrence of senior debt, certain mergers or acquisitions, and the payment of dividends. The borrowings under the agreement are secured by substantially all of the Company's assets. In December 1997, March 1998, and September 1998, the Company executed amendments to the line of credit agreement. The amendments extend the maturity date of the agreement to January 31, 2001, alter the provisions of the early termination fee, and modify the criteria for determining the amount available under the line. In accordance with the agreement, as amended, prior to December 31, 1998 the Company could borrow up to two and one-half times average monthly collections (as defined); from January 1999 through March 1999, two times average monthly collections; and subsequently the sum of one times average monthly recurring maintenance collections and seventy-five percent of eligible non-maintenance receivables (as defined). As of December 31, 1998, borrowings under the line of credit totaled $3,712,000, and $7,000 remained available for borrowing. As of March 31, 1999, borrowings under the line of credit were $1,408,000 and $29,000 remained available for borrowing. NONCOMPETE NOTE PAYABLE - The Company entered into various noncompete agreements in connection with a January 1991 acquisition. The final installment of $400,000 was due on January 31, 1997, but was subsequently converted to an 11.75% interest bearing unsecured note. As of December 31, 1998, the remaining balance is due in three equal annual payments of $119,574 (principal and interest) commencing on January 31, 1999. The January, 1999 payment was paid by the Company. Commitments related to the noncompete agreements were amortized and expensed ratably over the life of each agreement. PRIVATE EQUITY PLACEMENTS - The Company completed two private equity placements in fiscal 1997. In May 1996, the Company issued 2,140,000 units at a price of $5.00 per unit. In January 1997, the Company issued 1,126,100 units at a price of $5.00 per unit. Each unit consists of one share of common stock and a redeemable warrant (further described below). The two private equity placements provided net proceeds of approximately $14,971,000 to the Company. In conjunction with the May 1996 equity placement, outstanding promissory notes of $1,500,000 were converted into 300,000 units. Each unit consists of one share of common stock and a redeemable 13 warrant (further described below). In addition, all Series C Preferred Stock, and 16,135 of the 16,356 outstanding shares of Series D Preferred Stock were converted into 1,455,307 shares of common stock. REDEEMABLE WARRANTS - As described above, in conjunction with the May 1996 and January 1997 private equity placements and conversion of a $1,500,000 outstanding promissory note, the Company issued units, each consisting of one share of common stock and one redeemable warrant to purchase one share of common stock at an exercise price of $7.50 per share, subject to certain anti-dilutive adjustments. The shares and redeemable warrants comprising the units are immediately detachable and separately transferable. The redeemable warrants may be exercised at any time after the date of issuance for a period of three years. The Company can redeem the redeemable warrants at any time subsequent to 180 days after issuance if the closing bid price for the common stock is at or above $10.00 per share for twenty consecutive trading days subsequent to when the redeemable warrants first are redeemable. Subsequent to January 1, 1999, warrants to acquire approximately 609,000 shares of Common Stock that were due to expire on April 19, 1999 were exercised generating $4.6 million in cash. On March 31, 1999, the Company extended the expiration date from April 19, 1999 to June 18, 1999 for the remaining unexercised warrants originally issued in May 1996 to acquire approximately 1,531,000 shares of Common Stock. Of these unexercised warrants, 200,000 warrants are held by the Company's largest shareholder. In addition, subsequent to January 1, 1999, warrants to acquire 25,000 shares of common stock that were due to expire January 24, 2000 and warrants to acquire 5,000 shares of common stock related to the conversion of the promissory notes were exercised generating approximately $225,000 in cash. OTHER WARRANTS - In connection with the May 1996 private equity placement described above, the Company issued a warrant to the placement agent (the "Agent's Warrant") to purchase 200,000 shares of the Company's common stock at $5.00 per share. These warrants are not subject to redemption and expire May 1, 2001. Subsequent to January 1, 1999, warrants to acquire 18,000 shares of Common Stock were exercised generating $90,000 in cash. In connection with a renewal of a line-of-credit agreement in December 1994, the Company issued to a bank a five-year warrant option to purchase 75,000 shares of common stock at $17.50 per share. TAX CREDIT CARRYFORWARDS - As further described in Note 8 to the financial statements included herein at Part II, Item 8; as of December 31, 1998, the Company has investment business tax credit carryforwards and net operating loss (NOL) carryforwards for federal income tax purposes aggregating approximately $35,000,000 expiring at various times through the year 2012. NEW ACCOUNTING STANDARDS - In June 1997, SFAS No. 130, "Reporting Comprehensive Income," established standards for reporting and displaying comprehensive income and its components. The Company has chosen to disclose Comprehensive Income (Loss), which encompasses net income (loss) and foreign currency translation adjustments, in the Consolidated Statements of Stockholders' Equity. Prior years have been restated to conform to the requirements of SFAS No. 130. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" established reporting standards for companies operating in more than one business segment. Since the Company manages its business as a single entity that provides application software and related services to a single industry on a worldwide basis, the Company believes that the segment disclosure requirements of SFAS 14 No. 131 are not applicable to its operations. However, the applicable enterprise-wide disclosures required by SFAS No. 131 are included elsewhere in Part II, Item 8, Note 1. As previously reported, in October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which supersedes SOP 91-1. The Company adopted, as required, SOP 97-2 for software transactions entered into beginning April 1, 1998. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements (i.e., software products, upgrades/enhancements, postcontract customer support, installation, training, etc.) to be allocated to each element based on relative fair values of the elements. The fair value of an element must be based on evidence which is specific to the vendor. The revenue allocated to software products (including specified upgrades/enhancements) generally is recognized upon delivery of the products. The revenue allocated to postcontract customer support generally is recognized ratably over the term of the support and revenue allocated to service elements (such as training and installation) generally is recognized as the services are performed. If the Company does not have evidence of the fair value of all elements in a multiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or all elements are delivered. Further, the SOP limits the recognition of revenue for contracts with extended payment terms. In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" and in December 1998, issued SOP 98-9, "Modification of SOP 97-2, Software Recognition, With Respect to Certain Transactions". For fiscal years beginning on or before March 15, 1999, SOP 98-4 and 98-9 defer the application of certain passages in SOP 97-2 which limit what is considered evidence of fair value of various elements of multiple element arrangements. Additionally, for transactions entered into in fiscal years beginning after March 15, 1999, SOP 98-9 provides for revenue recognition for certain software arrangements involving multiple elements where vendor specific evidence does not exist for delivered elements. Management is in the process of reviewing SOP 98-9 to determine its impact, if any, on the Company. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivation Instruments and Hedging Activities", which addresses the accounting for derivative instruments. SFAS No. 133 is effective for financial statements for the Company's fiscal year beginning January 1, 2000. The Company does not expect that SFAS No. 133 will have a significant effect on its current financial reporting. EURO CONVERSION - Effective January 1, 1999, eleven of the fifteen member countries of the European Union (the "participating countries") have agreed to adopt a new common legal currency (the "euro"). The participating countries established fixed conversion rates between their existing sovereign currencies (the "legacy currencies") and the euro. Following the introduction of the euro, the legacy currencies are scheduled to remain legal tender in the participating countries as denominations of the euro between January 1, 1999 and January 1, 2002 (the "transition period"). During the transition period transactions may be settled using either the euro or the participating country's legacy currency on a "no compulsion, no prohibition" basis. Conversion rates will no longer be computed directly from one legacy currency to another but rather will utilize a "triangulation" method specified by European Union regulations whereby payments made in a legacy currency are converted to the euro and subsequently converted to the recipient's desired legacy currency. Beginning January 1, 2002, the participating countries will issue new euro-denominated bills and coins for use in cash transactions. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in legacy currencies such that legacy currencies will no longer be legal tender for any transactions, completing the euro conversion. The Company currently has no bank accounts denominated in any legacy currency and has not entered into any material transactions denominated in any legacy currency. The Company has produced enhancements to certain software products marketed in Europe to accommodate the euro conversion 15 process (the "euro module"). The cost to develop the euro module was not material and will be provided at minimal cost to existing customers. Management believes the euro module allows for the continued marketing and sale of the Company's products to customers requiring euro conversion capabilities. YEAR 2000 COMPLIANCE -The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any of the Company's internal use computer programs and its software products that are date sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, the inability to process transactions or engage in normal business activities. Based on a preliminary and on-going assessment, the Company has determined that it will be required to replace most of its internal-use financial and operational systems software and to modify certain existing products that it markets to customers, so that the software will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with the conversion to new internal-use software and with the planned modifications to its products, the Year 2000 issue will not pose significant operational problems for the Company and/or its customers. However, if such conversions and modifications are not made, or not made on a timely basis, the Year 2000 issue could have a material effect on the Company and customers utilizing certain products. The Company has warranted that certain products are Year 2000 compliant and that certain products will be made Year 2000 compliant. The Company has been and is currently providing to customers upgrade alternatives to non-Year 2000 compliant-versions of the Company's products to its customers. The Company has outlined and continues to develop a multi-faceted, comprehensive plan to address the Year 2000 issue and its potential effect on the Company's business. This plan considers (a) Company-owned or licensed software for internal use; (b) third-party- provided software services used for internal use;(c) Company proprietary software marketed to customers; (d) third-party software embedded in the Company's proprietary software marketed to customers; and (e) third-party software marketed to customers. Additionally, the plan will address alternatives and contingencies to address the possibility of situations whereby certain aspects of the Company's Year 2000 efforts are delayed or otherwise unsuccessful. Internal-Use Software - The Company plans to address and resolve the Year 2000 issue with respect to internal financial and operational systems, such as general ledger, order management, accounts payable, billing, accounts receivable, fixed assets, time reporting and project management, by replacing substantially all of such internal-use systems with vendor-certified, Year 2000-compliant software systems that offer enhanced features and functionality relative to the Company's existing internal-use software systems. The Company has purchased a Year 2000-compliant system and has started the initial implementation process in March, 1999 and expects to have the system operational by the third quarter of 1999. The out-of-pocket software, hardware and personnel cost estimates associated with this replacement system and requisite modifications to the Company's network infrastructure range from $500,000 to $750,000. The Company has a financing agreement with a third-party leasing company to finance the software cost of $225,000. Other implementation consulting services of approximately $265,000 will be paid on a monthly basis through the implementation period, starting in April, 1999. Approximately 50% of the Company's expenses are payroll-related expenses. The Company relies on a third party for most of its payroll processing services. The Company has received written certification from this payroll processing vendor that the software used in its payroll processing services is Year 2000 compliant. Payroll processing may be further impacted by the preparedness of various financial institutions and government agencies which receive information via electronic interface. The Company 16 further intends to request, but has not yet requested, from certain vendors of lesser significant products and services to the Company a written certification regarding Year 2000 compliance. Software Marketed to Customers - The Company has used and intends to continue using both internal and external resources to re-program, replace and test its proprietary software products for Year 2000 compliance. The Company anticipates completing the Year 2000 project as soon as practical, but in any event before any anticipated adverse impact. The total cost of this Year 2000 project is estimated to be approximately $150,000 of which approximately $50,000 has been spent to date. This project has been and will be funded over the next year through existing cash resources and operating cash flows. The Company also plans to determine the extent to which the Company's software products are vulnerable to the failure of third party products to be Year 2000 compliant. Generally, software products provided by third parties that are marketed directly or indirectly by the Company to its customers are developed by leading software suppliers with Year 2000 programs in process. There can be no guarantee, however, that third-party software products marketed by the Company will be rendered Year 2000-compliant on a timely basis. The Company intends to continually monitor and evaluate Year 2000 compliance through internal testing and by obtaining written certification of Year 2000 compliance from the vendors. If necessary, the Company will consider alternative vendors to ensure Year 2000 compliance for third-party software products marketed to its customers. While the Company is not heavily reliant on non-IT equipment with embedded technology, the Company will assess and evaluate such equipment as a part of its Year 2000 efforts. The requirements and timetable for the correction of Year 2000 issues are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that may cause material differences include, but are not limited to, the availability of trained personnel, the ability to locate and collect all relevant computer codes and similar uncertainties. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995 - This Annual Report on Form 10-K contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, acceptance of the Company's products by the market and management's plans and objectives. Such statements are subject to various risks and uncertainties which could cause actual results to vary materially from those stated. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. Such risks and uncertainties include the Company's ability to overcome its recent history of operating losses and declining revenues, the availability and amount of future sources of capital, the risks associated with future acquisitions, the willingness of independent insurance agencies to outsource their computer and other processing needs to third parties, the Company's ability to continue to develop new products to effectively address market needs in an industry characterized by rapid technological change, the Company's dependence on the insurance industry (and in particular independent agents), the highly competitive and rapidly changing automation systems market, the Company's ability to effectively protect its applications software and other proprietary information, the Company's ability to attract and retain quality management, and software, technical sales and other personnel. Certain of these as well as other risks and uncertainties are described in more detail in the Company's Registration statement on Form S-3 filed under the Securities Act of 17 1933, Registration No. 333-12781, and the Company's periodic filings pursuant to the Securities Exchange Act of 1934. The Company undertakes no obligation to update any such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events or developments. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Delphi is subject to certain market risks, including foreign currency and interest rates. The Company has foreign subsidiaries in Australia, Canada, New Zealand, Singapore and the United Kingdom (UK) that develop and sell software products and services in those respective countries. The Company is exposed to potential gains and losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company's primary exposure is to changes in exchange rates for the U.S. Dollar versus the Australian, Canadian, New Zealand and Singapore Dollars and the British pound. In the 1998 transition period, the net change in the cumulative foreign currency translation adjustments account, which is a component of stockholder's equity, was an unrealized (loss) of ($25,000). Unrealized foreign currency translation income (loss) of ($14,000) and $10,000 were recognized in fiscal 1998 and fiscal 1997, respectively. Delphi's exposure to interest rate risk relates to its debt obligations, which are primarily U.S. Dollar denominated. The Company's market risk therefore is the potential loss arising from adverse changes in interest rates. As further described in Note 6 to the financial statements included herein at Part II, Item 8, the Company's debt consists primarily of a floating-rate bank line-of credit. Market risk is estimated as the potential decrease in pretax earnings resulting from a hypothetical 10% increase in interest rates on the Company's debt. If such an increase occurred, the Company would incur approximately $35,000 per annum in additional interest expense based on the average debt borrowed during the nine months ended December 31, 1998. The Company does not feel such additional expense is significant. The Company does not currently use any derivative financial instruments relating to the risk associated with changes in interest rates. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Delphi Information Systems, Inc.: We have audited the accompanying consolidated balance sheets of Delphi Information Systems, Inc. (a Delaware Corporation) and subsidiaries as of December 31 and March 31, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the nine-months ended December 31, 1998 and each of the two years ended March 31, 1998 and 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delphi Information Systems, Inc. and subsidiaries as of December 31 and March 31, 1998, and the results of their operations and their cash flows for the nine months ended December 31, 1998 and each of the two years ended March 31, 1998 and 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's projections indicate that the Company's current debt facility will not provide sufficient financing to fund the cash requirements of the business, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to addressing this liquidity issue are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois April 15, 1999 19 DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except for share amounts)
ASSETS DECEMBER 31, 1998 MARCH 31, 1998 ----------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 1,053 $ 872 Accounts receivable, less allowances of $1,068 and $860, respectively 6,378 4,807 Other current assets 310 163 ---------- ---------- TOTAL CURRENT ASSETS 7,741 5,842 Property and equipment, net 1,899 2,084 Capitalized and purchased software, net 6,561 6,554 Other assets 344 302 ---------- ---------- TOTAL ASSETS $ 16,545 $ 14,782 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 4,032 $ 1,923 Accounts payable and accrued expenses 2,371 2,078 Accrued payroll and related benefits 182 419 Deferred revenue 3,418 4,381 ---------- ---------- TOTAL CURRENT LIABILITIES 10,003 8,801 Notes payable-long term 210 210 Other liabilities 265 180 ---------- ---------- TOTAL LIABILITIES 10,478 9,191 ---------- ---------- Commitments and contingencies (Note 9) STOCKHOLDERS' EQUITY: Preferred stock, $.10 par value, 2,000,000 shares authorized, 221 shares of Series D issued and outstanding, respectively 49 49 Common stock, $.10 par value, Non-designated, 20,000,000 shares authorized, 7,395,414 and 7,395,449 issued and outstanding, respectively 740 740 Additional paid-in capital 48,717 48,717 Accumulated deficit (43,516) (44,017) Cumulative foreign currency translation adjustment 77 102 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 6,067 5,591 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,545 $ 14,782 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. 20 DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
NINE MONTHS YEARS ENDED ENDED MARCH 31, DECEMBER 31, 1998 1998 1997 ----------------- ---- ---- REVENUE: Software $ 6,375 $ 3,509 $ 6,089 Services and other 12,846 18,956 21,625 -------- -------- -------- TOTAL REVENUE 19,221 22,465 27,714 COST OF REVENUE: Software 2,337 2,439 5,323 Services and other 7,352 9,512 13,464 -------- -------- -------- TOTAL COST OF REVENUE 9,689 11,951 18,787 -------- -------- -------- GROSS MARGIN 9,532 10,514 8,927 OPERATING EXPENSES: Product development 2,160 3,510 4,255 Sales and marketing 2,167 3,587 4,405 General and administrative 4,370 4,414 4,354 Amortization of goodwill, customer lists and noncompete agreements - 136 496 Restructuring charges - 2,053 1,297 -------- -------- -------- TOTAL OPERATING EXPENSES 8,697 13,700 14,807 -------- -------- -------- OPERATING INCOME (LOSS) 835 (3,186) (5,880) Minority interest (47) 47 - Interest income - (120) (131) Interest expense 359 392 108 -------- -------- -------- Income (loss) before income taxes 523 (3,505) (5,857) Income tax provision (benefit) 22 (99) 27 -------- -------- -------- Net income (loss) $ 501 ($ 3,406) ($ 5,884) -------- -------- -------- -------- -------- -------- Basic net income (loss) per common share $ 0.07 ($ 0.46) ($ 0.97) -------- -------- -------- -------- -------- -------- Diluted net income (loss) per common share $ 0.07 ($ 0.46) ($ 0.97) -------- -------- -------- -------- -------- -------- Weighted average shares outstanding: Basic 7,395 7,347 6,093 -------- -------- -------- -------- -------- -------- Diluted 7,419 7,347 6,093 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 21 DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except for share amounts)
CUMULATIVE FOREIGN Preferred Stock COMMON STOCK ADDITIONAL CURRENCY --------------------------------------- PAID-IN ACCUMULATED TRANSLATION COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INCOME (LOSS) ----------------------------------------------------------------------------- BALANCE, MARCH 31, 1996 52,624 $ 7,225 2,061,540 $ 206 $ 23,844 ($ 34,727) $ 106 ----------------------------------------------------------------------------- Net loss -- -- -- -- -- (5,884) -- ($ 5,884) Translation adjustment -- -- -- -- -- -- 10 10 --------- Comprehensive loss ($ 5,874) --------- Exercise of stock options -- -- 10,900 1 77 -- -- Shares sold under employee stock purchase plan -- -- 4,927 -- 27 -- -- Conversion of convertible promissory notes to common stock -- -- 300,000 30 1,470 -- -- Conversion of Series C Preferred Stock to common stock (36,268) (3,570) 725,360 73 3,497 -- -- Conversion of Series D Preferred Stock to common stock (16,135) (3,606) 729,947 73 3,533 -- -- Issuance of common stock in connection with private equity placements -- -- 3,266,100 327 14,644 -- -- CBS acquisition -- -- 161,460 16 1,026 -- -- Issuance of common stock as consideration for services provided -- -- 10,000 1 49 ----------------------------------------------------------------------------- BALANCE, MARCH 31, 1997 221 49 7,270,234 727 48,167 (40,611) 116 ----------------------------------------------------------------------------- Net loss -- -- -- -- -- (3,406) -- ($ 3,406) Translation adjustment -- -- -- -- -- -- (14) (14) --------- Comprehensive loss ($ 3,420) --------- Exercise of stock options -- -- 112,100 12 489 -- -- Shares sold under employee stock purchase plan -- -- 2,126 -- 11 -- -- Issuance of common stock as consideration for services provided -- -- 10,989 1 50 -- -- ----------------------------------------------------------------------------- BALANCE, MARCH 31, 1998 221 49 7,395,449 740 48,717 (44,017) 102 ----------------------------------------------------------------------------- Net income -- -- -- -- -- 501 -- $ 501 Translation adjustment -- -- -- -- -- -- (25) (25) --------- Comprehensive income $ 476 --------- Purchase of fractional shares due to reverse stock split -- -- (35) -- -- -- ----------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 221 $ 49 7,395,414 $ 740 $ 48,717 ($ 43,516) $ 77 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
22 DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE MONTHS YEARS ENDED ENDED MARCH 31, DECEMBER 31, 1998 1998 1997 ----------------- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 501 ($ 3,406) ($ 5,884) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization 722 1,138 1,284 Amortization of capitalized and purchased software 1,549 2,043 2,183 Amortization of goodwill, customer lists and noncompete agreements - 136 496 Write-off of capitalized and purchased software, goodwill and customer lists and non-compete agreements - 2,053 - Loss on disposal of fixed assets - - 14 Excess lease cost - - (824) Issuance of common stock as consideration for services provided - 51 50 CHANGES IN ASSETS AND LIABILITIES NET OF EFFECT OF ACQUISITION OF BUSINESSES: Accounts receivable, net (1,571) 434 3,111 Other assets (189) (174) 766 Accounts payable and accrued liabilities 293 (2,589) (2,300) Accrued payroll and related benefits (237) (201) (826) Other liabilities and deferred revenue (878) (2,681) (2,988) ---------- --------- --------- Net cash provided by (used in) operating activities 190 (3,196) (4,918) ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (537) (980) (593) Expenditures for capitalized and purchased software (1,556) (2,579) (1,761) Cash outlays for acquisitions, net of cash acquired - - (708) ---------- --------- --------- Net cash used in investing activities (2,093) (3,559) (3,062) ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of notes payable - - (3,030) Borrowings on notes payable 2,109 533 1,600 Proceeds from exercise of stock options and employee stock purchase plan - 512 105 Net proceeds from private equity placement - - 14,971 ---------- --------- --------- Net cash provided by financing activities 2,109 1,045 13,646 ---------- --------- --------- Foreign currency translation adjustment (25) (14) 10 ---------- --------- --------- Net change in cash and cash equivalents 181 (5,724) 5,676 Cash and cash equivalents at the beginning of the period 872 6,596 920 ---------- --------- --------- Cash and cash equivalents at the end of the period 1,053 872 6,596 ---------- --------- --------- ---------- --------- --------- SUPPLEMENTAL DISCLOSURES: Interest paid $ 359 $ 206 $ 163 Income taxes paid - - 39 NON-CASH TRANSACTIONS: Preferred stock and convertible promissory notes converted to common stock - - 8,675
The accompanying notes are an integral part of these consolidated financial statements. 23 DELPHI INFORMATION SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS - Delphi Information Systems, Inc. and Subsidiaries, (the "Company") develops, markets and supports computer software and Internet-based solutions which automate independent property and casualty insurance agencies and brokerages including the areas of sales management, policy administration, accounting and electronic interface with the computers of insurance carriers. FINANCING ISSUES - The Company generated increased revenue, net income and positive operating cash flow in the nine months ended December 31, 1998 (the "1998 transition period"). The increase in revenue was due primarily to the higher level of software sales compared to the prior period. Prior to the nine months ended December 31, 1998 (the "1998 transition period") the Company had experienced significant operating losses in each fiscal year since 1993, along with declining revenue. During this period, the Company financed its operations through bank financing and private placements of equity capital. To respond to these losses and declining revenue, during fiscal 1998 and continuing during the 1998 transition period, the Company took the following steps: 1) Changes in the senior executive management; 2) Rationalization and reallocation of the overall cost structure; 3) Implementation of programs to improve customer support; 4) Finalized development and release of the "cd" product line; and 5) Aggressive marketing of new products and services. Despite the improved financial results during the 1998 transition period, the Company is currently faced with liquidity concerns. Subsequent to January 1, 1999, the Company received approximately $4.9 million in cash related to proceeds from the exercise of outstanding stock warrants. These proceeds were used to fund operations, pay aged accounts payable and reduce borrowings under the Company's bank line of credit, which was designed to provide up to $4.0 million, subject to certain borrowing base limits. The amount borrowed under the line of credit was reduced from approximately $3.7 million at December 31, 1998 to approximately $1.4 million as of March 31, 1999. As of April 15, 1999, the total amount that the bank has made available, and that the Company is borrowing, under the bank line of credit is approximately $1.4 million. The Company believes the amount that should be available under the terms of the line of credit is substantially higher. Based on the Company's projections, the borrowing requirements of the business at certain times during 1999 will exceed $1.4 million but not the higher Company calculated maximum borrowing capacity under the existing line of credit. The cash requirements are, in great part, affected by the extended payment terms offered to customers on new software sales. In order to meet the projected cash requirements of the business, it will be necessary for the Company to secure financing sources, beyond those currently available, in order to continue as a going concern. Management believes that the required financing sources to operate the business as a going concern will be secured, although there can be no assurances that such financing will be available or that it will be available on terms satisfactory to the Company. As of April 15, 1999, management is having ongoing discussions with its bank in order to come to an agreement as to the available borrowing base under its line of credit agreement. Management believes that the borrowing base will be expanded, however, to date, no agreement has been reached, and there can be no assurance that such lender calculated maximum borrowing capacity will be adequate. Management also believes that there may be additional infusions of cash from the further exercise of outstanding stock warrants, which would supplement any cash made available through successful bank negotiations. In late March, 1999, the expiration date of warrants to purchase approximately 1.5 million shares of common stock at $7.50 per share was extended from April 19, 1999 to June 18, 1999. Finally, if the Company is unable to successfully renegotiate its available borrowings under its current line-of-credit agreement, management will endeavor to secure the necessary financing from other sources. Such sources could include a different bank, a "mezzanine lender", or an equity investor. Again, although management believes that the Company will be able to secure financing on terms satisfactory to the Company and on a timely basis, there can be no assurances that this will happen. Management intends to aggressively seek the required financing sources that are necessary in order to continue to operate the business. Management continues to believe that the Company is well suited to take advantage of the current market opportunities. Upon obtaining the necessary financing, the Company will continue to aggressively market its products and services, fund development and monitor costs to ensure the Company's products incorporate state-of-the-art technologies and provide customers with value-added solutions. 24 CONSOLIDATION - The consolidated financial statements include the accounts of Delphi Information Systems, Inc., ("Delphi USA"), its wholly owned subsidiary, Delphi Information Systems International, Inc., (Delphi International"), both Delaware corporations and all majority owned subsidiaries of Delphi International. Wholly owned subsidiaries of Delphi International are Canadian Insurance Computer Systems, Inc. ("Delphi Canada"), Delphi Information Systems, (UK) Ltd., Delphi Information Systems, (NZ) Ltd., Complete Broking Systems (Malaysia), Sdn. Bhd. and Delphi Information Systems PTE (Singapore) Ltd. Additionally, Delphi International holds a fifty-four percent interest in Complete Broking Systems Australia PTY, Ltd. Intercompany transactions and accounts have been eliminated in consolidation. Delphi has an insignificant amount of long-lived assets located outside of the United States in foreign operations as of December 31, 1998. Foreign operations delivered software and provided related services to external customers accounting for approximately 17.9% of total revenue for the nine-month period ended December 31, 1998. On July 23, 1996, the Company acquired Complete Broking Systems ("CBS") of Auckland, New Zealand in exchange for $500,000 cash and 161,460 shares of the Company's common stock. The acquisition has been accounted for as a purchase. Accordingly, the results of CBS have been recorded in the financial statements commencing on July 24, 1996. FISCAL YEAR - Prior to April 1998, the Company's fiscal year consisted of the twelve months ended March 31st. Effective April 1998, the Company changed its year-end to December 31st. Condensed statements of operations for the 1998 transition period and the nine months ended December 31, 1997 are noted below (in thousands):
