-----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, DAIYxD+7sB7QA3/q88mhwi/R1P7tNWzm81tprp4NWCWbUmuJEgHDeH0YJnzhLEvr ZkzTII+nEP9WJ5utg9rGYg== 0000893220-99-000380.txt : 19990331 0000893220-99-000380.hdr.sgml : 19990331 ACCESSION NUMBER: 0000893220-99-000380 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILADELPHIA CONSOLIDATED HOLDING CORP CENTRAL INDEX KEY: 0000909109 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232202671 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22280 FILM NUMBER: 99578183 BUSINESS ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: WYNNEWOOD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106428400 MAIL ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: BALA CYNWYD STATE: PA ZIP: 19004 FORMER COMPANY: FORMER CONFORMED NAME: MAGUIRE HOLDING CORP DATE OF NAME CHANGE: 19930714 10-K 1 PHILADELPHIA CONSOLIDATED HOLDING CORP. FORM 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from__________ to __________ COMMISSION FILE NUMBER: 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2202671 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) ONE BALA PLAZA, SUITE 100 BALA CYNWYD, PENNSYLVANIA 19004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 617-7900 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 24, 1999 as reported on the NASDAQ National Market System, was $137,086,971. Shares of Common Stock held by each executive officer and director and by each person who is known by the Registrant to beneficially own 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 24, 1999, Registrant had outstanding 12,220,115 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders to be held May 6, 1999 are incorporated by reference in Part III. The Exhibit Index is located on Page 55 of 273. 1 2 PART I Item 1. BUSINESS GENERAL As used in this Annual Report on Form 10-K, (i) "Philadelphia Insurance" refers to Philadelphia Consolidated Holding Corp., (ii) the "Company" refers to Philadelphia Insurance and its subsidiaries, doing business as Philadelphia Insurance Companies; (iii) the "Insurance Subsidiaries" refers to Philadelphia Indemnity Insurance Company ("PIIC") and Philadelphia Insurance Company ("PIC"), collectively; (iv) "MIA" refers to Maguire Insurance Agency, Inc., a captive underwriting manager; and (v) "PCHC Investment" refers to PCHC Investment Corp., an investment holding company. Philadelphia Insurance was incorporated in Pennsylvania in 1984, to serve as a holding company for its four wholly owned subsidiaries (PIIC, PIC, MIA, and PCHC Investment). 1998 marked the fifth anniversary for the Company as a publicly traded entity. During this five-year period, gross written premiums increased from $57.1 million to $197.4 million, the GAAP basis combined ratio (the sum of the net loss and loss adjustment expenses and acquisition costs and other underwriting expenses divided by net earned premiums) averaged 86.4%, and the net operating income compound annual growth rate was 42.1%. The Company believes these achievements are primarily due to its continued focus on generating underwriting profits through conservative underwriting and pricing discipline, its differentiation in the marketplace through development of value-added coverage and service enhancements, and its multiple channels of distribution. During 1998, the Company completed a $103.5 million FELINE PRIDES(SM) security offering, thereby adding new capital to the Company. The Company intends to use the proceeds from this security offering for general corporate purposes, which may include acquisitions (including, without limitation, acquisitions of programs or books of business), capital expenditures, capital contributions, and the repurchase by the Company of its common stock. From these proceeds, $33.1 million was contributed to the Company's subsidiaries and $3.1 million was utilized to buy back the Company's common stock, under a stock buy-back program of up to $10.0 million authorized by the Company's Board of Directors. The Insurance Subsidiaries have been assigned an "A+" (Superior) Best's Rating by A.M. Best Company. According to A.M. Best, the "A+" (Superior) rating is issued to companies that demonstrate excellent financial strength and ability to meet its obligations to policyholders. A.M. Best ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors. The Insurance Subsidiaries also possess an "A" claims paying ability rating by Standard & Poor's. According to Standard & Poor's, insurers rated "A" offer good financial security for policyholders. The Company believes that the "A+" rating assigned by A.M. Best and the "A" rating assigned by Standard & Poor's are important factors in marketing its products. BUSINESS STRATEGY The Company designs, markets and underwrites specialty commercial property and casualty insurance products incorporating value-added coverages and services for select target industries or niches. A mixed marketing strategy is utilized, wherein, the Company's production underwriting organization markets the Company's insurance products directly to the insured, designated broker representatives, and a network of preferred agents. The Company's production underwriting organization, consisting of 160 professionals at year end 1998, operates from 40 regional offices located across the United States and includes telemarketing staffs at its regional offices and the Philadelphia Home Office. Approximately, 54% of the total 1998 gross premium was produced indirectly either through the Company's 53 preferred agents (16%) or its some 4,000 broker relationships (38%). 2 3 Product Lines The following table sets forth, for the years ended December 31, 1998, 1997 and 1996, the gross written premiums on the Company's insurance product lines and the relative percentages that such premiums represented.
For the Years Ended December 31, ----------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- Dollars Percentage Dollars Percentage Dollars Percentage ------- ---------- ------- ---------- ------- ---------- (Dollars in Thousands) Gross Written Premiums Commercial Automobile ....... $ 21,748 11.0% $ 18,415 11.6% $ 18,506 13.5% Commercial Excess ........... 60,873 30.8 59,296 37.3 56,411 41.2 Commercial Package .......... 78,090 39.6 60,012 37.7 43,707 32.0 Specialty Lines ............. 30,396 15.4 20,748 13.0 16,558 12.1 Specialty Property & Inland Marine ...................... 1,104 .6 New Programs ................ 4,828 2.4 Involuntary ................. 369 .2 620 .4 1,673 1.2 -------- ------- -------- ------- -------- ------- Total ....................... $197,408 100.0% $159,091 100.0% $136,855 100.0% ======== ======= ======== ======= ======== =======
Commercial Automobile and Commercial Excess: The Company has provided Commercial Automobile Products to the leasing and rent-a-car industries for 36 years. Products offered to the rent-a-car industry include coverage for the business owner's property, dual interest liability, and physical damage on the rental vehicle. In 1998, the Company added paratransit as an additional class of business. Additionally, through arrangements with a number of the largest rent-a-car companies, the Company also offers its commercial excess product at the rental car counter to rent-a-car customers protecting them against liability for bodily injury and property damage, which is excess of the statutory coverage provided with the rental vehicle and primary over the renter's personal automobile insurance coverage. In keeping with its marketing philosophy, the Company includes a number of special features in its rental car products and services in an attempt to differentiate them from the competition. Such features include: catastrophic comprehensive coverage for losses due to fire, lightening, windstorm, hail, flood, earthquake and other specified causes; subrogation services on self-insured physical damage; liability deductibles; and self-insured retention programs. The Company also offers a full range of liability and physical damage coverages to automobile leasing companies and their customers. For the driver (the lessee), coverages include both primary liability and physical damage coverage on the vehicle. For the owner (the lessor), coverages include contingent and excess liability over the primary liability layer which protects lessors in the event of a loss when the primary coverage is absent or inadequate and contingent physical damage coverage. Additional products offered to leasing companies include interim primary liability and physical damage coverage, which protects the lessor of the vehicle before and after it is delivered to the lessee; residual value coverage which guarantees the value of the leased vehicle at the termination of the lease; and guaranteed asset protection coverage which protects the lessor and lessee for the difference between the leased vehicle's actual cash value and the lease or loan net value in instances where the vehicle is stolen or damaged beyond repair. 3 4 Commercial Package: The Company has been providing Commercial Multi Peril Package Policies ("Package Programs") to specific targeted niche markets for over 10 years. Among the organizations to which the Company offers its specialty niche package programs are non-profit, health and fitness, homeowners associations, and most recently, condominium associations, and day care facilities. The package policies provide a combination of comprehensive liability, property, automobile, and workers compensation coverage with limits up to $1.0 million for casualty, $100.0 million for property, and umbrella limits on an optional basis up to $10.0 million. Policies are further tailored to include special value-added features addressing unique aspects of each of the above niche markets - differentiating the Company's product offerings from those of its competitors. Specialty Lines: The Company has been providing specialty professional liability products for approximately ten years, specializing in non-ISO, proprietary policies developed primarily for the professional liability, employment practices and directors & officers liability markets. The Company focuses on maintaining a high renewal retention, improving current products, developing new products and staffing field offices with experienced underwriters. During 1998, the Company introduced a variety of coverage enhancements to several of its policies, including Executive Safeguard(SM), Miscellaneous Professional and Non-Profit Directors & Officers. These enhancements were designed to improve and differentiate the coverage offered without sacrificing underwriting results. In addition, two new products - Accountants and Dentists Professional Liability - were introduced into previously untapped markets. The Company has taken significant steps to regionalize its underwriting. By having a local underwriting presence, policyholders can benefit from quicker service and easier access to their underwriter. Furthermore, the Company is able to draw from other regional markets to fill its highly specialized personnel needs. The Company plans on staffing the remaining regional offices with experienced specialty lines underwriters during 1999. Specialty Property & Inland Marine: The Company established a Specialty Property & Inland Marine underwriting organization during 1998 specializing in large property risks and inland marine insurance. Products include the UltimateCover Policy which is designed to insure a wide range of business entities from shopping centers to hotels to educational. The Company anticipates that the UltimateCover Policy will not only provide the opportunity to market to new insureds, but will also provide the opportunity to round out existing product offerings and create cross-selling opportunities. With respect to inland marine products, the concentration of effort will be on the larger segments of the inland marine market including builders' risk, contractors' equipment and motor truck cargo. In addition, the expertise now exists to manuscript coverage forms for the unusual, "one-of-a-kind-type" account. The Specialty Property and Inland Marine Underwriting organization currently consists of a total of 20 professionals and support staff. The professionals possess an average experience level of 25 years in this market niche and will immediately introduce a "new" agency force to the Company's distribution, further complementing the Company's mixed marketing approach. New Products/Programs: The Company continually evaluates new product(s)/program(s) which either complement its current niche markets or provide opportunities consistent with its strategic focus on conservative underwriting and pricing within a select market niche. During 1998, the Company offered for the first time workers' compensation coverage (through a fronting and quota share arrangement) to "round out" its specialty and commercial lines product offerings. Additionally, the Company introduced a commercial multi-peril package product for day care facilities and a mobile home program. 4 5 The following table provides the geographic distribution of the Company's risks insured as represented by direct earned premiums for all product lines for the year ended December 31, 1998. No other state accounted for more than 2% of total direct earned premiums for all product lines for the year ended December 31, 1998 (Dollars in Thousands).
State Direct Earned Premiums Percent of Total ----- ---------------------- ---------------- California................................. $32,395 18.7% Florida.................................... 19,327 11.1 New York................................... 10,556 6.1 New Jersey................................. 8,809 5.1 Illinois................................... 7,186 4.1 Hawaii..................................... 7,015 4.0 Texas...................................... 6,478 3.7 North Carolina............................. 6,338 3.7 Massachusetts.............................. 6,241 3.6 Pennsylvania............................... 6,167 3.6 Ohio....................................... 6,057 3.5 Washington................................. 3,713 2.1 Connecticut................................ 3,588 2.1 Other...................................... 49,685 28.6 -------- ----- Total Direct Earned Premiums............... $173,555 100.0% ======== =====
Underwriting and Pricing The Company's underwriting function is segregated into three independent groups: Commercial Lines, Specialty Lines, and Specialty Property & Inland Marine. Commercial and Specialty Lines, and Specialty Property and Inland Marine responsibilities include: pricing all business, managing the risk selection process, and monitoring loss ratios by product and insured. The Commercial Lines group, which has underwriting responsibility for the Company's commercial automobile and commercial package products, currently consists of home office underwriters that are supported by underwriting assistants, raters, and other policy administration personnel. The Commercial Lines underwriters and support staff are organized into geographic underwriting teams responsible for underwriting and servicing specific commercial automobile and commercial package products. Each underwriting team is under the direction of a Senior Underwriter who reports to the Vice President of Commercial Lines Underwriting. The Specialty Lines group, which has underwriting responsibility for the Company's professional liability products, consists of 16 home office underwriters and 10 regional underwriters, who report to the Chief Operating Officer, and are supported by underwriting assistants. The Specialty Lines underwriters have responsibility for underwriting specific professional liability products within designated Company marketing regions. The Specialty Lines underwriters located in regional offices work closely with the marketing department to generate profitable business. The Specialty Property & Inland Marine group, which has authority for the Company's large property and inland marine products, currently consists of two home office underwriters who are supported by underwriting assistants and other personnel. In addition, the Company has strategically placed 13 underwriting teams within the Company's existing field offices. These regional underwriters have total responsibility for sales, underwriting, policy issuance, and overall management of the book of business. All regional and home office Specialty Property & Inland Marine underwriters report to the Vice President of Specialty Property & Inland Marine Underwriting. The Company believes that by delivering excellent service on a local basis, relationship building will be enhanced. 5 6 The Company uses a combination of Insurance Services Office, Inc. ("ISO") coverage forms and rates and independently filed forms and rates. Coverage forms and rates are independently developed in situations where the line of business is not supported by ISO or where management believes the ISO forms and rates do not adequately address the risk. Departures from ISO forms are also used to differentiate the Company's products from its competitor's products and are independently filed. The Company attempts to follow conservative underwriting and pricing practices. When necessary, the Company is willing to reunderwrite, sharply curtail or discontinue a product deemed to present unacceptable risks. Written underwriting guidelines are maintained, and updated regularly, for all classes of business underwritten. Adherence to underwriting guidelines is maintained through underwriting audits. Product price levels are measured utilizing a price monitoring system which measures the aggregate price level of the book of business. This system is intended to assist management and underwriters in recognizing and correcting price deterioration before it results in underwriting losses. Reinsurance The Company's casualty reinsurance agreement with Swiss Re America (the "Reinsurer") provides that the Company bears the first layer of liability on each occurrence (varying from $100,000 to $500,000 based upon the specific product) with the Reinsurer bearing the remaining contractual liability to policy limits of $1.0 million. Casualty risks in excess of $1.0 million up to $11.0 million are reinsured under a casualty treaty ("Excess Treaty") placed through a reinsurance broker. GE RE, Trenwick, and Liberty Mutual currently participate on the Excess Treaty at 50%, 25%, and 25%, respectively. Each of these reinsurers is rated "A" (Excellent) or better by A.M. Best Company. Facultative reinsurance is placed for each casualty risk in excess of $11.0 million. The Company also has an excess casualty reinsurance agreement with the Reinsurer providing an additional $5.0 million of coverage for protection from exposures such as extra-contractual obligations and judgments in excess of policy limits. Additionally, the Company has an errors and omissions insurance policy which provides an additional $5.0 million of coverage with respect to these exposures. The Company's property excess of loss reinsurance treaty provides that the Company bears the first $500,000 layer of loss on each risk with General Reinsurance and Swiss Re America bearing the next $9.5 million layer of loss on each risk on a 55% / 45% quota share basis, respectively. The Company has an automatic facultative excess of loss cover with General Reinsurance and Swiss Re America (participating on a 55% / 45% quota share basis, respectively) for each property risk in excess of $10.0 million up to $100.0 million. Additionally, the Company has property catastrophe reinsurance for property catastrophe losses in excess of $2.0 million up to $14.0 million. The Company seeks to limit the risk of a reinsurer's default in a number of ways. First, the Company principally contracts with large reinsurers that are rated at least "A-" (Excellent) by A.M. Best. Second, the Company seeks to collect the obligations of its reinsurers on a timely basis. This collection effort is supported by a reinsurance recoverable system that is regularly monitored. Finally, the Company typically does not write casualty policies in excess of $10.0 million nor property policies in excess of $50.0 million. The Company regularly assesses its reinsurance needs and seeks to improve the terms of its reinsurance arrangements as market conditions permit. Such improvements may involve increases in retentions, modifications in premium rates, changes in reinsurers and other matters. Marketing and Distribution Proactive risk selection based on sound underwriting criteria and relationship selling in clearly defined target markets continues to be the foundation of the Company's marketing plan. Within this framework, the Company's marketing effort is designed to assure a systematic and disciplined approach to developing business which is anticipated to be profitable. The Company's most important distribution channel is its production underwriting organization. The production underwriting organization is currently comprised of 160 employees located in 40 field offices in major markets across the country. The field offices are focused daily on interacting with prospective and existing insureds. In addition to this direct 6 7 marketing, relationships with approximately 4,000 brokers have been formed either as a result of the broker having a relationship with the insured, or through seeking the Company's expertise in one of its specialty products. The Company's preferred agent program, wherein business relationships are formed with brokers specializing in certain of the Company's business niches, has grown to 53 preferred agent relationships at year end 1998, representing approximately $32.0 million in gross written premium. The Company anticipates increasing the number of these relationships by approximately 30% in 1999 thereby further increasing the distribution of the Company's niche products. This mixed marketing concept not only provides the flexibility to work with the broker and/or policyholder but also provides the flexibility to seize emerging market opportunities. With regard to the Specialty Property & Inland Marine underwriting organization, the Company has developed working relationships with a variety of distribution channels including wholesalers, brokers, and select independent agents. The Company supplements its marketing efforts through trade shows, direct mailings and national advertisements placed in trade magazines serving industries in which the Company specializes. Product Development The Company continually evaluates new product opportunities, consistent with its strategic focus on selected market niches. Direct contacts between the Company's field and home office personnel and its customers have produced a number of new product ideas. All new product ideas are presented to the Product Development Committee (the "Committee") for consideration. The Committee, currently composed of the Company's two most senior executives, as well as officers from the underwriting and claims departments, meets regularly to review the feasibility of products from a variety of perspectives, including underwriting risk, marketing and distribution, reinsurance, long-term viability and consistency with the Company's culture and philosophy. For each new product, an individualized test market plan is prepared, addressing such matters as the appropriate distribution channel (e.g., a limited number of selected production underwriters), an appropriate cap on premiums to be generated during the test market phase and reinsurance requirements for the test market phase. Test market products may involve lower retentions than customarily utilized. After a new product is approved for test marketing, the Company monitors its success based on specified criteria (e.g., underwriting results, sales success, product demand and competitive pressures). If expectations are not realized, the Company either moves to improve results by initiating adjustments or abandons the product. Claims Management and Administration In accordance with its emphasis on underwriting profitability, the Company actively manages claims under its policies in an effort to investigate reported incidents at the earliest juncture, service insureds and minimize fraud. Claim files are regularly audited by claims supervisors and the Company's reinsurers in an attempt to ensure that claims are being processed properly and that reserves are being set at appropriate levels. Claims examiners are expected to set conservative reserves, an important factor in the Company's reserve development over the years. See "Loss and Loss Adjustment Expenses." The Company maintains a Special Investigations Unit to investigate suspicious claims and to serve as a clearinghouse for information concerning fraudulent practices primarily within the rental car industry. Working closely with a variety of industry contacts, including attorneys, investigators and rental car company fraud units, this unit has uncovered a number of fraudulent claims. Loss and Loss Adjustment Expenses The Company is liable for losses and loss adjustment expenses under its insurance policies and reinsurance treaties. While the Company's professional liability policies are written on claims-made forms and while claims on its other policies are generally reported promptly after the occurrence of an insured loss, in many cases several years may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the Company's payment of the loss. The Company reflects its liability for the ultimate payment of all incurred losses and loss adjustment expenses by establishing loss and loss adjustment expense reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred. 7 8 When a claim involving a probable loss is reported, the Company establishes a case reserve for the estimated amount of the Company's ultimate loss and loss adjustment expense. This estimate reflects an informed judgment, based on the Company's reserving practices and the experience of the Company's claims staff. Management also establishes reserves on an aggregate basis to provide for losses incurred but not reported ("IBNR"), as well as future development on claims reported to the Company. As part of the reserving process, historical data are reviewed and consideration is given to the anticipated effect of various factors, including known and anticipated legal developments, changes in societal attitudes, inflation and economic conditions. Reserve amounts are necessarily based on management's estimates and judgments; as new data become available and are reviewed, these estimates and judgments are revised, resulting in increases or decreases to existing reserves. To verify the adequacy of its reserves, the Company engages independent actuarial consultants to perform interim loss reserve analyses and annual certifications. The following table sets forth a reconciliation of beginning and ending reserves for unpaid loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, for the years indicated. As a result of changes in estimates of insured events of prior years, the Company reduced losses and loss adjustment expenses incurred by $3,170,000, $1,716,000 and $965,000 in 1998, 1997 and 1996, respectively. Such favorable development was due to losses emerging at a lesser rate than had been originally anticipated when the initial reserves for the applicable accident years were estimated.