NINE MONTHS ENDED DECEMBER 31, ------------------------------- 1997 1998 (UNAUDITED) -------------------------------- Revenue $19,221 $16,636 Cost of revenue 9,689 9,180 ------- ------- Gross margin 9,532 7,456 Operating expenses 8,697 11,018 ------- ------- Operating income (loss) $ 835 ($3,562) ------- ------- ------- ------- Income (loss) before income taxes $ 523 ($3,749) ------- ------- ------- ------- Net income (loss) $ 501 ($3,708) ------- ------- ------- -------
REVENUE RECOGNITION - In October 1997, the AICPA issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which supersedes SOP 91-1. The Company has adopted SOP 97-2 for software transactions subsequent to March 31, 1998. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements (i.e., software products, upgrades/enhancements, postcontract 25 customer support, installation, training, etc.) to be allocated to each element based on relative fair values of the elements. The fair value of an element must be based on evidence which is specific to the vendor. The revenue allocated to software products (including specified upgrades/enhancements) generally is recognized upon delivery of the products. The revenue allocated to service elements (such as training and installation) generally is recognized as the services are performed. Maintenance is generally billed to customers on a quarterly or annual basis in advance thereby resulting in deferred revenue, which is recognized as revenue ratably over the term of the related maintenance contract. If the Company does not have evidence of the fair value of all elements in a multiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or all elements are delivered. Further, the SOP limits the recognition of revenue for contracts with extended payment terms. In March 1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" and in December 1998, issued SOP 98-9, "Modification of SOP 97-2, Software Recognition, With Respect to Certain Transactions". For fiscal years beginning on or before March 15, 1999, SOP 98-4 and 98-9 defer the application of certain passages in SOP 97-2 which limit what is considered evidence of fair value of various elements of multiple element arrangements. Additionally, for transactions entered into in fiscal years beginning after March 15, 1999, SOP 98-9 provides for revenue recognition for certain software arrangements involving multiple elements where vendor specific evidence does not exist for delivered elements. Management is in the process of reviewing SOP 98-9 to determine its impact, if any, on the Company. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. SOFTWARE DEVELOPMENT COSTS - The Company capitalizes internally generated software development costs and purchased software, collectively referred to as software development costs, in compliance with the Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility for the product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs consider external factors including, but not limited to, anticipated future gross product revenues, estimated economic life and changes in software and hardware technology. Amortization of capitalized software development costs, through cost of software revenue, begins when the products are available for general release to customers. The annual amortization is the straight-line method over the remaining estimated economic life of the product. The maximum amortization period is five years. Amortization of software development costs is included in cost of software revenue. Software development costs are amortized on a product-by-product basis. Amortization of software development costs was $1,549,000 in the 1998 transition period and $2,043,000 and $2,183,000 in fiscal 1998 and 1997, respectively. Net capitalized and purchased software costs at December 31, 1998 and March 31, 1998 consist of the following (in thousands):
December 31, 1998 March 31, 1998 ----------------- --------------- Total cost $ 13,357 $ 11,801 Less accumulated amortization (6,796) (5,247) --------- --------- $ 6,561 $ 6,554 --------- --------- --------- ---------
26 As further discussed in Note 3, during the year ended March 31, 1998, the Company decreased the carrying value of certain software development costs by $1,283,000, to reflect impairment. GOODWILL AND CUSTOMER LISTS - Goodwill consists of the excess of the cost of acquisitions less the net fair market value of identifiable assets and liabilities. Customer lists represent the estimated value of acquired customer lists. Costs are amortized on a straight-line basis over five to ten years. During fiscal 1998, all unamortized goodwill and customer lists of $770,000 were written off to reflect impairment. Amortization of goodwill and customer lists was $136,000 and $496,000 in fiscal 1998, and 1997, respectively. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of three to ten years. Leasehold improvements are amortized over the shorter of the expected life of the improvements or the lease term. INCOME TAXES - The Company follows the liability method of accounting for income taxes pursuant to the Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. EARNINGS PER SHARE - Basic earnings per share ("EPS") is equal to net income divided by the weighted average number of shares of common stock outstanding for the period. Diluted EPS recognizes the dilutive effect of common stock equivalents and is equal to net income divided by the sum of the weighted average number of shares outstanding and common stock equivalents. At December 31, 1998 the Company's common stock equivalents consist of stock options, common stock warrants, and convertible preferred stock. Consistent with previous standards, SFAS No. 128 prohibits inclusion of the impact of common stock equivalents in the calculation of EPS when inclusion results in antidilution. Accordingly, for each of the years ended March 31, 1998 and 1997, basic and diluted EPS are equal. A reconciliation of the number of weighted average shares used in calculating basic and diluted net income (loss) per share is as follows (in thousands):
December 31, March 31, 1998 1998 1997 ---- -------------------- Weighted average number of common shares outstanding - basic 7,395 7,347 6,093 Effect of potentially dilutive stock options and preferred stock 24 (a) (a) ----- ----- ----- Weighted average number of Common shares outstanding - diluted 7,419 7,347 6,093 ----- ----- ----- ----- ----- -----
(a) Common stock equivalents excluded to prevent anti-dilution. Share and net income (loss) per share amounts have been adjusted to reflect the one-for-five reverse stock split effective May 8, 1998. FOREIGN CURRENCY TRANSACTIONS - The accounts of the Company's foreign subsidiaries have been translated according to the provisions of the Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation". Gains or losses resulting from translation of the foreign subsidiaries' financial statements are included in stockholders' equity. Any gains or losses resulting from foreign 27 currency transactions are reflected in the consolidated statements of operations of the period in which they occur. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS - In the 1998 transition period, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting and displaying comprehensive income and its components. The Company has chosen to disclose Comprehensive Income (Loss), which encompasses net income (loss) and foreign currency translation adjustments, in the Consolidated Statements of Stockholders' Equity. Prior years have been restated to conform to the requirements of SFAS No. 130. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" established reporting standards for companies operating in more than one business segment. Since the Company manages its business as a single entity that provides application software and related services to a single industry on a worldwide basis, the Company believes that the segment disclosure requirements of SFAS No. 131 are not applicable to its operations. The applicable enterprise-wide disclosures required by SFAS No. 131 are included elsewhere in these notes to consolidated financial statements. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which addresses the accounting for derivative instruments. SFAS No. 133 is effective for financial statements for the Company's fiscal year beginning January 1, 2000. The Company does not expect that SFAS No. 133 will have a significant effect on its current financial reporting. CONCENTRATIONS OF CREDIT RISK - In fiscal 1998, one domestic customer (including its foreign subsidiaries) accounted for approximately 12.7% of consolidated revenue. At March 31, 1998 accounts receivable from the significant customer totaled $1,445,000. The customer is a publicly traded multi-national insurance company listed on the New York Stock Exchange. In both the 1998 transition period and fiscal 1997, no single customer represented more than 10% of consolidated revenue. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 1998 transition period presentation. NOTE 2: STOCKHOLDERS' EQUITY: STOCKHOLDER RIGHTS AGREEMENT - On March 23, 1998, the Board of Directors of the Company adopted a stockholder rights plan (the "Stockholder Rights Plan") designed to protect the stockholders from certain unfair and coercive tactics. Pursuant to a Stockholder Rights Agreement (the "Rights Agreement") the Company declared a dividend of one preferred share purchase right ("Right") on each outstanding share of the Company's Common Stock, $.10 par value per share ("Common Shares"), payable to stockholders of record at the close of business on March 23, 1998. Except as described below, each Right, when exercisable, entitles the holder thereof to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Shares, par value $.10 per share (the "Preferred Shares"), of the Company at an exercise price of $25.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. 28 Until the date an "Acquiring Person" (as defined) is identified, the Rights are not detachable and are not exercisable. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to the greater of (1) a preferential quarterly dividend payment of $100 per share, or (2) an aggregate dividend of 100 times the dividend declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to a preferential liquidation payment of $100 per share, plus an amount equal to 100 times the aggregate amount to be distributed per share of common stock of 100 times the payment made per Common Share. Each Preferred Share will have 100 votes, voting together with the Common Shares except as otherwise required by law. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per Common Share. The Rights are protected by customary antidilution provisions. If any person or group becomes an Acquiring Person, then each holder of a Right (other than Rights beneficially owned by the Acquiring Person), will have the right to receive upon exercise of such Right that number of Common Shares (or, in certain circumstances, cash, property or other securities of the Company) having a market value of two times the exercise price of the Right. If at any time after the time that any person or group becomes an Acquiring Person, the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold, proper provision will be made so that each holder of a Right (other than Rights beneficially owned by the Acquiring Person), will thereafter have the right to receive, upon the exercise thereof at the then-current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the Purchase Price of the Right. At any time after the time that any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights beneficially owned by such person or group, any Associate or Affiliate thereof, and certain transferees thereof, which will be void), in whole or in part, at an exchange ratio of one Common Share or one-hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges) per Right (subject to adjustment). At any time prior to the time that any person becomes an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right, subject to adjustment, which may (at the option of the Company) be paid in cash, Common Shares or other consideration deemed appropriate by the Board of Directors. The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish; provided, however, that no redemption will be permitted or required after the time that any person becomes an Acquiring Person. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of the Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, except that from and after such time as any person becomes an Acquiring Person no such amendment may make the Rights redeemable if the Rights are not then redeemable in accordance with the terms of the Rights Agreement or may adversely affect the interests of the holders of the Rights. 29 Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. The Rights will expire on March 23, 2008, unless the Rights are earlier redeemed or exchanged by the Company, as described. The Rights are not calculated as weighted shares outstanding until they are exercised. REVERSE STOCK SPLIT - On May 6, 1998, the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to effect a one-for-five reverse stock split of the Company's outstanding $.10 par value Common Stock and to reduce the number of authorized shares from 75,000,000 to 20,000,000 effective May 8, 1998. All share and per share information in these financial statements have been adjusted accordingly. PRIVATE EQUITY PLACEMENTS - In May 1996, the Company issued 2,140,000 units at a price of $5.00 per unit. In January 1997, the Company issued 1,126,100 units at a price of $5.00 per unit. Each unit consists of one share of common stock and a redeemable warrant (further described below). The two private equity placements provided net proceeds of approximately $14,971,000 to the Company. In conjunction with the May 1996 equity placement, outstanding promissory notes of $1,500,000 were converted into 300,000 units. Each unit consists of one share of common stock and a redeemable warrant (further described below). In addition, all Series C Preferred Stock, and 16,135 of the 16,356 outstanding shares of Series D Preferred Stock were converted into 1,455,307 shares of common stock. REDEEMABLE WARRANTS - As described above, in conjunction with the May 1996 and January 1997 private equity placements and conversion of a $1,500,000 outstanding promissory note, the Company issued units, each consisting of one share of common stock and one redeemable warrant to purchase one share of common stock at an exercise price of $7.50 per share, subject to certain anti-dilutive adjustments. The shares and redeemable warrants comprising the units are immediately detachable and separately transferable. The redeemable warrants may be exercised at any time after the date of issuance for a period of three years. The Company can redeem the redeemable warrants at any time subsequent to 180 days after issuance if the closing bid price for the common stock is at or above $10.00 per share for twenty consecutive trading days subsequent to when the redeemable warrants first are redeemable. Subsequent to January 1, 1999, warrants to acquire approximately 609,000 shares of Common Stock that were due to expire on April 19, 1999 were exercised generating approximately $4.6 million in cash. On March 31, 1999, the Company extended the expiration date from April 19, 1999 to June 18, 1999 for the remaining unexercised warrants originally issued in May 1996 to acquire approximately 1,531,000 shares of Common Stock. Of these unexercised warrants, 200,000 warrants are held by the Company's largest shareholder. In addition, subsequent to January 1, 1999, warrants to acquire 25,000 shares of common stock that were due to expire January 24, 2000 and warrants to acquire 5,000 shares of common stock related to the conversion of the promissory notes were exercised generating approximately $225,000 in cash. OTHER WARRANTS - In connection with the May 1996 private equity placement described above, the Company issued a warrant to the placement agent (the "Agent's Warrant") to purchase 200,000 shares of the Company's common stock at $5.00 per share. The Agent's Warrant is not subject to redemption and expires May 1, 2001. Subsequent to January 1, 1999, warrants to acquire 18,000 shares of Common Stock were exercised generating approximately $90,000 in cash. 30 In connection with a renewal of a line-of-credit agreement in December 1994, the Company issued to a bank a five-year warrant option to purchase 75,000 shares of common stock at $17.50 per share. SERIES D CONVERTIBLE PREFERRED STOCK - At December 31, 1998 the Company had 221 shares of Series D Convertible Preferred Stock issued and outstanding. Each share is convertible into 45 shares of common stock at the request of the holder. The Preferred Stock has voting rights equal to the number of common shares into which the preferred shares is convertible. The Preferred Stock is not entitled to dividends. NOTE 3 - RESTRUCTURING CHARGES: The Company's product strategy is centered on a new generation of products, collectively referred to as "cd" products. Consistent with the Company's product strategy, the development of enhanced versions of legacy products has been limited. As new products are introduced to the market, existing customers utilizing legacy products are encouraged to migrate to the Company's new generation of products. During the first two quarters of fiscal 1998 the Company experienced some customer attrition related to certain legacy product maintenance price increases effective in April 1997. During the second quarter of fiscal 1998, in response to changes in the Company's markets and technology trends, the product strategy was altered requiring modification of a portion of the underlying technology of "cd" products. As a result of the decrease in legacy maintenance revenue and the requirement to modify a portion of the underlying technology of "cd" products, the recoverability of a portion of intangible assets was deemed impaired. Accordingly, during the second quarter of fiscal 1998, the carrying value of capitalized and purchased software was reduced $1,283,000 and goodwill and customer lists of $770,000 were written off. The Company generated significant operating losses during the first two quarters of fiscal 1997. In response to the losses, the Company was restructured resulting in significant reductions in payroll expense and other operating expenses. In addition, as the Company transitioned out of the hardware business, a portion of the inventory on hand was deemed obsolete. As a result, the Company incurred a restructuring charge in fiscal 1997 summarized as follows (in thousands): Severance cost $ 643 Inventory Obsolescence 400 Other costs 254 ------- $1,297 ------- -------
As of December 31, 1998, there are no remaining accruals related to these restructuring charges. NOTE 4- INVESTMENT IN APT: The Company owns a 20% interest in the common stock of Alliance for Productive Technology, Inc. ("APT"), a privately held company formed as an alliance of agency automation vendors, insurance companies, agents' associations, and insurance industry organizations. The purpose of APT is to provide non-proprietary interface products and services to the insurance industry. The Company has entered into a distribution agreement with APT to enable it to incorporate certain APT products and features into the Company's products. The investment of $230,000 has been recorded as a long-term other asset as of December 31, 1998. As further described in Note 6, a portion of the Company's investment is held as security for a note payable to APT. 31 NOTE 5- PROPERTY AND EQUIPMENT: Property and equipment at December 31, 1998 and March 31, 1998 consists of the following (in thousands):
December 31, March 31, 1998 1998 ------------ --------- Computer equipment and purchased software $ 7,111 $ 6,676 Leasehold improvements 975 984 Furniture, fixtures and other 1,804 1,742 ------------ --------- 9,890 9,402 Less accumulated depreciation and amortization (7,991) (7,318) ------------ --------- $ 1,899 $ 2,084 ------------ --------- ------------ ---------
NOTE 6 - NOTES PAYABLE: Notes payable at December 31, 1998 and March 31, 1998, are comprised of the following (in thousands):
December 31, March 31, 1998 1998 ------------ --------- Bank line-of-credit $ 3,712 $ 1,603 Noncompete note payable 300 300 Note payable - APT (Note 4) 230 230 Less current portion (4,032) (1,923) ------------ --------- $ 210 $ 210 ------------ --------- ------------ ---------
BANK LINE-OF-CREDIT - Effective January 1997, the Company established a line of credit up to $4,000,000 subject to borrowing base limits. The agreement provides for minimum monthly interest at the bank's prime lending rate plus two and one-half percent (2.5%) on the greater of the actual amount outstanding or $1,600,000. The agreement includes certain covenants including the maintenance of a minimum net worth of $2,000,000 and restrictions upon certain activities by the Company without the approval of the bank including the incurrence of senior debt, certain mergers or acquisitions, and the payment of dividends. The borrowings under the agreement are secured by substantially all of the Company's assets. In December 1997, March 1998, and September 1998 the Company executed amendments to the line of credit agreement. The amendments extend the maturity date of the agreement two years to January 31, 2001, alter the provisions of the early termination fee, and modify the criteria for determining the amount available under the line. In accordance with the amendments, prior to December 31, 1998 the Company may borrow up to two and one-half times average monthly collections (as defined); from January 1999 through March 1999, two times average monthly collections; and subsequently up to the sum of one times average monthly collections from recurring maintenance revenue and seventy-five percent of eligible non-maintenance receivables (as defined). As of December 31, 1998, borrowings under the line of credit totaled $3,712,000, and $7,000 remained available for borrowing. As of March 31, 1999, the borrowings under the line of credit totaled $1,408,000 and $29,000 remained available for borrowing. As discussed above, the line of credit agreement provides for minimum monthly interest on the greater of the balance outstanding or $1,600,000. In order to minimize interest expense net of interest income, the Company has periodically drawn on the line of credit and invested the proceeds in cash equivalents. The cash equivalents are unrestricted and may be utilized by the Company at any time. At December 31, 32 1998 the Company was in technical default under certain provisions of the line of credit. The Company has obtained waivers for these defaults. As of April 15, 1999, the total amount that the bank has made available, and that the Company is borrowing under the bank line of credit is approximately $1.4 million. The Company believes that the amount that should be available under the terms of the line of credit is substantially higher. Management is having ongoing discussions with its bank in order to come to an agreement as to the available borrowing base under its line-of-credit agreement. Management believes that the borrowing base will be expanded, however, to date, no agreement has been reached, and there can be no assurance that such lender calculated maximum borrowing capacity will be adequate. See Note 1 of the consolidated financial statements for further discussion of financing issues and financing alternatives. Additional information related to line of credit borrowings for the nine months ended December 31, 1998 and the year ended March 31, 1998, is as follows (in thousands):
December 31, March 31, 1998 1998 ------------ --------- Maximum amount borrowed during the period $ 3,926 $ 2,294 Average amount borrowed during the period $ 2,532 $ 1,546 Interest rate at the end of the period 10.25% 11.0% Weighted average interest rate incurred during the period 11.7% 11.7%
Average borrowings were determined based on the amounts outstanding at each month end. The weighted average interest rate during the period was computed by dividing actual interest by average borrowings outstanding during each of the periods. NONCOMPETE NOTE PAYABLE - The Company entered into various noncompete agreements in connection with a January, 1991 acquisition. The final installment of $400,000 was originally due on January 31, 1997, but was subsequently converted to an 11.75% interest bearing unsecured note. As of December 31, 1998, the remaining balance is due in three equal annual payments of $119,574 (principal and interest) commencing on January 31, 1999. Commitments related to the noncompete agreements were amortized and expensed ratably over the life of each agreement. The January, 1999 installment was paid by the Company. NOTE PAYABLE-APT - In conjunction with the purchase of the common stock of APT discussed in Note 4, the Company entered into a note payable secured by a portion of the APT common stock. The note bears 33 interest at the prime rate, 7.75% at December 31, 1998. Interest is due semi-annually and the final principal payment of $230,000 is due January 1, 1999. The Company is currently discussing an extension of the January 1, 1999 payment and APT continues to hold a portion of the Company's investment as security for the note payable. The note may be prepaid without penalty. NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued liabilities at December 31, 1998 and March 31, 1998, consist of the following (in thousands):
December 31, March 31, 1998 1998 ------------ --------- Trade accounts payable $1,884 $1,304 Accrued and other liabilities 487 774 ------ ------ $2,371 $2,078 ------ ------ ------ ------
NOTE 8 - INCOME TAXES: Income (loss) before income taxes consisted of (in thousands):
Nine Months Ended Years Ended December 31, March 31, ------------ ---------- 1998 1998 1997 ------- ------- -------- Domestic $ 782 $(3,985) $(5,681) Foreign (259) 480 (176) Total $ 523 $(3,505) $(5,857)
The income tax provision (benefit) consisted of (in thousands):
Nine Months Ended Years Ended December 31, March 31, 1998 1998 1997 ---- ---- ---- Current: U.S. Federal $ - $ - $ - State 22 (48) 27 Foreign -- (51) -- ------ ------ ------ Total $ 22 $ (99) $ 27 ------ ------ ------ ------ ------ ------
34 The income tax provision at the federal statutory rate differs from the effective rate because of the following items:
Nine Months Ended Years Ended December 31, March 31, ------------ --------- 1998 1998 1997 ------ ------- ------- Statutory rate 34.0% (34.0)% (34.0)% State income tax 4.2 (1.4) 0.5 Amortization of intangible assets relating to acquired businesses _ .3 3.3 Increase in valuation allowances (34.0) 26.2 24.7 Other, net - 6.1 6.0 ------ ------- ------- Effective rate 4.2% (2.8)% 0.5% ------ ------- ------- ------ ------- -------
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for December 31, 1998 and March 31, 1998 are as follows (in thousands):
December 31, March 31, 1998 1998 Deferred Tax Deferred Tax ------------ ------------ Assets Liabilities Assets Liabilities ---------- ------------- ---------- ------------- Depreciation $ - $ 144 $ - $ 272 Product enhancements - 2,616 - 2,403 Accruals 103 - 272 - Bad debts 299 - 332 - NOL carryforwards 12,395 - 12,417 - Tax credit carryforwards 870 - 738 - ---------- ------------- ---------- ------------- 13,667 2,760 13,759 2,675 Valuation allowance 10,907 - (11,084) - ---------- ------------- ---------- ------------- Total deferred taxes $ 2,760 $ 2,760 $ 2,675 $ 2,675 ---------- ------------- ---------- ------------- ---------- ------------- ---------- -------------
Due to the uncertainty of realizing any of the net deferred tax assets, the Company has provided a valuation allowance against the entire net amount. As of December 31, 1998, the Company has investment business tax credit carryforwards and net operating loss (NOL) carryforwards for federal income tax purposes aggregating approximately $35,000,000 expiring at various times through the year 2012. The utilization of tax credits and net operating losses may be limited due to changes in ownership and other restrictions imposed by the Internal Revenue Code. 35 NOTE 9 - COMMITMENTS AND CONTINGENCIES: Lease Commitments: The Company leases office space under non-cancelable operating leases with expiration dates ranging through 2003, with various renewal options. Capital leases range from three to five years and are primarily for computer equipment. The aggregate minimum annual lease payments under leases in effect on December 31, 1998 are set forth below (in thousands) as follows:
Capital Operating Year Leases Leases - ---- ------- --------- 1999 $ 228 $ 850 2000 173 798 2001 44 668 2002 30 527 2003 -- 393 ------- --------- Total minimum lease commitments $ 475 $3,236 --------- --------- Less: amount representing interest (86) ------- Present value of obligations under capital leases 389 Less: current portion (175) ------- Long-term obligations under capital leases $ 214 ------- -------