As of and For the Years Ended December 31, ----------------------------------------------- 1998 1997 1996 ---- ---- ---- (Dollars in Thousands) Unpaid loss and loss adjustment expenses at beginning of year (1) .................................. $ 108,928 $ 85,723 $ 68,246 --------- --------- --------- Provision for losses and loss adjustment expenses for current year claims .................................... 69,544 56,725 41,083 Decrease in estimated ultimate losses and loss adjustment expenses for prior year claims .............. (3,170) (1,716) (965) --------- --------- --------- Total incurred losses and loss adjustment expenses ........ 66,374 55,009 40,118 --------- --------- --------- Loss and loss adjustment expense payments for claims attributable to: Current year ........................................... 13,402 9,512 7,427 Prior years ............................................ 26,870 22,292 15,214 --------- --------- --------- Total payments ............................................ 40,272 31,804 22,641 --------- --------- --------- Unpaid loss and loss adjustment expenses at end of year (1) $ 135,030 $ 108,928 $ 85,723 ========= ========= =========
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported in the Consolidated Financial Statements because of the inclusion therein of reinsurance receivables of $16,120, $13,502 and $10,919 at December 31, 1998, 1997 and 1996, respectively. The following table presents the development of unpaid loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, from 1988 through 1998. The top line of the table shows the estimated reserve for unpaid loss and loss adjustment expenses at the balance sheet date for each of the indicated years. These figures represent the estimated amount of unpaid loss and loss adjustment expenses for claims arising in the current year and all prior years that were unpaid at the balance sheet date, including IBNR losses. The table also shows the re-estimated amount of the previously recorded unpaid loss and loss adjustment expenses based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. 8 9 AS OF AND FOR THE YEARS ENDED DECEMBER 31, (Dollars in Thousands)
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- $ 10,615 $ 12,198 $ 15,930 $ 22,248 $ 31,981 $ 38,714 $ 53,595 $ 68,246 Cumulative Paid as of: 1 year later .................... 2,955 3,354 4,286 6,698 9,865 10,792 12,391 15,214 2 years later .................... 4,832 6,249 8,084 12,485 16,290 19,297 23,139 31,410 3 years later .................... 6,584 8,807 10,838 16,288 21,253 24,991 33,511 40,637 4 years later .................... 7,813 10,155 12,907 17,780 24,299 28,903 38,461 5 years later .................... 8,341 11,217 13,211 19,406 25,793 30,558 6 years later .................... 8,748 11,497 13,792 19,898 26,321 7 years later .................... 8,704 11,760 14,074 20,246 8 years later .................... 8,696 11,902 14,329 9 years later .................... 8,746 11,905 10 years later ................... 8,754 Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year: 1 year later ..................... 9,535 12,628 15,953 22,056 30,538 38,603 52,670 67,281 2 years later .................... 9,825 12,644 15,712 21,327 30,428 38,016 52,062 66,061 3 years later .................... 9,645 12,424 14,822 21,198 29,648 37,184 51,149 63,872 4 years later .................... 9,437 11,947 14,811 21,118 29,306 36,272 49,805 5 years later .................... 9,053 11,836 14,841 21,399 28,553 35,783 6 years later .................... 8,859 12,060 14,593 21,106 28,370 7 years later .................... 8,770 12,008 14,606 21,013 8 years later .................... 8,783 12,039 14,596 9 years later .................... 8,804 12,039 10 years later ................... 8,804 Cumulative Redundancy Dollars ........................ $ 1,811 $ 159 $ 1,333 $ 1,235 $ 3,611 $ 2,931 $ 3,790 $ 4,374 Percentage ..................... 17.1% 1.3% 8.4% 5.6% 11.3% 7.6% 7.1% 6.4%
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED 1996 1997 1998 ---- ---- ---- $ 85,723 $108,928 $135,030 Cumulative Paid as of: 1 year later .................... 22,292 26,870 2 years later .................... 38,848 3 years later .................... 4 years later .................... 5 years later .................... 6 years later .................... 7 years later .................... 8 years later .................... 9 years later .................... 10 years later ................... Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year: 1 year later ..................... 84,007 105,759 2 years later .................... 81,503 3 years later .................... 4 years later .................... 5 years later .................... 6 years later .................... 7 years later .................... 8 years later .................... 9 years later .................... 10 years later ................... Cumulative Redundancy Dollars ........................ $ 4,220 3,170 Percentage ..................... 4.90% 2.9%
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported in the Consolidated Financial Statements because of the inclusion therein of reinsurance receivables of $16,120, $13,502, $10,919, $9,440, $5,580, $5,539, $1,770, $1,267, $1,672 and $1,591 at December 31, 1998, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, and 1989, respectively. (2) The Company maintains its historical loss records net of reinsurance and therefore is unable to conform the presentation of this table to the financial statements. 9 10 The cumulative redundancy represents the aggregate change in the reserve estimated over all prior years, and does not present accident year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. The unpaid loss and loss adjustment expense of PIIC and PIC, as reported in their Annual Statements prepared in accordance with statutory accounting practices and filed with state insurance departments, differ from those reflected in the Company's financial statements prepared in accordance with generally accepted accounting principles ("GAAP") with respect to recording the effects of reinsurance. Unpaid loss and loss adjustment expenses under statutory accounting practices are reported net of the effects of reinsurance whereas under GAAP these amounts are reported without giving effect to reinsurance in accordance with Statement of Financial Accounting Standards ("SFAS") No. 113. Under GAAP, reinsurance receivables, with a corresponding increase in unpaid loss and loss adjustment expense, have been recorded. (See footnote (1) on Page 10 for amounts). There is no effect on net income or shareholders' equity due to the difference in reporting the effects of reinsurance between statutory accounting practices and GAAP as discussed above. Operating Ratios Statutory Combined Ratio The statutory combined ratio, which is the sum of (a) the ratio of loss and loss adjustment expenses incurred to net earned premiums (loss ratio) and (b) the ratio of policy acquisition costs and other underwriting expenses to net written premiums (expense ratio), is the traditional measure of underwriting experience for insurance companies. Generally, if the combined ratio is below 100%, an insurance company has an underwriting profit and if it is above 100%, the insurer has an underwriting loss. The following table reflects the consolidated loss, expense and combined ratios of the Insurance Subsidiaries together with the property and casualty industry-wide combined ratios after policyholders' dividends.
For the Years Ended December 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Loss Ratio ........................................... 54.1% 55.3% 55.7% 57.1% 59.5% Expense Ratio ........................................ 31.0% 29.1% 31.1% 29.6% 29.9% ----- ----- ----- ----- ----- Combined Ratio ....................................... 85.1% 84.4% 86.8% 86.7% 89.4% ===== ===== ===== ===== ===== Industry Combined Ratio after Policyholders" Dividends 104.8% 101.6% 105.8% 106.3% 108.3% ===== ===== ===== ===== ===== (1) (2) (2) (2) (2)
(1) Source: Best's Review/Preview PC 1999 (Estimated 1998). (2) Source: Best's Aggregates & Averages, 1998 Edition. 10 11 Premium-to-Surplus Ratio: While there are no statutory provisions governing premium-to-surplus ratios, regulatory authorities regard this ratio as an important indicator as to an insurer's ability to withstand abnormal loss experience. Guidelines established by the National Association of Insurance Commissioners (the "NAIC") provide that an insurer's net premium-to-surplus ratio is satisfactory if it is below 3 to 1. The following table sets forth, for the periods indicated, net written premiums to policyholders' surplus for the Insurance Subsidiaries (statutory basis):
As of and For the Years Ended December 31, ----------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ---------- ----------- (Dollars in Thousands) Net Written Premiums.................. $ 143,036 $ 111,797 $ 83,994 $ 62,072 $ 55,398 Policyholders' Surplus................ $ 152,336 $ 105,985 $ 81,906 $ 67,500 $ 56,027 Premium to Surplus Ratio.............. 1.0 to 1.0 1.0 to 1.0 1.0 to 1.0 .9 to 1.0 1.0 to 1.0
Investments The Company's investment objective continues to be the realization of relatively high levels of investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company's A.M. Best and Standard & Poors' ratings. The Company utilizes professional investment managers for its fixed maturity and equity investments, which consist of diversified issuers and issues. At December 31, 1998, the Company had total investments with a carrying value of $356.5 million. At December 31, 1998, 79.6% of the Company's total investments were investment grade fixed maturity securities, including U.S. treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate debt securities, collateralized mortgage securities and asset backed securities. The collateralized mortgage securities and asset backed securities consist of short tranche securities possessing favorable pre-payment risk profiles. The remaining 20.4% of the Company's total investments consisted primarily of publicly-traded common stock securities. The following table sets forth information concerning the composition of the Company's total investments at December 31, 1998:
Estimated Percent of Amortized Market Carrying Carrying Cost Value Value Value -------- -------- -------- ---------- (Dollars in Thousands) Fixed Maturities: Obligations of States and Political Subdivisions ....................... $112,196 $117,195 $117,195 32.9% U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies .......... 7,706 7,918 7,918 2.2 Corporate and Bank Debt Securities .. 69,532 69,391 69,391 19.5 Collateralized Mortgage Securities .. 42,755 42,820 42,820 12.0 Asset Backed Securities ............. 46,368 46,394 46,394 13.0 Equity Securities .................... 43,441 72,768 72,768 20.4 -------- -------- -------- ----- Total Investments .................. $321,998 $356,486 $356,486 100.0% ======== ======== ======== =====
At December 31, 1998, all of the Insurance Subsidiaries' fixed maturity securities consisted of U.S. government securities or securities rated "1" or "2" by the NAIC; the majority of the Company's fixed maturity securities were rated "A-" or better by Standard & Poor's Corporation. 11 12 The cost and estimated market value of fixed maturity securities at December 31, 1998, by remaining original contractual maturity, are set forth below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations, with or without call or prepayment penalties:
Amortized Cost Estimated Market Value ---------------- ------------------------ (Dollars in Thousands) Due in one year or less....................................... $ 10,571 $ 10,737 Due after one year through five years......................... 33,688 34,237 Due after five years through ten years........................ 118,704 123,095 Due after ten years........................................... 26,471 26,435 Collateralized Mortgage and Asset Backed Securities........... 89,123 89,214 ------------- -------------- Total.................................................... $ 278,557 $ 283,718 ============= ==============
Investments of the Insurance Subsidiaries must comply with applicable laws and regulations which prescribe the type, quality and diversification of investments. In general, these laws and regulations permit investments, with specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, real estate mortgages and real estate. Regulation General: Insurance companies are subject to supervision and regulation in the states in which they transact business. Such supervision and regulation, designed primarily for the protection of policyholders and not shareholders, relates to most aspects of an insurance company's business and includes such matters as authorized lines of business; underwriting standards; financial condition standards; licensing of insurers; investment standards; premium levels; policy provisions; the filing of annual and other financial reports prepared on the basis of Statutory Accounting Practices ("SAP"); the filing and form of actuarial reports; the establishment and maintenance of reserves for unearned premiums; losses and loss adjustment expenses; transactions with affiliates; dividends; changes in control; and a variety of other financial and non-financial matters. Because the Insurance Subsidiaries are domiciled in Pennsylvania, the Pennsylvania Department of Insurance (the "Department") has primary authority over the Company. Regulation of Insurance Holding Companies: Pennsylvania, like many other states, has laws governing insurance holding companies (such as Philadelphia Insurance). Under Pennsylvania law, a person generally must obtain the Department's approval to acquire, directly or indirectly, 10% or more of the outstanding voting securities of Philadelphia Insurance or either Insurance Subsidiary. The Department's determination of whether to approve any such acquisition is based on a variety of factors, including an evaluation of the acquiror's financial stability, the competence of its management and whether competition in Pennsylvania would be reduced. The Pennsylvania statute requires every Pennsylvania-domiciled insurer which is a member of an insurance holding company system to register with the Department by filing and keeping current a registration statement on a form prescribed by the NAIC. The Pennsylvania statute also specifies that at least one-third of the board of directors and each committee thereof, of either the domestic insurer or its publicly owned holding company (if any), must be comprised of outsiders (i.e., persons who are neither officers, employees nor controlling shareholders of the insurer or any affiliate). In addition, the domestic insurer or its publicly held holding company must establish one or more committees comprised solely of outside directors, with responsibility for recommending the selection of independent certified public accountants; reviewing the insurer's financial condition, the scope and results of the independent audit and any internal audit; nominating candidates for director; evaluating the performance of principal officers; and recommending to the board the selection and compensation of principal officers. Dividend Restrictions: As an insurance holding company, Philadelphia Insurance will be largely dependent on dividends and other permitted payments from the Insurance Subsidiaries to pay any cash dividends to its shareholders. The ability of the Insurance Subsidiaries to pay dividends to the Company is subject to Pennsylvania insurance laws, which currently require that dividends be paid from profits and afford the Department 30 days to disapprove the payment of "extraordinary dividends" from a domestic property and casualty insurer to its shareholders (i.e., dividends over a twelve-month period that exceed the greater of (a) 10% of policyholders' surplus shown on the latest Annual Statement filed with the Department, or (b) the net income for the period covered by such statement but in no event to exceed the amount of unassigned funds (i.e., retained earnings plus or minus net unrealized gains or losses). In addition, the law specifies factors 12 13 to be considered by the Department to allow it to determine that policyholders' surplus after the payment of dividends is reasonable in relation to an insurance company's outstanding liabilities and adequate to its financial needs. Such factors include, for example, the size of the company, the extent to which its business is diversified among several lines of insurance, the number and size of risks insured, the nature and extent of the company's reinsurance, and the adequacy of the company's reserves. Accumulated statutory profits of the Insurance Subsidiaries from which dividends may be paid totaled $80.5 million at December 31, 1998. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $17.7 million of dividends in 1999 without obtaining prior approval from the Department. During the fourth quarter of 1998, for surplus allocation purposes, PIC paid a $5.5 million dividend to Philadelphia Insurance which Philadelphia Insurance subsequently contributed to PIIC. The National Association of Insurance Commissioners: In addition to state-imposed insurance laws and regulations, the Insurance Subsidiaries are subject to the general SAP and reporting formats established by the NAIC. The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulation of insurance companies. These model laws and regulations generally are not directly applicable to an insurance company unless and until they are adopted by applicable state legislatures or departments of insurance. However, NAIC model laws and regulations have become increasingly important in recent years, due primarily to the NAIC's state regulatory accreditation program. Under this program, states which have adopted certain required model laws and regulations and meet various staffing and other requirements are "accredited" by the NAIC. Such accreditation is the cornerstone of an eventual nationwide regulatory network and there is a certain degree of political pressure on individual states to become accredited by the NAIC. Because the adoption of certain model laws and regulations is a prerequisite to accreditation, the NAIC's initiatives have taken on a greater level of practical importance in recent years. The NAIC accredited Pennsylvania under the NAIC Financial Regulation Standards in March 1994. All the states have adopted the NAIC's financial reporting form, which is typically referred to as the NAIC "Annual Statement" and most states, including Pennsylvania, generally defer to the NAIC with respect to SAP. In this regard, the NAIC has a substantial degree of practical influence and is able to accomplish certain quasi-legislative initiatives through amendments to the NAIC annual statement and applicable accounting practices and procedures. For instance, in recent years the NAIC has required all insurance companies to have an annual statutory financial audit and an annual actuarial certification as to loss reserves by including such requirements within the annual statement instructions. Capital and Surplus Requirements: PIC's eligibility to write insurance on a surplus lines basis in most jurisdictions is dependent on its compliance with certain financial standards, including the maintenance of a requisite level of capital and surplus and the establishment of certain statutory deposits. In recent years, many jurisdictions have increased the minimum financial standards applicable to surplus lines eligibility. For example, California and certain other states have adopted regulations which require surplus lines companies operating therein to maintain minimum capital of $15 million, calculated as set forth in the regulations. PIC maintains capital to meet these requirements. Risk-Based Capital: Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. Based on the standards currently adopted, the policyholders' surplus at December 31, 1998 is in excess of the prescribed risk-based capital requirements. Insurance Guaranty Funds: The Insurance Subsidiaries are subject to guaranty fund laws which can result in assessments, up to prescribed limits, for losses incurred by policyholders as a result of the impairment or insolvency of unaffiliated insurance companies. Typically, an insurance company is subject to the guaranty fund laws of the states in which it conducts insurance business; however, companies which conduct business on a surplus lines basis in a particular state are generally exempt from that state's guaranty fund laws. During the five years ended December 31, 1998, the amount of such guaranty fund assessments paid by the Company was not material. Shared Markets: As a condition of its license to do business in various states, PIIC is required to participate in mandatory property-liability shared market mechanisms or pooling arrangements which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase coverage voluntarily provided by private insurers. In addition, some states require automobile insurers to participate in reinsurance pools for claims that exceed a certain amount. PIIC's participation in such shared markets or pooling mechanisms is generally in amounts related to the amount of PIIC's direct writings for the type of coverage written by the specific pooling mechanism in the applicable state. Possible New Legislation, Regulations or Interpretations: New regulations and legislation have been (and are being) proposed from time to time to limit damage awards; to bring the industry under regulation by the federal government; to control premiums, policy terminations and other policy terms; and to impose new taxes and assessments. It is not possible 13 14 to determine whether any of these proposals will be adopted in any jurisdictions and, if so, in what form or in what jurisdictions. In addition, the Company could be affected by interpretations of state insurance regulators with respect to licensing requirements applicable to the product distribution method currently utilized by the rent a car companies that are customers of the Company. The impact of these initiatives on the Company can not be determined. Competition The commercial property and casualty insurance industry is highly competitive. Many of the Company's existing and potential competitors are larger, have considerably greater financial and other resources, have greater experience in the insurance industry and offer a broader line of insurance products than the Company. Not only does the Company compete with other insurers, it also competes with new forms of insurance organizations such as risk retention groups and self-insurance mechanisms. Overall, due to the abundance of capital in the insurance industry, the current business climate remains competitive from a solicitation and pricing standpoint. In the context of the current environment, the Company will not sacrifice pricing guidelines for premium volume and will "walk away", if necessary, from writing business that does not meet established underwriting standards and pricing guidelines. Management believes, though, that the Company's mixed marketing strategy is a strength in this market environment, in that it provides the flexibility to quickly deploy the marketing efforts of the Company's direct production underwriters from soft market segments to market segments with emerging opportunities. Additionally, through the mixed marketing strategy, the Company's production underwriters have established relationships with approximately 4,000 brokers, thus facilitating a regular flow of submissions. Employees As of February 26, 1999, the Company had 386 full-time employees and 13 part-time employees. The Company actively encourages its employees to continue their educational efforts and aids in defraying their educational costs (including 100% of education costs related to the insurance industry). Management believes that the Company's relations with its employees are generally excellent. Item 2. DESCRIPTION OF PROPERTY The Company leases certain office space in Bala Cynwyd, PA which serves as its headquarters location and also leases 40 field offices for its field marketing organization. The Company sold its previous headquarters building in Wynnewood, PA for proceeds of approximately $2.0 million during 1998. Item 3. LEGAL PROCEEDINGS The Company is not subject to any material pending legal proceedings other than ordinary routine litigation incidental to its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1998. 14 15 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS During the fourth quarter of 1998, the Company did not sell any of its securities which were not registered under the Securities Act of 1933. The Company's common stock, no par value, trades on The NASDAQ Stock Market under the symbol "PHLY". As of February 23, 1999, there were 272 holders of record and 1,180 beneficial shareholders of the Company's common stock. The high and low sales prices of the common stock, as reported by the National Association of Securities Dealers, were as follows:
1998 1997(1) ----------------------------- ----------------------------- Quarter High Low High Low ------------ ------------- ------------ ------------- First 21.750 16.750 15.000 11.250 Second 24.375 20.000 17.563 14.000 Third 23.000 18.625 23.250 16.500 Fourth 23.688 19.375 23.000 15.688
(1) 1997 First, Second, and Third Quarters restated to reflect a two-for-one split of the Company's common stock distributed in November 1997. The Company did not declare cash dividends on its common stock in 1998 and 1997, and currently intends to retain its earnings to enhance future growth. The payment of dividends by the Company will be determined by the Board of Directors and will be based on general business conditions and legal and regulatory restrictions. As a holding company, the Company is dependent upon dividends and other permitted payments from its subsidiaries to pay any cash dividends to its shareholders. The ability of the Company's insurance subsidiaries to pay dividends to the Company is subject to regulatory limitations (see Note 2 to the Consolidated Financial Statements). 15 16 Item 6. SELECTED FINANCIAL DATA
As of and For the Years Ended December 31, ----------------------------------------------------------------------------- (In Thousands, Except Share and Per Share Data) 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ Operations Statement Data: Gross Written Premiums ................... $ 197,408 $ 159,091 $ 136,855 $ 104,180 $ 89,099 Gross Earned Premiums .................... $ 174,737 $ 150,128 $ 121,820 $ 99,507 $ 84,657 Net Written Premiums ..................... $ 143,036 $ 111,797 $ 83,994 $ 62,072 $ 55,398 Net Earned Premiums ...................... $ 122,687 $ 100,555 $ 72,050 $ 58,188 $ 52,085 Net Investment Income .................... 15,448 9,703 7,910 6,506 4,902 Net Realized Investment Gain (Loss) ...... 474 (16) 260 181 (1,697) Other Income ............................. 219 228 282 309 314 - -------------------------------------------------------------------------------------------------------------------------- Total Revenue ....................... 138,828 110,470 80,502 65,184 55,604 - -------------------------------------------------------------------------------------------------------------------------- Net Loss and Loss Adjustment Expenses .............................. 66,374 55,009 40,118 33,227 31,009 Acquisition Costs and Other Underwriting Expenses ................. 38,422 31,344 22,210 17,105 15,541 Other Operating Expenses ................. 2,212 1,909 1,386 2,564 1,347 - -------------------------------------------------------------------------------------------------------------------------- Total Losses and Expenses ........... 107,008 88,262 63,714 52,896 47,897 - -------------------------------------------------------------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust ...................... 4,770 - -------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes ............... 27,050 22,208 16,788 12,288 7,707 Total Income Tax Expense ............ 7,022 5,338 3,414 2,458 1,734 - -------------------------------------------------------------------------------------------------------------------------- Net Income .......................... $ 20,028 $ 16,870 $ 13,374 $ 9,830 $ 5,973 - -------------------------------------------------------------------------------------------------------------------------- Weighted-Average Common Shares Outstanding (1) ....................... 12,249,262 12,193,659 11,879,506 11,627,702 11,627,702 Weighted-Average Share Equivalents Outstanding (1) ....................... 2,680,165 2,736,039 2,373,742 2,049,004 1,647,902 - -------------------------------------------------------------------------------------------------------------------------- Weighted-Average Shares and Share Equivalents Outstanding (1) ........... 14,929,427 14,929,698 14,253,248 13,676,706 13,275,604 - -------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share (1)(2) .......... $ 1.63 $ 1.38 $ 1.13 $ 0.85 $ 0.51 - -------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share(1)(2) ......... $ 1.34 $ 1.13 $ 0.94 $ 0.72 $ 0.45 - -------------------------------------------------------------------------------------------------------------------------- Year End Financial Position: Total Investments and Cash and Cash Equivalents ................ $ 388,059 $ 229,599 $ 180,061 $ 140,086 $ 105,720 Total Assets .......................... 469,198 288,126 225,938 174,148 140,718 Unpaid Loss and Loss Adjustment Expenses ............................ 151,150 122,430 96,642 77,686 59,175 Minority Interest in Consolidated Subsidiaries: ....................... 98,905 Total Shareholders' Equity ............ 137,483 111,284 85,642 68,316 52,600 Common Shares Outstanding(1) .......... 12,200,563 12,242,431 12,079,612 11,627,702 11,627,702 - -------------------------------------------------------------------------------------------------------------------------- Insurance Operating Ratios (Statutory Basis): Net Loss and Loss Adjustment Expenses to Net Earned Premiums ..... 54.1% 55.3% 55.7% 57.1% 59.5% Underwriting Expenses to Net Written Premiums .................... 31.0% 29.1% 31.1% 29.6% 29.9% - -------------------------------------------------------------------------------------------------------------------------- Combined Ratio ........................... 85.1% 84.4% 86.8% 86.7% 89.4% ========================================================================================================================== A.M. Best Rating ......................... A+ A A A A (Superior) (Excellent) (Excellent) (Excellent) (Excellent)
(1) 1996, 1995, and 1994 restated to reflect a two-for-one split of the Company's common stock distributed in November 1997. (2) 1996, 1995, and 1994 earnings per share amounts restated in accordance with the provisions of SFAS No. 128 adopted as of December 31, 1997. 16 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Operations 1998 marked the fifth anniversary for the Company as a publicly traded entity. During this five-year period, gross written premiums increased from $57.1 million to $197.4 million, the GAAP basis combined ratio (the sum of the net loss and loss adjustment expenses and acquisition costs and other underwriting expenses divided by net earned premiums) averaged 86.4%, and the net operating income compound annual growth rate was 42.1%. The Company believes these achievements are primarily due to its continued focus on generating underwriting profits through conservative underwriting and pricing discipline, its differentiation in the marketplace through development of value-added coverage and service enhancements, and its multiple channels of distribution. 1998 was a year in which the Company not only continued to realize profitable growth, but also built upon its existing franchise foundation. For 1998, the Company reported net income of $20.0 million, an 18.3% increase over its net income of $16.9 for 1997. This increase was principally due to a 24.1% increase in gross written premiums, a 58.8% increase in net investment income and profitable underwriting which resulted in an 85.4% GAAP basis combined ratio, which, once again, is substantially lower than the commercial property and casualty insurance industry as a whole. The Company's gross written premium growth during the year was attributable to a number of factors, including: the continued growth and strengthening of the Company's field marketing organization from 100 professionals at year end 1997 to 160 at year end 1998 and the addition of two new field offices; the addition of a Specialty Property and Inland Marine underwriting organization which brings a new line of business to the Company; increased product distribution through the Preferred Agent Program by the addition of 18 new Preferred Agent relationships; and new product offerings. Additionally, the 58.8% growth in net investment income was due to the 63.8% increase in total investments during 1998. This growth in total investments was primarily due to investing the proceeds of the Company's FELINE PRIDES(SM) security offering. During 1998, the Company completed a $103.5 million FELINE PRIDES(SM) security offering, thereby adding new capital to the Company. The Company intends to use the proceeds from this security offering for general corporate purposes, which may include acquisitions (including, without limitation, acquisitions of programs or books of business), capital expenditures, capital contributions, and the repurchase by the Company of its common stock. From these proceeds, $33.1 million was contributed to the Company's subsidiaries, of which, $20.0 million was contributed to the Company's insurance subsidiaries to support anticipated growth. Additionally, $3.1 million was utilized to buy back the Company's common stock, under a stock buy-back program of up to $10.0 million authorized by the Company's Board of Directors. The Company's insurance subsidiaries are rated "A+" (Superior) by A.M. Best Company and have been assigned an "A" claims paying ability rating by Standard & Poors'. Investments The Company's investment objective continues to be the realization of relatively high levels of investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company's A.M. Best and Standard & Poors' ratings. The Company utilizes professional investment managers for its fixed maturity and equity investments. These investments consist of diversified issuers and issues, and as of December 31, 1998 approximately 73% of the total invested assets (total investments plus cash equivalents) consisted of investments in fixed maturity securities. The Company increased its existing portfolio of fixed maturity securities by predominately investing in investment grade taxable fixed maturity securities during 1998 due to the more favorable after-tax yields as compared to tax-exempt fixed maturity securities. At the end of 1998, investment grade taxable fixed maturity securities represented 51.5% of the total invested assets, compared to 35.7% as of the end of 1997. The Company has also continued to invest in common stock of quality growth-oriented mid-and large-cap companies seeking to achieve diversification and capital appreciation in its invested assets. At December 31, 1998, common stocks comprised 18.8% of invested assets, compared to 20.9% as of the end of 1997. 17 18 The Company increased its existing portfolio of collateralized mortgage and asset backed securities during 1998 in order to realize more favorable after-tax yields. Collateralized mortgage and asset backed securities amounted to $42.8 million and $46.4 million, respectively, as of December 31, 1998 and $7.3 and $11.3, respectively, as of December 31 1997. These securities are short tranche securities possessing favorable prepayment risk profiles. The Company had no derivative financial instruments. RESULTS OF OPERATIONS (1998 versus 1997) Premiums: Gross written premiums grew $38.3 million (24.1%) to $197.4 million in 1998 from $159.1 million in 1997; gross earned premiums grew $24.6 million (16.4%) to $174.7 million in 1998 from $150.1 million in 1997; net written premiums increased $31.2 million (27.9%) to $143.0 million in 1998 from $111.8 million in 1997; and net earned premiums grew $22.1 million (22.0%) to $122.7 million in 1998 from $100.6 million in 1997. The overall growth in premiums are attributable to a number of factors including: - - Expansion of marketing efforts relating to commercial auto, commercial package, and specialty lines products through the increase in the Company's field organization to a total of 160 professionals. - - The continued development and growth of the Company's Preferred Agent Program (18 new preferred relationships formed in 1998), initiated in 1996, wherein business relationships are formed with brokers specializing in certain of the Company's business niches, thereby increasing the distribution of the Company's niche products. - - The addition of a new Specialty Property and Inland Marine underwriting organization during the fourth quarter of 1998 as well as several other new programs during the year. Overall premium growth has been offset in part by the loss of accounts in certain market niches due to inadequate pricing levels being experienced as a result of market competition. Consistent with its underwriting focus, the Company has maintained pricing levels for its insurance products reflective of its underwriting assessment. As a result, loss in premium writings will occur due to inadequate pricing levels. Net Investment Income: Net investment income approximated $15.4 million in 1998 and $9.7 million in 1997. Total investments grew to $356.5 million at December 31, 1998 from $217.7 million at December 31, 1997, primarily due to investing the proceeds from the Company's FELINE PRIDES(SM) security offering and cash flows provided from operating activities. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $11.4 million (20.7%) to $66.4 million in 1998 from $55.0 million in 1997 and the loss ratio decreased to 54.1% in 1998 from 54.7% in 1997. The increase in net loss and loss adjustment expenses was due primarily to the 22.0% growth in net earned premiums. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $7.1 million (22.7%), to $38.4 million in 1998 from $31.3 million in 1997. This increase was due primarily to the 22.0% growth in net earned premiums. Income Tax Expense: The Company's effective tax rates for 1998 and 1997 were 26.0% and 24.0%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities. The increase in the effective tax rate is principally due to a greater investment of cash flows in taxable securities relative to tax-exempt securities and greater net investment gains on the sale of securities in 1998 vs. 1997. RESULTS OF OPERATIONS (1997 versus 1996) Premiums: Gross written premiums grew $22.2 million (16.2%) to $159.1 million in 1997 from $136.9 million in 1996; gross earned premiums grew $28.3 million (23.2%) to $150.1 million in 1997 from $121.8 million in 1996; net written premiums increased $27.8 million (33.1%) to $111.8 million in 1997 from $84.0 million in 1996; and net earned premiums 18 19 grew $28.5 million (39.5%) to $100.6 million in 1997 from $72.1 million in 1996. The overall growth in premiums and the varying growth rates for gross written premiums, gross earned premiums, net written premiums and net earned premiums are attributable to a number of factors including: - - Overall premium growth is primarily attributable to: continued marketing efforts relating to commercial auto, commercial package, and specialty lines products, along with the continued development of the Company's Preferred Agent Program, initiated in 1996, wherein business relationships are formed with brokers specializing in certain of the Company's business niches, thereby increasing the distribution of the Company's niche products; the increase of the Company's proprietary field organization to a total of 100 professionals, production underwriters and customer service representatives. - - Net written and net earned premiums grew at higher rates than gross written and gross earned premiums, primarily due to the renegotiation of the Company's reinsurance program effective January 1, 1997, whereby more favorable reinsurance rates were realized while substantially the same retentions and coverages were maintained. Net Investment Income: Net investment income approximated $9.7 million in 1997 and $7.9 million in 1996. The increase of $1.8 million (22.8%) is due primarily to the increase in total investments as a result of cash flows provided from operating activities and the additional investment income as a result of the relative percentage increase in corporate taxable securities versus tax exempt municipal securities. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $14.9 million (37.2%) to $55.0 million in 1997 from $40.1 million in 1996 and the loss ratio decreased to 54.7% in 1997 from 55.7% in 1996. The increase in net loss and loss adjustment expenses was due primarily to the 39.5% growth in net earned premiums. Additionally, since more earned premium was retained from the lower cost of reinsurance (see "Premiums", above), and there was relatively higher net earned premium growth on products with low loss experience, the 37.2% increase in net loss and loss adjustment expenses was lower than the 39.5% net earned premium growth. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $9.1 million (41.0%), to $31.3 million in 1997 from $22.2 million in 1996. This increase was due primarily to the 39.5% growth in net earned premiums. Income Tax Expense: The Company's effective tax rates for 1997 and 1996 were 24.0% and 20.3%, respectively. The effective rates differed from the 35% statutory rate principally due to investment income earned on tax-exempt securities. The increase in the effective tax rate is principally due to a greater investment in taxable securities relative to tax-exempt securities during 1997. GROWTH OPPORTUNITIES The attainment of profitable new business continues to be a primary focus of the Company. During the fourth quarter of 1998, the Company added a new Specialty Property and Inland Marine underwriting organization which specializes in large property risks and all classes of inland marine insurance. The Company also anticipates growing its Preferred Agent Program, thereby further increasing the distribution of the Company's niche products. In addition, the Company has grown its field organization during 1998 to 160 professionals, including production underwriters and customer service representatives, and plans to further expand this organization in 1999, thereby further strengthening its resources to prospect the Company's existing niches for profitable new business. The Company also seeks acquisition opportunities to purchase programs or books of business which complement its niche markets or parallel its conservative underwriting and pricing discipline. The Company is exploring opportunities in this regard. Overall, due to the abundance of capital in the insurance industry, the current business climate remains very competitive from a solicitation and pricing standpoint. In the context of the current environment, the Company will not sacrifice underwriting standards or pricing guidelines solely for premium volume and will "walk away", if necessary, from writing business that does not meet established underwriting standards and pricing guidelines, as has occurred in the commercial auto niche over the past three years and in the Company's nursing home commercial package product during the fourth quarter of 1998. Management believes, though, that the Company's mixed marketing strategy is a strength in this market environment, in that it provides the flexibility to quickly deploy the marketing efforts of the Company's direct production underwriters from soft market segments to market segments with emerging opportunities. Additionally, through the mixed marketing strategy, the 19 20 Company's production underwriters have established relationships with approximately 4,000 brokers, thus facilitating a regular flow of submissions. LIQUIDITY AND CAPITAL RESOURCES Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose principal assets currently consist of 100% of the capital stock of the Insurance Subsidiaries (Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company), Maguire Insurance Agency, Inc., and PCHC Investment Corp. Its primary sources of funds are dividends from its subsidiaries and payments to it pursuant to tax allocation agreements with the Insurance Subsidiaries. For the year ended December 31, 1998, payments to PCHC pursuant to such tax allocation agreements totaled $9.3 million. The payment of dividends to PCHC from the Insurance Subsidiaries is subject to certain limitations imposed by the insurance laws of the Commonwealth of Pennsylvania. Accumulated statutory profits of the Insurance Subsidiaries from which dividends may be paid totaled $80.5 million at December 31, 1998. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $17.7 million of dividends in 1999 without obtaining prior approval from the Insurance Commissioner of the Commonwealth of Pennsylvania. During the fourth quarter of 1998, for surplus allocation purposes, Philadelphia Insurance Company paid a $5.5 million dividend to PCHC which PCHC subsequently contributed to Philadelphia Indemnity Insurance Company. On May 4, 1998, the consolidated capitalization of the Company increased by approximately $99.0 million from the sale of FELINE PRIDES(SM) and Trust Preferred securities. The sales of FELINE PRIDES(SM) consisted of 9,350,000 units of Income Prides with a stated amount of $10.00, 1,000,000 units of Growth Prides with a face amount equal to the stated amount, and 1,000,000 units of separate Trust Preferred securities with a stated amount of $10.00. $33.1 million from the sale of these securities was contributed to the Company's subsidiaries, of which, $20.0 million was contributed to the Insurance Subsidiaries. Additionally, $3.1 million was utilized by the Company to buy back its common stock under its stock buy-back program. The Company anticipates using the remaining proceeds for general corporate purposes, which may include acquisitions (including, without limitation, acquisitions of programs or books of business), capital expenditures, additional capital contributions to its subsidiaries and the repurchase by the Company of its common stock. The Company is obligated to make cash distributions, commencing May 4, 1998 through May 15, 2001, at a rate of 7.0% of the stated amount per annum for the Income Prides and the separate Trust Preferred securities and contract adjustment payments at the rate of .50% per annum of the $10.00 stated amount to the holders of the Growth Prides. Under certain reinsurance agreements, the Company is required to maintain investments in trust accounts to secure its reinsurance obligations (primarily the payment of losses and loss adjustment expenses on business it does not write directly). At December 31, 1998, the investment and cash balances in such trust accounts totaled approximately $11.2 million. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1998, the balance on deposit for the benefit of such policyholders totaled approximately $11.0 million. The Company has produced net cash from operations of $49.8 million in 1998, $38.0 million in 1997 and $37.6 million in 1996. Management believes that the Company has adequate liquidity to pay all claims and meet all other cash needs. The Insurance Subsidiaries, which operate under a pooling agreement, must have certain levels of policyholders' surplus to support premium writings. Guidelines of the National Association of Insurance Commissioners (the "NAIC") suggest that a property and casualty insurer's ratio of annual statutory net premium written to policyholders' surplus should not exceed 3-to-1. The ratio of combined annual statutory net premium written by the Insurance Subsidiaries to their combined policyholders' surplus was 1.0-to-1.0 for 1998 and 1997. Management believes that the policyholders' surplus, which was $152.3 million at December 31, 1998, will be sufficient to support current and anticipated premium writings. Risk-based capital is designed to measure the acceptable amount of capital and surplus an insurer should have, based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark level may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. Based on the standards currently contained in the applicable Pennsylvania Insurance Company statutes, the Insurance Subsidiaries' capital and surplus is in excess of the prescribed risk-based capital requirements. 20 21 Year 2000 Readiness Disclosure Background In the past, many computer software programs were written utilizing two digits rather than four in defining a year in the date field. As a result, date-sensitive computer software and embedded technology may recognize the year "00" in the date field as the year 1900 rather than 2000. This inability of computer hardware, software, and other technology to distinguish between the year 1900 and 2000 is generally referred to as the Year 2000 issue. If this situation occurs, the potential exists for computer systems and equipment failures or erroneous calculations by computer programs and embedded technology in the year 2000. Approach The Company has established a Year 2000 oversight committee comprised of certain senior officers and internal audit personnel to develop a comprehensive approach with regard to the Company's assessment and mitigation of the Year 2000 issue. To date, this approach has included the establishment of a Year 2000 task force comprised principally of various information technology personnel under the direction of the Company's Information Technology Vice President. The task force has been meeting on a regularly scheduled basis to assess the Company's readiness with regard to the Year 2000 issue. The task force has divided the Year 2000 project into three main sections: "IT Systems", which encompasses the Company's hardware and software (operating and application); "Non-IT Systems", which encompasses embedded technology and microprocessors contained in telecommunications and facilities management systems and other equipment; and "Third Parties", which encompasses the Company's major vendors, suppliers and customers. The general phases to the task force's approach are: Phase 1 Inventorying Year 2000 items; Phase 2 Prioritizing identified items; Phase 3 Assessing the Year 2000 Compliance of the items determined to be material to the Company; Phase 4 Creating a project plan to address material items that are determined not to be Year 2000 compliant; Phase 5 Executing the project plan, which includes repairing, replacing or upgrading of such items; Phase 6 Testing the material items. Status With respect to the "IT Systems" and "Non-IT Systems" sections, Phases 1 - 5 have been completed and Phase 6 is currently in process. The Company expects to have substantially all "IT Systems" and "Non-IT Systems" Year 2000 issues mitigated by March 31, 1999. With respect to the "Third Parties" section, the Company has identified and prioritized its critical vendors, suppliers and customers and communicated with them about their plans in addressing the Year 2000 problem. Evaluations of certain of the most critical vendors are in process and the "Third Party" section is expected to be completed by June 30, 1999. Costs The total cost associated with required modifications to become Year 2000 compliant is not expected to have a material effect on the Company's operations or financial condition. The estimated total cost to the Company of the Year 2000 project is approximately $125,000. The total amount expended on the project through December 31, 1998 was approximately $115,000, which related primarily to the "IT Systems" and "Non-IT Systems" section. This amount came from the Company's operating funds. 21 22 The estimated cost of the Company's Year 2000 efforts and the dates on which the Company believes it will complete the various phases referred to above are based on management's best estimates using various assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans and other matters. There can be no assurance that these estimates will prove to be accurate, and actual results could differ from those currently anticipated. Specific factors that could cause such differences include the availability and costs of personnel trained in Year 2000 issues, the ability to identify, assess, remediate, and test all relevant computer codes and embedded technology, the risk that reasonable testing will not uncover all Year 2000 problems and similar uncertainties. Risk Factors The Company utilizes computer systems in virtually all aspects of its business. The Company also maintains relationships with a number of vendors, suppliers, and customers whose own state of readiness with regard to the Year 2000 issue could potentially impact the Company. These parties include software, hardware, and telecommunication providers; banks and investment brokers; reinsurers and reinsurance intermediaries; certain agents; and utilities. The failure to correct a material Year 2000 issue by the Company or a material "Third Party" could materially and adversely impact the Company's statement of operations, liquidity; and financial position. Due to the uncertainty inherent in the Year 2000 issue, the Company is unable to determine whether the consequences of Year 2000 failures will have a material impact on the Company's statement of operations, liquidity, or financial position. However, the Company believes with its completion of its Year 2000 project significant interruptions of operations should be reduced. Additionally, the Company issues professional liability, including Directors & Officers liability, and commercial multi-peril insurance policies. Coverage under certain of these policies may cover losses suffered by insureds as a result of Year 2000 issues. The Company's professional liability policies are written on a "claims made and reported" basis, and since early 1997 approximately 50% of such policies have included a Year 2000 exclusion endorsement. The Company is including a Year 2000 exclusion endorsement on virtually all new or renewing professional liability policies providing coverage effective January 1, 1999 and thereafter. On occasion, for qualifying accounts, underwriters may remove the exclusion after satisfactory receipt and review of a supplemental application (which includes a warranty statement) and other underwriting information. With respect to its commercial multi-peril policies the Company believes claims against the comprehensive general liability coverage under these policies should fail based upon the doctrine of fortuity. However, it is not possible to predict whether or to what extent coverage could ultimately be found to exist by the courts and the effect thereof on the Company. Additionally, the Company could incur expense to contest the assertion of Year 2000 coverage claims, even if the Company prevails in its position. As a result, it is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue is specifically excluded or included. Contingency Plans The Company has not established contingency plans for non-compliance of its "IT Systems" or "Non-IT Systems" since the Company anticipates that the "IT Systems" and "Non-IT Systems" sections will be Year 2000 compliant by March 31, 1999. The Company's review of the "Third Parties" section will be completed by June 30, 1999. Presently, the Company is not aware of any major "Third Party" problem. The Company is on schedule with its expected completion dates for all sections. To the extent that the Company is aware of a non-compliant material "Third Party" a contingency plan would be developed which would potentially include replacing non-compliant material "Third Party" vendors and suppliers. INFLATION Property and casualty insurance premiums are established before the amount of losses and loss adjusted expenses, or the extent to which inflation may affect such amounts, is known. The Company attempts to anticipate the potential impact of inflation in establishing its premiums and reserves. Substantial future increases in inflation could result in future increases in interest rates, which, in turn, are likely to result in a decline in the market value of the Company's investment portfolio and resulting unrealized losses and/or reductions in shareholders' equity. 22 23 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal years beginning after June 15, 1999. SFAS No. 133 requires that an entity shall recognize all derivative instruments in the statement of financial position as either assets or liabilities depending on the rights or obligations under the instrument. Furthermore, derivative instruments shall be measured at fair value. SFAS No. 133 also provides guidance for accounting for changes in the fair value (that is, gains or losses) of a derivative instrument. The Company will adopt the provisions of SFAS No. 133 as of January 1, 2000. At December 31, 1998 the Company held no derivative financial instruments. In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accounts issued Statement of Position (SOP) 97-3 "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," specifying the preferable accounting treatment for entities that are subject to guaranty-fund and other insurance-related assessments. The Company will adopt the provisions of SOP 97-3 in the first quarter of 1999 and does not expect a material impact on the Company's financial statements. FORWARD-LOOKING INFORMATION Certain information included in this report and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, the impact of Year 2000 issues, and similar matters. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company's business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; and (v) the impact of Year 2000 issues, including the matters referred to above under "Risk Factors". 23 24 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. The Company does not have any derivative financial instruments. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency. DECEMBER 31, 1998 EXPECTED MATURITY DATES (Dollars in thousands, except average interest rate)