The current portion of the present value of obligations under capital leases is included in the consolidated balance sheets with accounts payable and accrued expenses; the long-term portion is included with other liabilities. Rental expense for office facilities and certain equipment subject to operating leases for the nine months ended December 31, 1998 and for fiscal year 1998 and 1997 aggregated $1,392,000, $1,826,000, and $2,421,000, respectively. Contingencies: The Company believes there are no legal contingencies that would have a material impact on the financial statements. NOTE 10 - CASH OPTION PROFIT SHARING PLAN AND TRUST: Effective January 1, 1988, the Company adopted and implemented a 401(k) Cash Option Profit Sharing Plan which allows employees to contribute part of their compensation to the Profit Sharing Plan and Trust, on a pre-tax basis. The Company is under no obligation to contribute to the Plan. For the nine-months ended December 31, and for the fiscal years ended March 31, 1998 and 1997, the Company did not make any contributions to the plan. 36 NOTE 11 - STOCK OPTIONS: The Company's 1996 Stock Incentive Plan provides for the granting of 1,200,000 stock options and stock appreciation rights to officers, directors and employees. Options granted under this plan may be incentive stock options as defined under current tax laws or nonstatutory options. Options are granted at prices determined by the Board of Directors (not less than 100 percent of the market price of the stock at the time of grant and 110 percent with respect to incentive stock options granted to optionees who own 10 percent or more of the Company's stock). Stock options under this plan generally become exercisable in 25 percent increments vesting on each of the first through fourth anniversaries of the date of grant. All options must be exercised within ten years of the date of grant (with respect to incentive stock optionees owning ten percent or more of the Company's stock, the term may be no longer than five years). No stock appreciation rights are outstanding. The Company's 1998 Director Option Plan provides for granting of up to 300,000 stock options to non-employee directors. Only nonstatutory options may be granted under this plan. Options are granted at prices not less than 100% of the market price of the stock at the time of grant. Stock options under this plan generally become exercisable over periods ranging from one to three years. All options must be exercised within ten years of the date of grant. The Company has granted nonstatutory options outside the stock incentive plan to purchase up to an aggregate of 20,000 shares. These options are granted at prices determined by the Board of Directors (no less than 100 percent of the market price). The options have various vesting periods and must be exercised within seven to ten years of the date of the grant. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock option plans and its stock purchase plan. Had compensation cost for these stock based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data):
Nine Months Ended December 31, Years ended March 31, 1998 1998 1997 ------------- -------- -------- Net income (loss) as reported $ 501 ($3,406) ($5,884) Pro forma net loss ($48) ($4,417) ($6,276) Net income (loss) per share, as reported $0.07 ($0.46) ($0.97) Net income (loss) per share, pro forma ($0.01) ($0.60) ($1.03)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost shown above may not be representative. 37 The per share weighted-average fair values of stock options granted during the nine-month period ended December 31, 1998 and the years ended March 31, 1998 and 1997 were $2.38, $4.50 and $3.85, respectively, on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Nine Months Ended December 31, Years ended March 31, 1998 1998 1997 ------------ -------- -------- Expected volatility 44% 64% 64% Expected dividend yield none none none Risk-free interest rate 5.30% 6.21% 6.61% Expected life of stock options 6 years 10 years 10 years
38 A summary of the status of the Company's stock options plans at December 31, 1998, and March 31, 1998 and 1997 is presented below:
Within Plan Outside Plan ------------------------------------------------ ---------------------------------------------- Weighted Weighted Shares Average Shares Average Under Option Exercise Under Option Exercise Option Prices Price Option Prices Price - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1996 247,946 $3.90-$33.75 $6.05 20,000 $3.90-$36.90 $20.70 Granted 484,850 3.45-5.95 4.95 -- -- -- Exercised (3,100) 5.00 5.00 -- -- -- Canceled (226,438) 3.90-33.75 5.65 (19,000) 3.90-36.90 20.45 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1997 503,258 $3.45-$33.75 $5.15 1,000 $3.90-$36.90 $26.25 Granted 826,151 3.28-7.50 4.65 -- -- -- Exercised (112,100) 3.44-5.00 4.62 -- -- -- Canceled (370,301) 3.44-7.50 5.20 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1998 847,008 $3.28-$33.75 $4.77 1,000 $26.25 $26.25 Granted 548,400 3.38-5.12 5.07 -- -- -- Exercised -- -- -- -- -- -- Canceled (318,915) 3.28-33.75 $4.59 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 1,076,493 $2.93-$7.85 $4.59 1,000 $26.25 $26.25 - ------------------------------------------------------------------------------------------------------------------------------------ Exercisable at December 31, 1998 228,031 $2.91-$7.85 $4.73 1,000 $26.25 $26.25 - ------------------------------------------------------------------------------------------------------------------------------------ Available for Grant at December 31, 1998 402,562 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
The weighted average remaining lives for the options outstanding at December 31, 1998 are 9.2 years. 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information regarding directors of the Company required by this item is incorporated by reference to the Company's definitive proxy statement relating to its 1999 Annual Meeting of Stockholders for the nine months ended December 31, 1998 under the captions "Election of Directors" and "Compliance with SEC Filing Requirements" which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. In September 1998, the board of directors of the Company accepted the resignation of Reid E. Simpson, Senior Vice-President and Chief Financial Officer. While the Company conducted a search for a successor, the board of directors named the Company's Controller, David J. Vock, acting Chief Financial Officer. In November 1998, the Company announced the appointment of Edward J. O'Connell to the positions of Senior Vice President Finance & Administration, Chief Financial Officer and Secretary. The executive officers and senior management of the Company are as follows:
Name Age Position - ---- --- -------- Max Seybold 38 President, Chief Executive Officer Robin Raina 32 Executive Vice President, Chief Operating Officer Edward J. O'Connell 46 Senior Vice President-Finance & Administration, Chief Financial Officer and Secretary
The executive officers of the Company are elected annually by the Board. Max Seybold joined the Company in January 1998 as Senior Vice President - Professional Services and was named President and Chief Executive Officer in February 1998. In March 1998, Mr. Seybold was elected to the Board of Directors. Prior to joining the Company, Mr. Seybold held the position of President and Chief Executive Officer for Mindware/BPR, Inc. of Waltham, Massachusetts, an international technology consulting firm. Prior to joining Mindware/BPR Mr. Seybold founded software/professional services firms based in Switzerland and Germany. Mr. Seybold holds an Masters of Business Administration in Strategic Management and Information Technology from Friedrich-Alexander-University in Nuernberg, Germany. Robin Raina joined the Company in October, 1997 as Vice President - Professional Services and was promoted to Senior Vice President - Sales and Marketing in February 1998. Mr. Raina was promoted to Executive Vice President, Chief Operating Officer in December, 1998. Prior to joining the Company, Mr. Raina held senior management positions for Mindware/BPR serving in Asia and North America. 40 While employed by Mindware/BPR, an international technology consulting firm, Mr. Raina was responsible for managing projects for multinational corporations including setting-up offshore laboratories, building intranets, managing service bureaus and support centers, providing custom programming, and year 2000 conversions. Mr. Raina holds an Industrial Engineering degree from Thapar University in Punjab, India. Edward J. O'Connell joined the Company in December, 1998 as Senior Vice President-Finance & Administration, Chief Financial Officer and Secretary. Prior to joining the Company, Mr. O'Connell was Chief Operating Officer of Keck, Mahin & Cate, a professional services partnership from 1995 to 1998. Mr. O'Connell was Senior Vice President, Finance and Chief Financial Officer of GenDerm Corporation, a pharmaceutical company, from 1991 to 1995 and was Executive Vice President - Finance and Administration and Chief Financial Officer of Union Special Corporation, an international manufacturer of industrial sewing equipment from 1981 to 1991. Mr. O'Connell is a CPA and spent seven years with a Big Five public accounting firm. Mr. O'Connell received a BBA in Accounting from the University of Notre Dame in 1974. ITEM 11. EXECUTIVE COMPENSATION There is hereby incorporated by reference the information appearing under the caption "Compensation of Directors and Executive Officers" in the Company's proxy statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information appearing under the captions "Security Ownership of Management" and "Principal Stockholders of Delphi" in the Company's proxy statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information appearing under the captions "Compensation of Directors and Executive Officers" in the Company's proxy statement for its 1999 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1998. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS. The following consolidated financial statements and supplementary data of the Company and its subsidiaries, required by Part II, Item 8 are filed herewith: - Report of Independent Public Accountants - Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998 - Consolidated Statements of Operations for the nine months ended December 31, 1998 and for the Years Ended March 31, 1998 and 1997 - Consolidated Statements of Stockholders' Equity for the nine months ended December 31, 1998 and for the Years Ended March 31, 1998 and 1997 - Consolidated Statements of Cash Flows for the nine months ended December 31, 1998 and for the Years Ended March 31, 1998 and 1997 - Notes to Consolidated Financial Statements (a) 2. FINANCIAL STATEMENTS. The following financial statement schedule is filed herewith: Schedule II - Valuation and Qualifying Accounts for the nine months ended December 31, 1998 and for the years ended March 31, 1998 and 1997. Schedules other than those listed above have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto. EXHIBITS 3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Company's Registration Statement on Form S-8 (No. 333-23361), and incorporated herein by reference). 3.2 Bylaws of the Company 3.3 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Form 10Q for the quarter ended June 30, 1998, and incorporated herein by reference). 4.1 Form of Redeemable Warrant to purchase shares of common stock of Delphi Information Systems, Inc. (filed as Exhibit 4.12 to the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1996, and incorporated herein by reference). 4.2 Form of Unit Investment Agreement to purchase common stock and warrants of Delphi Information Systems, Inc. (filed as Exhibit 4.13 to the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1996, and incorporated herein by reference). 4.3 Form of Warrant to purchase shares of common stock of Delphi Information Systems, Inc. held by R.J. Steichen & Company (filed as Exhibit 4.14 to the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1996, and incorporated herein by reference). 4.4 Rights Agreement between Delphi Information Systems, Inc. and ChaseMellon Shareholder Services, LLC, as Rights Agent (filed as Exhibit 99.1 to the Company's Registration of Certain Classes of Securities on Form 8-A (No. 000-15946) and incorporated herein by reference). MATERIAL CONTRACTS 10.1 Delphi Information Systems, Inc. 1983 Stock Incentive Plan, as amended (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-45153) and incorporated herein by reference). 10.2 Delphi Information Systems, Inc. Cash Option Profit Sharing Plan (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8 (No. 33-19310) and incorporated herein by reference). 10.3 Delphi Information Systems, Inc. 1989 Stock Purchase Plan (included in the prospectus filed as part of the Company's Registration Statement on Form S-8 (No. 33-35952) and incorporated herein by reference). 10.4 Delphi Information Systems, Inc. Non-Qualified Stock Option Plan for Directors (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1992, and incorporated herein by reference). 10.5 Delphi Information Systems, Inc. 1996 Stock Incentive Plan (filed as Exhibit 4.3 to the Company's Registration Statement on Form S-8 (File No. 33323261), and incorporated herein by reference). 10.6 Stock Purchase Warrant dated June 5, 1992, issued by the Company to Silicon Valley Bank, and related Registration Rights Agreement (filed as Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33-45153) and incorporated herein by reference). 10.7 Lease between the Company and Westlake Renaissance Court for office space in Westlake Village, California, as amended (filed as Exhibit 10.5 to the Company's Registration Statement on Form S-1 (No. 33-14501) and incorporated herein by reference). 10.8 Lease dated April 17, 1986, between Mortimer B. Zuckerman and Edward H. Linde, as Trustees, as Landlord and McCracken Computer Inc., as Tenant, relating to premises at 10-20 Burlington Mall Road, Burlington, Massachusetts, as amended (filed as Exhibit 10.22 to the Company's Form S-1 Registration Statement (No. 33-45153) and incorporated herein by reference). 10.9 Employment agreement dated July 7, 1994, between the Company and M. Denis Connaghan (filed as Exhibit 10.23 to the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1995, and incorporated herein by reference). 10.10 Form of Stock Purchase Warrant between the Company and Silicon Valley Bank (filed as Exhibit 10.26 to the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1995, and incorporated herein by reference). 10.11 Loan and Security Agreement as amended between the Company and Coast Business Credit dated January 1997 and related Schedule and Capex Promissory Note. (filed as Exhibit 10.11 to the Company's Annual Report on Form 10K for the fiscal year ended March 31, 1997, and incorporated herein by reference). 10.12 Second Amendment dated December 18, 1997 to Loan and Security Agreement between the Company and Coast Business Credit dated January 1997. (filed as Exhibit 10.12 to the Company's Form 10-Q for the quarter ended December 31, 1997, and incorporated herein by reference.) 10.13 Third Amendment dated March 23, 1998 to Loan and Security Agreement between the Company and Coast Business Credit dated January 1997. (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and incorporated herein by reference.) 10.14 Fourth Amendment dated September 30, 1998 to Loan and Security Agreement between the Company and Coast Business Credit dated January 1997. (filed as Exhibit 10.14 to the Company's Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference.) 10.15* Lease agreement dated September, 1998 between the Company and Crossroads of Commerce III, relating to premises at 3501 Algonquin Road, Rolling Meadows, IL. 10.16* Lease agreement effective October, 1998 between the Company and 485 Properties LLC relating to premises at Five Concourse Parkway, Atlanta, Georgia. 10.17 Delphi Information Systems, Inc. 1998 Non-Employee Directors' Stock Option Plan (filed as Exhibit A to the Company's proxy statement dated August 12, 1998, and incorporated herein by reference.) 21.1* The subsidiaries of the Company. 23.1* Consent of Independent Public Accountants 27.1* Financial Data Schedule. * Filed herewith (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K in the quarter ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DELPHI INFORMATION SYSTEMS, INC. (Registrant) By /s/ Max Seybold ---------------------------------- Max Seybold President and Chief Executive Officer Date: April 14, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/Yuval Almog Chairman of the Board April 14, 1999 - --------------------------- (Yuval Almog) /s/Max Seybold Director, President. and April 14, 1999 - --------------------------- Chief Executive Officer (Max Seybold) /s/Edward J. O'Connell Senior Vice President-Finance & April 14, 1999 - --------------------------- Administration, Chief Financial (Edward J. O'Connell) Officer, and Secretary /s/William R. Baumel Director April 14, 1999 - --------------------------- (William R. Baumel) /s/Larry G.Gerdes Director April 14, 1999 - --------------------------- (Larry G. Gerdes) SCHEDULE II DELPHI INFORMATION SYSTEMS, INC. Schedule II - Valuation and Qualifying Accounts for the Nine Months Ended December 31, 1998 and Fiscal Years Ended March 31, 1998 and 1997 Allowance for doubtful accounts receivable.
Nine Months Fiscal Fiscal Ended Year Ended Year Ended December 31, March 31, March 31, 1998 1998 1997 ------------ ---------- ---------- Beginning Balance $860,000 1,613,000 $ 922,000 Provisions for Allowance 699,000 356,000 1,662,000 Write-off of Accounts Receivable Against Allowance (491,000) (1,109,000) (971,000) ------------ ---------- ---------- $ 1,068,000 $ 860,000 $1,613,000 ------------ ---------- ---------- ------------ ---------- ----------
EX-10.15 2 EXHIBIT 10.15 EXHIBIT 10.15 Lease Agreement dated September, 1998, between the Company and Crossroads of Commerce III, relating to premises at 3501 Algonquin Road, Rolling Meadows, Illinois. LEASE BETWEEN DELPHI INFORMATION SYSTEMS, INC. TENANT AND LA SALLE NATIONAL BANK, N.A., as Trustee under Trust Agreement dated August 27, 1982 and known as Trust Number 105272 LANDLORD CROSSROADS OF COMMERCE III ROLLING MEADOWS, ILLINOIS 60008 LEASE SUMMARY SHEET DATE OF LEASE: September , 1998 TENANT: DELPHI INFORMATION SYSTEMS, INC.BROKER: For Landlord - Mark C. Smith, CB Richard Ellis For Tenant - Brian Borkan, BKB CommercialPREMISES LEASED: Entire 5th Floor Rentable Square Feet - 20,686 square feet COMMENCEMENT DATE: October 1, 1998 TERMINATION DATE: September 30, 2003 NET RENT: For Entire Term: $1,344,590.04 payable in 60 monthly installments as follows: 10/1/98 to 9/30/99 - 12 installments of $20,686.00 10/1/99 to 9/30/00 - 12 installments of $21,547.92 10/1/00 to 9/30/01 - 12 installments of $22,409.83 10/1/01 to 9/30/02 - 12 installments of $23,271.75 10/1/02 to 9/30/03 - 12 installments of $24,133.67 ELECTRICITY: Separately Metered to Tenant TENANT'S PRO-RATA SHARE OF ADDITIONAL RENT: Tenant pays 11.12% of all taxes and operating expenses, in addition to net rent PERMITTED USES: General office use SECURITY DEPOSIT: None CANCELLATION RIGHTS: On 10/1/01 upon payment of $100,000 On 10/1/02 upon payment of $50,000 THE LEASE SUMMARY IS FOR INFORMATIONAL PURPOSES ONLY. IN THE EVENT ANY INFORMATION ON THE LEASE SUMMARY IS IN CONFLICT WITH ANY PROVISION IN THE LEASE AGREEMENT, THE LEASE AGREEMENT SHALL PREVAIL. LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease") is made and entered into this day of September 1998, by and between LA SALLE NATIONAL BANK, N.A., not individually, but as Trustee under Trust Agreement dated August 27, 1982 and known as Trust No. 105272, hereinafter referred to as "Landlord," and DELPHI INFORMATION SYSTEMS, INC., a Delaware Corporation, licensed to do business in the State of Illinois, hereinafter referred to as "Tenant." LANDLORD HEREBY LEASES TO TENANT, and Tenant accepts the entire fifth (5th) floor, hereinafter referred to as "Premises," said Premises consisting of 20,686 rentable square feet (which includes a 13% add-on factor), hereinafter referred to as "Rentable Square Feet," situated in that certain office building known as Crossroads of Commerce III, Rolling Meadows, Illinois 60008. Said building is comprised of a total of 195,779 rentable square feet of office space, which together with the land upon which it is located, the walkway, driveway, and parking areas (including those areas conferred by certain easements) are hereinafter collectively referred to as the "Building." SECTION 1. TERM The term of this Lease shall be sixty (60) months commencing on October 1, 1998, hereinafter referred to as the "Commencement Date," and shall end on September 30, 2003, hereinafter referred to as the "Termination Date," unless sooner terminated as herein provided, said term of months hereinafter referred to as the "Term." SECTION 2. NET RENT A. Tenant agrees to pay to Landlord a consideration of One Million, Three Hundred and Forty Four Thousand, Five Hundred and Ninety and 04/100 Dollars ($1,344,590.04), for the entire Term, hereinafter referred to as "Net Rent", in Sixty (60) monthly installments as hereinafter set forth: 1. For the twelve (12) month period from October 1, 1998 to September 30, 1999, the Tenant shall pay to the Agent of the Landlord twelve (12) monthly installments of Twenty Thousand, Six Hundred and Eighty Six and 00/100 Dollars ($20,686.00) each ($12.00 per square foot); 2. For the twelve (12) month period from October 1, 1999 to September 30, 2000, the Tenant shall pay to the Agent of the Landlord twelve (12) monthly installments of Twenty One Thousand, Five Hundred and Forty Seven and 92/100 Dollars ($21,547.92) each ($12.50 per square foot); 3. For the twelve (12) month period from October 1, 2000 to September 30, 2001, the Tenant shall pay to the Agent of the Landlord twelve (12) monthly installments of Twenty Two Thousand, Four Hundred and Nine and 83/100 Dollars ($22,409.83) each ($13.00 per square foot); 4. For the twelve (12) month period from October 1, 2001 to September 30, 2002, the Tenant shall pay to the Agent of the Landlord twelve (12) monthly installments of Twenty Three Thousand, Two Hundred and Seventy One and 75/100 Dollars ($23,271.75) each ($13.50 per square foot); and 5. For the twelve (12) month period from October 1, 2002 to September 30, 2003, the Tenant shall pay to the Agent of the Landlord twelve (12) monthly installments of Twenty Four Thousand, One Hundred and Thirty Three and 67/100 Dollars ($24,133.67) each ($14.00 per square foot). B. Net Rent and Additional Rent (as hereinafter defined), and other payments reserved and required under this Lease are collectively referred to as the "Rental". Tenant is required to pay Rental to Landlord's agent, Lincoln Atrium Management Company, 59 W. Seegers Road, Arlington Heights, Illinois 60005 ("Agent"), or to such other agent or at such other place as Landlord may from time to time hereafter designate in writing. All Rental, except as otherwise specifically provided or hereafter otherwise designated, shall be made payable as indicated hereinabove without notice or demand, and without abatement, deduction, counterclaim or set off of any kind. C. All Rental shall be paid in advance on the first day of each and every calendar month of the Term. SECTION 3. ADDITIONAL RENT It is mutually understood that the Net Rent does not include therein the Tenant's share of taxes (as hereinafter defined and referred to as "Taxes") on the Building and operating expenses (as hereinafter defined and referred to as "Operating Expenses"). Commencing on the Commencement Date, the Tenant agrees to pay to Landlord Eleven point Twelve percent (11.12%) ("Tenant's Pro-rata Share") of Taxes and Operating Expenses, which sums are hereinafter collectively referred to as "Additional Rent"), in addition to the Net Rent. The Tenant's Pro-rata Share is calculated by dividing the Rentable Square Feet by 185,990, which is 95% of 195,779, the rentable square feet of the Building. In the event the Building is more than 95% occupied the Tenant's Pro-rata Share shall be recalculated. A. Taxes are defined as those taxes levied or assessed against the Building by any lawful authority for each calendar year of the Term, regardless of whether or not the amount assessed or levied is payable in that year or in a subsequent year. Specifically, Taxes shall mean all taxes and assessments, of every kind and nature, special or otherwise, including without limitation, general real property taxes, personal property taxes imposed upon fixtures, machinery, apparatus systems and appurtenances in, upon, or used in connection with the Building or the operation thereof, sewer rents, water rents, special assessments, transit taxes, any tax or excise on Rental, or any other tax (however described) on account of Rental received for use and occupancy of any or all of the Building, whether such Taxes are imposed by the United States, the State of Illinois, the County of Cook, the City of Rolling Meadows (hereinafter referred to as the "City"), or any other governmental authority or agency or political subdivision. There shall also be included in Taxes all reasonable fees and costs including, without limitation, attorneys' fees paid or incurred by Landlord in seeking to obtain a reduction of or a limit on an increase in Taxes or assessment therefor, and objecting to or defending against the levy of same. If at any time during the Term the method of taxation then prevailing shall be altered so that any tax, assessment, levy, imposition, or charge or any part thereof, shall be imposed upon Landlord (or upon the beneficiaries of Landlord) in place, or partly in place, of any such Taxes or increase therein heretofore described in this subparagraph, and/or the same shall be measured by or be based in whole or in part upon the Building or the Rental or other income therefrom, then all such taxes, assessments, impositions, levies, or charges or part thereof shall be included in Taxes, to the extent that such items would be payable if the Building were the only property and/or income of Landlord (or the only property and/or ncome of the beneficiaries of Landlord) subject thereto. Taxes shall not include any Federal, State, or local municipal income taxes, capital stock taxes, or estate or inheritance taxes, other than as specifically provided for above, or penalties or interest on the late payment of installments of Taxes, or late filing of any reports. From time to time, the Landlord, in its reasonable discretion, shall take all reasonable and proper steps and procedures to minimize Taxes, including, but not limited to, the contesting of or objecting to increases of the determination of the fair market value of the Building by the Cook County Assessor for real estate tax purposes and the objecting to the tax rate imposed by the taxing authorities. The Landlord does not warrant that any such steps or procedures will result in the reduction or minimization of Taxes. In the event of a refund of Taxes is received, said sum shall be applied to the reduction of Taxes in the year of receipt. B. Operating Expenses are defined as those expenses and costs incurred by or paid on behalf of the Landlord and which, in accordance with generally accepted accounting practice as applied to the operation, repair, management and maintenance of first-class office buildings, amenities and parking areas, are properly charged, expensed or amortized to such ownership, operation, management and maintenance, including but not limited to, window washing, utility charges, parking lot and common area cleaning, office cleaning expenses, elevator repair and maintenance, interior and exterior plant maintenance and landscaping, maintenance and repair, snow removal, lease payments of leased equipment, insurance, wages and other benefits of janitors, security personnel and services, management fees (not to exceed 5% of total rental collected) and expenses including secretarial, engineers and other on-site employees (including without limitation, the amount of any social security taxes, unemployment insurance contributions and fringe benefits), professional fees, and fuel costs. Operating Expenses shall not include: (a) interest and principal payments on mortgages and other debt service and ground lease payments, if any; (b) franchise or income taxes imposed upon Landlord; (c) the cost or fees for any lease, work or service performed in any instance for an individual tenant and not for all tenants in common; (d) capital improvements and replacements as a result of defects in construction or equipment or caused as a result of fire, casualties or the exercise of the right of eminent domain; (e) leasing commissions and costs, (f) attorneys' fees, costs and disbursements and other expenses connected with ownership, organization, partnership or corporate legal expenses incurred for matters not related to the operation of the Building; (g) costs of Landlord for services sold to tenants and for which Landlord is entitled or would ordinarily be entitled to be reimbursed directly by tenants and not chargeable to all tenants as Operating Expenses; (h) depreciation and amortization, except as allowed pursuant to this sub section; (i) fees or other compensation paid to subsidiaries or affiliates of Landlord for services on or to the Building, but only to the extent that the costs of such services exceed competitive costs of services of equal quality and quantity were they not so rendered by a subsidiary or affiliate; (j) any compensation paid to clerks, attendants or other persons in commercial for profit concessions operated by Landlord in the Building; (k) advertising and promotion expenses; (l) wages, salaries or other compensation paid to any executive employees above the grade of Building manager; (m) brokerage commissions, legal costs (including attorneys fees and disbursements) and other costs incurred in connection with the sale of the Building; (n) all capital improvements except to the extent they reduce Operatng Expenses; (o) any expenses for which Landlord is reimbursed by insurance, third parties or otherwise; (p) costs of acquiring or maintaining works of art; and (q) costs, fines, penalties, legal fees or costs of litigation incurred due to late payments of Taxes, utility bills and other costs incurred as a result of Landlord's failure to make such payments when lawfully and rightly due. C. The Tenant is required to pay its share of Additional Rent on a monthly basis in installments equal to 1/12th of the Landlord's estimate of the amount due from the Tenant in each calendar year of the Term. As soon as practicable in each year during the Term and in the calendar year next following the year in which this Lease expires, Landlord shall deliver to Tenant a statement, hereinafter referred to as the "Annual Statement," certified by Landlord's chief financial officer to be true and correct, setting forth the amount of Taxes and Operating Expenses paid or incurred by Landlord during the immediately preceding year. The Landlord will endeavor to supply the Annual Statement to the Tenant by October 1st of each calendar year, but failure to supply the Annual Statement by said date shall not affect the rights of the Landlord to receive Additional Rent, or any other sums, due from the Tenant, nor shall the Landlord be prejudiced in any way. Within thirty (30) days after the delivery of the Annual Statement, Tenant shall pay to Landlord in one lump sum, Tenant's Pro-rata Share of any increase in Taxes and Operating Expenses for the immediately preceding calendar year in excess of the previous year's estimate of Taxes and Operating Expenses paid by the Tenant. If the Taxes and Operating Expenses for the immediately preceding calendar year are less than the previous year's estimate paid by Tenant, Landlord shall refund Tenant's Pro-rata Share of such excess within thirty (30) days after the delivery of the Annual Statement. Tenant shall pay, additionally, a lump sum equal to one-twelfth (1/12) of Tenant's annual share of the estimate for then current calendar year's Taxes and Operating Expenses in excess of the previous year's estimate, multiplied by the number of months then elapsed between January 1 of the then current calendar year and the month in which the Annual Statement is delivered to the Tenant. After delivery of the Annual Statement, the monthly installments of Additional Rent due thereafter shall be appropriately increased or decreased to 1/12th of the said current calendar year's estimate. If the Term of this Lease ends on other than the last day of a calendar year, Tenant's share shown on the Annual Statement delivered after the end of the Term shall be prorated and paid as aforesaid. D. The Tenant, or its representative, shall have the right to examine and audit the Landlord's books and records with respect only to the items relating to Additional Rent, after providing the Landlord with a prior written notice requesting such examination ("First Exception Notice"), within ninety (90) days following the date of the mailing of the Annual Statement to the Tenant. Such examination or audit shall be made at the Landlord's place of business during normal business hours. Within thirty (30) days after the completion of the audit, which must begin within ninety (90) days of the First Exception Notice, the Tenant must deliver to the Landlord a written statement setting forth any alleged exceptions to any items or calculations specified in the Annual Statement, stating in particularity the grounds for said exception ("Second Exception Notice"). Failure on the part of the Tenant to serve on the Landlord the First Exception Notice and/or the Second Exception Notice, as provided for hereinabove, all within the time periods specified, shall result in the binding and conclusive presumption of an approval by the Tenant of the computations and charges set forth in the Annual Statement, and such Additional Rent charges shall be considered as final and accepted and binding upon and by the Tenant and may not be contested at any time thereafter. If the audit by the Tenant reveals an overstatement of an amount chargeable to the Tenant as provided in the Annual Statement and the Landlord agrees to such overstatement, the overstatement shall be applied to the succeeding month's Rental, or if the Lease has expired, then such amount shall be paid by the Landlord to the Tenant assuming there are no sums due from the Tenant to the Landlord, or if there are any sums due from the Tenant to the Landlord, then such amount shall be applied to the payment of such sums. In the event the Landlord disagrees as to whether or not there has been an overcharge in Additional Rent, the Tenant can elect to submit the controversy to bining arbitration before the American Arbitration Association, in accordance with the rules then prevailing, within one year after the date of the Annual Statement. Failure to do so will result in a conclusive and final waiver of the Tenant's right to contest the charges set forth in the Annual Statement or in the Second Exception Notice, and such Additional Rent charges shall be considered as final and accepted and binding upon and by the Tenant. Regardless of the provisions set forth in this subparagraph and whether or not the Tenant properly contests any Additional Rent charges in any Annual Statement, the Tenant must pay, when due, all Rental and/or contested Additional Rent charges, subject to its right to secure a refund or credit therefor should the Tenant prevail successfully in any of the procedures set forth herein. In the event the Landlord agrees to an alleged overstatement, or if the court determines there is in fact an overstatement, the Landlord shall pay the Tenant's reasonable legal costs and audit fees; however should the Landlord agreed overstatement be less than three percent (3%) of the total amount due from the Tenant for Additional Rent for the year in question, or should the court determine that there was no overstatement, reasonable legal and audit fees incurred by the Landlord shall be paid by the Tenant to the Landlord. E. The provisions of this Section 3. shall survive the termination of this Lease. SECTION 4. SERVICES A. Landlord shall furnish the following services, without any additional charges to the Tenant: 1. Janitorial and Cleaning Services - In and about the Premises and the common areas of the Building on a daily basis, Saturdays, Sundays, and major holidays excepted. 