TOTAL FAIR 1999 2000 2001 2002 2003 Thereafter TOTAL VALUE ------- ------- ------- ------- ------- ---------- -------- -------- FIXED MATURITIES AVAILABLE FOR SALE: Principal Amount $27,070 $19,060 $37,900 $36,830 $25,470 $121,230 $267,560 $281,830 Book Value $27,160 $19,250 $38,150 $37,460 $25,690 $128,980 $276,690 Average Interest Rate 6.71% 6.10% 6.37% 5.95% 6.38% 6.08% 6.20% 5.71% PREFERRED: Principal Amount $ 30 0.0 0.0 0.0 0.0 0.0 $ 30 $ 1,880 Book Value $ 1,870 0.0 0.0 0.0 0.0 0.0 $ 1,870 Average Interest Rate 7.57% 0.0 0.0 0.0 0.0 0.0 7.57% 7.52% SHORT-TERM DEBT: Principal Amount $31,650 0.0 0.0 0.0 0.0 0.0 $ 31,650 $ 31,570 Book Value $31,570 0.0 0.0 0.0 0.0 0.0 $ 31,570 Average Interest Rate 4.92% 0.0 0.0 0.0 0.0 0.0 4.92% 4.92%
24 25 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Philadelphia Consolidated Holding Corp. and Subsidiaries Index to Financial Statements and Schedules
Financial Statements Page -------------------- ---- Report of Independent Accountants 26 Consolidated Balance Sheets - As of December 31, 1998 and 1997 27 Consolidated Statements of Operations - For the Years Ended December 31, 1998, 1997 and 1996 28 Consolidated Statements of Comprehensive Income - For the Years Ended December 31, 1998, 1997, and 1996 29 Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended December 31, 1998, 1997 and 1996 30 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998, 1997 and 1996 31 Notes to Consolidated Financial Statements 32 - 44 Financial Statement Schedules: Schedule I Summary of Investments - Other Than Investments in Related Parties As of December 31, 1998 S-1 II Condensed Financial Information of Registrant As of December 31, 1998 and 1997 and For Each of the Three Years in the Period Ended December 31, 1998 S-2 -- S-4 IV Reinsurance For the Years ended December 31, 1998, 1997 and 1996 S-5 VI Supplemental Information Concerning Property- Casualty Insurance Operations As of and For the Years Ended December 31, 1998, 1997 and 1996 S-6
25 26 To the Board of Directors and Shareholders of Philadelphia Consolidated Holding Corp.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Philadelphia Consolidated Holding Corp. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers, LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania February 5, 1999 26 27 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, ----------------------- 1998 1997 --------- --------- ASSETS Investments: Fixed Maturities Available for Sale at Market (Amortized Cost $278,557 and $165,052) ............................ $ 283,718 $ 170,678 Equity Securities at Market (Cost $43,441 and $29,501) ............... 72,768 46,988 --------- --------- Total Investments ............................................... 356,486 217,666 Cash and Cash Equivalents .............................................. 31,573 11,933 Accrued Investment Income .............................................. 3,771 2,786 Premiums Receivable .................................................... 27,769 15,269 Prepaid Reinsurance Premiums and Reinsurance Receivables ........................................... 22,892 18,573 Deferred Acquisition Costs ............................................. 16,853 10,970 Property and Equipment ................................................. 4,877 5,797 Other Assets ........................................................... 4,977 5,132 --------- --------- Total Assets .................................................... $ 469,198 $ 288,126 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Policy Liabilities and Accruals: Unpaid Loss and Loss Adjustment Expenses ............................. $ 151,150 $ 122,430 Unearned Premiums .................................................... 64,787 42,116 --------- --------- Total Policy Liabilities and Accruals ........................... 215,937 164,546 Other Liabilities ...................................................... 9,463 7,948 Deferred Income Taxes .................................................. 7,410 4,348 --------- --------- Total Liabilities ............................................... 232,810 176,842 --------- --------- Minority Interest in Consolidated Subsidiaries: Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of Company ................................. 98,905 --------- --------- Commitments and Contingencies Shareholders' Equity: Preferred Stock, $.01 Par Value, 10,000,000 Shares Authorized, None Issued and Outstanding...................................... Common Stock, No Par Value, 50,000,000 Shares Authorized, 12,330,825 Shares Issued and 12,242,431 Shares Issued and Outstanding .......................................... 44,796 42,788 Notes Receivable from Shareholders ................................... (1,680) (1,422) Accumulated Other Comprehensive Income ............................... 22,417 15,023 Retained Earnings .................................................... 74,923 54,895 Less Cost of Common Stock Held in Treasury, 130,262 Shares in 1998 ............................................ (2,973) --------- --------- Total Shareholders' Equity ...................................... 137,483 111,284 --------- --------- Total Liabilities and Shareholders' Equity ...................... $ 469,198 $ 288,126 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 27 28 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31, ---------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenue: Net Written Premiums ............................... $ 143,036 $ 111,797 $ 83,994 Change in Net Unearned Premium Reserve (Increase) .. (20,349) (11,242) (11,944) ------------ ------------ ------------ Net Earned Premiums ................................ 122,687 100,555 72,050 Net Investment Income .............................. 15,448 9,703 7,910 Net Realized Investment Gain (Loss) ................ 474 (16) 260 Other Income ....................................... 219 228 282 ------------ ------------ ------------ Total Revenue ................................. 138,828 110,470 80,502 ------------ ------------ ------------ Losses and Expenses: Loss and Loss Adjustment Expenses .................. 74,074 61,839 44,720 Net Reinsurance Recoveries ......................... (7,700) (6,830) (4,602) ------------ ------------ ------------ Net Loss and Loss Adjustment Expenses .............. 66,374 55,009 40,118 Acquisition Costs and Other Underwriting Expenses ........................... 38,422 31,344 22,210 Other Operating Expenses ........................... 2,212 1,909 1,386 ------------ ------------ ------------ Total Losses and Expenses ...................... 107,008 88,262 63,714 ------------ ------------ ------------ Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust ................................... 4,770 ------------ ------------ ------------ Income Before Income Taxes ........................... 27,050 22,208 16,788 ------------ ------------ ------------ Income Tax Expense (Benefit): Current ............................................ 7,941 6,521 3,596 Deferred ........................................... (919) (1,183) (182) ------------ ------------ ------------ Total Income Tax Expense ....................... 7,022 5,338 3,414 ------------ ------------ ------------ Net Income ..................................... $ 20,028 $ 16,870 $ 13,374 ============ ============ ============ Per Average Share Data: Basic Earnings Per Share(1) ........................ $ 1.63 $ 1.38 $ 1.13 ============ ============ ============ Diluted Earnings Per Share(1) ...................... $ 1.34 $ 1.13 $ 0.94 ============ ============ ============ Weighted-Average Common Shares Outstanding(1) ........ 12,249,262 12,193,659 11,879,506 Weighted-Average Share Equivalents Outstanding(1) .... 2,680,165 2,736,039 2,373,742 ------------ ------------ ------------ Weighted-Average Shares and Share Equivalents Outstanding(1) ..................................... 14,929,427 14,929,698 14,253,248 ============ ============ ============
(1) 1996 share information restated to reflect a two-for-one split of the Company's common stock distributed in November 1997, see Note 11. The accompanying notes are an integral part of the consolidated financial statements. 28 29 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)
For the Years Ended December 31, --------------------------------- 1998 1997 1996 -------- -------- -------- Net Income ........................................... $ 20,028 $ 16,870 $ 13,374 -------- -------- -------- Other Comprehensive Income, Net of Tax: Holding Gain Arising during Period, Net of Tax of $4,147, $4,119, and $1,489 ...................... 7,702 7,649 2,766 Reclassification Adjustment, Net of Tax of $166 ... (308) -------- -------- -------- Other Comprehensive Income ........................... 7,394 7,649 2,766 -------- -------- -------- Comprehensive Income ................................. $ 27,422 $ 24,519 $ 16,140 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 29 30 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
For the Years Ended December 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- Common Stock: Balance at Beginning of Year .............................. $ 42,788 $ 41,167 $ 39,057 Issuance of Shares Pursuant to Employee Stock Purchase Plan 853 898 1,131 Exercise of Employee Stock Options, Net of Tax Benefit .... 597 723 979 Purchase Contracts of Common Stock ....................... 558 --------- --------- --------- Balance at End of Year ................................ 44,796 42,788 41,167 --------- --------- --------- Notes Receivable from Shareholders: Balance at Beginning of Year .............................. (1,422) (924) Notes Receivable Issued Pursuant to Employee Stock Purchase Plan ..................................... (828) (873) (1,131) Collection of Notes Receivable ............................ 570 375 207 --------- --------- --------- Balance at End of Year ................................ (1,680) (1,422) (924) --------- --------- --------- Unrealized Investment Appreciation, Net of Deferred Income Taxes: Balance at Beginning of Year ............................ 15,023 7,374 4,608 Change in Unrealized Investment Appreciation, Net of Deferred Income Taxes .......................... 7,394 7,649 2,766 --------- --------- --------- Balance at End of Year ................................ 22,417 15,023 7,374 --------- --------- --------- Retained Earnings: Balance at Beginning of Year .............................. 54,895 38,025 24,651 Net Income ................................................ 20,028 16,870 13,374 --------- --------- --------- Balance at End of Year ................................ 74,923 54,895 38,025 --------- --------- --------- Common Stock Held in Treasury: Balance at Beginning of Year Common Shares Repurchased ................................. (3,100) Exercise of Employee Stock Options, Net of Tax Benefit .... 127 --------- --------- --------- Balance at End of Year ................................ (2,973) --------- --------- --------- Total Shareholders' Equity ............................ $ 137,483 $ 111,284 $ 85,642 ========= ========= =========
(1) 1996 share information restated to reflect a two for one split of the Company's common stock distributed in November 1997, see Note 11. The accompanying notes are an integral part of the consolidated financial statements. 30 31 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Years Ended December 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- Cash Flows from Operating Activities: Net Income ............................................ $ 20,028 $ 16,870 $ 13,374 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Realized Investment (Gain) Loss ............... (474) 16 (260) Depreciation and Amortization Expense ............. 1,277 1,232 930 Deferred Income Tax Benefit ....................... (919) (1,183) (182) Change in Premiums Receivable ..................... (12,500) (7,157) (214) Change in Other Receivables ....................... (5,318) (655) (5,747) Change in Deferred Acquisition Costs .............. (5,883) (1,937) (3,876) Change in Other Assets ............................ 522 (3,345) (269) Change in Unpaid Loss and Loss Adjustment Expenses 28,847 25,788 18,956 Change in Unearned Premiums ....................... 22,671 8,962 15,035 Change in Other Liabilities ....................... 1,533 (575) (184) --------- --------- --------- Net Cash Provided by Operating Activities ....... 49,784 38,016 37,563 --------- --------- --------- Cash Flows from Investing Activities: Proceeds from Sales of Investments in Fixed Maturities Available for Sale ....................... 50,874 5,564 2,594 Proceeds from Maturity of Investments in Fixed Maturities Available for Sale ..................... 36,736 9,305 9,476 Proceeds from Sales of Investments in Equity Securities .......................................... 19,440 5,896 2,168 Proceeds from Sale of Real Estate ..................... 1,987 Cost of Fixed Maturities Available for Sale Acquired ............................................ (199,024) (42,309) (32,783) Cost of Equity Securities Acquired .................... (35,610) (15,536) (12,412) Purchase of Property and Equipment, net ............... (2,229) (1,609) (1,989) --------- --------- --------- Net Cash Used for Investing Activities .......... (127,826) (38,689) (32,946) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from Offering of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust . 99,463 Exercise of Employee Stock Options, Net of Tax Benefit 724 723 979 Collection of Notes Receivable ........................ 570 375 207 Proceeds from Shares Issued Pursuant to Employee Stock Purchase Plan ....................................... 25 25 Cost of Common Stock Repurchased ...................... (3,100) --------- --------- --------- Net Cash Provided by Financing Activities ....... 97,682 1,123 1,186 --------- --------- --------- Net Increase in Cash and Cash Equivalents .............. 19,640 450 5,803 Cash and Cash Equivalents at Beginning of Year ......... 11,933 11,483 5,680 --------- --------- --------- Cash and Cash Equivalents at End of Year ............... $ 31,573 $ 11,933 $ 11,483 ========= ========= ========= Cash Paid During the Year for: Income Taxes .......................................... $ 7,546 $ 7,158 $ 3,024 Non-Cash Transactions: Issuance of Shares Pursuant to Employee Stock Purchase Plan in Exchange for Notes Receivable ........................................ $ 828 $ 873 1,131
The accompanying notes are an integral part of the consolidated financial statements. 31 32 Philadelphia Consolidated Holding Corp. and Subsidiaries Notes to Consolidated Financial Statements 1. General Information and Significant Accounting Policies Philadelphia Consolidated Holding Corp. ("Philadelphia Insurance"), and its subsidiaries (collectively the "Company") doing business as Philadelphia Insurance Companies, include two Pennsylvania domiciled property and casualty insurance companies, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company ("Insurance Subsidiaries"); an underwriting manager Maguire Insurance Agency, Inc.; and an investment subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites specialty commercial property and casualty insurance products for select target industries or niches including, among others, the rent-a-car industry; automobile leasing industry; nonprofit organizations; the health, fitness and wellness industry; and selected classes of professional liability. All marketing, underwriting, claims management, investment, and general administration is provided by the underwriting manager. The Company manages one operating segment comprised of all its property and casualty insurance business. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company prepared in conformity with generally accepted accounting principles. All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements requires making 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior years' amounts have been reclassified for comparative purposes. (a) Investments Investments classified as Available for Sale are carried at market value with the change in unrealized appreciation (depreciation) credited or charged directly to shareholders' equity, net of applicable deferred income taxes. Income on fixed maturities is recognized on the accrual basis. The decision to purchase or sell investments is based on management's assessment of various factors such as foreseeable economic conditions, including current interest rates and the interest rate risk, and the liquidity and capital positions of the Company. Investments in fixed maturities are adjusted for amortization of premiums and accretion of discounts to maturity date, except for collateralized mortgage and asset backed securities which are adjusted for amortization of premiums and accretion of discounts over their estimated lives. Certain collateralized mortgage and asset backed securities repayment patterns will change based on interest rate movements and, accordingly, could impact future investment income if the reinvestment of the repayment amounts are at lower interest rates than the underlying securities. Collateralized mortgage and asset backed securities amounted to $42,820,000 and $46,394,000, respectively, at December 31, 1998 and $7,329,000 and $11,302,000, respectively, at December 31, 1997. The collateralized mortgage and asset back securities held as of December 31, 1998 and 1997 are short tranche securities possessing favorable prepayment risk profiles. Equity securities are carried at market value with the change in unrealized appreciation (depreciation) credited or charged directly to shareholders' equity, net of applicable deferred income taxes. Realized investment gains and losses are calculated on the specific identification basis and recorded as income when the securities are sold. (b) Cash and Cash Equivalents Cash equivalents, consisting of fixed maturity investments with maturities of three months or less when purchased and money market funds, are stated at cost which approximates market value. 32 33 (c) Deferred Acquisition Costs Policy acquisition costs, which include commissions, premium taxes, fees, and other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and expenses that are expected to be incurred, based upon historical and current experience. Amortization of policy acquisition costs in the accompanying consolidated statements of operations was $30,034,000, $25,034,000 and $17,739,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (d) Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Costs incurred in developing information systems technology are capitalized and included in property and equipment. These costs are amortized over their useful lives from the dates the systems technology became operational. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in earnings. (e) Reserves for Unpaid Loss and Loss Adjustment Expenses The liability for unpaid loss and loss adjustment expenses includes an amount determined on the basis of claims adjusters' evaluations and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates, and while management believes that the amount is adequate, the ultimate liability may be in excess of, or less than, the amount provided. The methods of making such estimates and establishing the resulting liabilities are continually reviewed and updated and any adjustments resulting therefrom are reflected in operations currently. (f) Unearned Premiums Premiums are generally earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of the policies in-force are reported as unearned premiums. (g) Reinsurance Ceded In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. Amounts for reinsurance assets and liabilities are reported gross. (h) Income Taxes The Company files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date (see Note 8). (i) Earnings Per Share Earnings per share and common stock equivalents outstanding have been retroactively restated to reflect the increased number of common shares resulting from a two-for-one stock split that was announced in October 1997 and distributed to shareholders on November 5, 1997. A total of 6,119,716 additional shares were issued as a result of the stock split. The par value of the Company's stock remained unchanged. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", specifying the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock. Under SFAS No. 128, basic and diluted per share amounts shall be presented for net income on the face of the statement of operations. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared 33 34 in the earnings of the entity. The Company adopted the provisions of SFAS No. 128 as of December 31, 1997 and restated all prior period earnings per share data to conform with the provisions of this Statement. 2. Statutory Information Accounting Principles: The Philadelphia Indemnity Insurance Company ("PIIC") and the Philadelphia Insurance Company ("PIC") are domiciled in the Commonwealth of Pennsylvania. PIIC and PIC are required to report to certain regulatory agencies on the basis of Statutory Accounting Practices ("SAP"). The statutory financial statements are prepared in accordance with accounting practices prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as Commonwealth laws, regulations, and general administrative rules. Permitted Statutory Accounting Practices encompass all accounting practices not so prescribed. Generally accepted accounting principles ("GAAP") differ in certain respects from SAP prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania. The principal differences between SAP and GAAP are as follows: - Under SAP, investments in debt securities are carried at amortized cost, while under GAAP, investments in debt securities classified as Available for Sale are carried at fair value. - Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other costs of underwriting policies are charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over the period covered by the policy. - Under SAP, certain assets, designated as "Non-admitted Assets" (such as prepaid expenses) are charged against surplus. - Under SAP, federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences. - Under SAP, certain reserves are established in amounts which differ from amounts which would be provided in conformity with GAAP. Financial Information: The statutory capital and surplus of PIIC as of December 31, 1998 and 1997 was $113,659,000 and $75,894,000, respectively. Statutory net income of PIIC for the years ended December 31, 1998, 1997, and 1996 was $9,785,000, $8,839,000 and $5,626,000, respectively. Capital contributions to PIIC for the years ended December 31, 1998 and 1997 were $19,500,000 and $0, respectively. The statutory capital and surplus of PIC as of December 31, 1998 and 1997 was $38,677,000 and $30,091,000, respectively. Statutory net income of PIC for the years ended December 31, 1998, 1997, and 1996 was $6,339,000, $5,494,000 and $3,629,000, respectively. Capital contributions to PIC for the years ended December 31, 1998 and 1997 were $6,000,000 and $0, respectively. Dividend Restrictions: The Insurance Subsidiaries are subject to various regulatory restrictions which limit the maximum amount of annual shareholder dividends allowed to be paid. The maximum dividend which PIIC may pay to Philadelphia Insurance during 1999 without prior approval is $11,366,000 and the maximum dividend which PIC may pay to Philadelphia Insurance during 1999 without prior approval is $6,339,000. Risk-Based Capital: Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer's domiciliary insurance department, and ultimately, rehabilitation or liquidation. Based on the standards, PIIC's and PIC's capital and surplus at December 31, 1998 is in excess of the prescribed risk-based capital requirements. 34 35 3. Investments The Company invests primarily in investment grade fixed maturities, the majority of which are rated "A-" or better by Standard and Poors'. The cost, gross unrealized gains and losses, estimated market value and carrying value of investments as of December 31, 1998 and 1997 are as follows (in thousands):
Gross Gross Estimated Unrealized Unrealized Market Carrying Cost (1) Gains Losses Value (2) Value -------- ----- ------ --------- ----- December 31, 1998 Fixed Maturities: Available for Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 7,706 $ 212 $ $ 7,918 $ 7,918 Obligations of States and Political Subdivisions 112,196 5,069 70 117,195 117,195 Corporate and Bank Debt Securities 69,532 1,011 1,152 69,391 69,391 Collateralized Mortgage Securities 42,755 174 109 42,820 42,820 Asset Backed Securities 46,368 213 187 46,394 46,394 - ----------------------------------------------------------------------------------------------------------------- Total Fixed Maturities Available for Sale 278,557 6,679 1,518 283,718 283,718 - ----------------------------------------------------------------------------------------------------------------- Equity Securities 43,441 29,769 442 72,768 72,768 - ----------------------------------------------------------------------------------------------------------------- Total Investments $321,998 $ 36,448 $ 1,960 $356,486 $356,486 ================================================================================================================= December 31, 1997 Fixed Maturities: Available for Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 12,943 $ 205 $ 9 $ 13,139 $ 13,139 Obligations of States and Political Subdivisions 105,117 4,670 91 109,696 109,696 Corporate Debt Securities 28,549 681 18 29,212 29,212 Collateralized Mortgage Securities 7,244 85 7,329 7,329 Asset Backed Securities 11,199 103 11,302 11,302 - ----------------------------------------------------------------------------------------------------------------- Total Fixed Maturities Available for Sale 165,052 5,744 118 170,678 170,678 - ----------------------------------------------------------------------------------------------------------------- Equity Securities 29,501 17,800 313 46,988 46,988 - ----------------------------------------------------------------------------------------------------------------- Total Investments $194,553 $ 23,544 $ 431 $217,666 $217,666 =================================================================================================================
(1) Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. (2) Estimated market values have been based on quoted market prices. The Company had no debt or equity investments in a single issuer totaling in excess of 10% of shareholders' equity at December 31, 1998. 35 36 The cost and estimated market value of fixed maturity securities at December 31, 1998, by remaining contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Market Cost (1) Value (2) -------- -------- Due in One Year or Less $ 10,571 $ 10,737 Due After One Year Through Five Years 33,688 34,237 Due After Five Years through Ten Years 118,704 123,095 Due After Ten Years 26,471 26,435 Collateralized Mortgage and Asset Backed Securities 89,123 89,214 - ---------------------------------------------------------------------------------- $278,557 $283,718 ==================================================================================
(1) Original cost adjusted for amortization of premiums and accretion of discounts. (2) Estimated market values have been based on quoted market prices. The sources of net investment income for the years ended December 31, 1998, 1997, and 1996 are as follows (in thousands):
1998 1997 1996 -------- -------- -------- Fixed Maturities Available for Sale $ 13,404 $ 8,978 $ 7,377 Equity Securities 634 480 257 Cash and Cash Equivalents 1,983 602 422 - ----------------------------------------------------------------------------------- Total Investment Income 16,021 10,060 8,056 Investment Expense (573) (357) (146) - ----------------------------------------------------------------------------------- Net Investment Income $ 15,448 $ 9,703 $ 7,910 ===================================================================================
There are no investments in fixed maturity securities that were non-income producing during the years ended December 31, 1998, 1997, and 1996. Investment expense includes $189,000, $164,000 and $60,000, in advisory fees paid to a related party in 1998, 1997, and 1996, respectively. Realized pre-tax gains (losses) on the sale of investments for the years ended December 31, 1998, 1997, and 1996 are as follows (in thousands):
1998 1997 1996 ------- ------- ------- Fixed Maturities Available for Sale Gross Realized Gains $ 1,090 $ 22 $ 47 Gross Realized Losses (89) (52) (28) - --------------------------------------------------------------------------------------- Net Gain (Loss) 1,001 (30) 19 - --------------------------------------------------------------------------------------- Equity Securities Gross Realized Gains 1,641 628 280 Gross Realized Losses (2,284) (614) (39) - --------------------------------------------------------------------------------------- Net Gain (Loss) (643) 14 241 - --------------------------------------------------------------------------------------- Gross Realized Gain on Sale of Real Estate 116 - --------------------------------------------------------------------------------------- Total Net Realized Investment Gain (Loss) $ 474 $ (16) $ 260 =======================================================================================
36 37 4. Restricted Assets PIIC and PIC have investments, principally U.S. Treasury securities, on deposit with the various states in which they are licensed insurers. At December 31, 1998 and 1997 the carrying value on deposit totaled $11,032,000 and $10,912,000, respectively. 5. Trust Accounts The Company is required to maintain certain investments in trust accounts under reinsurance agreements with unrelated insurance companies that cede insurance risks to the Company. At December 31, 1998 and 1997, the Company had investments with a carrying value of $2,326,000 and $2,403,000, respectively, in trust accounts pursuant to a terminated quota share reinsurance agreement. Under the terms of this agreement, net premiums received by the Company were invested and held in a trust account to pay future claims. Interest income on these investments is distributed to the parties to the quota share agreement on a quarterly basis. The Company receives its interest in net trust investments in accordance with a formula that specifies certain percentages of funds to be released over a five-year period as losses are settled. The Company also maintains investments in trust accounts under current reinsurance agreements with unrelated insurance companies. These investments collateralize the Company's obligations under the reinsurance agreements. The Company possesses sole responsibility for investment and reinvestment of the trust account assets. All dividends, interest and other income, resulting from investment of these assets are owned by the Company, and are distributed on a monthly basis. At December 31, 1998 and 1997 the carrying value of these trust fund investments were $8,886,000 and $12,205,000, respectively. The Company's share of the investments in the trust accounts is included in investments and cash equivalents, as applicable, in the accompanying consolidated balance sheets. 6. Property and Equipment The following table summarizes property and equipment at December 31, 1998 and 1997 (dollars in thousands):
December 31, -------------------- Estimated Useful 1998 1997 Lives (Years) ---- ---- ------------- Furniture, Fixtures and Automobiles $ 2,676 $ 2,473 5 Computer and Telephone Equipment 8,890 7,176 3-7 Land and Building 150 2,277 40 Leasehold Improvements 1,247 974 10-12 - ------------------------------------------------------------------- 12,963 12,900 Accumulated Depreciation and Amortization (8,086) (7,103) - ------------------------------------------------------------------- Property and Equipment $ 4,877 $ 5,797 ===================================================================
Included in property and equipment are costs incurred in developing or purchasing information systems technology of $2,716,500 and $2,516,500 in 1998 and 1997, respectively. Amortization of these costs was $195,300, $180,200 and $100,100 for the years ended December 31, 1998, 1997, and 1996, respectively. Depreciation expense, excluding amortization of capitalized information systems technology costs, was $1,169,700, $858,200 and $530,000, for the years ended December 31, 1998, 1997, and 1996, respectively. 37 38 7. Liability for Unpaid Loss and Loss Adjustment Expenses Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is summarized as follows (in thousands):
1998 1997 1996 --------- --------- --------- Balance at January 1, $ 122,430 $ 96,642 $ 77,686 Less Reinsurance Recoverables 13,502 10,919 9,440 --------- --------- --------- Net Balance at January 1, 108,928 85,723 68,246 --------- --------- --------- Incurred related to: Current Year 69,544 56,725 41,083 Prior Years (3,170) (1,716) (965) --------- --------- --------- Total Incurred 66,374 55,009 40,118 --------- --------- --------- Paid related to: Current Year 13,402 9,512 7,427 Prior Years 26,870 22,292 15,214 --------- --------- --------- Total Paid 40,272 31,804 22,641 --------- --------- --------- Net Balance at December 31, 135,030 108,928 85,723 Plus Reinsurance Recoverables 16,120 13,502 10,919 --------- --------- --------- Balance at December 31, $ 151,150 $ 122,430 $ 96,642 ========= ========= =========
As a result of changes in estimates of insured events of prior years, the Company reduced losses and loss adjustment expenses incurred by $3,170,000, $1,716,000 and $965,000 in 1998, 1997, and 1996, respectively. Such favorable development was due to losses emerging at a lesser rate than had been originally anticipated when the initial reserves for the applicable accident years were estimated. 8. Income Taxes The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 1998 and 1997 are as follows (in thousands):
December 31, ------------------ 1998 1997 ---- ---- Assets: Effect of Loss Reserve Discounting $ 6,853 $ 5,735 Excess of Tax Over Financial Reporting Earned Premium 4,131 2,709 Other Assets 127 128 - ------------------------------------------------------------------------------------- Total Assets 11,111 8,572 ===================================================================================== Liabilities: Deferred Policy Acquisition Costs, Deductible for Tax 5,899 3,752 Property and Equipment Basis 550 494 Tax Effect of Unrealized Appreciation of Securities 12,070 8,089 Other Liabilities 2 585 - ------------------------------------------------------------------------------------- Total Liabilities 18,521 12,920 - ------------------------------------------------------------------------------------- Net Deferred Income Tax Liability $ 7,410 $ 4,348 =====================================================================================
38 39 The following table summarizes the differences between the Company's effective tax rate for financial statement purposes and the federal statutory rate (dollars in thousands):
Amount of Tax Percent ------------- ------- For the year ended December 31, 1998: Federal Tax at Statutory Rate $ 9,468 35% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,944) (7) Other, Net (502) (2) - ------------------------------------------------------------------------------------------------------ Income Tax Expense $ 7,022 26% ====================================================================================================== For the year ended December 31, 1997: Federal Tax at Statutory Rate $ 7,773 35% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,812) (8) Other, Net (623) (3) - ------------------------------------------------------------------------------------------------------ Income Tax Expense $ 5,338 24% ====================================================================================================== For the year ended December 31, 1996: Federal Tax at Statutory Rate $ 5,708 34% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,670) (10) Other, Net (624) (4) - ------------------------------------------------------------------------------------------------------ Income Tax Expense $ 3,414 20% ======================================================================================================
As of December 31, 1998, the Company has approximately $0.6 million in net operating loss carryforwards, which expire in 2000 and 2001, available to offset future taxable income. Utilization of the loss carryfowards is limited to an annual amount of $336,000. For financial reporting purposes, the tax benefit of any utilization of these operating loss carryfowards is applied to reduce goodwill ($118,000 in 1998) and does not reduce income tax expense. Philadelphia Insurance has entered into tax sharing agreements with each of its subsidiaries. Under the terms of these agreements, the income tax provision is computed as if each subsidiary were filing a separate federal income tax return, including adjustments for the income tax effects of net operating losses and other special tax attributes, regardless of whether those attributes are utilized in the Company's consolidated federal income tax return. 9. Minority Interest in Consolidated Subsidiaries: Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of Company On May 5, 1998, the Company issued 10.350 million FELINE PRIDES(SM) at $10.00 per security and PCHC Financing I, the Company's business trust subsidiary, issued 1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation amount per trust preferred security equal to $10.00. The 10.350 million FELINE PRIDES(SM) consisted of 9.350 million units referred to as Income Prides and 1.000 million units referred to as Growth Prides. Each Income Prides consists of a unit comprised of (a) a purchase contract under which the holder will purchase a number of shares of Philadelphia Consolidated Holding Corp. common stock no later than May 16, 2001 (ranging from .3858 to .4706 shares per FELINE PRIDES(SM)) under the terms specified in the stock purchase contract and (b) beneficial ownership of a 7.0% Trust Originated Preferred Security issued by PCHC Financing I and representing an undivided beneficial ownership in the assets of PCHC Financing I. Each holder will receive aggregate cumulative cash distributions at the annual rate of 7.00% of the $10.00 stated amount for the security, payable quarterly in arrears. Each Growth Prides consists of a unit with a face amount of $10.00 comprised of (a) a purchase contract under which (i) the holder will purchase a number of shares of Philadelphia Consolidated Holding Corp. common stock no later than May 16, 2001 (ranging from .3858 to .4706 shares per FELINE PRIDES(SM)) under the terms specified in the stock purchase contract and (ii) the Company will pay the holder contract adjustment payments at the rate of .50% of the stated amount per annum and (b) a 1/100 undivided beneficial ownership interest in a treasury security having a principal amount at maturity equal to $1,000 and maturing on May 15, 2001. The applicable distribution rate on the trust originated securities that remain outstanding during the period May 16, 2001 through May 16, 2003, will be reset so that the market value of the Trust Originated Preferred Securities will be equal to 100.5 percent of the stated amount. The Company may limit the reset rate to be no higher than the rate on the two-year benchmark treasury plus 255 basis points. The guarantee by the Company is a full and unconditional guarantee on a subordinated unsecured basis with respect to the Trust 39 40 Originated Preferred Securities, but will not apply to any payment of distributions except to the extent the Trust shall have funds available therefor. Proceeds from the offering were approximately $99.0 million (after underwriting and associated costs). The proceeds from the sale of the Growth Prides were used to purchase the underlying securities to be transferred to the holders of the Growth Prides pursuant to the terms thereof. All the proceeds from the sale of the Trust Preferred Securities that were not components of the Income Prides and all of the proceeds from the sale of the Income Prides were invested by PCHC Financing I in debentures of the Company. The debentures account for substantially all the assets of PCHC Financing I. The debentures, whose principal amount is $106.7 million, mature on May 16, 2003 and pay interest initially at the rate of 7.0% per annum until May 15, 2001 and at the reset rate thereafter. The Company utilized $33.1 million of the net proceeds to make contributions to its subsidiaries, of which $20.0 million was contributed to the Insurance Subsidiaries. Additionally, $3.1 million was utilized by the Company to buy back its common stock under its stock buy-back program. The Company anticipates utilizing the remaining proceeds for general corporate purposes which may include acquisitions, capital expenditures, and the repurchase by the Company of its common stock. 10. Shareholders' Equity The Company has established non-qualified stock bonus and stock option plans. Under the stock bonus plan, the Company has granted a total of 137,500 shares to certain officers of the Company, of which all such shares have been issued and are vested. Under the Company's stock option plan, stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of grant. Options outstanding as of December 31, 1994 are exercisable over a four-to-five-year vesting period. Options issued in 1998, 1997, 1996, and 1995 are exercisable after the expiration of five years following the grant date. Under this plan, the Company has reserved 2,475,000 shares of common stock for issuance pursuant to options granted under the plan. In addition to stock options granted pursuant to the Company's stock option plan, the Company's Board of Directors have granted previous awards of 2,613,492 stock options. SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at a fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for the Company's compensation instruments is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. 40 41 The following is a summary of the Company's option activity, including weighted-average option information:
1998 1997 1996(2) ---------------------- ---------------------- ---------------------- Exercise Exercise Exercise Price Price Price Per Per Per Options Option(1) Options Option(1) Options Option(1) --------- ---------- --------- --------- --------- ---------- Outstanding at beginning of year 3,473,042 $ 3.85 3,572,292 $ 3.86 3,200,642 $2.84 Granted 256,125 $19.07 5,000 $16.38 917,900 $8.39 Exercised (68,600) $ 4.53 (84,250) $ 4.42 (292,500) $3.33 Canceled (23,400) $12.00 (20,000) $ 6.00 (253,750) $8.05 --------- --------- --------- Outstanding at end of year 3,637,167 $ 4.85 3,473,042 $ 3.85 3,572,292 $3.86 ========= ========= ========= Exercisable at end of year 2,708,142 2,768,792 2,819,218 Weighted-average fair value of options granted during the year $7.69 $6.38 $2.87
Exercise Exercisable Exercise Outstanding Price Remaining at Price At December Per Contractual December Per Range of Exercise Prices 31, 1998 Option(1) Life (Years)(1) 31, 1998 Option(1) - ------------------------------------------------------------------------------------------------------------- $2.61 2,664,142 $ 2.61 4.1 2,664,142 $ 2.61 $4.75 to $7.31 44,000 $ 5.22 2.6 44,000 $ 5.22 $8.13 to $9.31 667,900 $ 8.48 7.2 -- -- $16.38 to $19.75 203,625 $18.54 9.4 -- -- $20.50 to $23.50 57,500 $20.74 9.4 -- -- ---------- --------- 3,637,167 $ 4.85 2,708,142 $ 2.65 ========= =========
(1) Weighted Average. (2) Restated to reflect a two-for-one split of the Company's common stock distributed in November 1997, see Note 11. The Company has established a non-qualified Employee Stock Purchase Plan (the "Stock Purchase Plan"). The aggregate maximum number of shares that may be issued pursuant to the Stock Purchase Plan is 500,000. Shares may be purchased under the Stock Purchase Plan by eligible employees during designated one-month offering periods established by the Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. The purchase price of shares may be paid by the employee over six years pursuant to the execution of a promissory note. The promissory note(s) are collateralized by such shares purchased under the Stock Purchase Plan and are interest free. Under the Stock Purchase Plan, the Company issued 51,794 and 78,569 shares in 1998 and 1997, respectively. The weighted-average fair value of those purchase rights granted in 1998 and 1997 was $2.70 and $1.94, respectively. In addition, the Company has also established a non-qualified Directors Stock Purchase Plan ("Directors Plan") for the benefit of non-employee Directors. The aggregate maximum number of shares that may be issued pursuant to the Directors Plan is 50,000. Non-employee Directors, during monthly offerings periods, may designate a portion of his or her fees to be used for the purchase of shares under the terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. No shares have been issued pursuant to the Directors Plan as of December 31, 1998. 41 42 Since the Company has adopted the disclosure-only provisions of SFAS No. 123, no compensation cost has been recognized for the Company's compensation instruments. The following represents pro forma information as if the Company recorded compensation costs using the fair value of the issued compensation instruments (the results may not be indicative of the actual effect on net income in future years) (in thousands, except per average common share data):
1998 1997 1996(1) ------------ ------------- ------------ Net Income As Reported $20,028 $16,870 $13,374 Assumed Stock Compensation Cost 453 $ 354 281 ------- -------- -------- Pro Forma Net Income $19,575 $16,516 $13,093 ======= ======== ======== Diluted Earnings Per Average Common Share as Reported $ 1.34 $ 1.13 $ 0.94 ======= ======= ======= Pro Forma Diluted Earnings Per Average Common Share $ 1.31 $ 1.11 $ 0.92 ======= ======= =======
(1) Per share information restated to reflect a two-for-one split of the Company's common stock distributed in November 1997, see Note 11. The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following weighted-average assumptions:
1998 1997 1996 ------------ ------------- -------------- Expected Stock Volatility 29.5% 25.9% 20.0% Risk-Free Interest Rate 5.3% 5.8% 5.8% Expected Option Life-Years 6.0 6.0 6.0 Expected Dividends 0.0% 0.0% 0.0%
11. Common Stock Split On October 16, 1997, the Board of Directors approved a two-for-one split of the Company's common stock payable to shareholders of record on October 27, 1997 for distribution on November 5, 1997. Weighted-average common shares outstanding, common stock equivalents, and earnings per share have been restated to reflect this stock split. 12. Stock Repurchase Authorization On August 3, 1998, the Company's Board of Directors authorized the Company to repurchase up to $10.0 million of its common stock. As of December 31, 1998, the Company had repurchased 159,100 shares for approximately $3.1 million under this authorization. 13. Reinsurance In the normal course of business, the Company has entered into various reinsurance contracts with unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the Company from its obligation to policyholders. The loss and loss adjustment expense reserves ceded under such arrangements were $16,120,000 and $13,502,000 at December 31, 1998 and 1997, respectively. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The percentage of ceded reinsurance reserves that are with companies rated "A" (Excellent) or better by A.M. Best Company is 100% as of December 31, 1998 and 1997, respectively. Additionally, approximately 1%, 2%, and 4% of the Company's net written premiums for the years ended December 31, 1998, 1997, and 1996, respectively, were assumed from an unrelated reinsurance company. 42 43 The effect of reinsurance on premiums written and earned is as follows (in thousands):
Written Earned For the Year Ended December 31, 1998: Direct Business $195,697 $173,555 Reinsurance Assumed 1,712 1,181 Reinsurance Ceded 54,373 52,049 - ---------------------------------------------------------------------- Net Premiums $143,036 $122,687 - ---------------------------------------------------------------------- Percentage Assumed of Net 1.0% ====================================================================== For the Year Ended December 31, 1997: Direct Business $157,060 $147,514 Reinsurance Assumed 2,031 2,614 Reinsurance Ceded 47,294 49,573 - ---------------------------------------------------------------------- Net Premiums $111,797 $100,555 - ---------------------------------------------------------------------- Percentage Assumed of Net 2.6% ====================================================================== For the Year Ended December 31, 1996: Direct Business $132,611 $117,354 Reinsurance Assumed 4,244 4,466 Reinsurance Ceded 52,861 49,770 - ---------------------------------------------------------------------- Net Premiums $ 83,994 $ 72,050 - ---------------------------------------------------------------------- Percentage Assumed of Net 6.2% ======================================================================
14. Profit Sharing The Company has a defined contribution Profit Sharing Plan, which includes a 401K feature, covering substantially all employees. Under the plan, employees may contribute up to an annual maximum of the lesser of 15% of eligible compensation or the applicable Internal Revenue Code limit in a calendar year. The Company makes a matching contribution in an amount equal to 50% of the participant's pre-tax contribution, subject to a maximum of 6% of the participant's eligible compensation. The Company may also make annual discretionary profit sharing contributions at each plan year end. Participants are fully vested in the Company's contribution upon completion of seven years of service. The Company's contributions to the plan were $423,000 $474,300 and $322,400, in 1998, 1997, and 1996, respectively. 15. Commitments and Contingencies The Company is subject to routine legal proceedings in connection with its property and casualty insurance business. The Company is not involved in any pending or threatened legal or administrative proceedings, which management believes can reasonably be expected to have a material adverse effect on the Company's financial condition or results of operations. The Company currently leases office space to serve as its headquarters location and 40 field offices for its production underwriters. Rental expense for these operating leases was $1,242,000, $916,700 and $736,700 for the years ended December 31, 1998, 1997, and 1996, respectively. At December 31, 1998, the future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 1998 were as follows: Year Ending December 31: 1999 $ 1,618,000 2000 1,423,000 2001 1,141,000 2002 1,034,000 2003 and Thereafter 179,000 - ------------------------------------------------------------------------- Total Minimum Payments Required $ 5,395,000 =========================================================================
43 44 16. Summary of Quarterly Financial Information - Unaudited The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 1998 and 1997 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations for such periods, have been made for a fair presentation of the results shown (in thousands, except share and per share data):
Three Months Ended ---------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ------------ ------------ ------------- ------------ Net Earned Premiums $ 26,915 $ 29,662 $ 32,165 $ 33,945 Net Investment Income $ 2,700 $ 3,730 $ 4,446 $ 4,572 Net Realized Investment Gain (Loss) $ 3 $ 96 $ 1,609 $ (1,234) Net Loss and Loss Adjustment Expenses $ 14,858 $ 15,949 $ 17,438 $ 18,129 Acquisition Costs and Other Underwriting Expenses $ 8,219 $ 9,187 $ 10,159 $ 10,857 Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust $ $ 1,217 $ 1,742 $ 1,811 Net Income $ 4,518 $ 4,841 $ 6,076 $ 4,593 Basic Earnings Per Share $ 0.37 $ 0.39 $ 0.50 $ 0.38 Diluted Earnings Per Share $ 0.30 $ 0.32 $ 0.41 $ 0.31 Weighted-Average Common Shares Outstanding 12,262,983 12,297,633 12,248,331 12,188,540 Weighted-Average Share Equivalents Outstanding 2,790,988 2,839,746 2,713,348 2,822,910 ------------ ------------ ------------ ------------ Weighted-Average Shares and Share Equivalents Outstanding 15,053,971 15,137,379 14,961,679 15,011,450 ============ ============ ============ ============
March 31, June 30, September 30, December 31, 1997(1) 1997(1) 1997(1) 1997 ------------ ------------ ------------- ------------ Net Earned Premiums $ 22,388 $ 25,163 $ 26,492 $ 26,512 Net Investment Income $ 2,211 $ 2,404 $ 2,535 $ 2,553 Net Realized Investment Gain (Loss) $ 28 $ (59) $ 156 $ (141) Net Loss and Loss Adjustment Expenses $ 12,481 $ 13,832 $ 14,429 $ 14,267 Acquisition Costs and Other Underwriting Expenses $ 6,946 $ 7,858 $ 8,429 $ 8,111 Net Income $ 3,622 $ 3,992 $ 4,468 $ 4,788 Basic Earnings Per Share $ 0.30 $ 0.33 $ 0.37 $ 0.39 Diluted Earnings Per Share $ 0.25 $ 0.27 $ 0.30 $ 0.32 Weighted-Average Common Shares Outstanding 12,133,216 12,175,688 12,223,940 12,240,286 Weighted-Average Share Equivalents Outstanding 2,570,174 2,674,217 2,815,533 2,792,963 ------------ ------------ ------------ ------------ Weighted-Average Shares and Share Equivalents Outstanding 14,703,390 14,849,905 15,039,473 15,033,249 ============ ============ ============ ============
(1) Share information restated to reflect a two-for-one split of the Company's common stock distributed in November 1997 (see Note 11). 44 45 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this Report in that the registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later that 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's director and executive officers required by this Item is incorporated by reference to the Proxy Statement under the caption "Management-Directors and Executive Officers". Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Proxy Statement under the captions "Executive Compensation","Stock Option Exercises and Holdings" and "Directors Compensation". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management". Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Proxy Statement under the caption "Additional Information Regarding the Board". PART IV Item 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Exhibits 1. The Financial Statements and Financial Statement Schedules listed in the accompanying index on page 25 are filed as part of this Report. 2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report.
Exhibit No. Description - ----------- ----------- 3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date. 3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance. 3.2 * By-laws of Philadelphia Insurance, as amended to date. 10.1 *(1) Amended and Restated Key Employees' Stock Option Plan. 10.1.1 ********(1) Amended and Restated Key Employees' Stock Option Plan. 10.2 *(1) Key Employees' Stock Bonus Plan. 10.2.1 *(1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock Bonus Plan. 10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1, 1990, with Swiss Re, as amended to date. 10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date.
45 46 10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with Swiss Re, as amended to date. 10.9 * Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201, as amended to date. 10.10 * Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Property Quota Share Reinsurance Agreement No. DP2AB, effective October 1, 1990, as amended to date. 10.11 * Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. DC2ABC, effective October 1, 1990, as amended to date. 10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance Corporation, as amended to date. 10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance Corporation. 10.14 * General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to date. 10.15 * E & O Insurance Policy effective July 20, 1993. 10.15.1 ******* E & O Insurance Policy effective July 20, 1996. 10.15.2 ********* E & O Insurance Policy effective July 20, 1997. 10.16 * Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated November 16, 1992. 10.17 *(1) Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning options. 10.18 *(1) James J. Maguire Stock Option Agreements. 10.18.1 ***(1) Amendment to James J. Maguire Stock Option Agreements. 10.19 *(1) Wheelways Salary Savings Plus Plan Summary Plan Description. 10.20 * Key Man Life Insurance Policies on James J. Maguire 10.21 * Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC. 10.22 * Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date. 10.23 * Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date. 10.24 *(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date. 10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996. 10.25 *(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date. 10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996. 10.26 * General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company. 10.27 * Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993. 10.28 ** Lease tracking portfolio assignment agreement. 10.29 ****(1) James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship Life. 10.30 ***** Allenbrook Software License Agreement, dated September 26, 1995. 10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A. 10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America. 10.33 ******(1) Employee Stock Purchase Plan. 10.34 ******(1) Cash Bonus Plan. 10.35 ******(1) Executive Deferred Compensation Plan. 10.36 ********(1) Directors Stock Purchase Plan 10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc. 10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic Reinsurance Agreement effective January 1, 1997.