2. Heating and Air Conditioning - To provide a temperature required, in Landlord's reasonable judgment and consistent with the operation of a first class office building, for comfortable occupancy of the Premises under normal business operations, from 8:00 A. M. to 6:00 P. M. Monday through Friday, Saturdays 8:00 A. M. to 2:00 P.M., Sundays and major holidays excepted. If the use of excessive heat-generating equipment by the Tenant in the Premises affects the temperatures otherwise maintained by the air conditioning system for normal business operations, and thereby requires in the reasonable judgment of Landlord the modification of the air conditioning system, including installation of supplementary air conditioning units or diffusers in the Premises, Landlord reserves the right to perform such modification; and all of the cost thereof shall be paid by Tenant to Landlord at the time of completion of such modification. 3. Water - Water for drinking, lavatory, and toilet purposes in the common areas. 4. Elevator Service - Twenty-four (24) hour automatic passenger elevator service in common with other tenants. All freight elevator service shall be subject to reasonable scheduling by the Landlord after prior notice to Landlord by Tenant. 5. Window Washing - Window washing of all windows in the Premises both inside and out, weather permitting, at intervals to be reasonably determined by Landlord. 6. Parking - Reasonable, safe and adequate outdoor parking facilities for the joint use of all tenants, on a first-come, first-serve basis. 7. Landscaping - Landscaping of common areas and interior plantings. 8. Lighting - Lighting of the parking lot and common areas during appropriate hours depending upon seasons of the year. 9. Security Services - A card access security system for after-hours security, and a security guard stationed in the first floor lobby area from 6:00 P.M. to 12:00 A.M. on Monday to Friday and from 7:00 A.M. to 3:00 P.M. on Saturday, holidays excepted. 10. Keys and access cards - Landlord will supply 25 Premises entry keys and access cards on or before the Commencement Date. B. Landlord will perform additional services on such terms and conditions as may be mutually agreed upon by Landlord and Tenant. All charges for such additional services shall be due and payable at the same time as the installment of Rental with which they are billed, or if billed separately, shall be payable within thirty (30) days after such billing. In case Tenant fails to pay for any such additional services, Landlord may, without notice to Tenant, discontinue any or all of such additional services. C. Unless due to Landlord's negligence, Tenant agrees that Landlord shall not be liable in damages, by abatement of Rental or otherwise, for failure to furnish or delay in furnishing any services itemized above, when such failure or delay in furnishing same is occasioned, in whole or part, by repairs, renewals, replacements, or improvements; or by any strike, lockout or other labor trouble; or by inability to secure electricity, gas, water or other utility; or by any accident or casualty whatsoever; or by the act or default of tenants or other parties; or by any law, order, ordinance, or regulation of any municipal, local, state, or federal government, agency, or authority; and/or by any other causes beyond the reasonable control of Landlord. Nor shall any such discontinuance or such failure or delay of services be deemed to give rise to an eviction, constructive or actual, of Tenant, or give rise to any right on the part of the Tenant to terminate this Lease. SECTION 5. CONSTRUCTION AND ACCEPTANCE OF PREMISES A. Within six (6) months from the Commencement Date, the Tenant will submit to the Landlord a detailed plan of the changes and modifications to the Premises it may desire. The Landlord will then retain the architectural firm of Tsolinas/Moreno & Associates, to prepare detailed architectural, engineering, electrical, and mechanical working drawing plans, hereinafter referred to as the "Tenant Plans", for all work requested by the Tenant, said work hereinafter referred to as "Tenant Improvements". The Tenant Plans are subject to the written approval of the Landlord and the Tenant, which both parties agree shall not be unreasonably withheld or delayed. When the Tenant Plans have been fully approved by the Landlord and the Tenant, they will be attached to this Lease, labeled Exhibit A, and made a part hereof as if they were part of this Lease at the time of the execution hereof. B. The Landlord agrees to construct the Tenant Improvements and any Additional Tenant Improvements (as defined hereinafter), in accordance with the Tenant Plans and Change Orders (as defined hereinafter), at the sole cost and expense of the Landlord, provided the cost and expense of constructing same does not exceed the sum of One Hundred Thirty Four Thousand Dollars ($134,000), which is based upon Six and 50/100 Dollars ($6.50) per Rentable Square Feet. The fees and costs of Tsolinas/Moreno & Associates shall be considered part of the costs of the Tenant Improvements. The general contractor constructing the Tenant Improvements will be CFM Construction Company. The Landlord agrees that the aggregate of all fees charged by the general contractor for profit, overhead and supervision shall not exceed Fifteen Percent (15%) of the total cost of the Tenant Improvements or the Additional Tenant Improvements. C. Any additional work or changes requested by the Tenant and not a part of the originally approved Tenant Plans, shall be set forth in written orders (herein referred to as "Change Orders"), detailing the additional work or changes and the cost and expense (and/or credits, if any) thereof. All approved additional work and changes shall be referred to herein as "Additional Tenant Improvements". All Change Orders must be signed and approved by both the Tenant and Landlord. D. In the event the total costs of the Tenant Improvements and Additional Tenant Improvements are in excess of One Hundred Thirty Four Thousand Dollars ($134,000), said excess shall hereinafter be referred to "Tenant's Share of Tenant Improvements", and shall be paid to the Landlord by the Tenant upon the determination of the actual aggregate costs. In the event the costs of the Tenant Improvements and the Additional Tenant Improvements do not exceed One Hundred Thirty Four Thousand Dollars ($134,000), the Tenant shall not be entitled to the said savings in an abatement of Rental nor in any other payment or compensation. E. When the Tenant Improvements and/or Additional Tenant Improvements are Substantially Complete, the Landlord shall so notify the Tenant in writing. Not later than five (5) business days thereafter, the Tenant agrees to inspect the Premises with the Landlord. Should the inspection reveal that certain items of Tenant Improvements have not been completed or are not in compliance with the Tenant Plans, a written statement will jointly be prepared, and agreed to by both Landlord and Tenant, setting forth such items, which statement is hereinafter referred to as the "Punch List". The Landlord agrees to promptly complete and remedy the Punch List items. By occupying the Premises, the Tenant formally accepts and acknowledges that the Premises are in a condition complying with all of Landlord's covenants hereunder, with the exception of those items, if any, on the Punch List and any latent defects. F. No promise of the Landlord to alter, remodel or improve the Premises or the Building, and no representation respecting the condition of the Premises or the Building has been made by the Landlord to the Tenant unless the same is contained herein or made a part hereof. G. The construction and installation of all Tenant Improvements and Additional Tenant Improvements shall be subject to the approval of the Village of Rolling Meadows, and any other governmental authority having jurisdiction thereof. H. The Landlord warrants that its contractors have not nor will they use asbestos materials in the construction of the Building or the Tenant Improvements. I. All work by Landlord and its contractors in constructing the Tenant Improvements shall conform to all applicable building codes and shall be of first class quality and workmanship. J. In the event the Tenant fails to submit detailed plans to the Landlord for its desired Tenant Improvements within six (6) months from the Commencement Date, the requirement on the part of the Landlord to pay for the Tenant Improvements shall cease and no longer be of any force and effect. SECTION 6. USE Tenant shall use and occupy the Premises only for general office use and for no other purpose without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Tenant's use of the Premises shall at all times be in a high grade and reputable manner and conform to all applicable laws, ordinances, regulations, and codes promulgated by any and all governmental bodies and to the requirements of any applicable fire rating bureau or other body exercising similar functions. SECTION 7. REPAIRS Tenant will, at its own expense, keep the Premises in good order, repair and tenantable condition at all times during the Term of this Lease. Except for repairs and restorations that may be required to be made by Landlord pursuant to the provisions of this Lease or for repairs and replacements covered by Landlord's insurance, Tenant shall promptly and adequately repair all damages to the Premises and replace or repair all damaged or broken glass, fixtures, and appurtenances. If the Tenant does not do so, Landlord may, after giving Tenant written notice, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof plus ten percent (10%) within thirty (30) days thereafter. Landlord may enter the Premises at all reasonable times to make such repairs and replacements after giving the Tenant reasonable notice. Landlord agrees to keep and maintain the Building in a first-class operating condition and in compliance with all applicable laws, ordinances, rules and regulations. SECTION 8. TENANT ALTERATIONS After the Commencement Date and occupancy of the Premises, Tenant shall not make installations, alterations or additions in or to the Premises without submitting plans and specifications therefor to Landlord and securing the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld. In the event the costs of the installations, alterations or additions do not exceed Ten Thousand Dollars ($10,000), and does not involve the Building's structure or systems, the Tenant does not have to obtain the prior written consent of the Landlord, however it must notify the Landlord of its intentions, submit to the Landlord its plans and specifications, and follow all other requirements and procedures provided for the Section 8. All such installations, alterations or additions shall shall be done at the sole cost, risk and responsibility of Tenant. Prior to letting of contracts, Tenant shall submit to Landlord copies of contracts and necessary permits, building permits, certificates of appropriate insurance, names of Tenant's contractors, amounts of the contracts with each of Tenant's contractors, and adequate guarantees (in the sole discretion of the Landlord) which will insure the payment of Tenant's contractors and/or subcontractors upon completion of their work, and comply with such other requirements related to the work as Landlord may impose. All installations, alterations and additions shall be constructed in a good and workmanlike manner with only good grades of materials equivalent to or better than Building standards, and shall comply with all insurance requirements and with all ordinances and regulations of the City and all other applicable governmental bodies having jurisdiction thereof. The Tenant agrees to hold Landlord harmless from all claims, costs, damages, liabilities, and expenses which may arise or be connected in any way with the work. All alterations, improvements, and additions made by Tenant in or upon the Premises shall, unlss Landlord requests their removal at the time of approval, become Landlord's property and shall remain upon the Premises at the termination of this Lease by lapse of time or otherwise, without compensation to Tenant, unless such improvements are by their nature removable such as removable cubicles. Nothing herein shall give Landlord any interest in Tenant's office furniture and equipment, which shall remain the property of the Tenant subject to the provisions of Section 23. hereinafter. Tenant is permitted to install a security alarm system in the Premises, and to remove same upon the end of the Term. SECTION 9. COVENANT AGAINST LIENS Tenant covenants and agrees not to permit any lien of mechanics or materialmen to be placed against the Building or any part thereof, and, in case of any such lien attaching, to immediately pay off and remove the same. Tenant has no authority or power to cause or permit any lien or encumbrance of any kind whatsoever, whether created by act of Tenant, operation of law, or otherwise, to attach to or be placed upon the Building or any part thereof. In the event of a lien being placed against the Building, Tenant shall have the right to contest such lien provided it gives the Landlord security, adequate in Landlord's sole discretion, to insure payment thereof. Adequate security is defined as a deposit of monies by the Tenant with the Landlord equal to one hundred and fifty percent (150%) of the amount of said lien, to be held by the Landlord without obligation for payment of interest thereon to Tenant, or in lieu of a deposit of monies, a bond or letter of credit equal to one hundred and fifty percent (150%) of the amount of said lien, the terms of which shall be satisfactory to the Landlord. The deposit, the bond or letter of credit ("Security") will be returned to the Tenant, less reasonable attorneys fees and other costs incurred by the Landlord and less any Rental due from the Tenant, if any, when the Landlord receives satisfactory evidence that the Building has been fully and completely released from the lien. The Landlord shall have the right to apply the Security to the payment and release of the lien at any time it determines or finds, in its sole and exclusive discretion, that (i) the Tenant is not diligently contesting the claim, or (ii) a court or arbitrator determines the lien is valid, even though the Tenant may have appealed, or intends to appeal, such court order or award, (iii) the lien holder initiates foreclosure proceedings against the Building, or (iv) a period of three hundred and sixty-five (365) days have expired since the date of said lien without release or adjudication thereof. Any funds remaining from the Security after payment of the lien, shall first be applied to the payment of Landlord's attorneys fees and other costs incurred as a result of this matter, then to the payment of any Rental due from the Tenant to the Landlord, if any, and the balance, if any, shall be paid to the Tenant within thirty (30) days after the date of the release of the lien. SECTION 10. WAIVER OF CLAIMS To the extent not expressly prohibited by law, Tenant hereby waives all rights to recover from Landlord, Landlord's Beneficiaries, and their officers, agents, servants, employees, and mortgagees, for any damage or injury either to person or property sustained by Tenant or by other persons, due to the Building or the Premises becoming out of repair, or due to the happening of any accident or occurrence in or about the Building or the Premises or any part thereof, unless such damage or injury was caused by the negligence or wrongful intentional acts of the Landlord, its employees or agents. This provision shall apply particularly (but not exclusively) to damage caused by fire, water, snow, frost, steam, sewage, gas, sewer gas or odors, or by the bursting or leaking of pipes (including the sprinkler systems), faucets and plumbing fixtures. Tenant further agrees that all of its personal property and fixtures installed upon the Premises shall be there at the risk of Tenant only and that Landlord shall not be liable for any damage thereto or theft thereof, unless the Landlord caused the damage or loss on account of its negligent or intentional acts. SECTION 11. PARKING AREA Tenant and its officers, employees, agents, customers, and invitees shall have the nonexclusive right in common with Landlord and all others to whom Landlord has or may hereafter grant rights to use the parking areas of the Building; subject to such rules and regulations, including reserved parking, as Landlord may from time to time impose; however, in no event shall the Tenant be charged any sums of money for the privilege and right to use the said parking facilities. Tenant agrees to abide by all rules and regulations and to use its best efforts to cause its officers, employees, agents, customers, and invitees to conform thereto. Landlord may at any time close temporarily any part of the parking area to make repairs or changes to prevent the acquisition of public rights in such area or to discourage non-customers' parking, and may do such other acts in and to the parking area as in its judgment may be desirable to improve the convenience thereof, so long as Tenant will still have adequate parking available for its use. Tenant shall not at any time interfere with the rights of Landlord and other tenants, their concessionaires, officers, employees, agents, customers, and invitees to use any part of the parking areas. SECTION 12. RIGHTS RESERVED BY LANDLORD Landlord shall have the following rights, exercisable with reasonable notice (except said rights may be exercised without notice in emergency situations) and without liability to Tenant for damage or injury to property, person, or business, and without effecting an eviction, constructive or actual, or giving rise to claim for set-off or abatement of Rental; however in exercising all such rights, the Landlord shall use reasonable efforts to minimize interference with the Tenant's conduct of business at the Premises: A. To change the Building's name, provided thirty (30) days prior written notice is given to Tenant, however the new name will not be a software company that is a direct competitor of the Tenant; B. To install, affix, and maintain any and all signs on the exterior and/or interior of the Building and in the parking areas; C. To show the Premises to prospective tenants at reasonable hours during the last three (3) months of the Term; D. To decorate or to make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, which Landlord may deem necessary or which may be required by the City or by any other governmental agency having jurisdiction over the Building; and for such purposes to enter upon the Premises and, during the continuance of any said work, to temporarily close doors, entryways, public space, and corridors in the Building and to interrupt or temporarily suspend Building services and facilities, provided that Landlord will at all times use its best efforts to maintain reasonable accessibility to the Premises, and to minimize any disruption of Tenant's business. The Landlord shall give the Tenant reasonable advance notice (at least 24 hours, which notice may be oral) of any required entry; however in the event of a serious emergency, in the Landlord's discretion, advance notice shall not have to be given; E. To grant to anyone the exclusive right and privilege to conduct any business in the Building, and such exclusive right and privilege will be binding upon Tenant, provided such exclusive right shall not operate to exclude Tenant from the use expressly permitted in Section 6 above; F. To approve the weight, size, and location of safes, printing machinery, computers, and other heavy equipment and articles in and about the Premises and the Building and to require all such items and furniture and similar items to be moved into and/or out of the Building and Premises only at such times and in such manner as Landlord shall direct in writing. Movements of Tenant's property into or out of the Building and within the Building are entirely at the risk and responsibility of Tenant, and Landlord reserves the right to require permits before allowing any such property to be moved into or out of the Building; G. To close the Building after the regular working hours and on Saturdays, Sundays, and legal holidays, subject however, to Tenant's right to admittance under such regulations as Landlord may prescribe from time to time, which may include by way of example but not of limitation, that persons entering or leaving the Building identify themselves to a watchman, by registration or otherwise, and that said persons establish their right to enter or leave the Building; H. To have pass keys to the Premises; and I. To establish reasonable controls and rules for the movement of packages, supplies, and all property in and out of the Building to insure the proper maintenance, management, and security of the Building. SECTION 13. TENANT COVENANTS Tenant agrees to observe the following covenants and to comply with all existing rules and regulations and those reasonable rules and regulations that Landlord may hereafter from time to time make for the Building; however, it is agreed by the Tenant that the Landlord shall not be liable in any way for any damage caused to it or its invitees or employees, by the nonobservance by any of the other tenants of such similar covenants in their leases or of rules and regulations provided for herein or in other leases: A. Tenant shall occupy and use the Premises during the Term hereof for the purpose specified in Section 6. above and none other, and shall not conduct itself, or permit its agents, employees or invitees to conduct themselves, in the Premises or in the Building, in a manner inconsistent with the character of the Building as an office building of the highest class, or interfere with the comfort or convenience of other tenants; B. Tenant shall not, without the prior written consent of Landlord, exhibit, sell, or offer for sale on the Premises or in the Building any article or thing except those articles and things essentially connected with the stated use of the Premises by Tenant as set forth in Section 6 above; C. Tenant will not make or permit to be made any use of the Premises which, directly or indirectly, is forbidden by public law, ordinance, or governmental regulation; D. Tenant shall not sell or offer to sell or permit to be sold or offered for sale in the Premises any alcoholic or other intoxicating beverage; E. Tenant shall not display, inscribe, print, paint, maintain, or affix on any place in or about the Building (or the parking lot or landscaped area of the Building) any sign, notice, legend, direction, figure, or advertisement, except on the doors of the Premises and on the Directory Boards, and then only such name or names and matter, and in such color, size, style, place, and materials, as shall first have been approved in writing by Landlord; however this provision shall not restrict the Tenant from including its name on any directory or suite signage, and does not apply to signs within the Premises; F. Tenant shall not advertise the business, profession, or activities of Tenant conducted in the Building in any manner which violates the letter or spirit of any code of ethics adopted by any recognized association or organization pertaining to such business, profession, or activities, and shall not use the name of the Building for any purposes other than that of the business address of Tenant, and Tenant shall never use any picture or likeness of the Building in any circulars, notices, advertisements, or correspondence without Landlord's prior written consent; G. Tenant shall not obstruct or use for storage or for any purpose other than ingress and egress, the common and/or public areas of the Building; H. No additional locks or similar devices shall be attached to any door in the Premises or the Building without Landlord's prior written consent and only upon the condition that Landlord shall have the keys to or combination of such additional locks or devices; I. No keys for any door other than those provided by Landlord shall be made by Tenant; if more than twenty five keys for the entry door are desired, Landlord will provide the same to the Tenant at the Tenant's cost; J. Upon termination of this Lease or of Tenant's possession of the Premises, Tenant shall surrender all keys and entry cards to the Premises and the Building; K. Tenant shall not install or operate any steam or internal combustion engine, boiler, pressure vessel, machinery, refrigerating, or heating device (except for kitchen appliances customarily used in offices), or air conditioning apparatus in or about the Premises, or carry on any mechanical business therein, or use the Premises for housing accommodations or lodging or sleeping purposes, or do any cooking therein, or use any illumination other than electric light, or use or permit to be brought into the Building any flammable oils or fluids such as gasoline, kerosene, naphtha and benzine, or any explosive, radioactive materials, or other articles hazardous to life, limb, or property; L. Tenant shall not do or permit anything to be done, or keep or permit anything to be kept, in the Premises which would increase the fire or other casualty insurance rate on the Building, or which would result in the Landlord's insurance companies refusing to insure the Building in amounts reasonably satisfactory to Landlord; M. In the event that any use of the Premises by Tenant increases the cost of insurance, Tenant shall pay such increased cost to Landlord on demand, but such demand or acceptance of such payment shall not be construed as a consent by Landlord to Tenant's such use, or limit Landlord's further remedies under this Lease; N. Tenant shall cooperate fully with Landlord to assure the effective operation of the Building's air conditioning, heating, and ventilating systems; O. Landlord reserves the right to require that any alterations or additions done by the Tenant be done using Landlord's designated contractors or contractors approved by Landlord, provided such contractors are market competitive; P. Tenant shall not use lamps in the ceiling light fixtures or window coverings of a color or style other than that approved in advance in writing by Landlord or managing agent; Q. The color of all paint and other decorating materials used by Tenant on those portions of the Premises which are visible to the exterior shall be approved in writing in advance by Landlord; R. Tenant will not install on the windows facing the exterior or the interior lobby any window coverings without the prior written consent of Landlord; S. Tenant shall keep the doors to the corridors closed except when in use for ingress and egress, and Tenant shall not place or allow anything to be placed against or near the doors to the corridors which may diminish the light in or be unsightly from the corridors; T. Tenant shall not hang drapes, blinds, or other window treatments except in a color, style, and manner approved by Landlord; U. Tenant shall not bring or permit to be in the Building any bicycle or other vehicle, or dog (except in the company of a blind person), or other animal or bird; V. Tenant shall not make or permit any noise, vibration, or odor to emanate from the Premises; W. Tenant shall not do anything therein tending to create or maintain a nuisance; X. Tenant shall not disturb, solicit, or canvass any occupant of the Building; Y. Tenant shall not do any act tending to injure the reputation of the Building; and/or Z. Tenant represents, warrants, and covenants to Landlord that Tenant shall at no time (a) use or permit the use of the Premises and/or the Building for the generation, manufacture, production, storage, release, discharge, or disposal of Hazardous Materials (as hereinafter defined) except in accordance with Environmental Regulations (as hereinafter defined); or (b) to transport Hazardous Materials to or from the Premises, except in accordance with Environmental Regulations; or (c) perform any act or action whatsoever which violates any Environmental Regulations; and/or (d) allow or permit any other person or entity to do any of the above: 1. The term "Hazardous Materials" is defined as and includes, without limitation, any flammable explosives, radioactive materials, asbestos and asbestos containing materials, hazardous wastes, hazardous or toxic substances, or related materials defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the Resource Conservation and Recovery Act of 1976, as amended (42 U.S.C. Sections 6901, et seq.), and in the regulations adopted and publications promulgated pursuant thereto, or any other federal, state, or local environmental laws, ordinances, rules, or regulations dealing with hazardous materials, excluding customary general office and cleaning supplies. 