46 47 10.39 ********* Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective January 1, 1997. 10.40 ********** Inspire Software License Agreement, dated December 31, 1998. 10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc. 11 ********** Statement regarding computation of earnings per share. 21 * List of Subsidiaries of the Registrant. 23 ********** Consent of PricewaterhouseCoopers, LLP 24 * Power of Attorney 99.1 ********** Report of Independent Accountants of PricewaterhouseCoopers, LLP on Financial Statement Schedules.
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1 Registration Statement under the Securities Act of 1933 (Registration No. 33-65958). ** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference. *** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated by reference. **** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated by reference. ***** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. ****** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated by reference. ******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. ******** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference. ********* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ********** Filed herewith. (1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1998. 47 48 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. Philadelphia Consolidated Holding Corp. By: /s/ James J. Maguire ------------------------------------------ James J. Maguire Chairman of the Board of Directors, President, and Chief Executive Officer March 26, 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 --------- ----- ---- March 26, 1999 /s/ James J. Maguire Chairman of the Board of -------------------------------- Directors, President and Chief Executive James J. Maguire Officer (Principal Executive Officer) /s/ Craig P. Keller Vice President, Secretary, Treasurer, March 26, 1999 -------------------------------- and Chief Financial Officer Craig P. Keller (Principal Financial and Accounting Officer) /s/ James J. Maguire, Jr. Executive Vice President & COO, Director March 26, 1999 -------------------------------- James J. Maguire, Jr. /s/ Sean S. Sweeney Executive Vice President, Director March 26, 1999 -------------------------------- Sean S. Sweeney /s/ William J. Henrich, Jr. Director March 26, 1999 -------------------------------- William J. Henrich, Jr. /s/ Paul R. Hertel, Jr. Director March 26, 1999 -------------------------------- Paul R. Hertel, Jr. /s/ Roger L. Larson Director March 26, 1999 -------------------------------- Roger L. Larson /s/ Thomas J. McHugh Director March 26, 1999 -------------------------------- Thomas J. McHugh /s/ Michael J. Morris Director March 26, 1999 -------------------------------- Michael J. Morris /s/ J. Eustace Wolfington Director March 26, 1999 -------------------------------- J. Eustace Wolfington
48 49 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule I - Summary of Investments - Other than Investments in Related Parties As of December 31, 1998 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D Estimated Amount at which Market shown in the Type of Investment Cost * Value Balance Sheet - ------------------------------------------------------------------------------------------------------- Fixed Maturities: Bonds: United States Government and Government Agencies and Authorities $ 26,759 $ 26,974 $ 26,974 States, Municipalities and Political Subdivisions 112,196 117,195 117,195 Public Utilities 3,366 3,634 3,634 All Other Corporate Bonds 133,854 133,539 133,539 Redeemable Preferred Stock 2,382 2,376 2,376 -------- -------- -------- Total Fixed Maturities 278,557 283,718 283,718 -------- -------- -------- Equity Securities: Common Stocks: Public Utilities 141 290 290 Banks, Trust and Insurance Companies 7,011 12,308 12,308 Industrial, Miscellaneous and all other 36,289 60,170 60,170 -------- -------- -------- Total Equity Securities 43,441 72,768 72,768 -------- -------- -------- Total Investments $321,998 $356,486 $356,486 ======== ======== ========
* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. S-1 50 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Only) Balance Sheets (In Thousands, Except Share Data)
As of December 31, -------------------------- 1998 1997 --------- --------- ASSETS Fixed Maturities Available for Sale at Market $ $ 30 Cash and Cash Equivalents (65) (3) Mortgage Loans (a) 1,125 Equity in and Advances to Unconsolidated Subsidiaries (a) 238,292 109,540 Other Assets 14 589 --------- --------- Total Assets $ 238,241 $ 111,281 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Income Taxes Payable (Recoverable) $ 675 $ (162) Other Liabilities 1,178 159 --------- --------- Total Liabilities 1,853 (3) --------- --------- Minority Interest in Consolidated Subsidiaries: Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of Company 98,905 --------- --------- Commitments and Contingencies Shareholders' Equity Preferred Stock, $.01 Par Value, 10,000,000 Shares Authorized, None Issued and Outstanding Common Stock, No Par Value, 50,000,000 Shares Authorized, 12,330,825 shares Issued and 12,242,431 Shares Issued and Outstanding 44,796 42,788 Notes Receivable from Shareholders (1,680) (1,422) Accumulated Other Comprehensive Income 22,417 15,023 Retained Earnings 74,923 54,895 Less Cost of Common Stock held in Treasury, 130,262 Shares in 1998 (2,973) --------- --------- Total Shareholders' Equity 137,483 111,284 --------- --------- Total Liabilities and Shareholders' Equity $ 238,241 $ 111,281 ========= =========
(a) These items have been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 32-44. S-2 51 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule II, Continued Condensed Financial Information of Registrant (Parent Only) Statements of Operations (In Thousands)
For the Years Ended December 31, ------------------------------------ 1998 1997 1996 -------- -------- -------- Revenue: Dividends from Subsidiaries(a) $ 5,470 $ $ Net Investment Income 2,598 10 11 Net Realized Investment Gain, (Loss)(b) (671) 672 -------- -------- -------- Total Revenue 7,397 10 683 -------- -------- -------- Other Expenses 725 540 496 -------- -------- -------- Total Expenses 725 540 496 -------- -------- -------- Minority Interest: Distributions on Company Mandatorily Redeemable Preferred Securities of Subsidiary Trust 4,770 -------- -------- -------- Income, (Loss) Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries 1,902 (530) 187 Income Tax Expense (Benefit) 675 (162) 74 -------- -------- -------- Income, (Loss) Before Equity in Earnings of Unconsolidated Subsidiaries 1,227 (368) 113 Equity in Earnings of Unconsolidated Subsidiaries 18,801 17,238 13,261 -------- -------- -------- Net Income $ 20,028 $ 16,870 $ 3,374 ======== ======== ========
(a) This item has been eliminated in the Company's Consolidated Financial Statements. (b) $31 and $665 of this amount has been eliminated in the Company's Consolidated Financial Statements for 1998 and 1996, respectively. See Notes to Consolidated Financial Statements included in Item 8, pages 32-44. S-3 52 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule II, Continued Condensed Financial Information of Registrant (Parent Only) Statements of Cash Flows (In Thousands)
For the Years Ended December 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- Cash Flows From Operating Activities: Net Income $ 20,028 $ 16,870 $ 13,374 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Net Realized Investment (Gain), Loss 671 (672) Amortization Expense (Income) (145) 68 79 Equity in Earnings of Unconsolidated Subsidiaries (18,801) (17,238) (13,261) Change in Other Liabilities 1,019 (16) 25 Change in Other Assets 575 10 (9) Change in Income Taxes Payable 837 (584) (88) --------- --------- --------- Net Cash Provided (Used) by Operating Activities 4,184 (890) (552) --------- --------- --------- Cash Flows From Investing Activities: Proceeds From Maturity of Investments in Fixed Maturities Available for Sale 569 Proceeds From Sales of Investments in Equity Securities 2,427 2,335 Cost of Fixed Maturities Available for Sale Acquired (62,753) Cost of Equity Securities Acquired (13,721) (119) Net Transfers to Subsidiaries (a) (28,450) (581) (2,678) --------- --------- --------- Net Cash Used by Investing Activities (101,928) (581) (462) --------- --------- --------- Cash Flows From Financing Activities: Proceeds From Offering of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 99,463 Exercise of Employee Stock Options, Net of Tax Benefit 724 723 979 Collection of Notes Receivable 570 375 207 Proceeds from Shares Pursuant to Employee Stock Purchase Plan 25 25 Cost of Common Stock Repurchased (3,100) --------- --------- --------- Net Cash Provided by Financing Activities 97,682 1,123 1,186 --------- --------- --------- Net Increase (Decrease) in Cash and Equivalents (62) (348) 172 Cash and Cash Equivalents at Beginning of Year (3) 345 173 --------- --------- --------- Cash and Cash Equivalents at End of Year $ (65) $ (3) 345 ========= ========= ========= Cash Dividends Received From Unconsolidated Subsidiaries $ 5,470 $ $ ========= ========= ========= Non-Cash Transactions: Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for Notes Receivable $ 828 $ 873 $ 1,131
(a) These items have been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 32-44. S-4 53 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule IV - Reinsurance Earned Premiums For the Years Ended December 31, 1998, 1997, and 1996 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------------------------------------------------------------------------------------------------- Ceded to Assumed from Percentage of Gross Other Other Amount Amount Companies Companies Net Amount Assumed to Net - ------------------------------------------------------------------------------------------------------------------------- 1998 Property and Casualty Insurance $173,555 $52,049 $1,181 $122,687 1.0% ========================================================================================================================= 1997 Property and Casualty Insurance $147,514 $49,573 $2,614 $100,555 2.6% ========================================================================================================================= 1996 Property and Casualty Insurance $117,354 $49,770 $4,466 $72,050 6.2% =========================================================================================================================
S-5 54 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations As of and For the Years Ended December 31, 1998, 1997, and 1996 (Dollars in Thousands)
Reserve for Deferred Unpaid Policy Claims and Discount if Net Affiliation with Acquisition Claim any deducted Unearned Earned Registrant Costs Adjustment in Column C Premiums Premiums Expenses COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Consolidated Property - Casualty Entities December 31, 1998 $16,853 $151,150 $0 $64,787 $122,687 December 31, 1997 $10,970 $122,430 $0 $42,116 $100,555 December 31, 1996 $ 9,033 $ 96,642 $0 $33,154 $ 72,050
Claims and Claims Adjustment Expenses Amortization of Incurred Related to deferred policy Paid Claims Net (1) (2) acquisition costs and Claim Affiliation with Investment Current Prior Adjustment Net Written Registrant Income Year Year Expenses Premiums COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K Consolidated Property - Casualty Entities December 31, 1998 $15,448 $69,544 ($3,170) $30,034 $40,272 $143,036 December 31, 1997 $ 9,703 $56,725 ($1,716) $25,034 $31,804 $111,797 December 31, 1996 $ 7,910 $41,083 ($965) $22,210 $22,641 $ 83,994
S-6 55 Philadelphia Consolidated Holding Corp. and Subsidiaries Exhibit Index For the Year Ended December 31, 1998
Exhibit No. Page No. Description - ----------- -------- ----------- 3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date. 3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance. 3.2 * By-laws of Philadelphia Insurance, as amended to date. 10.1 *(1) Amended and Restated Key Employees' Stock Option Plan. 10.1.1 ********(1) Amended and Restated Key Employers' Stock Option Plan. 10.2 *(1) Key Employees' Stock Bonus Plan. 10.2.1 *(1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock Bonus Plan. 10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P- 106,401,402, effective January 1, 1990, with Swiss Re, as amended to date. 10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date. 10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with Swiss Re, as amended to date. 10.9 * Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201, as amended to date. 10.10 * Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Property Quota Share Reinsurance Agreement No. DP2AB, effective October 1, 1990, as amended to date. 10.11 * Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. DC2ABC, effective October 1, 1990, as amended to date. 10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance Corporation, as amended to date. 10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance Corporation. 10.14 * General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to date. 10.15 * E & O Insurance Policy effective July 20, 1993. 10.15.1 ******* E & O Insurance Policy effective July 20, 1996. 10.15.2 ********* E & O Insurance Policy effective July 20, 1997. 10.16 * Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated November 16, 1992.
(E-1) P. 55 56 10.17 *(1) Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning options. 10.18 *(1) James J. Maguire Stock Option Agreements. 10.18.1 ***(1) Amendment to James J. Maguire Stock Option Agreements. 10.19 *(1) Wheelways Salary Savings Plus Plan Summary Plan Description. 10.20 * Key Man Life Insurance Policies on James J. Maguire 10.21 * Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC. 10.22 * Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIIC, as amended to date. 10.23 * Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date. 10.24 *(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date. 10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996. 10.25 *(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date. 10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996. 10.26 * General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company. 10.27 * Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993. 10.28 ** Lease tracking portfolio assignment agreement. 10.29 ****(1) James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship Life. 10.30 ***** Allenbrook Software License Agreement, dated September 26, 1995. 10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A. 10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America. 10.33 ******(1) Employee Stock Purchase Plan. 10.34 ******(1) Cash Bonus Plan. 10.35 ******(1) Executive Deferred Compensation Plan. 10.36 ********(1) Directors Stock Purchase Plan. 10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc. 10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic Reinsurance Agreement effective January 1, 1997. 10.39 ********* Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective January 1, 1997. 10.40 ********** Page 58 of 273 Inspire Software License Agreement, dated December 31, 1998.
(E-2) P. 56 57 10.41 ********** Page 85 of 273 Lease Agreement dated July 6, 1998 with Bala Plaza, Inc. 11 ********* Page 266 of 273 Statement regarding computation of earnings per share. 21 * List of Subsidiaries of the Registrant. 23 ********* Page 268 of 273 Consent of PricewaterhouseCoopers, LLP 24 * Power of Attorney 27 ********* Page 270 of 273 Financial Data Schedule 99.1 ********* Page 272 of 273 Report of Independent Accountants of PricewaterhouseCoopers, LLP on Financial Statement Schedules.
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1 Registration Statement under the Securities Act of 1933 (Registration No. 33-65958). ** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference. *** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated by reference. **** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated by reference. ***** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. ****** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated by reference. ******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. ******** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference. ********* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ********** Filed herewith.
(1) Compensatory Plan or Arrangement, or Management Contract. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1998. (E-3) P. 57 EX-10.40 2 INSPIRE SOFTWARE LICENSE AGREEMENT 1 ================================================================================ INSpire Insurance Solutions, Inc. License Agreement This License Agreement is made this 31st day of December, 1998 (the "Effective Date") by and between INSPIRE INSURANCE SOLUTIONS, INC., a Texas corporation having its principal place of business located at 300 Burnett Street, Fort Worth, Texas, 76102, ("INSpire"), and Philadelphia Consolidated Holding Corp. and all of its subsidiaries, including, but not limited to, Philadelphia Insurance Company of One Bala Plaza, Ste. 100, Bala Cynwyd, Pennsylvania, 19004, (collectively, "Client"). WHEREAS, Client has been using certain software licensed by Inspire on a trial basis and now desires to acquire such software, in addition to other software, under a perpetual license; and WHEREAS, Inspire desires to license such software to Client and provide Client with (i) related implementation services pursuant to an Implementation Support schedule attached hereto; and (ii) support and maintenance services pursuant to a System Maintenance schedule which is also attached hereto; NOW, THEREFORE, in consideration of the mutual promises herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. INSpire grants to Client, and Client accepts, subject to all the terms and conditions of this Agreement, a non-exclusive, non-transferable (except as permitted under Section 3), perpetual License to use a property and casualty information processing system (the "System"). The System consists of certain computer software as more fully described in Schedule 6 of this Agreement and the documents specified in Schedule 4 (collectively such documents are hereinafter referred to as the "System Specifications"). 2. Attached hereto are Schedules 1 through 8. Such schedules are incorporated herein by reference as if set forth in full (except for Schedule 8), and both parties expressly agree to be bound by them. 3. The License granted hereunder is limited to use of the System by the Client for processing its data and files at any of Client's locations and on any type of network, including, but not limited to, a wide area network configuration which connects Client's locations to the System via remote access modems. The rights, benefits, duties, and obligations granted to Client hereunder are personal to Client, and the Agreement may not be sold, transferred or assigned to any third party without the express written consent of INSpire. Any attempted sale, transfer, or assignment without such consent shall be null, void, and of no effect. Notwithstanding the foregoing or anything herein to the contrary, Philadelphia Consolidated Holding Corp. shall be permitted to assign this Agreement, without the imposition of any transfer or assignment fees, to any one of the following parties: (i) 1 ================================================================================ 2 ================================================================================ any successor by merger, acquisition, consolidation or other corporate restructuring; (ii) any parent, subsidiary or affiliate; or (iii) any entity which purchases all or substantially all of Philadelphia Consolidated Holding Corp.'s or any of its subsidiaries' assets. Unless otherwise agreed by the parties, the use of the Software System by any assignee of Client shall be limited to processing the data, records and/or customers of that portion of Client's business supported by the Software System prior to assignment of this Agreement. 4. (a) INSpire warrants that for a period of one (1) year after the date of Acceptance of the System under Schedule 5, the System will conform to the System Specifications, except for any failure to conform caused by Client-created error. Should the System fail to perform in accordance with the foregoing warranty during the warranty period, INSpire will, at its sole cost and expense, correct the non-conformity(ies) within the following time frames corresponding to the severity level of the failure/non-conformity: i. Priority A -INSpire will acknowledge Priority A failures/non-conformities within one (1) hour during normal business hours, 8:00 a.m. CST -- 5:00 p.m. CST and within two (2) hours outside of normal business hours from the time the call was placed by Client. INSpire will provide a fix or workaround within the later of twenty (24) hours from the time the call was placed by Client or at the start of the first business day after the call. ii. Priority B - INSpire will acknowledge Priority B failures/non-conformities within one (1) hour during normal business hours, 8:00 a.m. CST -- 5:00 p.m. CST and within two (2) hours outside of normal business hours from the time the call was placed by Client. INSpire will provide a fix or workaround within seventy two (72) hours from the time the call was placed by Client. iii. Priority C - INSpire will acknowledge Priority C failures/non-conformities within seventy two (72) hours from the time the call was placed by Client. INSpire will provide a fix or workaround within seven (7) days from the time the call was placed by Client. For any failures/non-conformities for which INSpire provides a workaround, INSpire will provide a schedule for the fix of such failure/non-conformities and INSpire will use its reasonable best efforts to provide such fix within thirty (30) days after the call was placed by Client. For purposes of this section 4 a., the following definitions apply: Priority A means a failure/non-conformity that renders the System inoperative or causes the System to fail catastrophically. Priority B means a failure/non-conformity that significantly degrades performance of the System or materially restricts Client's use of the System. Priority C means a failure/non-conformity that causes only a minor impact on the use of the System. 2 ================================================================================ 3 ================================================================================ The priority level of each reported failure/non-conformity will be determined jointly between Client and INSpire at the time the failure/non-conformity is reported. If the failure of the System to conform to the System Specifications is due to Client-created error, Client agrees to pay for Inspire's services (at the time and materials rates specified in Schedule 7) rendered in analyzing and correcting the non-conformity(ies), provided that any such non-conformity(ies) are corrected. (b) Inspire represents and warrants that the System and all updates thereto can and will correctly handle the change of the century in a standard and compliant manner, including the year 2000 and beyond as well as the leap year and the absence of leap year, and will operate accurately in all respects with respect to date related operations. For purposes of this Agreement, compliance with the foregoing with respect to the year 2000 shall mean that neither the performance nor the functionality of the System will be affected by any changes caused by the advent of the year 2000. In particular: i. Year 2000 compliance shall mean that no value used for the current date will cause any interruption in the operation of the System. ii All manipulations of time-related data will produce the desired results for all valid dates within the System, proper to, through and beyond the year 2000. iii Where required, data elements, interfaces and data storage will specify the century to eliminate data ambiguity iv Where any date element is represented without a century, the correct century shall be unambiguous for all manipulations involving that element. (c) Inspire represents and warrants that it is the owner of all right, title and interest in and to the System (except for the component noted on Schedule 6 as being owned by Cover All Technologies, Inc., referred to hereinafter as the "ValueRate Software" and the component noted on Schedule 6 as being owned by Bexar, Inc., referred to hereinafter as the "M.A.R.S. Software") and that it has the right to grant to Client the license granted hereunder free and clear of any liens and encumbrances. With respect to the ValueRate Software and the M.A.R.S Software, Inspire represents and warrants that it has the rights to license such software to Client on the terms herein stated. (d) INSpire warrants that the System is and shall remain free of features such as "back doors", "trojan horses" and "time bombs" through which the System could be disabled either directly or indirectly via remote access. (e) INSpire warrants that the System is and shall remain free of any and all computer viruses (excluding any viruses exposed to the System by Client) and that Inspire has taken all reasonable steps to ensure that the System is free of such viruses. (f) INSpire warrants that all services rendered hereunder shall be rendered in a professional manner consistent with general industry practices. INSpire also warrants there will be no reassignment of resources to another client of INSpire when such reassignment would hinder or adversely affect the successful completion of the 3 ================================================================================ 4 ================================================================================ Implementation Tasks identified on Schedule 7 of this Agreement or the successful completion of the Acceptance Criteria identified on Schedule 5 of this Agreement. 5. Client acknowledges that the System is a confidential and commercially valuable proprietary product of INSpire, and agrees to keep the System confidential and not to disclose it, in full or in part, to any third party (except its employees, accountants, attorneys, and any governmental authority or agency) without the express written consent of INSpire, such written consent by INSpire not to be unreasonably withheld. Notwithstanding the foregoing, Client shall not be in breach of this Section 5 if Client is required to disclose the System or any information related thereto pursuant to applicable laws, rules or regulations, government requirement, court order or in connection with the enforcement of any of its rights or remedies under this Agreement. Client agrees, in furtherance of this provision, to exercise at least the same degree of care with respect to the System as it exercises with respect to its own data, records, information, materials and processes which it deems to be confidential and proprietary in nature. Inspire shall hold in confidence and not disclose (except on a confidential basis to its employees who need to know and who are informed of their confidentiality obligations) all Confidential Information received from Client in the same manner and to the same extent as it holds in confidence its own Confidential Information, and shall not use any such Confidential Information except for purposes contemplated by this Agreement. As used in this Agreement, "Confidential Information" shall mean all confidential and proprietary information, including but without limitation, components, drawings, data, plans, programs, specifications, techniques, processes, inventions or other information or material, owned, possessed or used by Client which is disclosed orally, in writing or is viewed by Inspire. In the event of a breach by Inspire of its obligations under this paragraph, Client will suffer irreparable harm, Client's remedies at law will be inadequate and Client shall have, in addition to any other remedies it may have, the right to obtain injunctive relief to restrain any breach or threatened breach thereof Except to the extent retained in connection with the enforcement of its rights and remedies under this Agreement, upon termination of this Agreement, Client shall return to INSpire any and all copies of the System, or any portion thereof, whether said copies were created by INSpire or by Client. It is expressly agreed by the parties that the termination of this Agreement will not terminate their obligations under this paragraph. 