2. The term "Environmental Regulations" is defined as all federal, state, and local laws, including all zoning laws or ordinances, and all regulations, codes, requirements, public and private land use restrictions, rules and orders which relate to or govern Hazardous Materials, and/or the environmental conditions in, on, under, or about the Premises or the Building, in force at the time of the execution of the Lease and at any time during the Term. SECTION 14. UTILITY SERVICES AND MAINTENANCE A. The Tenant shall be responsible for and shall pay for utility costs incurred in connection with lighting, telephone and data, machinery, office machines and equipment, and all other devices used by Tenant in the operation of the Premises and the business of the Tenant (other than for heating and air-conditioning which is paid by the Landlord). Such utility costs shall be separately metered to the Tenant, and Tenant agrees to pay such cost promptly. B. Tenant shall make arrangements directly with the telephone company servicing the Building for such telephone and data service to the Premises as may be desired by Tenant, and Tenant shall pay the entire cost thereof. C. If Tenant desires telegraphic, fiber optic, computer data, fax, telephonic, burglar alarm, or signal service (which services shall be at Tenant's sole expense), Landlord shall, upon request, and within ten (10) working days of such request, direct where and how all connections and wiring for such service shall be introduced and run. In the absence of such directions, Tenant shall make no borings, cuttings, or install any wires or cables in or about the Premises. D. Unless due to Landlord's negligence, Tenant covenants and agrees that Landlord shall in no event be liable or responsible to Tenant for any loss, damage, or expense which Tenant may sustain or incur if either the quality or character of electrical service is changed or if it is no longer suitable for Tenant's requirements. Tenant covenants and agrees that at all times its use of electric current shall never exceed its allocable portion of the capacity of existing feeders to the Building or the Premises or wiring or installation; and also that it shall make no alterations or additions to the electric service or wiring to the Premises without the prior written consent of the Landlord in each instance, which consent shall not be unreasonably withheld. SECTION 15. QUIET ENJOYMENT Landlord represents that it has full power and authority to enter into this Lease. Provided Tenant performs and observes all terms, conditions and agreements herein contained, Tenant shall have the quiet possession of the Premises during the full Term of this Lease, including any extension thereof. SECTION 16. INDEMNITY A. Tenant agrees to protect, indemnify, and save harmless the Landlord, the Landlord's beneficiaries, their mortgagees, agents, tenants, servants, contractors and employees, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs, or expenses (including without limitation reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Landlord by reason of (a) any accident, bodily injury to or death of persons or loss of or damage to property occurring on or about the Building and the Premises or any part thereof, and alleged to be due to any act or failure to act or any negligence or default under this Lease by Tenant, its contractors, agents, servants, and employees; (b) any failure on the part of Tenant to perform or comply with any of the terms of this Lease; and/or (c) any performance by or for the Tenant of any labor or services or the furnishing by or for the Tenant of any materials or any property in respect to the Building and/or the Premises or any part thereof. Excluded from this indemnity are any claims resulting from the negligent or intentional acts of the Landlord, the Landlord's beneficiaries, their mortgagees, agents, tenants, servants, contractors or employees. In case any action, suit, or proceeding is brought against the Landlord, the Landlord's beneficiaries, their mortgagees, agents, tenants, servants, contractors or employees by reason of any such occurrences, Tenant will, at Tenant's sole expense, resist and defend such action, suit, or proceeding, by legal counsel, the choice of whom shall be subject to the Landlord's reasonable written approval. B. Landlord agrees to protect, indemnify, and save harmless the Tenant, its agents, employees and contractors, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs, or expenses (including without limitation reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted against Tenant by reason of (a) any accident, bodily injury to or death of persons or loss of or damage to property occurring on or about the Building and the Premises or any part thereof, and alleged to be due to any act or failure to act or any negligence or default under this Lease by Landlord, its contractors, agents, servants, and employees; (b) any failure on the part of Landlord to perform or comply with any of the terms of this Lease; and/or (c) any performance by or for the Landlord of any labor or services or the furnishing by or for the Landlord of any materials or any property in respect to the Building and/or the Premises or any part thereof. Excluded from this indemnity are any claims resulting from the negligent or intentional acts of the Tenant, its agents, employees and contractors. In case any action, suit, or proceeding is brought against the Tenant, its agents, employees and contractors by reason of any such occurrences, Landlord will, at Landlord's sole expense, resist and defend such action, suit, or proceeding, by legal counsel, the choice of whom shall be subject to the Tenant's reasonable written approval. SECTION 17. INSURANCE A. Tenant shall procure and maintain at its own cost policies of commercial general liability insurance insuring Landlord, the Landlord's beneficiaries, the Agent, their mortgagees, agents, servants, and employees from the following: 1. From all claims, demands, liabilities, lawsuits or actions for bodily injury or death to any persons in an amount of not less than Two Million Dollars ($2,000,000), and for damage to property in an amount of not less than One Million Dollars ($1,000,000), made by or on behalf of any person or persons, firm, entity, or corporation, arising from, related to, or connected with the Tenant, its operations, and/or the Premises; and 2. Said insurance shall also fully insure for the claims covered by the indemnity provided for in Section 16. herein above. The insurance shall be placed with companies, and in form and substance, reasonably satisfactory to Landlord and the mortgagees of Landlord. Said insurance shall not be subject to cancellation except after at least thirty (30) days prior written notice to Landlord and/or the Landlord's mortgagees. Certificates of insurance reasonably satisfactory to Landlord, together with satisfactory evidence of payment of the premiums therefor, must be delivered to Landlord prior to the Commencement Date, and thirty (30) days prior to the end of the term of each such coverage. B. Landlord will obtain insurance policies covering the Building for public liability and fire, sprinkler leakage, malicious mischief, vandalism, and other extended coverage perils, for the full insurable replacement value of the Premises, the cost of which is an Operating Expense, in accordance with Section 3. hereinabove. SECTION 18. ASSIGNMENT AND SUBLETTING Tenant shall not assign nor in any other way transfer this Lease or any interest therein, nor sublet the Premises or any part or parts thereof, nor permit occupancy by anyone other than the Tenant, without the previous written consent of the Landlord, which consent shall not be unreasonably withheld or delayed. The Landlord may grant its consent, provided the Landlord determines the proposed assignee or sublessee is reasonably reputable and in the case of an assignee only is as financially responsible as the Tenant. In order for Landlord to consider said assignment or sublease, the Tenant shall provide the following: A. The Tenant shall give the Landlord a notice of its intention to assign or sublet ("Notice to Sublease"), which notice shall include reliable information, including, but not limited to, the name of the proposed assignee or sublessee, its financial responsibility evidenced by financial statements and credit reports, its reputation, a description of its business activities, and specific terms as to the assignment or sublease agreement, including rental, term, and the date when the assignment or sublease is to take effect. The Tenant shall comply with all reasonable requests of the Landlord for additional information. B. Within ten (10) business days from the date of the receipt by the Landlord of the Notice to Sublease, or the additional information requested by Landlord, if any, whichever date is later, the Landlord shall give its consent or denial, in writing. Provided the Landlord consented to the assignment or sublet, such consent shall be conditioned upon the delivery to the Landlord, within ten (10) business days after such consent, of the following documents: 1. Four executed copies of the assignment which shall include an assumption by the assignee, from and after the effective date of the assignment, of the performance and observance of those covenants and conditions contained in this Lease to be performed and observed by the Tenant. The substance and form of the assignment agreement shall be subject to the Landlord's reasonable approval. 2. Should a sublease be involved, four executed copies of the sublease agreement, which shall include an agreement on the part of the subtenant to be obligated, from and after the effective date of the sublease, to the performance and observance of the covenants and conditions contained in this Lease to be performed and observed by the Tenant. The substance and form of such sublease agreement shall be subject to the Landlord's reasonable approval. C. Consent by the Landlord to one or more assignments or subletting of this Lease shall not operate as a waiver of Landlord's rights as to any subsequent assignments or subletting. D. Any consented assignment or sublease shall in no way release the Tenant of any of its obligations and covenants under this Lease, nor should said assignment or sublease be construed or taken as a waiver of any of the Landlord's rights or remedies hereunder against or as relating to the Tenant. E. In the event the terms of the assignment or sublease provide for an increase in rental in excess of the Rental provided for herein, or in the event the Tenant receives a bonus or other considerations from the assignee or subtenant in consideration of said assignment or sublease, after deducting the reasonable costs of both the Landlord and the Tenant of the assignment or sublease, including but not limited to tenant improvements, leasing commissions, free rent, advertising expenses and legal expenses, such increased Rental, bonus, or other considerations shall be paid to the Landlord. F. To the extent allowed by law, the Tenant's interest in this Lease shall not pass to any trustee or receiver in bankruptcy, or any assignee for the benefit of creditors or any other third party by operation of law. G. Tenant shall pay to Landlord a reasonable fee for processing and review of all sublease and/or assignment documents, whether or not said sublease and/or assignment is actually executed by all parties, however such fee shall not exceed five hundred dollars ($500) for each sublease and/or assignment. H. Notwithstanding any provisions in this Section to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord and without losing any other option or right granted to Tenant under this Lease, to any corporation which controls, or is controlled by or is under common control with the Tenant, or to any person or entity which acquires all the assets of the Tenant's business as a going concern, or to an entity into which the Tenant merges or with which it is consolidated, provided (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, (iii) the use of the Premises remains unchanged, and (iv) the Tenant gives written notice to the Landlord of the assignment or sublease. SECTION 19. FIRE AND CASUALTY If the Premises and/or the Building shall be damaged or destroyed by fire or other casualty, and if it appears that the Premises and/or the Building may be repaired or restored within one hundred eighty (180) days after such damage, and provided the Landlord's mortgagees allow sufficient insurance proceeds for the cost of said repair or restoration, the Landlord shall commence to repair or restore the Premises and/or the Building as soon as reasonably possible and diligently complete said repairs and restoration with reasonable promptness. Notwithstanding anything to the contrary herein contained, Landlord shall have no duty pursuant to this Section 19. to repair or restore any portion of the alterations, additions, or improvements in the Premises or the decorations thereto, except to the extent that same were provided by Landlord at Landlord's cost, i.e., the Tenant Improvements. If Tenant wants any other or additional repairs, restorations, additions, or alterations, and if Landlord consents thereto, the same shall be done by Landlord at the Tenant's expense. If the damage renders the Premises untenantable in whole or in part and it cannot reasonably be repaired or restored within one hundred eighty (180) days after the damage, or if Landlord elects to demolish the Building or cease its operation, then Landlord shall have the right to cancel and terminate this Lease as of the date of such damage by giving written notice to Tenant at any time within sixty (60) days after such damage shall have occurred. If the damage had not been caused by the intentional act or neglect of the Tenant, and if this Lease was not cancelled or terminated in accordance with the provisions in this Section 19., then Rental shall abate during the period beginning with the date of such damage and ending with the date when the Premises and/or the Building are again rendered tenantable; however such abatement shall be limited to the ratio that the untenantable portion of the Premises bears to the entirePremises, should only a portion of the Premises be untenantable. In the event the Premises is not restored or repaired within one hundred and eighty (180) days, the Tenant shall have the right to terminate the Lease upon notice to the Landlord. Should the damage be caused by the intentional or wilful acts of the Tenant or its agents or employees, Rental shall not abate nor shall the Tenant have a right to cancel this Lease, and the Tenant shall continue to be liable therefor regardless that the Premises may not be habitable. SECTION 20. MUTUAL WAIVER OF SUBROGATION RIGHTS Whenever any loss, cost, damage or expense resulting from fire, explosion, or any other casualty or occurrence is incurred by either of the parties to this Lease in connection with the Premises, and such party is then covered in whole or in part by valid and collectible fire and extended coverage insurance with respect to such loss, cost, damage, or expense, then the parties so insured hereby release the other party from any liability it may have on account of such loss, cost, damage or expense to the extent of any amount recovered by reason of such insurance and waives any right to subrogation which might otherwise exist in or accrue to any person on account thereof, provided that such release of liability and waiver of the right of subrogation shall not be operative in any case where the effect thereof is to invalidate such insurance coverage or increase the cost thereof (provided that in the case of increased cost, the other party shall have the right, within thirty (30) days following written notice from the other, to pay such increased cost, thereupon keeping this release and waiver in full force and effect). SECTION 21. EMINENT DOMAIN A. In the event that the entire or a substantial part of the Premises shall be condemned or taken in any manner for any public or quasi-public use, and as a result thereof the Premises cannot be used for the same purpose as prior to such taking, this Lease and the Term shall cease and terminate as of the date possession is taken. For purposes of this Section, the phrase "substantial part of the Premises" is defined as and is understood to mean "more than twenty-five percent (25%) of the Premises." B. If less than a substantial part of the Premises shall be so condemned or taken, and after such taking the Premises can be used for the same purpose as prior thereto, the Term shall cease only on the part so taken, as of the date possession shall be taken by such public authority, and Tenant shall pay full Rental up to that date (with appropriate refund by Landlord of such Rental as may have been paid in advance for any period subsequent to the date possession is taken) and thereafter the Rental shall be equitably adjusted. Landlord shall, at its expense, make all necessary repairs or alterations to the Building and/or the Premises so as to constitute the remaining Building and/or Premises a complete architectural unit, provided that Landlord shall not be obligated to undertake any such repairs and alterations if the cost thereof exceeds the award resulting from such taking. C. If part of the Building or any adjacent property or street shall be condemned by a public or quasi-public authority, and in the reasonable opinion of the Landlord, the Building should be demolished or restored in such a way as to alter the Premises materially, Landlord may terminate this Lease and the Term shall expire on the date specified in the notice of termination as fully and completely as if such date was the Termination Date, and the Rental hereunder shall be apportioned as of such date. D. All damages awarded for any taking by a public authority under the power of eminent domain, whether for the whole or a part of the Premises and/or the Building, shall be the property of Landlord, whether such damages shall be awarded as compensation for diminution in value of the leasehold or to the fee of the Building, provided however the Tenant shall be entitled to an award and reimbursement for relocation expenses and business interruption, provided the award to the Landlord is not diminished or reduced in any way. SECTION 22. DEFAULTS A. Any one (1) or more of the following events shall be considered an event of default, hereinafter referred to as "Event of Default": 1. Tenant shall be adjudged an involuntary bankrupt, or a decree or order is entered approving a reorganization of Tenant, under the Federal bankruptcy or insolvency laws, or under the laws of any State, or any laws relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangements, composition, or extension, and any such adjudication, decree, judgment or order shall not have been vacated or stayed or set aside within ninety (90) days from the date of the entry or granting thereof; or 2. A involuntary decree or order appointing a receiver of the property of Tenant shall be entered by a court of competent jurisdiction, and such decree or order shall not have been vacated or set aside within ninety (90) days from the date of entry or granting thereof; or 3. Tenant shall file a petition in bankruptcy, or Tenant shall institute any proceedings or shall give its consent to the institution of any proceedings for any relief of Tenant under any Federal bankruptcy or insolvency laws, or under the laws of any state, or any laws relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangements, composition, or extension; or 4. Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver for Tenant or any of the property of Tenant; or 5. The Premises are levied upon by any federal, state or municipal revenue officer or similar officer, and such levy shall not have been vacated or stayed or set aside within ninety (90) days from the date of the entry or granting thereof; or 6. Tenant shall fail to pay any installment of Rental or other sums required to be paid by Tenant hereunder when due as herein provided, and such default shall continue for ten (10) business days after notice thereof in writing by Landlord to Tenant; or 7. A lien is filed or served on or against the Building and/or the Premises, which lien allegedly arose as a result of actions or actions of the Tenant, and such lien is not released to the sole satisfaction of the Landlord, within ninety (90) days from the date of the said lien; or if the Tenant seeks to contest the lien, it does not, within the sole discretion and judgement of the Landlord, fully comply with the provisions of Section 9 hereinabove; or 8. Tenant shall fail to keep, observe, or perform any of the other covenants and agreements herein contained to be kept, observed, and performed by Tenant, and such failure shall continue for thirty (30) days after notice thereof in writing to Tenant; provided, however, should remedial activity on the part of the Tenant reasonably require a period in excess of the said thirty (30) days, the Tenant shall not be considered to have committed an Event of Default provided it diligently pursues said remedial activity for a reasonable period of time as may be required, however, in no event shall said reasonable period of time exceed sixty (60) days. B. Upon the occurrence of any one (1) or more of the above Events of Default and after the expiration of any cure period provided, then upon written notice from Landlord to Tenant, the Landlord may elect to either (a) terminate the Lease, or (b) terminate the rights of the Tenant to possession of the Premises only without terminating the Lease. Upon either termination of the Lease or upon termination of the Tenant's right to possession of the Premises without termination of the Lease, Tenant shall surrender possession and vacate the Premises immediately and deliver possession thereof to Landlord, and Tenant hereby grants to Landlord the full and free right, without further demand or notice of any kind to Tenant, to enter into and upon the Premises, with due process of law if necessary, and to repossess the Premises as Landlord's former estate and to expel or remove Tenant and any others who may be occupying the Premises, and remove Tenant's personal property, signs, and other evidences of tenancy, without being deemed in any manner guilty of trespass, eviction, or forcible entry or detainer, without incurring any liability for any damage resulting therefrom, and without relinquishing Landlord's rights to Rental for the entire balance of the Term, or from any other obligations under this Lease, or any other right given to Landlord by operation of law. C. Upon termination of the Lease, Landlord shall be entitled to receive as damages (a) all Rental and other sums due and payable by Tenant on the date of the termination, plus (b) the present value of the Rental and other sums provided herein to be paid by Tenant for the rest of the Term based upon a discount rate of the then current prime rate of interest from time to time charged by the First National Bank of Chicago per annum less the present value of the fair market rental for the rest of the Term based upon the same discount rate, plus (c) the cost of performing any other covenants to be performed by Tenant and plus (d) the cost of attorneys' fees and court costs incurred by the Landlord, if any, in enforcing the rights of the Landlord. D. If Landlord elects to terminate the Tenant's right to possession of the Premises only without terminating the Lease, Landlord shall be entitled to receive as damages (a) all Rental and other sums due and payable by Tenant on the date of the termination, plus (b) all Rental and other sums as such becomes due and payable thereafter for the rest of the Term, plus (c) the cost of performing any other covenants to be performed by Tenant and plus (d) the cost of attorneys' fees and court costs incurred by the Landlord, if any, in enforcing the rights of the Landlord. E. If the Landlord elects to terminate the Tenant's right to possession of the Premises and not terminate the Lease, the Landlord shall have the obligation to use reasonable efforts to relet the Premises. Landlord may relet all or any part of the Premises for such rental and upon such terms as shall be reasonably satisfactory to Landlord, including the right to relet the Premises for a term greater or lesser than that remaining on the Term of this Lease, and the right to relet the Premises as a part of a larger area or a smaller area, and the right to change the character or use made of the Premises. For the purpose of such reletting, Landlord may decorate or make any repairs, changes, cleaning, painting, alterations, or additions in or to the Premises, and may further pay customary leasing brokers' commissions, market rent concessions to a new tenant or tenants, and reasonable attorneys' fees that may be necessary to induce or procure the replacement tenant. If the Premises are relet and a sufficient sum shall not be realized from the collection of the rental of such reletting, after paying all the expenses of such reletting referred to hereinabove to satisfy the remaining Rental and other charges due from the Tenant for the remainder of the Term, Tenant shall pay to the Landlord on demand any such deficiency within ten (10) days after demand. F. Landlord shall use all reasonable efforts to secure a substitute tenant for the Premises to mitigate its damages arising out of Tenant's Events of Default; however, Landlord shall not be deemed to have failed to use such reasonable efforts by reason of the fact that Landlord has leased or sought to lease other vacant premises owned by Landlord (or Landlord's Beneficiaries), whether in the Building or in other properties, in preference to reletting the Premises. G. In the event of any incurred Event of Default hereunder by Tenant, including but not limited to, Tenant's failure to obtain insurance, make repairs, or satisfy lien claims, Landlord may immediately or at any time thereafter, with notice to the Tenant, cure the Event of Default for the account and at the expense of Tenant. If Landlord at any time, by reason of any Event of Default, is compelled to pay or elects to pay any sum of money or do any act which will require the payment of any sum of money, the sum or sums so paid by Landlord, with interest thereon at the rate of four percent (4%) in excess of the then current prime rate of interest from time to time charged by the First National Bank of Chicago per annum, or twelve percent (12%) per annum, whichever is greater, commencing on the date of payment thereof, shall be due and payable by the Tenant to the Landlord. H. If either the Landlord or Tenant are compelled to incur any expense in instituting or prosecuting any action or proceeding in law or in equity to enforce any of their rights and obligations hereunder, the expenses incurred, including but not limited to reasonable attorneys' fees and court costs, with interest thereon at the rate of four percent (4%) in excess of the then current prime rate of interest from time to time charged by the First National Bank of Chicago per annum, or twelve percent (12%) per annum whichever is greater, shall be due and payable from the losing party to the prevailing party. The Landlord and the Tenant each waive the right to a trial by jury in the event of any such action or proceeding in law or in equity. I. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered to exclude or suspend any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given hereunder now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or any acquiescence therein. No receipt of monies by Landlord from Tenant after the termination of this Lease, or the termination of Tenant's right of possession of the Premises, or after the giving of any notice, shall reinstate, continue or extend the Term or affect any notice given to Tenant prior to the receipt of such monies, it being agreed that after the service of any notices provided in this Section 22, or the commencement of a lawsuit or after final judgment for possession of the Premises, Landlord may receive and collect any Rental due, and the payment of said Rental shall not waive or affect said notice, suit, judgment or Landlord's rights hereunder. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered to exclude or suspend any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given hereunder now or hereafter existing at law, or in equity, or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and as often as occasion may arise or as may be deemed expedient. J. The monthly installments of Rental are due on the 1st day of each month. Any other charges are due within ten (10) days of written notice thereof. All Rental and/or other sums due from Tenant to Landlord which are unpaid when due shall be assessed interest thereon at the rate of Four Percent (4%) in excess of the then current prime rate of interest from time to time charged by the First National Bank of Chicago per annum, or twelve percent (12%) per annum, whichever is greater, and said sum shall be due and payable by Tenant to Landlord. K. The provisions of this Section 22. shall survive the termination of this Lease. SECTION 23. SURRENDER OF POSSESSION Upon the termination of this Lease and/or the Term for any reason whatsoever, or in the event of the Tenant vacating the Premises and stops paying Rental without approval by the Landlord, Tenant shall surrender possession of the Premises to Landlord in good condition and repair, reasonable wear and tear, and damage by fire or other casualty, excepted, and remove all its personal property and effects therefrom. If possession of the Premises is not immediately surrendered on the Termination Date, Landlord may forthwith re-enter the Premises and repossess itself thereof as of its former estate and remove all persons and effects therefrom, using such force as may be necessary, with due process of law, if necessary, without being deemed guilty of any manner of trespass or forcible entry or detainer. Without limiting the generality of the foregoing, Tenant agrees to remove on or before the Termination Date, the items of property, title to which is to remain in Tenant under the terms of Section 8. of this Lease. If Tenant shall fail or refuse to remove all such property from the Premises, Tenant shall be conclusively presumed to have abandoned the same, and title thereto shall thereupon pass to Landlord without any cost to Landlord either by set-off, credit, allowance, or otherwise, and Landlord shall be entitled to be reimbursed by Tenant for the cost of any removal or other expenses incurred by Landlord plus ten percent (10%). SECTION 24. HOLDING OVER If Tenants shall retain possession of the Premises or any part thereof after the termination of this Lease, whether by lapse of time or otherwise, Tenants shall pay to Landlord one hundred and fifty percent (150%) of the amount of all forms of Rental then applicable for each month or portion thereof the Tenants remain in possession. Tenants shall also pay all consequential damages sustained by Landlord on account thereof including, but not limited to, loss of rental from prospective tenants for the Premises. The provisions of this Section 24. shall not operate as a waiver by Landlord of any right of re-entry hereinabove provided. SECTION 25. BROKERAGE The Tenant and Landlord warrant to each other that the only brokers or agents they have dealt with, or had any contact with, in connection with this Lease are as follows: BKB Commercial, and its agent, Brian Borkan CB Richard Ellis, and its agent, Mark C. Smith. The Landlord agrees to pay leasing commission arising out of this Lease and due to these two brokers. Both the Landlord and the Tenant agree to hold harmless and indemnify the other from and against any and all cost (including reasonable attorneys' fees), expense, or liability for any compensation, commissions, and charges claimed against them by any other undisclosed brokers or agents with respect to this Lease or the negotiation thereof. SECTION 26. SUBORDINATION From time to time before or after the execution of this Lease, the Landlord may execute a mortgage, or trust deed in the nature of a mortgage, of Landlord's interest in the Building. In such event: A. This Lease and all rights of Tenant hereunder are subject and subordinate to any and all such mortgages or trust deeds, blanket or otherwise, which do now or may hereafter affect the Building, and to any and all renewals, modifications, consolidations, replacements and extensions thereof. It is the intention of the parties that this provision be self-operative and that no further instrument shall be required to effect such subordination of this Lease or the rights of the Tenant. Tenant shall, however, upon demand at any time or times, execute, acknowledge, and deliver to Landlord, without expense to Landlord, any and all instruments that may be necessary or proper, in the reasonable judgment of the Landlord, to subordinate this Lease, and all rights of Tenant hereunder to any such mortgage or trust deed or to confirm or evidence such subordination. Provided the Tenant is not in default of the terms of this Lease, said subordination shall not disturb the quiet enjoyment of the Leased Premises by the Tenant for the balance of the Term. B. Should such mortgage or trust deed be foreclosed, the liability of the Landlord, mortgagee, trustee or purchaser from such foreclosure sale, or the liability of a subsequent owner designated as Landlord under this Lease, shall exist only so long as such Landlord, trustee, mortgagee, purchaser or owner is the owner of the Building, and such liability shall not continue or survive as to liabilities arising after transfer of ownership. C. Landlord agrees promptly to notify Tenant of the placing of any mortgage or trust deed against the Building (said notice shall contain the name and address of the mortgagee), and Tenant agrees in the event of any act or omission by Landlord which would give Tenant the right to terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise any such rights until it has notified in writing the holder of any mortgage or trust deed which at the time shall be a lien on the Leased Premises, of such act or omission, and such holder shall be provided with a reasonable time to cure any such act or omission. D. Tenant covenants and agrees, in the event any proceedings are brought for the foreclosure of any such mortgage or trust deed, to attorn, without any deductions or set-offs whatsoever, to the purchaser upon any such foreclosure sale, if so requested to do, by such purchaser, and to recognize such purchaser as the Landlord under this Lease. Tenant agrees to execute and deliver, at any time and from time to time, upon the request of Landlord or any holder of such mortgage, or trust deed or such purchaser, any instrument which, in the reasonable judgment of such requesting party, may be necessary or appropriate in any such foreclosure proceeding or otherwise to evidence such attornment. However, in the event of such foreclosure the Tenant's right to possession and quiet enjoyment shall not be disturbed provided it is in full compliance with all the terms and conditions of this Lease and it has not committed an incurred Event of Default. E. Any reference herein to the words "foreclosure, foreclosure sale and/or foreclosure proceeding" shall be interpreted to include a conveyance by deed in lieu of foreclosure. SECTION 27. ESTOPPEL CERTIFICATES Tenant shall at any time and from time to time, upon fifteen (15) days prior written notice from Landlord, execute, acknowledge, and deliver to Landlord, in the form attached hereto as Exhibit B, a written statement certifying (if true) that Tenant has accepted the Premises, that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), that the Landlord is not in default hereunder, the date to which Rental and other charges have been paid in advance, if any, and such other accurate certifications as may reasonably be required by Landlord or Landlord's mortgagee. It is intended that any such statement delivered pursuant to this Section 27. may be relied upon by any prospective purchaser or mortgagee of the Building, and their respective successors and assigns. The failure or refusal of Tenant to execute any such statement within fifteen (15) days after written notice by Landlord shall constitute a material Event of Default of this Lease in accordance with the provisions of Section 22. SECTION 28. NOTICES AND CONSENTS A. Whenever under this Lease a provision is made for notice of any kind (hereinafter referred to as "Notice"), the Notice shall be in writing, and signed by or on behalf of the party giving or making the Notice, and shall be given to the party at its address and/or fax number set forth below or such other address and/or fax number as the party may later specify for that purpose by Notice to the other party. Each Notice shall, for all purposes, be deemed given and received: 1. If given by fax, when the fax is transmitted to the party's fax number specified below and confirmation of complete receipt is received by that transmitting party during normal business hours or on the next business day if not confirmed during normal business hours; 2. If hand delivered to a party, when the copy of the Notice is receipted; 3. If given by a nationally recognized and reputable overnight delivery service, the day on which the Notice is actually received by the party; 4. If given by certified mail, return receipt requested, postage prepaid, two (2) business days after it is posted with the United States Postal Service, to the address of the party specified below. B. If any Notice is sent by fax, the transmitting party shall send a duplicate copy of the Notice to the other party by regular mail. In all events, however, any Notice sent by fax transmission shall govern all matters dealing with delivery of the Notice, including the date on which the Notice is deemed to have been received by the other party. C. The provisions above governing the date on which a Notice is deemed to have been received by a party to this Lease shall mean and refer to the date on which a party to this Lease, and not its counsel or other recipient to which a copy of the Notice may be sent, is deemed to have received the Notice. D. If Notice is tendered under the provisions of this Lease and is refused by the intended recipient of the Notice, the Notice shall nonetheless be considered to have been given and shall be effective as of the date of the refusal. The contrary notwithstanding, any Notice given to a party in a manner other than that provided in this Lease, that is actually received by that party, shall be effective with respect to said party on receipt of the Notice. E. Notices shall be sent to the following addresses: To the Landlord: Lincoln Atrium Management Company 59 West Seegers Road Arlington Heights, Illinois 60005 Fax Number - 847-364-7772 To the Tenant: Delphi Information Systems, Inc. 3501 Algonquin Road Rolling Meadows, IL 60008 Fax Number - 847-590-8280 Attention: President and copy to: Attention: Chief Financial Officer at the same address SECTION 29. AMERICANS WITH DISABILITIES ACT Notwithstanding anything to the contrary contained in this Lease, Landlord is and shall be solely responsible for ensuring that at the time of the Commencement Date, the Premises and the Building are in full compliance with Title III of the Americans With Disabilities Act (42 U.S.C. SS. 12101 et seq. - hereinafter referred to as "ADA"), and all regulations pursuant thereto (the "Regulations"). Landlord hereby indemnifies, saves, and holds harmless Tenant from and against any and all claims, demands, causes of action, suits, losses, costs, and expenses (including, without limitation, attorneys' fees and litigation costs), damages, penalties and fines asserted against, suffered or incurred by, Tenant in any way relating to or arising from, in whole or in part, an actual or asserted claim that the Premises or the Building (or any portion thereof), were in violation of the ADA or the Regulations as of the Commencement Date. SECTION 30. CANCELLATION OPTION A. If the Tenant has not committed an uncured Event of Default beyond any applicable cure period on the date it exercises its option, the Tenant shall have the right to cancel and terminate this Lease effective on September 30, 2001, provided the Tenant pays to the Landlord in the amount of One Hundred Thousand Dollars ($100,000) ("First Cancellation Fee"). To exercise the rights provided for in this Section 30, the Tenant shall serve a written notice upon the Landlord on or before January 1, 2001; included with such written notice shall be a cashiers check in the full amount of the First Cancellation Fee. The exercise of this right of cancellation, shall not excuse the Tenant from the continued performance of all of its covenants and obligations provided for in this Lease until September 30, 2001. Provided the Tenant has not committed an incurred Event of Default and has timely paid the First Cancellation Fee, the Term of this Lease shall terminate on September 30, 2001, as if such date was the end of the Term as set forth in Section 1. B. Provided the Tenant has not exercised its option to cancel this Lease as of September 30, 2001, and provided the Tenant has not committed an uncured Event of Default beyond any applicable cure period on the date it exercises its option, the Tenant shall have the right to cancel and terminate this Lease effective on September 30, 2002, provided the Tenant pays to the Landlord in the amount of Fifty Thousand Dollars ($50,000) ("Second Cancellation Fee"). To exercise the rights provided for in this Section 30, the Tenant shall serve a written notice upon the Landlord on or before January 1, 2002; included with such written notice shall be a cashiers check in the full amount of the Second Cancellation Fee. The exercise of this right of cancellation, shall not excuse the Tenant from the continued performance of all of its covenants and obligations provided for in this Lease until September 30, 2002. Provided the Tenant has not committed an incurred Event of Default and has timely paid the First Cancellation Fee, the Term of this Lease shall terminate on September 30, 2002, as if such date was the end of the Term as set forth in Section 1. SECTION 31. MISCELLANEOUS A. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the Trustee owner at the time in question of the fee of Building, and in the event of any transfer or transfers of the title to such fee, provided such grantee assumes liability for the grantor's obligations under this Lease, Landlord herein named (and in case of any subsequent transfer or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all liability regarding the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee. B. The Tenant may not record this Lease or a memorandum thereof with the Recorder of Deeds of Cook County, without the written consent of the Landlord. C. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. D. Nothing contained herein shall be deemed or construed by the parties hereto nor by any third party as creating the relationship of principal or agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provisions contained in this Lease nor any act of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. E. The captions of this Lease are for convenience only and are not to be construed as part of this Lease nor as defining or limiting in any way the scope or intent of the provisions hereof. F. If any term or provision of this Lease shall to any extent be held invalid or unenforceable, the remaining terms and provisions of this Lease shall not be affected thereby, but each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. G. All of the covenants, agreements, conditions, and undertakings contained in this Lease shall extend and inure to and be binding upon the representatives, successors, and assigns of the respective parties hereto, the same as if they were in every case specifically named, and whenever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply, wherever applicable, to the representatives, successors, and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation, or governmental authority, other than the parties hereto, their representatives, successors, and assigns, any right, claim, or privilege by virtue of any covenant, agreement, condition, or undertaking in this Lease contained. H. Submission of this Lease for examination or signature by Tenant does not constitute a reservation of or option for this Lease; it shall become effective as a Lease only upon execution and delivery by both Landlord and Tenant. I. No rights to light or air over any real estate, whether belonging to Landlord or any other party, are granted to Tenant by this Lease. J. This Lease shall be governed by and construed in accordance with the laws of the State of Illinois. K. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease (regardless of Tenant's designation of such payments) to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord in its sole discretion may elect. L. This Lease and the Exhibits, attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions, and understandings between Landlord and Tenant concerning the Premises, and there are no covenants, promises, agreements, conditions, or understandings, either oral or written, between them other than as are herein set forth. Except as herein otherwise provided, no subsequent alteration, amendment, change, or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. This Lease consists of the following: Lease of 28 Pages Exhibit A - Tenant Plans Exhibit B - Estoppel Certificate M. Notwithstanding anything contained herein to the contrary, Landlord shall remain responsible for, and shall indemnify and save Tenant harmless from and against any and all liability, damages, losses, claims, suits, and other costs (including reasonable attorneys' fees) arising out of, or connected with the presence on, in, or under the Building or the Premises, of any Hazardous Materials existing prior to the Commencement Date, or thereafter, resulting from any cause other than the Tenant, its agents, invitees, contractors, and/or employees, and/or its occupancy in, or use of, the Premises. O. The Tenant has been occupying the Premises since September 22, 1993 under a Lease Agreement with the Landlord dated April 7, 1993, and amended July 27, 1993 and June 15, 1995 (the "Old Lease"). The Tenant shall not be obligated under the terms and provisions of the Old Lease on and after the Commencement Date, however the Tenant shall remain obligated and liable under the Old Lease for any Rental and other amounts due or other obligations and liabilities which were due or accrued prior to the Commencement Date. SECTION 32. EXCULPATORY CLAUSE This Lease is executed by Landlord, not personally, but as trustee (hereinafter "Trustee") pursuant to a certain Trust Agreement dated August 27, 1982 and known as Trust Number 105272 (hereinafter "Trust Agreement"), in the exercise of the power and authority conferred upon and vested in it as Trustee, under the express direction of the Landlord's Beneficiaries, and subject to all provisions of the Trust Agreement, to which the Lease is expressly made subject. It is expressly understood and agreed that nothing in this Lease contained shall be construed as creating any liability whatsoever against the Trustee or Landlord's Beneficiaries, and in particular, without limiting the generality of the foregoing, there shall be no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained, to keep, preserve, or sequester any property of the Trust, and that all personal liability of the Trustee, and the Landlord's Beneficiaries, of every sort, if any, is hereby expressly waived by Tenant, and by every person now or hereafter claiming any right or security hereunder; and that so far as the parties hereto are concerned, the owner of any indebtedness or liability accruing hereunder shall look solely to the Trust Estate, which is the Building, subject to the provisions of the Trust Agreement, for the payment thereof. It is further understood and agreed that the Trustee has no agents or employees and merely holds a leasehold interest to the Building and has no control over the management thereof or the income therefrom and has no knowledge respecting rentals, leases, or other factual matter with respect to the Building, except as represented to it by the Landlord's Beneficiaries. THE BALANCE OF THIS PAGE IS INTENTIONALLY OMITTED THE SIGNATURE PAGE IS THE NEXT PAGE IN WITNESS WHEREOF, Landlord and Tenant have executed and entered into three (3) duplicate originals of this Lease of twenty-eight (28) pages, this page included, the day and year above first written. LANDLORD: LA SALLE NATIONAL BANK, N.A., not individually but as Trustee aforesaid, ----------------------------------------- TENANT: DELPHI INFORMATION SYSTEMS, INC., a Delaware Corporation ATTEST: - --------------- ----------------------------------------- Secretary President LANDLORD'S ACKNOWLEDGMENT STATE OF ILLINOIS COUNTY OF COOK I, , a Notary Public in and for said Country, in the State aforesaid, DO HEREBY CERTIFY THAT , personally known to me to be a Vice President of LA SALLE NATIONAL BANK, N.A., and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that he/she signed and delivered the said instrument as Vice President, and caused the corporate seal of said corporation to be affixed thereto, pursuant to authority given by the Trust Agreement, dated August 27, 1982 and known as Trust No. 105272, all by the direction of the beneficiaries thereof, for the uses and purposes therein set forth. Given under my hand and notarial seal this day of September 1998. Notary Public My commission expires . TENANT'S ACKNOWLEDGMENT STATE OF ILLINOIS COUNTY OF COOK I, , a Notary Public in and for said County, in the State aforesaid, DO HEREBY CERTIFY THAT personally known to me to be that President of DELPHI INFORMATION SYSTEMS, INC., a Delaware Corporation, duly licensed to transact business in the State of Illinois, and personally known to me to be the Secretary of said Corporation, and personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person and severally acknowledged that they signed and delivered the said instrument as President and Secretary of said Corporation, and caused the Corporate Seal to be affixed thereto, pursuant to authority given by the Board of Directors of said Corporation, as their free and voluntary act and as the free and voluntary act and deed of said Corporation, for the uses and purposes therein set forth. Given under my hand and notarial seal this day of September 1998. Notary Public My Commission expires: . ESTOPPEL CERTIFICATE The undersigned, DELPHI INFORMATION SYSTEMS, INC., a Delaware Corporation, hereby certifies that it is the Tenant under a certain Lease Agreement dated the day of September, 1998 with La Salle National Bank, N.A., as Trustee under Trust Agreement dated August 27, 1982, and known as Trust No. 105272, as the Landlord, which Lease Agreement leases to Tenant 20,686 square feet on the 5th floor (hereinafter referred to as Premises) at 3501 Algonquin Road, Rolling Meadows, Illinois 60008, in an office building known as Crossroads of Commerce III. The Tenant hereby further certifies as to the following: 1. That the Lease is in full force and effect and has not been modified, altered or amended; 2. That possession of the Premises has been accepted by the Tenant; 3. That the Term of the Lease commenced on October 1, 1998 and terminates on September 30, 2003; 4. That the Rentable Square Feet of the Premises is 20,686; 5. That the Base Rent payable by the Tenant for the entire Term is $1,344,590.04 payable as follows: 10/1/98 to 9/30/99 - 12 installments of $20,686.00 10/1/99 to 9/30/00 - 12 installments of $21,547.92 10/1/00 to 9/30/01 - 12 installments of $22,409.83 10/1/01 to 9/30/02 - 12 installments of $23,271.75 10/1/02 to 9/30/03 - 12 installments of $24,133.67 6. That the Tenant has accepted, and is in possession, of the Premises; that any Tenant Improvements to the Premises, required by the terms of the Lease to be made by the Landlord, have been completed to the satisfaction of the Tenant; 7. That there are no payments, credits or concessions required to be made or granted by Landlord to Tenant in connection with the Lease, so that the Landlord has no obligations or liabilities with respect thereto; 8. That no Rental due under the Lease has been paid more than thirty (30) days in advance of the date hereof; 9. That the Lease, the Premises or any portion thereof, have not been assigned or sublet, by operation of law or otherwise; 10. That there has been no default under the Lease, by either the Tenant or the Landlord, and that no event has occurred which, with the giving of notices, or the passage of time, or both, could result in a default under the Lease; 11. That the Tenant, as of the date hereof, does not have any charge, claim, lien, or right of set-off, under the Lease and/or against the Landlord; 12. That there are no agreements between the Landlord and the Tenant other than is stated and provided in the Lease and its Exhibits; 13. That the Tenant has no claim or right with respect to the Premises and/or Crossroads of Commerce III other than those rights set forth in the Lease; 14. That exceptions to the above statements are set forth hereinafter: (If none, state none) __________________________________________ and 15. That this Certificate is being made to _________________________ _________________________________________________________________________and said party may rely on the truthfulness of the statements set forth herein. This Certificate of Tenant is dated this day of . TENANT: DELPHI INFORMATION SYSTEMS, INC., a Delaware Corporation ATTEST: - --------------- ----------------------------------------- Secretary President EX-10.16 3 EXHIBIT 10.16 Exhibit 10.16 Lease agreement effective October, 1998 between the Company and 485 Properties LLC, relating to premises at Five Concourse Parkway, Atlanta, Georgia. LEASE AGREEMENT CONCOURSE ATLANTA, GEORGIA LANDLORD: 485 PROPERTIES, LLC TENANT: DELPHI INFORMATION SYSTEMS BUILDING: CORPORATE CENTER V SUITE: 3200 SQ. FT.: 6,694 RENTABLE SQUARE FEET TERM: FIVE (5) YEARS LEASE AGREEMENT CONCOURSE THIS LEASE AGREEMENT (the "Lease"), made this _____ day of October, 1998, by and between 485 PROPERTIES, LLC ("Landlord"), a Delaware limited liability company, which has as its address for all purposes hereunder as follows: 485 Properties, LLC c/o TC Atlanta, Inc. Five Concourse Parkway Suite 2000 Atlanta, Georgia 30328-6111 and DELPHI INFORMATION SYSTEMS ("Tenant"), a corporation of the State of Delaware, which has as its address: Five Concourse Parkway Suite 3200 Atlanta, Georgia 30328 WITNESSETH: 1. PREMISES AND TERM (a) Landlord hereby rents and leases to Tenant, and Tenant hereby rents and leases from Landlord, the following described space (the "Premises"): Floor: 32nd Suite: 3200 Rentable Square Feet: 6,694 Usable Square Feet: 5,820 located at the herein called "Building": Building: Corporate Center V Address: Five Concourse Parkway Fulton County, Georgia Total Building Rentable Area: 687,107 (b) The Premises are more particularly shown and outlined on the space plans attached hereto as EXHIBIT "A", and made a part hereof, and are located in that portion of the Building shown on EXHIBIT "B", attached hereto and by this reference incorporated herein. The term of this Lease (the "Term") shall commence on the 30th day after the date that the Lease has been executed by both the parties hereto (the "Commencement Date"), and end at midnight on the day immediately prior to the fifth (5th) anniversary of the Commencement Date, unless sooner terminated as herein provided. This Lease shall be effective and enforceable upon its execution and delivery, whether such execution and delivery occurs on, prior to, or after the Commencement Date. (c) "Lease Year" as used herein shall mean (i) each and every twelve (12) month period during the Term of this Lease, or (ii) in the event of Lease expiration or termination, the period between the last twelve (12) month period and said expiration or termination. The first such twelve (12) month period shall commence on the Commencement Date. (d) The Building and the land upon which said Building is located (which includes certain parking facilities serving the Building), more particularly described on EXHIBIT "C", attached hereto and by this reference incorporated herein, is herein referred to as the "Property". (e) The Premises shall include the appurtenant right to use, in common with others, public lobbies, entrances, stairs, corridors, elevators, and other public portions of the Building. All the windows and outside walls of the Premises, and any space in the Premises used for shafts, pipes, conduits, ducts, telephone ducts and equipment, electric or other utilities, sinks or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation, maintenance, inspection, display and repairs are hereby reserved to Landlord. No easement for light, air or view is granted or implied hereunder, and the reduction or elimination of Tenant's light, air or view will not affect this Lease. 2. RENT (a) Tenant shall pay to Landlord at P.O. Box 102353, Atlanta, Georgia 30368-0353 or at such other place Landlord designates, without demand, deduction or setoff, an annual rental for each year of the Term, due and payable in equal monthly installments (the "Monthly Rental") in advance on the first (1st) day of each calendar month during the Term as follows:
LEASE BASE RENTAL RATE (PER RENTABLE YEAR SQUARE FOOT PER ANNUM) ANNUAL RENTAL MONTHLY RENTAL ----- ------------------------------- ------------- -------------- 1 $31.00 $207,514.00 $17,292.83 2 $31.93 $213,739.42 $17,811.62 3 $32.89 $220,165.66 $18,347.14 4 $33.88 $226,792.72 $18,899.39 5 $34.90 $233,620.60 $19,468.38
Tenant shall pay the first month of the Monthly Rental for Lease Year 1 upon the execution and delivery of this Lease (with said amount to be applied against the Monthly Rental first due under the Lease). (b) If the Term commences at any time other than the first day of a month or terminates at any time other than the last day of a month, the amount of Rent due from Tenant shall be proportionately adjusted based on that portion of the month that this Lease is in effect. (c) The term "Rent", as used herein, shall mean Monthly Rental, "Tenant's Share" of "Operating Costs" (as those terms are defined herein) and any other amounts due of Tenant hereunder. (d) At all times that Landlord shall direct Tenant to pay Rent to a "lockbox" or other depository whereby checks issued in payment of Rent are initially cashed or deposited by a person or entity other than Landlord (albeit on Landlord's authority), then, for any and all purposes under this Lease: (i) Landlord shall not be deemed to have accepted such payment until ten (10) days after the date on which Landlord shall have actually received such funds (provided that Tenant shall not be in default of Tenant's obligation to pay Rent so long as Tenant shall pay Rent in the manner provided in Paragraph 2(a) hereinabove), and (ii) Landlord shall be deemed to have accepted such payment if (and only if) within said ten (10) day period, Landlord shall not have refunded (or attempted to refund) such payment to Tenant. 3. OPERATING COSTS (a) Tenant hereby covenants and agrees and shall be obligated to pay to Landlord, in addition to and not in lieu of the other amounts specified herein, the "Operating Costs," as hereinafter defined, of repairing, maintaining, owning and operating the Building and Property, in excess of the "Initial Operating Costs" (as that term is herein defined). These payments shall be in addition to and not in lieu of any other payments due from Tenant hereunder. The "Initial Operating Costs" shall be, for the purposes of this Lease, the actual Operating Costs for calendar year 1999, adjusted pursuant to the terms of this Lease. (b) The term "Operating Costs", as adjusted pursuant to the terms of this Lease, shall mean any and all operating expenses of the Property, Building and related areas (such as, by way of illustration but not limitation, the parking areas), computed on an accrual basis and including all expenses, costs, and disbursements of every kind and nature, which Landlord (i) shall pay; and/or (ii) become obligated to pay, including, but not limited to, the following: (i) Costs, wages and salaries of all persons engaged in the management, operation, repair, security or maintenance of the Property and Building, including, but not limited to, fringe benefits, taxes, insurance and any other benefits relating thereto; (ii) All supplies and materials used in the operation and maintenance of the Property and Building; (iii) Cost of water, sewage, electricity and other utilities furnished in connection with the operation of the Building; (iv) Cost of all service agreements and maintenance for the Property and Building and the equipment therein, including, but not limited to, trash removal, security services, alarm services, window cleaning, janitorial service, HVAC maintenance, elevator maintenance, and grounds maintenance; (v) Cost of all insurance relating to the Property and Building including, but not limited to, the cost of casualty and liability insurance applicable to the Property and Building and Landlord's personal property used in connection therewith; (vi) All taxes (ad valorem and otherwise), assessments, and governmental charges whether federal, state, county, or municipal, and whether by taxing districts or authorities presently taxing the Property and Building or by others, subsequently created or otherwise, and any other taxes (other than federal and state income taxes), and assessments attributable to the Property and Building or its operation and any reasonable consultants fees incurred with respect to issues or concerns involving the taxes or the Building, the Property, or both; (vii) Cost of repairs and general maintenance of the interior and exterior of the Property and Building (including, but not limited to, light bulbs and glass breakage; the redecorating, repainting, recarpeting and other such work of any common areas; heating, ventilation and air conditioning equipment; plumbing and electrical equipment; and elevators), parking areas, and landscaping; (viii) A management fee and other expenses incurred for the general operation and management of the Property and Building; (ix) An amortization cost due to any capital expenditures incurred (i) which have the effect of reducing or limiting Operating Costs of the Property and Building, if such reduction or limitation inures to Tenant's benefit (but only to the extent and in the amount that such Operating Costs of the Property and Building are reduced); (ii) which may be required by governmental authority or by Landlord's insurance carrier; or (iii) which are designed to protect or enhance the health, safety or welfare of the tenants in the Building or their invitees. (x) all assessments made, charged, levied, assessed or accrued against Landlord by The Concourse Office Park Association, Inc.; (xi) legal and accounting fees and expenses; (xi) anything which could be classified as an Operating Cost under generally accepted accounting principles, consistently applied, but not specified or expressly set forth hereunder. Excluded from "Operating Costs" are: (i) Capital items (except those expenditures referred to above); (ii) Leasing commissions; (iii) Specific costs billed to and paid by specific tenants or other third parties; (iv) Depreciation; (v) Principal, interest, and other costs directly related to financing the Building; (vi) The cost of any repairs or general maintenance paid by the proceeds of insurance policies carried by Landlord on the Property and Building; (vii) Costs of advertising and public relations and promotional costs (but not including the cost of newsletters for the Building; (viii) Attorney's fees associated with leasing of the Building; (ix) Any fines or penalties incurred due to the intentional violation by Landlord of any governmental authority; (x) Costs of management fees in excess of customary fees charged by managers of similar quality and reputation in similar sized first class office buildings in the Atlanta Northeast perimeter area; (xi) Costs, fines, interest, penalties, legal fees or costs of litigation incurred due to late payment of taxes, utility bills and other costs incurred as a result of Landlord's failure to make such payments when due; and (xii) Salaries and wages and other benefits paid by or on behalf of employees above the level of the Director of the Property Managers of the Building. (c) The term "Tenant's Share" shall mean the proportion that the Square Feet in the Premises bears to ninety-five percent (95%) of the Total Building Rentable Area, or the average percentage of the Total Building Rentable Area actually leased in the Building for any calendar year, if such average is greater than ninety-five percent (95%) of the Total Building Rentable Area. The average shall be determined by adding together the total leased space on the last day of each month during the calendar year in question and dividing by twelve (12). Tenant's Share is used in this Lease to determine the portion of Operating Costs payable by Tenant, on a per square foot per annum basis. Notwithstanding anything to the contrary contained herein, if the Building is not fully occupied during any calendar year, appropriate adjustments shall be made to determine Operating Costs as though the Building had been fully occupied in such calendar year for the entire calendar year. (d) On January 15 of each calendar year after the calendar year in which this Lease is executed (or as soon thereafter as practical), Landlord shall provide Tenant with the projected Operating Costs for such current calendar year, and Tenant shall thereafter pay Tenant's Share of projected Operating Costs for operating the Property and Building in excess of the Initial Operating Costs. Such projected Operating Costs in excess of the Initial Operating Costs shall be payable in advance on a monthly basis by paying one-twelfth (1/12th) of such amount during each month of such respective calendar year. If Landlord has not furnished Tenant such comparison by January 15, Tenant shall continue to pay on the basis of the prior year's estimate until the month after such comparison is given. Landlord shall, within one hundred twenty (120) days (or as soon thereafter as practical) after each calendar year during the Term provide Tenant an unaudited statement of such year's actual Operating Costs. If actual Operating Costs are greater than projected Operating Costs, Tenant shall pay Landlord, within thirty (30) days of such statement's receipt, Tenant's Share of the difference thereof. If such year's projected Operating Costs are greater than the actual Operating Costs, Landlord shall credit Tenant, within thirty (30) days of such statement issuance, Tenant's Share of the difference between projected Operating Costs and actual Operating Costs. (e) Tenant or its representative (which shall be an accounting firm among the top 10 nationally in gross revenues) shall have the right to examine Landlord's books and records showing Operating Costs upon reasonable prior notice and during normal business hours at any time within sixty (60) days following the furnishing by Landlord to Tenant of any final invoice or reconciliation statement for any given year. Any information obtained by Tenant and its auditors and examiners from such examination will be treated as confidential unless and until such information has been publicly disclosed by Landlord, and Tenant shall execute and cause its outside auditor or examiner to execute such confidentiality agreement as Landlord shall request, to reflect and effectuate the confidentiality provisions of this Paragraph. However, nothing herein contained shall limit or impair the right or obligation of Tenant to disclose such information when required by law or to appropriate regulatory authorities having jurisdiction over its affairs, or to use the same in connection with the enforcement of the terms and conditions of this Lease. Unless Tenant takes written exception to any item within sixty (60) days after the furnishing of Landlord's invoice or statements, then such invoices or statements shall be considered as final and accepted by Tenant. Tenant shall furnish Landlord with a copy of all information and material generated for or on behalf of Tenant with respect to such audit, whether or not Tenant disputes the calculations or charges from Landlord. If Tenant does dispute such charges, then Tenant shall submit to Landlord, as a part of the notice of such dispute, a precise and detailed narrative account of the exact nature of the dispute, with specific reference to the differences found by Tenant. Such statement shall be certified as true, correct and accurate by the auditor or examiner making such findings. If Tenant's audit reveals an underpayment of Operating Costs by Tenant, then Tenant shall pay the same within thity (30) days after receipt of the audit results. If the total Operating Costs as disclosed by such audit are finally determined to have been overstated by five percent (5%) or more, Landlord shall promptly reimburse or credit Tenant for the reasonable, actual costs of such audit (based upon the hourly charges of the personnel involved in the audit, and not any contingency payment), in addition to refunding all overpayments previously made by Tenant. (f) If this Lease commences at any time other than the first day of a calendar year or terminates at any time other than the last day of a calendar year the amount of Operating Costs due from Tenant shall be proportionately adjusted based on that portion of the year that this Lease was in effect. (g) Tenant's payments of Operating Costs shall not be deemed payments of base rental under any governmental wage and price controls or analogous governmental actions affecting the amount of Rent which Landlord may charge Tenant for the Premises. 4. DELIVERY OF THE PREMISES (a) Landlord shall deliver possession of the Premises to Tenant "as is, where is." Certain work may take place in the Premises in accordance with EXHIBIT "D", attached hereto and by this reference incorporated herein, while Tenant is in occupancy of the Premises. Landlord shall use its reasonable efforts to cause such work to be conducted in a manner that causes the least amount of disruption to and interference with Tenant's operations in the Premises. However, Tenant shall have no claim or cause of action whatsoever for interference or nuisance related to or arising out of such work in the Premises. Tenant shall cooperate with Landlord in the completion of such work in the Premises. (b) If within nine (9) months of the Commencement Date Tenant shall discover any latent defects in the Premises, Tenant shall provide Landlord with notice of such latent defect prior to the expiration of such nine (9) month period. Landlord shall promptly repair or restore any such latent defects of which it receives timely notice. Landlord shall not have any obligation to repair latent defects of which Tenant has given Landlord notice after this nine month period. 5. ACCEPTANCE OF THE PREMISES The taking of possession of the Premises by Tenant shall be conclusive evidence that Tenant accepts the same "as is" and that said Premises and the Building were in good and satisfactory condition for the use intended at the time such possession was taken, except for latent defects as described in Section 4 hereof. 6. USE Tenant shall use the Premises only for professional, executive office purposes, generally in accordance with the manner of use by other tenants in the Building. The occupancy rate of the Premises shall in no event be more than one (1) person per 200 rentable square feet within said Premises. Tenant's use of the Premises shall not violate any ordinance, law or regulation of any governmental body or the "Rules and Regulations" of Landlord (the "Rules") as set forth in EXHIBIT "F" attached hereto and made a part hereof, or cause an unreasonable amount of use of any of the services provided in the Building. Tenant shall conduct its business in the manner and according to the generally accepted business principles of the business or profession in which Tenant is engaged. 7. TENANT'S CARE OF THE PREMISES (a) Tenant will maintain the Premises and the fixtures and appurtenances therein in a first-class condition, and will not commit or permit waste therein. Any repair work, maintenance and any alterations permitted by Landlord in the Premises (i) shall be done at Tenant's sole cost and expense; (ii) shall be done by Landlord's employees or agents or, with Landlord's consent, by persons requested by Tenant; and (iii) shall first be consented to by Landlord, such consent not to be unreasonably withheld. Tenant shall, at Tenant's expense, but under the direction of Landlord and performed by Landlord's employees or agents, or with Landlord's consent, by persons requested by Tenant and consented to by Landlord, promptly repair any injury or damage to the Premises or Building caused by the misuse or neglect thereof by Tenant, by Tenant's contractors, sub-contractors, customers, employees, licensees, agents, or invitees. (b) Tenant will not, without Landlord's prior consent, make alterations, additions or improvements (including, but not limited to, structural alterations, additions or improvements) in or about the Premises and will not do anything to or on the Premises which will increase the rate of insurance on the Building or the Property. All alterations, additions or improvements of a permanent nature made or installed by Tenant to the Premises shall become the property of Landlord at the expiration or early termination of this Lease. Landlord reserves the right to require Tenant to remove any improvements or additions made to the Premises by Tenant and to repair and restore the Premises to their condition prior to such alteration, addition or improvement, reasonable wear and tear, unrepaired casualty and condemnation excepted, unless Landlord has agreed at or prior to the time Tenant requests the right to make such alteration, addition or improvement that such item need not be removed by Tenant at the expiration or early termination of the Term. (c) No later than the last day of the Term, Tenant will remove Tenant's personal property and repair injury done by or in connection with installation or removal of said property and surrender the Premises (together with all keys, access cards or entrance passes to the Premises and/or the Building) in as good a condition at the beginning of the Term, reasonable wear and tear, unrepaired casualty and condemnation excepted. All property of Tenant remaining in the Premises after expiration or early termination of the Term shall be deemed conclusively abandoned and may be removed by Landlord, and Tenant shall reimburse Landlord for the cost of removing the same, subject however, to Landlord's right to require Tenant to remove any improvements or additions made to the Premises by Tenant pursuant to the preceding Paragraph. (d) In doing any work on the installation of Tenant's furnishings, fixtures, or equipment in the Premises, Tenant will use only contractors or workers consented to by Landlord prior to the time such work is commenced. Landlord may condition its consent upon its receipt from such contractors or workers of acceptable (i) lien waivers; and (ii) evidence of liability and personal property insurance coverage in amounts and with insurance carriers satisfactory to Landlord. Tenant shall promptly remove any lien or claim of lien for material or labor claimed against the Premises or Building, or both, by such contractors or workers if such claim should arise, and hereby indemnifies and holds Landlord harmless from and against any and all loss, cost, damage, expense or liabilities including, but not limited to, attorney's fees, incurred by Landlord, as a result of or in any way related to such claims or liens. (e) All personal property brought into the Premises by Tenant, its employees, licensees and invitees shall be at the sole risk of Tenant, and Landlord shall not be liable for theft thereof or of money deposited therein or for any damages thereto, such theft or damage being the sole responsibility of Tenant. 8. SERVICES (a) Provided Tenant is in compliance with the terms and conditions of this Lease, Landlord shall cause to be furnished the following services at levels consistent with the level of other first class office buildings in the area of the Building (the cost of which services shall be reimbursed to Landlord in accordance with Paragraph 3 herein): (i) Elevator service for passenger and delivery needs. (ii) Air conditioning during summer operations and heat during winter operations at temperature levels similar to other first class office buildings in the Atlanta area, but consistent with and subject to all Federal and local energy conservation regulations. (iii) Public restrooms, including the furnishing of soap, paper towels, and toilet tissue. (iv) Either hot and cold or tempered running water for all restrooms and lavatories. (v) Janitorial service, including sanitizing, dusting, cleaning, mopping, vacuuming, and trash removal, each Monday through Friday, and floor waxing and polishing, window washing, smudge removal and venetian blind cleaning as appropriate. (vi) The replacement of building standard fluorescent lamps and ballasts as needed. (vii) Repairs and maintenance, for maintaining in good order at all times the exterior walls, exterior windows, exterior doors and roof of the Building, public corridors, stairs, elevators, storage rooms, restrooms, the heating, ventilating and air conditioning systems, electrical and plumbing systems of the Building, and the walks, paving and landscaping surrounding the Building. (viii) General grounds care. (ix) General management, including supervision, inspections and management functions. (x) Electricity for the Premises, Building and Property. (b) The services provided in Paragraph 8(a) are predicated on and are in anticipation of the use of the Premises as follows: (i) Services shall be provided for the Building during normal business hours as described in the Rules. (ii) HVAC design is based on sustained outside temperatures being no higher than 95 degrees Fahrenheit and no lower than 14 degrees Fahrenheit with sustained occupancy of the Premises by no more than one person per 150 square feet of floor area and heat generated by electrical lighting and fixtures not to exceed 3.0 watts per square foot. (iii) Electric power usage and consumption for the Premises shall be based on lighting of the Premises during normal business hours on a level suitable for normal office use and power for small desk-top machines and devices using no more than 110 volt, 20 amp circuits (allowable load of 15 amps). Heavier use items shall not be used or installed, unless expressly permitted elsewhere herein or by consent of Landlord. (iv) Should Tenant's total rated electrical design load per square foot in the Premises exceed the Building standard rated electrical design load, on a per square foot basis, as determined by Landlord from time to time, for either low or high voltage electrical consumption, or if Tenant's electrical design requires low voltage or high voltage circuits in excess of Tenant's share of the Building standard circuits, as such share is determined by Landlord in Landlord's reasonable judgment, Landlord may (at Tenant's expense), if reasonably possible, install within the Building one (1) additional high voltage panel and/or one (1) additional low voltage panel with associated transformer (the "Additional Electrical Equipment") as necessary to accommodate the aforesaid requirements. If the Additional Electrical Equipment is installed because Tenant's low or high voltage rated electrical design load exceeds the applicable Building standard rated electrical design load (on a per square foot basis), then a meter may also be added by Landlord (at Tenant's expense) to measure the electricity provided through the Additional Electrical Equipment. (c) If Tenant uses any services in an amount or for a period in excess of that provided for herein, Landlord also reserves the right to charge Tenant reimbursement for the cost of such added services. Landlord reserves the right to install separate metering devices to determine such excessive periods and/or amounts, at Tenant's sole cost and expense. If there is disagreement as to such additional charge, the opinion of the appropriate local utility company or an independent professional engineering firm shall prevail. (d) Landlord shall not be liable for any damages directly or indirectly, and Tenant shall have no right of set-off or reduction in Rent, resulting from the installation, use, malfunction, or interruption of use of any equipment in connection with the furnishing of services referred to herein, including, but not limited to, any interruption in services by any cause beyond the immediate control of the Landlord, except as expressly set forth in Paragraph 8(e) below; provided however, Landlord shall exercise due care in furnishing adequate and uninterrupted services. Without limitation on the foregoing, under no circumstances shall Landlord incur liability for damages caused directly or indirectly by any malfunction of Tenant's computer systems resulting from or arising out of the failure or malfunction of any electrical, air conditioning or other system serving the Building, and Tenant hereby expressly waives the right to make any such claim against Landlord. (e) If for any reason services to the Premises provided by, through or under Landlord are interrupted, such interruption of services is of a nature that it materially interferes with Tenant's use, occupancy and enjoyment of the Premises, and the provision of such service (and the interruption thereof) is within the reasonable control of Landlord, then Tenant shall hand-deliver notice of such interruption to Landlord. If such interruption lasts in excess of five (5) consecutive business days after Landlord has received notice of such interruption, Tenant may abate payments of its Monthly Rental after said fifth (5th) consecutive business day after Landlord has received notice of such interruption until such service is once again provided to the Premises in a manner which permits Tenant to use the Premises or a material portion thereof. (f) There may be available in the Building a shared communications systems service (the "Shared Service"), upon terms, conditions and fees to be agreed upon by Tenant and the party providing such Shared Service. Neither Landlord nor any manager of the Building shall be liable to Tenant for damages if the furnishing of any such Shared Service is disrupted, terminated or diminished in any manner, nor shall any disruption, diminution, or cessation relieve Tenant from the performance of any of Tenant's covenants, conditions and agreements under this Lease, nor shall any disruption, diminution or cessation constitute constructive eviction or entitle Tenant to an abatement of Rent. Tenant holds Landlord and any such manager harmless from any claims Tenant may have arising out of or connected with such cessation or interruption. If Tenant elects not to use the Shared Service, and Tenant has telephone or other such equipment installed at Tenant's own direction, such system shall not (i) cause the Building to violate any municipal safety codes or ordinances, including, but not limited to, fire safety codes; (ii) cause damage to the Building; (iii) require an amount of electrical or other services unreasonably in excess of the requirements for customary business-telephone systems; or (iv) impact upon the normal use, function and operation of the Shared Service. If Tenant elects not to use or be a part of the Shared Service, Tenant shall not use any wiring or other equipment which is a part of the Shared Service without the prior, written consent of the provider of such Shared Service. If Tenant uses any such wiring or equipment without such consent, Tenant shall be liable for, and shall pay to the provider of such services on demand, (i) the cost of such use; (ii) the cost of repairing or replacing any wiring or equipment damaged or altered by such use; and (iii) any other damages caused by such use. 9. DESTRUCTION OR DAMAGE TO PREMISES (a) If the Premises or the Building are totally destroyed (or so substantially damaged as to be untenantable in the reasonable determination of the Architect of the Building) by storm, fire, earthquake or other casualty, Landlord shall have the option to: (i) Terminate this Lease as of the date of the occurrence of the storm, earthquake, fire or other casualty by giving notice to Tenant within sixty (60) days from the date of such damage or destruction; or (ii) Commence the process of restoration of the Premises to a tenantable condition within sixty (60) days from the date of receipt by Landlord of all of the insurance proceeds paid with respect to such casualty, and proceed with due diligence to complete said restoration of the Premises. If Landlord chooses to restore the Premises, Rent shall abate with respect to the untenantable portion of the Premises from the date of such casualty until the date of substantial restoration thereof. If Landlord fails to complete such restoration within one hundred eighty (180) days of the date of the casualty, this Lease may be terminated as of the date of the casualty upon notice from either party to the other, given not more than ten (10) days following the expiration of said one hundred eighty (180) day period. If such notice is not given, this Lease shall remain in force and effect and Rent shall commence upon delivery of the Premises to Tenant in a tenantable condition (evidenced by notice to Tenant that the Premises are substantially completed). If damage or destruction of a material nature occurs to the Premises within twelve (12) months of the expiration of the Term, Tenant may, at its option upon written notice to Landlord within thirty (30) days after such damage or destruction, terminate this Lease as of the date of the damage or destruction. (b) If the Premises are damaged but not rendered wholly untenantable by any event set forth in Paragraph 9(a) above, Rent shall abate in the proportion the Premises have been made untenantable. Landlord shall restore the Premises expeditiously, and upon the date of restoration, full Rent shall commence. (c) Rent shall not abate if the damage or destruction of the Premises, whether total or partial, is the result of the negligence of Tenant, its contractors, subcontractors, agents, employees, guests or invitees. 10. DEFAULT BY TENANT; LANDLORD'S REMEDIES (a) The occurrence of any of the following shall constitute an Event of Default hereunder by Tenant: (i) The Rent or any other sum of money due of Tenant hereunder is not paid within five (5) days of the date notice of such late payment is received by Tenant; provided, however, if more than two (2) payments due of Tenant hereunder in any one (1) calendar year are not made until after notice of such late payment is received by Tenant, then it shall be an event of default hereunder by Tenant if any subsequent payment due of Tenant hereunder in the same calendar year is not made within ten (10) days of the date when due. (ii) The Premises are abandoned or vacated; (iii) Any petition is filed by or against Tenant under any section or chapter of the National or Federal Bankruptcy Act or any other applicable Federal or State bankruptcy, insolvency or other similar law, and, in the case of a petition filed against Tenant, such petition is not dismissed within sixty (60) days after the date of such filing; if Tenant shall become insolvent or transfer property to defraud creditors; if Tenant shall make an assignment for the benefit of creditors; or if receiver is appointed for any of Tenant's assets; (iv) Tenant fails to bond off or otherwise remove any lien filed against the Premises or the Building by reason of Tenant's actions, within thirty (30) days after Tenant has notice of the filing of such lien; (v) Tenant fails to observe, perform and keep the covenants, agreements, provisions, stipulations, conditions and Rules herein contained to be observed, performed and kept by Tenant (other than the failure to pay when due any Rent or any other sum of money becoming due Landlord hereunder, which under all circumstances is governed by and subject to Paragraph 10(a)(i) herein), and persists in such failure after fifteen (15) days written notice by Landlord requiring that Tenant remedy, correct, desist or comply (or if any such failure to comply on the part of Tenant would reasonably require more than fifteen (15) days to rectify, unless Tenant commences rectification within the fifteen (15) day notice period and thereafter promptly, effectively and continuously proceeds with the rectification of the failure to comply on the part of Tenant and, in all such events, cures such failure to comply on the part of Tenant no later than thirty (30) days after such notice). (b) Upon the occurrence of an Event of Default, Landlord shall have the option to do and perform any one or more of the following: (i) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant shall fail to do so, Landlord may, without further notice and without prejudice to any other remedy Landlord may have, enter upon the Premises without the requirement of resorting to the dispossessory procedures set forth in O.C.G.A. Sections 44-7-50 ET SEQ. and expel or remove Tenant and Tenant's effects without being liable for any claim for trespass or damages therefor. Upon any such termination, Tenant shall remain liable to Landlord for damages, due and payable monthly on the day Rent would have been payable hereunder, in an amount equal to the Rent and any other amounts which would have been owing by Tenant for the balance of the Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord, after deducting all of Landlord's reasonable costs and expenses (including, without limitation, advertising expenses and professional fees) actually incurred in connection with or in any way related to the termination of this Lease, eviction of Tenant and such reletting; and/or (ii) Declare the entire amount of Rent calculated on the current rate being paid by Tenant, and other sums which in Landlord's reasonable determination would become due and payable during the remainder of the Term (including, but not limited to, increases in Rent pursuant to Paragraph 2(a) and 3(d) herein), discounted to present value by using a reasonable discount rate selected by Landlord, to be due and payable immediately. Upon such acceleration of such amounts, Tenant agrees to pay the same at once, together with all Rent and other amounts theretofore due, at Landlord's address as provided herein; provided however, that such payment shall not constitute a penalty or forfeiture but shall constitute liquidated damages for Tenant's failure to comply with the terms and provisions of this Lease (Landlord and Tenant agreeing that Landlord's actual damages in such event are impossible to ascertain and that the amount set forth above is a reasonable estimate thereof). Upon making such payment, Tenant shall receive from Landlord all rents received by Landlord from other tenants renting the Premises during the Term, provided that the monies to which Tenant shall so become entitled shall in no event exceed the entire amount actually paid by Tenant to Landlord pursuant to the preceding sentence, less all of Landlord's reasonable costs and expenses (including, without limitation, advertising expenses and professional fees) actually incurred in connection with or in any way related to the reletting of the Premises. The acceptance of such payment by Landlord shall not constitute a waiver of rights or remedies to Landlord for any failure of Tenant thereafter occurring to comply with any term, provision, condition or covenant of this Lease; and/or (iii) Enter the Premises as the agent of Tenant without the requirement of resorting to the dispossessory procedures set forth in O.C.G.A. Sections 44-7-50 ET SEQ. and without being liable for any claim for trespass or damages therefor, and, in connection therewith, rekey the Premises, remove Tenant's effects therefrom and store the same at Tenant's expense, without being liable for any damage thereto, and relet the Premises as the agent of Tenant, without advertisement, by private negotiations, for any term Landlord deems proper, and receive the rent therefor. Tenant shall pay Landlord on demand any deficiency that may arise by reason of such reletting, but Tenant shall not be entitled to any surplus so arising. Tenant shall reimburse Landlord for all reasonable costs and expenses (including, without limitation, advertising expenses and professional fees) actually incurred in connection with or in any way related to the eviction of Tenant and reletting the Premises, and for the amount of any other Rent which would have been due of Tenant to Landlord hereunder if not for certain concessions granted by Landlord to Tenant. Landlord, in addition to but not in lieu of or in limitation of any other right or remedy provided to Landlord under the terms of this Lease or otherwise (but only to the extent such sum is not reimbursed to Landlord in conjunction with any other payment made by Tenant to Landlord), shall have the right to be immediately repaid by Tenant the amount of all sums expended by Landlord and not repaid by Tenant in connection with preparing or improving the Premises to Tenant's specifications and any and all costs and expenses incurred in renovating or altering the Premises to make it suitable for reletting; and/or (iv) As agent of Tenant, do whatever Tenant is obligated to do under this Lease, including, but not limited to, entering the Premises, without being liable to prosecution or any claims for damages, in order to accomplish this purpose. Tenant agrees to reimburse Landlord immediately upon demand for any expenses which Landlord may incur in thus effecting compliance with this Lease on behalf of Tenant. Landlord shall not be liable for any damages resulting to Tenant from such action, whether caused by the negligence of Landlord or otherwise. (c) Pursuit by Landlord of any of the foregoing remedies shall not preclude the pursuit of general or special damages incurred, or of any of the other remedies provided herein, at law or in equity. (d) No act or thing done by Landlord or Landlord's employees or agents during the Term shall be deemed an acceptance of a surrender of the Premises. Neither the mention in this Lease of any particular remedy, nor the exercise by Landlord of any particular remedy hereunder, at law or in equity, shall preclude Landlord from any other remedy Landlord might have under this Lease, at law or in equity. Any waiver of or redress for any violation of any covenant or condition contained in this Lease or any of the Rules now or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Rent with knowledge of the breach of any covenant in this Lease shall not be deemed a waiver of such breach. 11. ASSIGNMENT AND SUBLETTING (a) Tenant shall not sublet any part of the Premises, nor assign this Lease or any interest herein, nor, once any such sublet or assignment is consented to by Landlord, amend or modify the terms of such sublet or assignment, without the prior consent of Landlord, which consent may be granted or withheld, in all such instances, in Landlord's reasonable discretion. In no event shall Tenant be permitted to sublease space or assign its interest in the Lease to any existing occupant of the Building (whether as a tenant under a lease or otherwise), or to any subsidiary or affiliate thereof or related party thereto. In any event, no assignee or sublessee (or Tenant, on behalf or for the benefit of an assignee or sublessee) shall have the right to exercise any extension or renewal of Term, or any right to expand or otherwise increase the size of the Premises. Landlord may deny consent to an assignment or sublease if, by way of illustration but not limitation, the rate of compensation, including, but not limited to, all rent, requested by Tenant for the portion of the Premises to be subleased or for the assignment of the Lease would impact upon or impair Landlord's ability to rent space in the Building at the then market rate as offered by Landlord or if the financial statements of the proposed assignee or sublessee are unsatisfactory. Additionally, neither Tenant nor any other person having an interest in the possession, use, occupancy or utilization of the Premises shall enter into any lease, sublease, license, concession, assignment or other agreement for use, occupancy or utilization of space in the Premises which provides for rental or other payment for such use, occupancy or utilization based, in whole or in part, on the net income or profits derived by any person or entity from the Premises leased, used, occupied or utilized. Any such purported lease, sublease, license, concession, assignment or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession use, occupancy or utilization of any part of the Premises. If such a sublease is entered into, neither the rental payable thereunder nor the amount thereof passed on to any person or entity shall have deducted therefrom any expenses or costs related in any way to the subleasing of such space. (b) Consent by Landlord to one assignment or sublease shall not destroy or waive this provision, and all later assignments and subleases shall likewise be made only upon prior consent of Landlord, such consent of Landlord not to be unreasonably withheld or delayed. If a sublease or assignment is consented to by Landlord, any sublessees or assignees shall become liable directly to Landlord for all obligations of Tenant hereunder without relieving or in any way modifying Tenant's liability hereunder. If Tenant notifies Landlord of Tenant's intent to sublease or assign this Lease, Landlord shall within thirty (30) days from such notice (a) consent to such proposed subletting; (b) deny such consent, giving reasons for denying such consent at the time of the denial; (c) elect to cancel this Lease, or to reduce the Premises by the area requested to be subleased or assigned if the area is less than the entire Premises; or (d) elect to sublease the space, or take the assignment, as applicable, on the same terms and conditions as offered by the third-party. If Landlord elects to cancel or to reduce the area of the Premises, Tenant shall have ten (10) days from such notice to notify Landlord of Tenant's acceptance of such cancellation or reduction or Tenant's desire to remain in possession of Premises for the Term. If Tenant fails to so notify Landlord of Tenant's election to accept termination or reduction or to continue as Tenant hereunder, such failure shall be deemed an election to terminate or have the area of Premises reduced, as the case may be, and such termination or reduction shall be effective as of the end of the ten (10) day period provided for in Landlord's notice as hereinabove provided. If Landlord gives its consent to any such assignment or sublease, any rent or other cost to the assignee or subtenant for all or any portion of the Premises over and above the Rent payable by Tenant for such space shall be due and payable, and shall be paid, to Landlord. If this Lease is cancelled, the area of Premises is reduced or a sublease or assignment is made as herein provided, Tenant shall pay Landlord a charge equal to the actual costs incurred by Landlord, in Landlord's reasonable judgment (including, but not limited to, the use and time of Landlord's personnel), for all of the necessary legal and accounting services required to accomplish such cancellation, reduction of area of the Premises, assignment or subletting, as the case may be. (c) Tenant shall have the right to assign the Lease or sublet the Premises, or any part thereof, without Landlord's consent, but subject to Landlord's rights to notice and prohibition contained herein, to any parent, subsidiary, affiliate or controlled corporation or to a corporation into which Tenant may be converted or with which Tenant may merge ("Affiliate") if the Affiliate has a net worth greater than or equal to Tenant at the time of the proposed assignment or sublease. Tenant shall in any event have the obligation to notify Landlord of its intent of any such arrangement, and if Landlord reasonably determines that the proposed assignee or sublessee is engaged in a business which would materially interfere with the operation of the Property or that permitting the assignment or subletting would cause a violation by Landlord of its obligations under any lease covering a portion of the Property, Landlord shall have the right to prohibit such arrangement based upon the aforesaid factors. 12. CONDEMNATION If the Premises, or a part of such Premises such that the Premises in the reasonable judgment of the Architect for the Building are untenantable, are taken by eminent domain or other similar proceeding or are conveyed in lieu of such taking, this Lease shall expire on the date when title or right of possession vests, and Rent paid for any period beyond said date shall be repaid to Tenant. If there is a partial taking where this Lease is not terminated, the Rent shall be adjusted in proportion to the square feet of Premises taken, which square footage shall be determined by the Architect for the Building. In either event, Landlord shall be entitled, and Tenant shall not have any right, to claim any award made in any condemnation proceeding, action or ruling relating to the Building or the Property; provided, however, Tenant shall be entitled to make a claim in any condemnation proceeding, action or ruling relating to the Building for Tenant's moving expenses and the unamortized value of leasehold improvements in the Premises actually paid for by Tenant, to the extent such claim does not in any manner impact upon or reduce Landlord's claim or award in such condemnation proceeding, action or ruling. Landlord shall have, in Landlord's sole discretion, the option of terminating this Lease upon sixty (60) days prior notice to Tenant if any such condemnation, action, ruling or conveyance in lieu thereof makes continuation of Landlord's use of the Building economically unfeasible. 13. INSPECTIONS Landlord, its agents or employees may enter the Premises at reasonable hours and upon reasonable prior notice (except in an emergency for which no notice shall be required) to (a) exhibit the Premises to prospective purchasers or tenants of the Premises or the Building; (b) inspect the Premises to see that Tenant is complying with its obligations hereunder; and (c) make repairs (i) required of Landlord under the terms hereof; (ii) to any adjoining space in the Building; or (iii) to any systems serving the Building which run through the Premises. 14. SUBORDINATION (a) This Lease shall be subject and subordinate to any underlying land leases or deeds to secure debt which may now or hereafter affect this Lease, the Building or the Property and also to all renewals, modifications, extensions, consolidations, and replacements of such underlying land leases and deeds to secure debt. In confirmation of the subordination set forth in this Paragraph 14, Tenant shall, at Landlord's request, execute and deliver such further instruments desired by the holder of the deed to secure debt (a "Mortgagee") or by any lessor under any such underlying land leases. Notwithstanding the foregoing, Landlord or such Mortgagee shall have the right to subordinate or cause to be subordinated, in whole or in part, any such underlying land leases or deeds to secure debt to this Lease (but not in respect to priority of entitlement of insurance or condemnation proceeds). If any such underlying land leases or deeds to secure debt terminate for any reason or any such deeds to secure debt are foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, deliver to Mortgagee within ten (10) days of written request an attornment agreement, providing that such Tenant shall continue to abide by and comply with the terms and conditions of this Lease. (b) If any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale or conveyance in lieu of foreclosure under any deed to secure debt, Tenant shall at the option of the purchaser at such foreclosure or other sale, attorn to such purchaser and recognize such person as Landlord under this Lease. The institution of any suit, action or other proceeding by a Mortgagee or a sale of the Property pursuant to the powers granted to a Mortgagee under its deed to secure debt, shall not, by operation of law or otherwise, result in the cancellation or the termination of this Lease or of the obligations of Tenant hereunder. (c) If such purchaser requests and accepts such attornment, from and after such attornment, Tenant shall have the same remedies against such purchaser for the breach of an agreement contained in this Lease that Tenant might have had against Landlord if the deed to secure debt had not been terminated or foreclosed, except such purchaser shall not be (i) liable for any act or omission of the prior Landlord; (ii) subject to any offsets or defenses which Tenant might have against the prior Landlord; or (iii) bound by any Rent or security deposit which Tenant might have paid in advance to the prior Landlord. 15. INDEMNIFICATION AND HOLD HARMLESS (a) Tenant hereby indemnifies and holds Landlord harmless from and against any injury, expense, damage, liability or claim, imposed on Landlord by any person whomsoever, whether due to damage to the Premises, claims for injuries to the person or property of any other tenant of the Building or of any other person in or about the Building for any purpose whatsoever, or administrative or criminal action by a governmental authority, whether such injury, expense, damage, liability or claim results either directly or indirectly from the act, omission, negligence, misconduct or breach of any provisions of this Lease by Tenant, the agents, servants, or employees of Tenant, or any other person entering upon the Premises under express or implied invitation or consent of Tenant. Tenant further agrees to reimburse Landlord for any costs or expenses, including, but not limited to, court costs and reasonable attorney's fees, which Landlord may incur in investigating, handling or litigating any such claim or any action by a governmental authority. (b) Landlord hereby agrees to indemnify and hold Tenant harmless from and against any and all loss, cost or damage, or claim thereof, suffered or incurred by Tenant arising out of or resulting from the willful misconduct or gross negligence of Landlord, its agents, employees or contractors. (c) Tenant shall give notice to Landlord of any defective condition in or about the Premises known to Tenant, and further agrees to attempt to contact Landlord by telephone immediately in such instance. 16. TENANT'S INSURANCE Tenant shall carry (at its sole expense during the Term) (i) fire and extended coverage insurance insuring Tenant's interest in its improvements to the Premises and any and all furniture, equipment, supplies, contents and other property owned, leased, held or possessed by Tenant and contained therein, such insurance coverage to be in an amount equal to the full insurable value of such improvements and property, as such may increase from time to time, (ii) worker's compensation insurance as required by applicable law, and (iii) comprehensive liability coverage for injury to or death of a person or persons and for damage to property occasioned by or arising out of any construction work being done on the Premises, or arising out of the condition, use, or occupancy of the Premises, or other portions of the Building or Property, the limits of such policy or policies to be in amounts not less than One Million Five Hundred Thousand Dollars ($1,500,000) with respect to injuries to or death of any one person, Five Million Dollars ($5,000,000) with respect to any one casualty or occurrence and Three Hundred Thousand Dollars ($300,000) with respect to property damage. Landlord and Tenant shall each have included in all policies of insurance respectively obtained by them with respect to the Building or Premises a waiver by the insurer of all right of subrogation against the other in connection with any loss or damage insured against. To the full extent permitted by law, Landlord and Tenant each waives all right of recovery against the other, and agrees to release the other from liability for loss or damage to the extent such loss or damage is covered by valid and collectible insurance in effect at the time of such loss or damage; provided, however, that the foregoing release by each party is conditioned upon the other party's carrying insurance with the above described waiver of subrogation, and if such coverage is not obtained or maintained by either party, then the other party's foregoing release shall be deemed to be rescinded until such waiver is either obtained or reinstated. All said insurance policies shall be carried with companies licensed to do business in the State of Georgia reasonably satisfactory to Landlord and shall be noncancellable except after twenty (20) days' written notice to Landlord. Each policy shall name Landlord, Landlord's Property Manager and any other person designated by Landlord as additional insureds and provide that it is primary to, and ot contributing with, any policy carried by Landlord, Landlord's Property Manager, or other designated person covering the same loss. At Landlord's request, duly executed certificates of such insurance shall be delivered to Landlord prior to the Commencement Date and at least thirty (30) days prior to the expiration of each respective policy term. 17. REMEDIES CUMULATIVE The rights given to Landlord and Tenant herein are in addition to any rights that may be given to Landlord or Tenant by any statute or under law. 18. ENTIRE AGREEMENT - NO WAIVER This Lease contains the entire agreement of the parties hereto and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force and effect. The failure of either party to insist in any instance on strict performance of any covenant or condition hereof, or to exercise any option herein contained, shall not be construed as a waiver of such covenant, condition or option in any other instance. This Lease cannot be changed or terminated orally, and can be modified only in writing, executed by each party hereto. 19. HOLDING OVER If Tenant remains in possession of the Premises after expiration of the Term, or after any termination of the Lease by Landlord, with Landlord's acquiescence and without any written agreement between the parties, Tenant shall be a tenant at sufferance and such tenancy shall be subject to all the provisions hereof, except that the Monthly Rental for said holdover period shall be one hundred fifty percent (150%) of the amount of Rent due in the last month of the Term, for the first three (3) months of any such hold-over, and then double the amount of Rent thereafter. There shall be no renewal of this Lease by operation of law. Nothing in this Paragraph shall be construed as a consent by Landlord to the possession of the Premises by Tenant after the expiration of the Term or any termination of the Lease by Landlord, or as an exclusive remedy in the event of a holdover. 20. HEADINGS The headings in this Lease are included for convenience only and shall not be taken into consideration in any construction or interpretation of any part of this Lease. 21. NOTICES (a) Any notice, request or consent by either party to the other hereunder shall be valid only if in writing and shall be deemed to be duly given only if hand-delivered, or sent by certified mail or by a recognized national overnight delivery service which has a receipt of notice as a part of its delivery function. Such notices shall be addressed (i) if to Tenant, at the Premises and (ii) if to Landlord, at Landlord's address set forth above, or at such other address for either party as that party may designate by notice to the other. Notice shall be deemed given, if delivered personally, upon delivery thereof, and if mailed, upon the mailing thereof. (b) Tenant hereby appoints as its agent to receive service of all dispossessory or distraint proceedings, an employee in the Premises at the time of any such service. 22. HEIRS, SUCCESSORS, AND ASSIGNS - PARTIES (a) This Lease shall bind and inure to the benefit of Landlord and Tenant, and their respective successors, heirs, legal representatives and assigns. The term "Landlord" as used in this Lease means only the owner (or the ground lessee) for the time being of the Property and Building of which the Premises are a part, so that in the event of any sale or sales of said Property (or of any lease thereof), Landlord named herein shall be and hereby is entirely released of all covenants and obligations of Landlord hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, or the lessee, as the case may be, has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder during the period such party has possession of the Property and Building. If the Property and Building are severed as to ownership by sale and/or lease, the owner of the entire Building or lessee of the entire Building that has the right to lease space in the Building to tenants shall be deemed "Landlord". Tenant shall be bound to any such succeeding party for performance by Tenant of all the terms, covenants, and conditions of this Lease and agrees to execute any attornment agreement not in conflict with the terms and provisions of this Lease at the request of any such party. (b) The parties "Landlord" and "Tenant" and pronouns relating thereto, as used herein, shall include male, female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 23. ATTORNEY'S FEES If Landlord has to engage or consult with an attorney as a result of or in connection with a failure by Tenant to pay any Rent as and when due under the Lease, then Tenant shall owe to Landlord, in addition to and not in lieu of any other amounts due hereunder, and shall pay within ten (10) days after demand for payment therefor is made, all such attorneys fees incurred by Landlord. Also, if any law suit or court action between Landlord and Tenant arises out of or under this Lease, the prevailing party in such law suit or court action shall be entitled to and shall collect from the non-prevailing party the reasonable attorney's fees and court costs actually incurred by the prevailing party with respect to said lawsuit or court action. 24. TIME OF ESSENCE TIME IS OF THE ESSENCE OF THIS LEASE. 25. NO ESTATE IN LAND Tenant has only a usufruct under this Lease, not subject to levy or sale. No estate shall pass out of Landlord by this Lease. 26. LETTER OF CREDIT Tenant shall deliver to Landlord an irrevocable, unconditional letter of credit in favor of Landlord in the amount of $ 30,000.00, in a form acceptable to Landlord and issued by a bank in the Atlanta, Georgia metropolitan area. If Tenant defaults or otherwise fails to comply with the terms of the Lease for any reason, Landlord may immediately draw upon and receive payment under said letter of credit, it being the express intent of Landlord and Tenant that the letter of credit be used as a security deposit, securing the full and complete performance by Tenant of Tenant obligations under the Lease. Such letter of credit shall permit transfers of the payee thereunder if Landlord transfers its interest in the Building. The letter of credit shall be open and may be drawn upon for a period which expires eighteen months after the Commencement Date; provided however, that such letter of credit may be of a duration shorter than said period, so long as Tenant replaces said letter of credit with a new letter of credit, on the same terms and conditions, and in the same amount, as the prior letter of credit, at least one (1) month prior to the expiration of the prior letter of credit. 27. COMPLETION OF THE PREMISES Landlord shall supervise completion of the work described in EXHIBIT "D" subject to payments which may be required of Tenant thereunder. Any work required by Tenant as provided for in said EXHIBIT "D" shall be performed within the provisions and according to all standards of said EXHIBIT "D". 28. PARKING ARRANGEMENTS Landlord shall maintain unreserved parking spaces for use by Tenant and Tenant's invitees and employees, in such amount or ratio as is in compliance with the zoning for the Property, as may be modified from time to time, and Tenant (and Tenant's guests and employees) shall only be entitled to use that amount of parking spaces (determined on a parking space per square foot leased basis). Such parking shall be available subject to the limitations and conditions from time to time imposed by Landlord. Said parking shall be maintained on the Property or on areas located in the vicinity of the Property. 29. RULES AND REGULATIONS The Rules on EXHIBIT "F" are a part of this Lease. Landlord may from time to time amend, modify, delete or add additional Rules for the use, operation, safety, cleanliness and care of the Premises and the Building. Such new or modified Rules shall be effective upon written notice to Tenant. Tenant will cause its employees and agents, or any others permitted by Tenant to occupy or enter the Premises to at all times abide by the Rules. If there is a breach of any Rules, Landlord shall have all remedies in this Lease provided for in an Event of Default by Tenant and shall, in addition, have any remedies available at law or in equity, including but not limited to, the right to enjoin any breach of such Rules. Landlord shall not be responsible to Tenant for the nonobservance by any other tenant or person of any such Rules. 30. RIGHT TO RELOCATE At any time or from time to time during the Lease Term, Landlord shall have the unrestricted and unconditional right to relocate Tenant from the Premises to any other office space within the project currently referred to as "Concourse". Landlord shall deliver notice to Tenant of Landlord's desire to relocate Tenant, together with a proposal for the area to which such Premises shall be relocated. Should Landlord exercise its right to relocate Tenant under this Paragraph 30 then (i) expenses of said relocation or of any necessary renovation or alteration (including costs of cabling or re-cabling, costs of moving telephone equipment, costs of replacing stationary rendered obsolete by virtue of the change of address, and the costs of the move), as calculated by Landlord prior to any relocation, shall be paid by Landlord, and (ii) following such relocation, the substituted space shall for all purposes thereinafter constitute the Premises and all terms and conditions of this Lease shall apply with full force and effect to the Premises as so relocated. Tenant shall have the right to terminate the Lease if Tenant believes, in Tenant's reasonable and good faith judgment, that the space to which the Premises are being relocated is not acceptable. In such event, Tenant shall notify Landlord within twenty (20) days of the date Tenant first has notice of the space proposed as the new Premises, such termination to be effective sixty (60) days after such notice of termination is given. If Tenant has not relocated its premises within sixty (60) days after Landlord first notifies Tenant of Landlord's desire to relocate Tenant, then it shall be an event of default on the part of Tenant, and Landlord shall have, as a part of said remedies, the right to terminate this Lease. Such termination shall be effective upon any date selected by Landlord in the Termination Notice which is at least ten (10) days after the Termination Notice is given by Landlord to Tenant. Tenant hereby further covenants and agrees to promptly execute and deliver to Landlord any lease amendment or other such document appropriate to reflect the changes in the Lease described or contemplated above. 31. LATE PAYMENTS Any payment due of Tenant hereunder not received by Landlord within five (5) days of the date when due shall be assessed a five percent (5%) charge for Landlord's administrative and other costs in processing and pursuing the payment of such late payment, and shall be assessed an additional five percent (5%) charge for the aforesaid costs of Landlord for each month thereafter until paid in full. Acceptance by Landlord of a payment, and the cashing of a check, in an amount less than that which is currently due shall in no way affect Landlord's rights under this Lease and in no way be an accord and satisfaction. This provision does not prevent Landlord from declaring the non-payment of Rent when due an event of default hereunder. 32. ESTOPPEL CERTIFICATE Tenant shall, within ten (10) business days of the request by Landlord, execute, acknowledge and deliver to Landlord, any Mortgagee, prospective Mortgagee or any prospective purchaser or transferee of the Property, the Building, or both (as designated by Landlord), an Estoppel Certificate in recordable form, or in such other form as Landlord may from time to time require, evidencing whether or not (a) this Lease is in full force and effect; (b) this Lease has been amended in any way; (c) Tenant has accepted and is occupying the Premises; (d) there are any existing defaults on the part of Landlord hereunder or defenses or offsets against the enforcement of this Lease to the knowledge of Tenant (specifying the nature of such defaults, defenses or offsets, if any); (e) the date to which Rent and other amounts due hereunder, if any, have been paid; and (f) any such other information as may be reasonably requested by Landlord. Each certificate delivered pursuant to this Paragraph may be relied on by Landlord, any prospective purchaser or transferee of Landlord's interest hereunder, or any Mortgagee or prospective Mortgagee. 33. SEVERABILITY AND INTERPRETATION (a) If any clause or provision of this Lease shall be deemed illegal, invalid or unenforceable under present or future laws effective during the Term, the remainder of this Lease shall not be affected by such illegality, invalidity or unenforceability, and in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. (b) If any provisions of this Lease require judicial interpretation, the court interpreting or construing the same shall not apply a presumption that the terms of any such provision shall be more strictly construed against one party or the other by reason of the rule of construction that a document is to be construed most strictly against the party who itself or through its agent prepared the same, as all parties hereto have participated in the preparation of this Lease. 34. MULTIPLE TENANTS If more than one individual or entity comprises and constitutes Tenant, then all individuals and entities comprising Tenant are and shall be jointly and severally liable for the due and proper performance of Tenant's duties and obligations arising under or in connection with this Lease. 35. FORCE MAJEURE Landlord shall be excused for the period of any delay and shall not be deemed in default with respect to the performance of any of the terms, covenants, and conditions of this Lease when prevented from so doing by causes beyond Landlord's control, which shall include, but not be limited to, all labor disputes, governmental regulations or controls, fire or other casualty, inability to obtain any material or services, or acts of God. 36. QUIET ENJOYMENT So long as Tenant is in full compliance with the terms and conditions of this Lease, Landlord shall warrant and defend Tenant in the quiet enjoyment and possession of the Premises during the Term against any and all claims made by, through or under Landlord, subject to the terms of this Lease. 37. BROKERAGE COMMISSION; INDEMNITY TC ATLANTA, INC. ("TC") HAS ACTED AS CONTRACT MANAGER FOR LANDLORD IN THIS TRANSACTION AND THE WILLIAM B. HARE COMPANY ("HARE") HAS ACTED AS AGENT FOR TENANT IN THIS TRANSACTION. BOTH TC AND HARE ARE TO BE PAID A COMMISSION BY LANDLORD. Tenant and Landlord warrant that there are no other claims for broker's commissions or finder's fees in connection with its execution of this Lease. Tenant hereby indemnifies Landlord and holds Landlord harmless from and against all loss, cost, damage or expense, including, but not limited to, attorney's fees and court costs, incurred by Landlord as a result of or in conjunction with a claim of any real estate agent or broker, if made by, through or under Tenant. Landlord hereby indemnifies Tenant and holds Tenant harmless from and against all loss, cost, damage or expense, including, but not limited to, attorney's fees and court costs, incurred by Tenant as a result of or in conjunction with a claim of any real estate agent or broker, if made by, through or under Landlord. Tenant shall cause any agent or broker representing Tenant to execute a lien waiver to and for the benefit of Landlord, waiving any and all lien rights with respect to the Building or Property such agent or broker has or might have under Georgia law. 38. EXCULPATION OF LANDLORD Landlord's liability to Tenant with respect to this Lease shall be limited solely to Landlord's interest in the Building. Neither Landlord, any of the partners of Landlord, any officer, director, or shareholder of Landlord nor any of the partners of Landlord shall have any personal liability whatsoever with respect to this Lease. 39. ORIGINAL INSTRUMENT Any number of counterparts of this Lease may be executed, and each such counterpart shall be deemed to be an original instrument. 40. GEORGIA LAW This Lease has been made under and shall be construed and interpreted under and in accordance with the laws of the State of Georgia. 41. NO RECORDATION OF LEASE Without the prior consent of Landlord, neither this Lease nor any memorandum hereof shall be recorded or placed on public record. 42. HAZARDOUS WASTES Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Building, the Premises or the Property, any such materials or substances except to use in the ordinary course of Tenant's business, and then only after notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease from any release of hazardous materials on the Premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the Lease Term. 43. LEASE BINDING UPON DELIVERY This Lease shall not be binding until and unless all parties have duly executed said Lease and a fully executed counterpart of said Lease has been delivered to Tenant. 44. SPECIAL STIPULATIONS The special stipulations attached hereto as EXHIBIT "G" and made a part hereof, if any, shall control if in conflict with any of the foregoing provisions of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed under seal, on the day and year first above written. TENANT: DELPHI INFORMATION SYSTEMS, a corporation of the State of Delaware _________________________(SEAL) Authorized Signature _________________________ Type Name of Signatory Dated executed by _________________________(SEAL) Tenant:__________ Authorized Signature _________________________ Type Name of Signatory (CORPORATE SEAL) *Note: If Tenant is a corporation, two authorized corporate officers must execute this Lease in their appropriate capacities for Tenant, affixing the corporate seal. By the execution and delivery of this Lease Tenant has made and shall be deemed to have made a continuous and irrevocable offer to lease the Premises, on the terms contained in this Lease, subject only to acceptance by Landlord (as evidenced by Landlord's signature hereon), which Landlord may accept in its sole and absolute discretion. Tenant's Federal Employer Identification Number:______________ LANDLORD: 485 PROPERTIES, LLC, a Delaware limited liability company By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Date executed by Landlord:________ EXHIBIT "G" SPECIAL STIPULATIONS 1. RIGHT OF FIRST REFUSAL. Provided this Lease is then in full force and effect and Tenant is in full compliance with the terms and conditions of this Lease, and there is no sublease of any portion of the Premises or assignment of any of Tenant's interest in the Lease, Landlord hereby grants Tenant the right to lease approximately 10,000 rentable square feet on the 16th floor of the Building, more particularly shown on SCHEDULE "1" attached hereto and by this reference incorporated herein (the "Expansion Space"), in accordance with the within terms and conditions. Should Landlord receive an offer from an unaffiliated third party to lease the Expansion Space, upon terms and conditions and at a rental rate acceptable to Landlord, Landlord shall notify Tenant thereof in writing setting forth the terms and conditions of such offer, and offering to lease the Expansion Space to Tenant upon the financial terms contained in the third party offer. Tenant shall have five (5) days to accept or reject such offer. If Tenant rejects such offer or fails to respond within said five (5) day period, then Landlord shall be entitled to rent said space to such third party on such terms and conditions not materially more favorable than the terms and conditions offered to Tenant. If Tenant accepts said offer and such offer occurs within the first two (2) years of the Term, then Tenant shall have leased such space upon the financial terms contained in said offer, and upon the other terms and conditions as contained in this Lease and for a term coterminous with this Lease, except that the space shall be leased "as is, where is". The Rent for said Expansion Space shall commence on the earlier to occur of (i) thirty (30) days after Tenant accepts such offer for such Expansion Space, or (ii) on the date Tenant occupies said Expansion Space. If Tenant accepts such offer and such offer occurs after the end of the second year of the Term, then all terms and conditions set forth in the third party offer shall apply, including the term, which may not be coterminous with this Lease. 2. RENEWAL OF LEASE. (a) Provided this Lease is then in full force and effect and Tenant is in full compliance with the terms and conditions of this Lease, and there is no sublease of any portion of the Premises or assignment of any of Tenant's interest in the Lease, Landlord hereby grants to Tenant an option to renew this Lease for one (1) period of five (5) years, at a rental rate equal to the rental rate then being offered by Landlord to tenants desiring to lease comparable space in the Building or in other buildings comparable to the Building located in projects comparable to the project in which the Building is located, with comparable on-site amenities and services and comparable parking rights and privileges, as such rate is established by Landlord in its reasonable judgment. Tenant shall notify Landlord no more than fourteen (14) months and no less than twelve (12) months prior to the end of the Term if Tenant desires to renew this Lease under the terms of this Special Stipulation No. 2. If Tenant does give such notice, Landlord shall indicate to Tenant at least nine (9) months prior to the end of the Term the rental rate which shall be in effect for the Term as extended, on the basis as above-described. Tenant shall have thirty (30) days from the date Landlord makes such offer to either accept or reject such offer. If Tenant rejects such offer or fails to respond within such thirty (30) day period, then this Lease shall terminate as of the end of the Term as established herein. If Tenant accepts such offer, then the Term shall be extended by said five (5) year period, upon the same terms and conditions as contained in this Lease, and the rent for such period shall be the rent as offered by Landlord and accepted by Tenant pursuant to the terms and conditions of this Special Stipulation No. 2.(b) Notwithstanding anything to the contrary contained herein, any right or option to extend the Term of the Lease or expand the Premises is expressly contingent upon Landlord consenting to such extension or expansion, with such consent by Landlord to be granted or withheld solely upon the credit issues described below. Landlord shall not be obligated to consent to Tenant's exercise of any right or option for an extension or expansion, and such exercise by Tenant shall be of no force or effect if, at the time of the exercise in question by Tenant, the creditworthiness of Tenant (taking into account net worth, cash on hand and cash available and net cash flow from operations) would not be acceptable to Landlord, in Landlord's reasonable judgment, if Tenant desired to lease space from Landlord in the Building as a new tenant. As a condition to the consent by Landlord to the exercise of any such right or option by Tenant, Landlord may request current financial statements from Tenant certified by an officer or partner of Tenant, or, if available, an outside independent auditor, to be true and correct. Tenant shall provide such information to Landlord upon request, and Landlord shall have a reasonable time to review and assess such information prior to granting consent to any such exercise by Tenant. EX-21.1 4 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES Delphi Information Systems International, Inc. Canadian Insurance Computer Systems, Inc. Delphi Information Systems, (UK) Ltd. Delphi Information Systems, (NZ) Ltd. Complete Broking Systems, (Malaysia) Sdn. Bhd. Complete Broking Systems Australia PTY, Ltd. Delphi Information Systems, (Singapore) PTE, Ltd. EX-23.1 5 EXHIBIT 23.1 Exhibit 23-1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (No. 33-62901, 33-23261, 333-45156) and Form S-3 (No. 333-12781). ARTHUR ANDERSEN LLP Chicago, Illinois April 14, 1999 EX-27 6 EXHIBIT 27
5 YEAR DEC-31-1998 DEC-31-1998 1,053 0 7,446 (1,068) 29 7,741 9,890 (7,991) 16,545 10,003 0 0 49 740 5,278 16,545 19,221 19,221 9,689 9,689 7,998 699 359 523 22 501 0 0 0 501 0.07 0.07
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