6. APART FROM THE WARRANTIES EXPRESSLY MADE IN THIS AGREEMENT, INSpire MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, CONCERNING THE CAPABILITIES, PERFORMANCE, SPECIFICATIONS, OR CHARACTERISTICS OF THE SYSTEM. Neither party will be responsible to the other for any incidental or consequential damages, including but not limited to loss of business or business profits, regardless of whether said damages were foreseeable. Notwithstanding anything herein to the contrary, the foregoing limitations on INSpire's liability shall not apply to (i) damages arising from INSpire's willful misconduct; or (ii) the following paragraph. 4 ================================================================================ 5 ================================================================================ Notwithstanding anything in this Agreement to the contrary, INSpire shall pay Client as liquidated damages and not as a penalty, $10,000 per week for each full week that completion of Implementation (as specified in Schedule 7) is later than the Implementation Date (as defined in Schedule 7). Any such damages owed Client, as calculated weekly, shall be paid within five (5) days of the end of the week giving rise to such damages. Payment of liquidated damages owed to Client by INSpire (as described in the above paragraph) in excess of any monies actually paid by Client to INSpire under Schedule 2--Payment Terms of this License Agreement may, at INSpire's option, be done in the form of a credit to Client towards any future monies owed by Client under this License Agreement. However, if this License Agreement is terminated by either party for any reason, all liquidated damages owed to Client by INSpire, including any that have been credited in accordance with the foregoing sentence, shall be paid within five (5) days of the effective date of termination. 7. (a) INSpire warrants that it is the owner of the System (except for the ValueRate and M.A.R.S Software) and has the right to license it to Client. INSpire further warrants that the System does not infringe upon the proprietary interest or intellectual property rights of any third party. Client agrees to promptly inform INSpire in writing should it become aware of any claim or allegation that the System infringes upon the copyright, patent, trademark or any other proprietary right of a third party, in which event INSpire shall defend, indemnify and hold Client harmless from and against any such allegation, claim or action at its own expense, and to pay all costs (including reasonable attorneys' fees) incurred by, and damages finally awarded against, Client or paid by Client in settlement of such action. Client agrees to cooperate with said defense by complying with INSpire' reasonable instructions and requests to Client in connection with said defense. If, as the result of any such claim or action, Client is unable to use the System or any material portion thereof, Client shall have the right to terminate this Agreement upon written notice to INSpire, in which case INSpire shall promptly refund all fees previously paid by Client to INSpire hereunder. (b) INSpire agrees to indemnify, defend and hold harmless Client and its directors, officers and employees (collectively, the "Indemnified Parties") from and against all claims, losses, liabilities, damages and expenses (including reasonable legal fees and expenses) suffered or incurred by any of them resulting from, based upon, relating to or arising out of (i) a breach of any warranties made by INSpire herein, (ii) a breach by INSpire of any of its obligations hereunder, (iii) the conduct of INSpire, its employees, agents and subcontractors and any breach or violation of law. 8. Upon delivery of the System to Client, the risk of loss, damage or destruction shall be borne by Client. In the event of such loss, damage or destruction, INSpire agrees to furnish replacement materials at its reasonable costs but in no event be liable for the loss or replacement of Client's data used with the System except as otherwise provided for in this agreement. 9. Subject to the limitations on assignment contained in Paragraph 3, above, this Agreement shall be binding upon the parties hereto, their legal representatives, successors, subsidiaries and assigns. 5 ================================================================================ 6 ================================================================================ 10. In addition to the payment specified in this Agreement, Client shall pay any present or future sales, excise, use, value-added or other similar taxes or duties levied or based on payments made pursuant to this Agreement or on the System in regard to its use by Client or on the Agreement. INSpire agrees to promptly remit all taxes collected from Client to the appropriate taxing authority. 11. Neither party shall, without the express written consent of the other party, directly or indirectly induce or attempt to induce any employee of the other party to terminate his or her employment with the other party or hire any employee of the other party. 12. This Agreement may be terminated by INSpire for nonpayment of any monies due hereunder after thirty (30) days written notice from INSpire, or if Client fails to comply with the confidentiality provisions contained herein and Client fails to cure such failure or make such payment within thirty (30) days of written notice from INSpire. Such termination shall not affect any other remedy for said breach to which INSpire may be entitled. This Agreement may be terminated at any time by Client provided that Client (1) return all System materials to INSpire, (2) pay to INSpire the balance of any unpaid license fees (except where termination is due to (i) a breach of this Agreement by Inspire or (ii) rejection of the System by Client in accordance with Schedule 5), (3) pay to INSpire any unpaid service fees for work performed under this Agreement. Upon termination, INSpire shall not be responsible for the refund of any monies paid hereunder, except as otherwise provided in this Agreement. If Client terminates this Agreement as the result of a breach by INSpire which has remained uncured past the time frames outlined in section 4 a. of this Agreement INSpire shall promptly refund all fees paid by Client under this Agreement in accordance with the following refund schedule: i. 100% of all fees (License, Implementation & Maintenance) paid by Client if the breach occurs within one year from the Effective Date of this Agreement or within one year from the date of Acceptance (as defined in schedule 5) of the System by Client, whichever is later. ii. 50% of all fees (License, Implementation & Maintenance) paid by Client if the breach occurs after one year, but less than two years, from the date of this Agreement or the date of Acceptance of the System by Client, whichever is later. iii. 25% of all fees (License, Implementation & Maintenance) paid by Client if the breach occurs after two years, but less than three years, from the date of this Agreement or the date of Acceptance of the System by Client, whichever is later. iv. 12.5% of all fees (License, Implementation & Maintenance) paid by Client if the breach occurs after three years, but less than four years, from the date of this Agreement or the date of Acceptance of the System by Client, whichever is later. 6 ================================================================================ 7 ================================================================================ v. 6.25% of all fees (License, Implementation & Maintenance) paid by Client if the breach occurs after four years, but less than five years, from the date of this Agreement or the date of Acceptance of the System by Client, whichever is later. 13. This agreement shall be governed by any applicable provisions of the Uniform Commercial Code, unless the provisions of this Agreement are inconsistent therewith. 14. This Agreement shall be governed by and construed in accordance with the laws of the State of Pennsylvania, excluding that body of laws of such state dealing with conflicts of law. 15 This Agreement supersedes all prior communications and agreements between the parties relating to the subject matter of this Agreement and constitutes the full understanding between the parties with respect thereto. No waiver of any provision of this Agreement or of any breach and no modification or supplement hereto shall be binding, unless in writing and signed by an officer of INSpire and Client, and no waiver shall apply to any subsequent breach of the same or similar provision. 16. A waiver of a breach or default under this Agreement shall not be a waiver of any other breach or default. Failure of either party to enforce compliance with any term or condition of this Agreement shall not constitute a waiver of such term or condition unless accompanied by a clear written statement that such term or condition is waived. 17. Except as otherwise provided in this Agreement, any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed given if delivered in person or when sent by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, addressed to the party at its address set forth below: If to Inspire: ATTN: President Inspire Insurance Solutions, Inc. 300 Burnett Street Fort Worth, TX 76102 If to Bexar: ATTN: President Bexar, Inc. 2356 Hassell Rd. Suite A Hoffman Estates, Illinois 60195 If to Client: Jack T. Carballo Vice President of Insurance Operations Philadelphia Insurance Companies One Bala Plaza, Suite 100 Bala Cynwyd, PA 19004 7 ================================================================================ 8 ================================================================================ 18. Termination of this Agreement shall not terminate or negate any obligations of either party which have accrued prior to termination and which, by their nature, are intended to survive termination, including, but not limited to, Sections 5, 6, 7 and any other provisions under which Client is entitled to a refund of fees. 19. Prior to commencement of any services under this Agreement, INSpire shall place and maintain with responsible insurance carriers reasonably acceptable to Client, policies of insurance described in this section with the coverage amounts required herein. Inspire shall, if requested by Client, deliver to Client copies of certificates evidencing such insurance, which shall designate Client as an Additional Insured on the Commercial General Liability policy only (not a named insured) and which shall provide thirty (30) days prior written notice to Client in the event of cancellation or other termination of same, as follows: (a) Comprehensive General Liability. INSpire shall procure Comprehensive General Liability coverage including Blanket Contractual, Broad Form Property Damage, Completed Operations and Independent Contractor's Liability with a minimum limit of liability in the amount of $2,000,000. This coverage may be provided under INSpire's Umbrella Liability policy and shall be in the form of "occurrence" coverage. (b) Workers' Compensation. INSpire shall procure Workers' Compensation at the statutory limits in compliance with the applicable State and Federal Laws. (c) E & 0 and Professional Liability. INSpire shall procure Error and Omission and Professional Liability coverage with a minimum limit of liability of $2,000,000 each claim. This coverage shall be in the form of "claims made" coverage. This coverage shall not have any retention or deductible in excess of $250,000 per claim. (d) Comprehensive Automobile Liability. INSpire shall procure Comprehensive Automobile Liability Insurance including coverage for Personal Injury, Bodily Injury and Property Damage with a minimum combined single limit of liability of $l,000,000. (e) Directors & Officers Liability. INSpire shall procure Directors & Officers Liability coverage with a minimum limit of liability of $5,000,000 each claim. This coverage shall be in the form of "claims made" coverage. This coverage shall not have any retention or deductible in excess of $250,000 per claim. 8 ================================================================================ 9 ================================================================================ IN WITNESS HEREOF the parties have caused the signatures of their duly authorized officers to be hereunto affixed. INSpire Insurance Solutions, Inc. License Agreement Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ Bexar, Inc. agrees to be bound by this Agreement as a guarantor of INSpire's obligations with respect to the MARS Software. BEXAR, INC. By: /s/ RIC DEBEJAR ------------------------------ Name: RIC DEBEJAR ------------------------------ Title: President ------------------------------ Date: January 25, 1999 ------------------------------ 9 ================================================================================ 10 ================================================================================ Supplemental Conditions Schedule 1 -- Hardware Hardware Requirements The System must be capable of supporting 200 simultaneous users with the following response time: *Local Connections -- 5 seconds or less *Remote Connections -- 10 seconds or less The System must be fully functional in the following environments: Workstation: Workstations consist of personal computers running Window 95 or Windows 98 or Windows NT Workstation. Machines should be 300MH Pentium Processor with a minimum of 64MB of memory for Win95/98 or 64MB of memory for Windows NT Workstation. The workstations connect to the network using Novell NetWare Client 32 Version 2.x or higher. The display should be SVGA (800x600x256) capable. The system does not require any local disk storage on the client machine. System/Database Servers: Servers consist of Compaq Proliant Series machines using the Compaq internal disk array or Data General Aviion series machines utilizing a Clariion disk array in raid 5 configuration. The database server should be any machine running an operating system (OS), for which a version of Oracle is available. Operating systems include Novell NetWare 3.12 or higher, Windows NT 3.51 or higher. Local Area Network The network environment is a 10/100 MB Ethernet network using Intel 10/100 network interface cards and a mix of Intel and Synoptics 10/100 hubs. These are connected to the servers via a Cisco catalyst 5500 LAN switch. Wide Area Network: The wide area network is a combination of frame relay and dial-up networking. The frame relay network is a point to point methodology, using Cisco routers and Motorola FT100 CSU/DSU's to link to the home office. The dial-up network utilizes VPN or Internet tunneling technology to connect to the home office. All wide area strategies use Citrix as the operating client for remote processing. The System must be compatible with multiple Citrix Winframe and Metaframe products. 10 ================================================================================ 11 ================================================================================ Schedule 1 -- Hardware, continued Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 11 ================================================================================ 12 ================================================================================ Supplemental Conditions Schedule 2 -- Payment Terms Payment Terms A. License Agreement 1. 25% of license fee upon execution of License Agreement. 2. 75% of license fee upon Acceptance, as defined in Schedule 5 of this Agreement. Client may, at its sole option, elect to accept and use any one of the individual components that collectively comprise the System (as such components are identified in Schedule 4 of this Agreement) even though the remaining components may not collectively meet the Acceptance Criteria referenced in Schedule 5 of this Agreement. If Client elects such an option, then Client must pay INSpire the full amount of the license fee applicable to such component as listed on Schedule 6 of this Agreement. B. All work performed by INSpire under (i) Section 4(a) for client-caused errors; (ii) Schedule 3 for training in excess of training included in the license fees; or (iii) Schedule 7 for implementation, shall be billed on an hourly basis each month in accordance with the rates specified in Schedule 7. All payments shall be due and payable within thirty (30) days of receipt of invoice. C. Other Expenses In addition to the payments provided for above, Client will pay INSpire for the following miscellaneous personnel expenses: 1. Mileage at the IRS published rate in force on the date incurred. 2. All other reasonable travel and lodging expense incurred by INSpire personnel pursuant to this Agreement and approved in advance by Client. 3. Out-of-pocket expenses for meals or other expenses not specified elsewhere in this schedule and approved in advance by Client. 4. Any work performed by INSpire at the written request of Client outside the scope of services already contracted for within the terms of this Agreement will be billed by INSpire on a time and expense basis at the rates specified in Schedule 7. All work performed on a time and expense basis must be approved by Client in writing before actually being performed by INSpire. If such work is not approved by Client in writing before such work is performed then Client is not obligated to pay for the work. D. Source Code Payment of the license fee guarantees to Client the source code for the System (excluding the ValueRate and M.A.R.S. Software), and INSpire shall deliver such source code 12 ================================================================================ 13 ================================================================================ Schedule 2 -- Payment Terms, continued (including a copy of all source code documentation relating thereto) promptly following Acceptance. With respect to the M.A.R.S. Software, Bexar agrees to enter into a mutually acceptable source code escrow agreement with Client within thirty days of the Effective Date of this Agreement. Among other terms customarily found in such agreements, Bexar will agree to a release of the M.A.R.S. Software source code to Client in the event INSpire ceases to be a going concern, INSpire commences a voluntary bankruptcy proceeding, or an involuntary bankruptcy proceeding is commenced against INSpire, or INSpire fails to support and maintain the M.A.R.S. Software in accordance with the terms of this Agreement. With respect to the ValueRate Software, INSpire agrees to enter into a mutually acceptable source code escrow agreement with Client within thirty days of the Effective Date of this Agreement. Among other terms customarily found in such agreements, INSpire will agree to a release of the ValueRate Software source code to Client in the event INSpire ceases to be a going concern, INSpire commences a voluntary bankruptcy proceeding, or an involuntary bankruptcy proceeding is commenced against INSpire, or INSpire fails to support and maintain the ValueRate Software in accordance with the terms of this Agreement. INSpire warrants that it has the authority of Cover All Technologies, Inc. to enter into such an escrow agreement regarding the ValueRate Software source code. Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 13 ================================================================================ 14 ================================================================================ Supplemental Conditions Schedule 3 -- Training/Installation/Documentation Training A. The training classes specified below in Section B for the System as accepted without customizations (including both user and operational training) are included in the license fee. Training courses are conducted by INSpire personnel at the Client site in a classroom setting equipped with workstations, overhead projectors, a visual display unit, a flip chart, and/or a dry erase board whenever possible. Course books are provided for up to twenty students in each class. Workshops or exercises are included in the class in order to provide the participants with practical hands-on use of the system. Additional or customized training requested by the Client is available on a time and materials basis at the rates specified in Schedule 7. B. The following is a list of Base System classes (one session each) included in the license fee for Client: WPC User Courses 1. Administrator/Operator Training -- INSpire 200 2. Premium System Training (including Billing) -- INSpire 107 3. Claims System Training -- INSpire 112 4. Financials Training -- INSpire 114 5. Reference File Training -- INSpire 119 6. Open Item Reconciliation System Training -- INSpire 111 7. Agency System Training -- INSpire 105 ValueRate 8. System Administration Training 9. Policy Administration and Rating Training M.A.R.S. 10. User Training, Class 1 (8 hours) 11. Technical Training, Class 2 (8 hours) C. Training is limited to a reasonable number of people per class, not to exceed 20. Additional materials and training for more than twenty people will be provided on a time and materials basis at the fees stated in Schedule 7. Installation A. Installation of the System is included in the implementation fees. Installation consists of: INSpire's technicians loading the System on Client's servers, network & workstations. Value Rate, M.A.R.S. & WPC will be installed on both Client's LAN and CITRIX servers. The following products/components are included as part of Installation: 14 ================================================================================ 15 ================================================================================ Schedule 3 -- Training/Installation/Documentation, continued o Value Rate software with the following specifications: - Oracle database. - Capable of running all states (excluding Massachusetts automobile & all coverage lines for Hawaii). - Configured to support the following six coverages: General Liability, Inland Marine, Crime, Glass, Commercial Auto, and Commercial Property (inclusive of Boiler & Machinery, Earthquake, & Flood). - Configured with Client's individual State rate effective dates. - Configured with Client's individual State loss cost multipliers. - Configured with Client's modifications to accept product codes & expanded producer profile. o Transfluent interface software capable of processing all states (excluding Massachusetts automobile & all coverage lines for Hawaii). o 32-bit WPC software with an Oracle database. o PSP software. o Batch Scripts needed to run Transfluent interface. o Open Door software needed to run Transfluent interface. o Managerial and Actuarial Reporting System (M.A.R.S.) reporting Software. Documentation A. The Client is provided with one printed set of user documentation reflecting the System. The Client is permitted to make additional copies as necessary. B Documentation is also available on-line using Microsoft Word and Doc-To-Help. Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 15 ================================================================================ 16 ================================================================================ System Specifications Schedule 4 System Specifications The System Specifications are comprised of the following: o Value Rate -- as collectively outlined, defined and described in the Commercial Package Policy Application Description Manual dated 12/02/98, the Commercial Auto Application Description Manual dated 12/02/98 and the Philadelphia Insurance Companies' Commercial Umbrella Underwriting Guideline dated 1/1/97. o Transfluent, a software product which maps and translates data from one format to another. This translation is controlled by user configurable parameters. In the INSpire total processing solution, these parameters are pre-set and are used to convert data which has been entered and calculated in Value Rate to WPC on a nightly basis. This facilitates a single point of entry. Inclusive in this component is the tool known as "Open Door". It is hereby warranted by INSpire that the nightly batch process performed via this Transfluent component of the System will take no longer than two hours to process a minimum of 200 policies a night. It is agreed that the nightly batch process will be performed only on a stand-alone machine as described in Schedule 1 of this Agreement. "The Nightly Batch Process" is defined as inclusive of all of the following functions: a.) the extraction of data from Value Rate b.) the conversion of data from Value Rate to WPC using Transfluent c.) executing all edit processing using WPC's Open Door facility d.) executing all WPC batch jobs, not including printing, needed to update the WPC database o WPC -- as outlined, defined and described in the WPC Windows into Property and Casualty Base Functionality Document, Version 6. o PSP Policy Set Production -- as outlined, defined and described in the PSP Base Functionality Document (WPC/EmPOWER Interface) dated 12/02/98 o Base Reports - as presented in the WPC Base Reports Documentation o Managerial and Actuarial Reporting System (MARS) report writer software Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 16 ================================================================================ 17 ================================================================================ Systems Acceptance Test Schedule 5 Systems Acceptance Test 1. Within twenty (20) business days of completion of implementation of the System in accordance with Schedule 7, Client, with INSpire's assistance, shall test the functional capabilities of the System and determine whether the System satisfies all of the criteria set forth on the attachment to this Schedule 5 (collectively, the "Acceptance Criteria"). If the System satisfies all of the Acceptance Criteria as reasonably determined by Client, the System shall be deemed to be accepted ("Acceptance"). If any of the criteria are not satisfied as reasonably determined by Client, the System shall not be accepted and INSpire shall have as many additional days as they feel necessary to remedy the problems which caused the System to fail to satisfy the Acceptance Criteria. When INSpire advises Client that the problems have been remedied the parties shall again determine whether the System satisfies all of the Acceptance Criteria. Notwithstanding the above, if the System fails to satisfy all of the Acceptance Criteria as reasonably determined by Client by August 1, 1999 Client shall have the option, in its sole discretion, to (i) terminate this Agreement immediately and receive a refund of all license, maintenance and implementation fees paid hereunder; or (ii) allow INSpire to continue to attempt to remedy the problems which caused the System to fail to satisfy all of the Acceptance Criteria. If Client elects to allow INSpire to continue past August 1, 1999 with its attempts to remedy the problems causing failure to satisfy all of the Acceptance Criteria, Client still retains its right to terminate this Agreement at any time thereafter and receive a refund of all license, maintenance and implementation fees paid hereunder, within 10 days of termination. In no event shall Client be obligated to accept the System if the Acceptance Criteria have not been satisfied within the time frame indicated above or any other time frame which the parties may, in Client's sole discretion, agree to in writing. The Acceptance test will be performed on the hardware specified on Schedule 1 of this Agreement. "ACCEPTANCE CRITERIA" 1. The Value Rate software component of the System must allow the Client to: o Enter Client test package policies including independent (non-ISO) filed coverages o Specify Client's product codes, bill plans & commission plans o Accurately rate test policies with standard ISO o rates & Client specified rate effective dates and loss cost multipliers for the 48 states and coverages identified in the definition of Installation in Schedule 3 of this Agreement. o Accurately rate test policies with rate overrides. o Create appropriate rating worksheets o Convert policies from quote status to bound status. 17 ================================================================================ 18 ================================================================================ Schedule 5, continued o Fully print test policies including declaration pages, sub-declarations pages and all standard ISO endorsements. 2. The Transfluent software component of the System must allow the Client to: o Successfully transport all applicable and necessary fields from Value Rate to WPC as per the "Nightly Batch Process" defined under Schedule 4, System Specifications, of this Agreement. 3. The WPC software component of the System must allow the Client to: o Accurately capture premium and policy data from the Value Rate system including but not limited to product code, billing, commission and statistical information. o Accurately perform customer service functions o Accurately enter Cash payment for each of the bill types. o Accurately create a cash adjustment. o Accurately create a refund a check. o Accurately enter flat & midterm cancellations. 4. The PSP software component of the System must allow the Client to run daily cycles to: o Accurately print agency, direct and account bills. o Accurately print commission statements. o Accurately print reports as specified by the INSpire Base Reports documentation referenced in Schedule 4 of this Agreement. o Accurately enter and process claims 5. The M.A.R.S. software component of the System must allow the Client to define, extract and print management reports from the data contained within the ValueRate and WPC software components of the System. 6. In addition to the specific functionality of the items listed in paragraphs 1. through 5. above, the functionality of all processes specifically identified in the documentation referenced in Schedule 4 of this Agreement as System Specifications are considered part of this Acceptance Criteria. Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 18 ================================================================================ 19 ================================================================================ License Costs Schedule 6 License Fee Schedule The System includes the following:
- -------------------------------------------------------------------------------- Windows into Property & Casualty (WPC) System, as per Schedule 4 License Fee: $645,000 - -------------------------------------------------------------------------------- Policy Set Production (PSP) as per Schedule 4 License Fee: $ 30,000 - -------------------------------------------------------------------------------- * ValueRate as per Schedule 4 - Commercial Package Policy (excluding HI) - Commercial Auto with Garage (excluding MA and HI) - Commercial Texas Auto - Commercial Umbrella Policy (all states) License Fee: $560,700 - -------------------------------------------------------------------------------- ** Managerial and Actuarial Reporting System (M.A.R.S.) software as per Schedule 4 License Fee: $ 88,800 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total License Fee: 1,324,500 - --------------------------------------------------------------------------------
* Owned by Cover All Technologies, Inc.** Owned by Bexar, Inc. 19 ================================================================================ 20 Schedule 6, continued Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 20 ================================================================================ 21 ================================================================================ Implementation Services Schedule 7 Implementation Services INSpire shall implement the System for Client by June 1, 1999 (the "Implementation Date"). Implementation shall consist of successful completion of the following tasks (collectively, the "Implementation Tasks"): 1. ValueRate will be modified to support Client's Product Code and Account Number scheme. 2. ValueRate, Transfluent and WPC will be modified to accommodate Client's expanded Producer Profile. 3. Satisfaction of the Acceptance Criteria in accordance with Schedule 5. A flat fee of $30,000 will be paid by Client for the implementation of the WPC component of the System in accordance with the payment terms listed on Schedule 2, section A of this Agreement. (i.e., 25% upon execution and 75% upon Acceptance) A flat fee of $30,000 will be paid by Client for the implementation of the ValueRate component of the System in accordance with the payment terms listed on Schedule 2, section A of this Agreement. (i.e., 25% upon execution and 75% upon Acceptance) A flat fee of $105,000 will be paid by Client for INSpire to successfully implement items #1 and #2 listed above under Implementation Services as well as for INSpire to perform all functions necessary (inclusive of building and populating all user tables) in order for the System to be tested by Client in accordance with the System Acceptance Test listed on Schedule 5 of this Agreement. Payment of this flat fee of $105,000 will be in accordance with the payment terms listed on Schedule 2, section A of this Agreement. (i.e., 25% upon execution and 75% upon Acceptance) A flat fee of $1,200 will be paid by Client for the implementation of the M.A.R.S. component of the System in accordance with the payment terms listed on Schedule 2, section A of this Agreement. (i.e., 25% upon execution and 75% upon Acceptance) The implementation and license fees agreed to in this Agreement do not include any travel and lodging expense incurred by INSpire personnel in meeting INSpire's obligations under this Agreement. Such expenses will be paid by Client in accordance with Schedule 2 of this Agreement. Except for services rendered for a "flat fee", it is agreed that INSpire will bill all work performed on an hourly basis as allowed for in this Agreement at a rate of $150.00 per hour with the exception of the following: INSpire will provide to Client, free of charge, 75 hours of Consulting time to assist Client with the development of Interfaces with the WPC product. 21 ================================================================================ 22 ================================================================================ Schedule 7, continued Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 22 ================================================================================ 23 ================================================================================ System Maintenance Schedule 8 This Schedule 8 shall become effective only upon Acceptance of the System under Schedule 5. INSpire shall provide Client with System maintenance services on the terms described below, In the event of a conflict between the terms of this Schedule 8 and the Agreement (including the other Schedules) the terms of this Schedule 8 shall control. Warranty INSpire warrants that while this Schedule is in effect, the System will conform to the System Specifications. INSpire will, at its sole cost and expense correct any failures or non-conformity(ies) within the following time frames corresponding to the severity level of the failure/non-conformity: i. Priority A - INSpire will acknowledge Priority A failures/non-conformities within one (1) hour during normal business hours, 8:00 a.m. CST -- 5:00 p.m. CST and within two (2) hours outside of normal business hours from the time the call was placed by Client. INSpire will provide a fix or workaround within the later of twenty (24) hours from the time the call was placed by Client or at the start of the first business day after the call. ii. Priority B - INSpire will acknowledge Priority B failures/non-conformities within one (1) hour during normal business hours, 8:00 a.m. CST -- 5:00 p.m. CST and within two (2) hours outside of normal business hours from the time the call was placed by Client. INSpire will provide a fix or workaround within seventy two (72) hours from the time the call was placed by Client. iii. Priority C - INSpire will acknowledge Priority C failures/non-conformities within seventy two (72) hours from the time the call was placed by Client. INSpire will provide a fix or workaround within seven (7) days from the time the call was placed by Client. For any failures/non-conformities for which INSpire provides a workaround, INSpire will provide a schedule for the fix of such failure/non-conformities and INSpire will use its reasonable best efforts to provide such fix within thirty (30) days after the call was placed by Client. For purposes of this Schedule 8, the following definitions apply: Priority A means a failure/non-conformity that renders the System inoperative or causes the System to fail catastrophically. Priority B means a failure/non-conformity that significantly degrades performance of the System or materially restricts Client's use of the System. Priority C means a failure/non-conformity that causes only a minor impact on the use of the System. 23 ================================================================================ 24 ================================================================================ Schedule 8, continued The priority level of each reported failure/non-conformity will be determined jointly between Client and INSpire at the time the failure/non-conformity is reported. If the failure of the System to conform to the System Specifications is due to Client created error, Client agrees to pay (at the time and materials rates specified in Schedule 2) for the services rendered in analyzing and correcting the failure, provided that any such non-conformity(ies) are corrected to the reasonable satisfaction of Client. Enhancements INSpire shall make available all version upgrades and enhancements to the System. Client shall not be charged a license fee for any version upgrades and enhancements developed during the term of this Schedule. Telephone Support Inspire shall provide technical support via toll-free telephone during the hours of 8:00 a.m. CST -- 5:00 p.m. CST Monday through Friday excluding national holidays. All calls placed before 1 P.M. shall be returned before 5 P.M. that same day. All other calls shall be returned before 11 A.M. the next business day. Update Services INSpire will provide the Client with periodic releases of the System ("Updates") which contain error corrections and/or minor changes to the existing feature/functionality of the System. Each Update will consist of a set of programs and files made available in the form of machine readable media and will be accompanied by a level of documentation adequate to inform Client of the problems resolved by such Update (including any significant differences resulting from such Update which are known by INSpire) and how to install such Update. Support Services INSpire will provide support services (in addition to the basic Support Services described above) in the form of "ISO Updates." Such ISO Update services are as follows: INSpire will issue periodic ISO Update software releases to the Client. Such software releases (which are considered part of the System) shall be licensed to the Client for use in accordance with the licensing provisions of this Agreement. In addition, Client shall be responsible to obtain any other license (from ISO) which may be required to permit its use of such ISO Update software. Each ISO Update software release will consist of a set of programs and files made available in the form of machine readable media and will be accompanied by a level of documentation adequate to inform Client of the changes and/or additions to the ISO rules covered by such ISO Update software release. Additionally, ISO Updates will reflect changes and/or additions to ISO rules for all of the software programs forming the System. ISO 24 ================================================================================ 25 ================================================================================ Schedule 8, continued Updates will be based upon (1) normal and customary ISO rule changes and/or additions and (2) upon INSpire's standard interpretation of any such ISO rule change and/or new ISO rule. ISO Updates shall not include any Federal, state or other requirements which are not comprised in or reflected by a standard ISO rule change and/or addition. Client shall install all ISO Updates in a timely manner as reasonably determined by Client. Extensive ISO Updates "Extensive ISO Updates" are software releases which reflect any ISO rule changes and/or additions which are in excess of the normal and customary ISO rule changes and/or additions addressed by the ISO Update services described in the preceding paragraph. Any such Extensive ISO Update may be licensed by Client in accordance with and subject to the licensing provisions of this Agreement. Each Extensive ISO Update will consist of a set of programs and files made available in the form of machine readable media and will be accompanied by a level of documentation adequate to inform Client of the changes and/or additions to the ISO rules covered by such Update as well as how to install such Update. Extensive ISO Updates are based upon INSpire's standard interpretation of any such extensive ISO rule change and/or new ISO rule. Term This Schedule shall take effect on the date the System is accepted by Client in accordance with the terms of Schedule 5 of this Agreement and shall continue until terminated by Client, with or without cause, upon thirty (30) days prior written notice to INSpire. Upon termination, INSpire shall refund to Client any maintenance fees paid in advance hereunder. Renewal Changes INSpire reserves the right to change, for each year this Schedule remains in effect after the first year, the fees charged hereunder, provided that such fees shall not be increased per year by more than five percent (5%) of the dollar amount charged during the expiring year. Expenses Client shall reimburse INSpire in accordance with Schedule 2, Section C. Fees Upon Acceptance, Inspire shall invoice and Client shall pay within 10 days the amount of $198,675.00(the "Maintenance Fee") for one year of coverage under this Schedule. Thereafter, on every anniversary of the date of Acceptance, so long as this Schedule remains in effect, INSpire shall invoice and Client shall pay the dollar 25 ================================================================================ 26 ================================================================================ Schedule 8, continued amount equal to 18% of the total license fee paid under this Agreement. Client shall pay all such invoices within ten (10) days. Source Code INSpire shall provide Client with a copy of the source code (and accompanying documentation) for all software provided under this Schedule (excluding the ValueRate Software, M.A.R.S. Software and any other third party software). All such source code shall be provided to Client within thirty (30) days of the date upon which the corresponding object code is provided. Accepted By: INSPIRE INSURANCE SOLUTIONS, INC. PHILADELPHIA CONSOLIDATED HOLDING CORP. on behalf of itself and its subsidiaries BY: /s/ W. J. SMITH, III BY: /s/ JAMES J. MAGUIRE, JR. ----------------------------- ------------------------------------- (Authorized Officer) (Authorized Officer) Name: W. J. SMITH, III Name: JAMES J. MAGUIRE, JR. --------------------------- ----------------------------------- Title: President & COO Title: Executive Vice President & COO -------------------------- ---------------------------------- Address: 300 Burnett Street Address: One Bala Plaza, Ste. 100 Fort Worth, TX 76102 Bala Cynwyd, PA 19004 Date: January 19, 1999 Date: December 31, 1998 ---------------------- ------------------------ 26 ================================================================================ EX-10.41 3 LEASE AGREEMENT 1 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE ("Amendment") is made on this 6th day of July, 1998, by and between BALA PLAZA, INC., a Delaware corporation ("Landlord"), PHILADELPHIA CONSOLIDATED HOLDING CORP., a Pennsylvania corporation ("Tenant"). BACKGROUND A. The Prudential Insurance Company of America ("Prudential") and Tenant entered into a certain Lease, dated as of August, 1995 (the "Original Lease"), pursuant to which Prudential leased to Tenant approximately 16,880 rentable square feet of space on the first floor and 3,550 rentable square feet of space on the lower level (collectively, the "Premises") of the building known as One Bala Plaza ("Building") and upon lands located in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property"). The Premises are more fully described in the Original Lease. B. Thereafter Landlord succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Original Lease was assigned to Landlord. C. Landlord and Tenant then entered into a First Amendment of Lease, dated May 8, 1997 ("First Amendment"), pursuant to which the parties amended the Original Lease to, among other things, (i) expand the Premises by adding thereto approximately 2,210 rentable square feet of space located on the first floor of the Building, (ii) provide for the performance by Landlord of certain improvements to such additional space, (iii) adjust the annual Base Rent payable by Tenant under the Original Lease, and (iv) adjust Tenant's Percentage. D. The Original Lease, as amended by the First Amendment, is referred to herein as the "Lease." E. Landlord and Tenant now desire to further amend the Lease to, among other things, (i) further expand the Premises by adding thereto l2,304 rentable square feet of space located on the second floor of the Building, shown outlined and hatched in black on the floor plan attached hereto as Exhibit A (the "Additional Space"), (ii) further adjust the Base Rent and additional rent payable by Tenant under the Lease, and (iii) otherwise modify and amend the Lease, all as set forth in this Amendment. F. Tenant currently has the right to use and occupy the Additional Space pursuant to (i) that certain Agreement of Sublease (the "Sublease"), dated of even date herewith, between Manugistics, Inc., as sublessor, and Tenant, as sublessee, which pertains to a portion of the Additional Space consisting of 2,812 rentable square feet of space (the "Manugistics Space"), 2 and (ii) that certain Agreement of Sub-Sublease (the "Sub-Sublease"), dated of even date herewith, between Manugistics, Inc., as sub-sublessor, and Tenant, as sub-sublessee which pertains to a portion of the Additional Space consisting of 9,492 rentable square feet of space (the "Osteopathic Medical Center Space"), each of which expires on June 30, 2002 (but may be sooner terminated in accordance with the terms thereof). The Manugistics Space and the Osteopathic Medical Center Space are more particularly described in the Sublease and Sub-Sublease, respectively. NOW, THEREFORE, in consideration of the mutual covenants and conditions herein set forth and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Demise of Additional Space. a. Landlord hereby leases, demises and lets unto Tenant the Additional Space, and Tenant hereby takes and hires the Additional Space from Landlord. The Additional Space shall be added to and become a part of the Premises in two separate steps, one corresponding to the Manugistics Space and one corresponding to the Osteopathic Medical Center Space. Such steps may occur simultaneously or at different times. b. The Manugistics Space shall be added to and become a part of the Premises for the period commencing on the earlier date ("Manugistics Space Commencement Date") to occur of (i) July 1, 2002, or (ii) the first day after the date that the Sublease has expired or been terminated, and terminating on February 28, 2003, being the scheduled expiration date of the term of the Lease. Landlord and Tenant agree to execute a confirmation of the Manugistics Space Commencement Date, substantially in the form of Exhibit B attached hereto, within thirty (30) days after the occurrence of such date. Effective on the Manugistics Space Commencement Date, the Manugistics Space shall be (i) added to the Premises, and (ii) governed by all of the provisions of the Lease, as amended hereby. Tenant hereby agrees to accept the Manugistics Space in its "as is" condition as of the Manugistics Space Commencement Date. Tenant acknowledges that neither Landlord, nor Landlord's agents, representatives, employees, servants or attorneys have made or will make any representations or promises, whether express or implied, concerning the condition of the Manugistics Space, and agrees that Landlord shall have no obligation to make any alterations or improvements to the Manugistics Space. c. The Osteopathic Medical Center Space shall be added to and become a part of the Premises for the period commencing on the earlier date ("Osteopathic Medical Center Space Commencement Date") to occur of (i) July 1, 2002, or (ii) the first day after the date that the Sublease has expired or been terminated, and terminating on February 28, 2003, being the scheduled expiration date of the term of the Lease. Landlord and Tenant agree to execute a confirmation of the Osteopathic Medical Center Space Commencement Date, substantially in the form of Exhibit B attached hereto, within thirty (30) days after the occurrence of such date. Effective on the Osteopathic Medical Center Space Commencement Date, the Osteopathic 2 3 Medical Center Space shall be (i) added to the Premises, and (ii) governed by all of the provisions of the Lease, as amended hereby. Tenant hereby agrees to accept the Osteopathic Medical Center Space in its "as is" condition as of the Osteopathic Medical Center Space Commencement Date. Tenant acknowledges that neither Landlord, nor Landlord's agents, representatives, employees, servants or attorneys have made or will make any representations or promises, whether express or implied, concerning the condition of the Osteopathic Medical Center Space, and agrees that Landlord shall have no obligation to make any alterations or improvements to the Osteopathic Medical Center Space. 2. Adjustment of Annual Base Rent and Additional Rent. a. The adjustments applicable to the Manugistics Space shall be as follows: i. Effective on the Manugistics Space Commencement Date and continuing through the expiration date of the term of the Lease, Tenant shall pay Landlord annual Base Rent and monthly installments thereof for the Manugistics Space as more particularly set forth in this Section 2(a). Such Base Rent shall be in addition to the Base Rent payable by Tenant for the portion of the Premises that does not include the Manugistics Space (or the Osteopathic Medical Center Space). If the Manugistics Space Commencement Date occurs before June 30, 2000, then the Base Rent for the Manugistics Space shall be:
Annual Monthly Base Rent Period Base Rent Base Rent Per RSF - ------ --------- --------- --------- Manugistics Space Commencement Date to 06/30/00 $61,864.00 $5,155.33 $22.00 07/01/00-06/30/02 $67,488.00 $5,624.00 $24.00 07/01/02-02/28/03 Fair Market Rent Fair Market Rent Fair Market Rent
If the Manugistics Space Commencement Date occurs after June 30, 2000 and before June 30, 2002, then the Base Rent for the Manugistics Space shall be:
Annual Monthly Base Rent Period Base Rent Base Rent Per RSF - ------ --------- --------- --------- Manugistics Space Commencement Date to 06/30/02 $67,488.00 $5,624.00 $24.00 07/01/02-02/28/03 Fair Market Rent Fair Market Rent Fair Market Rent
If the Manugistics Space Commencement Date occurs on July 1, 2002, then the Base Rent for the Manugistics Space shall be: 3 4
Annual Monthly Base Rent Period Base Rent Base Rent Per RSF - ------ --------- --------- --------- Manugistics Space Commencement Date to 02/28/03 Fair Market Rent Fair Market Rent Fair Market Rent
ii. Effective on the Manugistics Space Commencement Date and continuing through the expiration date of the term of the Lease, Tenant shall pay to Landlord additional rent with respect to the Manugistics Space, including without limitation additional rent under Article 5 of the Lease. For that the purpose, (i) the Base Year under paragraph 5(c)(i) of the Lease shall remain the 1995 calendar year through the expiration date of the term of the Lease. iii. Effective on the Manugistics Space Commencement Date, Tenant's Percentage under paragraph 5(c)(iii) of the Lease shall increase by 0.770%, which is the ratio that the rentable square foot area of the Manugistics Space bears to the total rentable square foot area of office space in the Building. b. The adjustments applicable to the Osteopathic Medical Center Space shall be as follows: i. Effective on the Osteopathic Medical Center Space Commencement Date and continuing through the expiration date of the term of the Lease, Tenant shall pay Landlord annual Base Rent and monthly installments thereof for the Osteopathic Medical Center Space as more particularly set forth in this Section 2(b). Such Base Rent shall be in addition to the Base Rent payable by Tenant for the portion of the Premises that does not include the Osteopathic Medical Center Space (or the Manugistics Space). If the Osteopathic Medical Center Space Commencement Date occurs before June 30, 2000, then the Base Rent for the Osteopathic Medical Center Space shall be:
Annual Monthly Base Rent Period Base Rent Base Rent Per RSF - ------ --------- --------- --------- Osteopathic Medical Center Space Commencement Date to 06/30/00 $208,824.00 $17,402.00 $22.00 07/01/00-06/30/02 $227,808.00 $18,984.00 $24.00 07/01/02-02/28/03 Fair Market Rent Fair Market Rent Fair Market Rent
If the Osteopathic Medical Center Space Commencement Date occurs after June 30, 2000 and before June 30, 2002, then the Base Rent for the Osteopathic Medical Center Space shall be: 4 5
Annual Monthly Base Rent Period Base Rent Base Rent Per RSF - ------ --------- --------- --------- Osteopathic Medical Center Space Commencement Date to 06/30/02 $227,808.00 $18,984.00 $24.00 07/01/02-02/28/03 Fair Market Rent Fair Market Rent Fair Market Rent
If the Osteopathic Medical Center Space Commencement Date occurs on July 1, 2002, then the Base Rent for the Osteopathic Medical Center Space shall be:
Annual Monthly Base Rent Period Base Rent Base Rent Per RSF - ------ --------- --------- --------- Osteopathic Medical Center Space Commencement Date to 02/28/03 Fair Market Rent Fair Market Rent Fair Market Rent
ii. Effective on the Osteopathic Medical Center Space Commencement Date and continuing through the expiration date of the term of the Lease, Tenant shall pay to Landlord additional rent with respect to the Osteopathic Medical Center Space, including without limitation additional rent under Article 5 of the Lease. For that the purpose, (i) the Base Year under paragraph 5(c)(i) of the Lease shall remain the 1995 calendar year through the expiration date of the term of the Lease. iii. Effective on the Osteopathic Medical Center Space Commencement Date, Tenant's Percentage under paragraph 5(c)(iii) of the Lease shall increase by 2.599%, which is the ratio that the rentable square foot area of the Osteopathic Medical Center Space bears to the total rentable square foot area of office space in the Building. c. For purposes of this Amendment, the term "Fair Market Rent" shall mean the annual base rent, per square foot (with a tenant to pay additional rent of the same types described in Article 5 of the Lease), at which landlords are leasing comparable office space in buildings that are comparable to the Building and located in the Bala Cynwyd and Conshohocken markets (with appropriate adjustments to take account of variations in location, size and tenant fit-up costs undertaken by such landlords), but in no event less than the Base Rent that is due and owing on the Manugistics Space Commencement Date for the space added to the Premises pursuant to the First Amendment. d. When both the Manugistics Space and the Osteopathic Medical Center Space are added to the Premises, the Premises shall comprise an aggregate of approximately 34,944 rentable square feet, and Tenant's Percentage under paragraph 5(c)(iii) of the Lease shall be 9.567%, which is the ratio that the rentable square foot area of the Premises (i.e. 34,944 rentable square feet, as agreed by Landlord and Tenant) bears to the total rentable square foot 5 6 area of office space in the Building (i.e. 365,256 rentable square feet, as agreed by Landlord and Tenant). e. Effective on the date hereof, clause (2) of paragraph 5(c) of the Lease is hereby amended and restated as follows: "(2) Any increase in Operation and Maintenance Costs for each Comparison Year over the Operation and Maintenance Costs for the Base Year, excluding any non-recurring Operation and Maintenance Costs for the Base Year." 3. Conditions to Effectiveness. Landlord and Tenant agree that, notwithstanding any provision of this Amendment to the contrary, all rights and obligations of each of Tenant and Landlord under Sections 1 and 2 of this Amendment are contingent upon (a) the execution and delivery by Tenant and Manugistics, Inc. of the Sublease and the Sub-Sublease, and (b) the execution and delivery by Landlord, Tenant, Manugistics, Inc. and Osteopathic Medical Center of Philadelphia of the applicable Consent and Agreement related to each. Once the Sublease, the Sub-Sublease and the Consent and Agreement related to each are executed and delivered, Tenant shall promptly deliver complete, fully executed originals to Landlord, whereupon the foregoing contingency shall be deemed to be satisfied without further act or deed by Landlord or Tenant. 4. Restatement of Insurance Provisions. Article 16 of the Lease is hereby amended and restated in its entirety as follows: "16. INDEMNIFICATION AND INSURANCE. (a) Indemnity. Tenant shall defend, indemnify and hold Landlord and its officers, directors, employees, shareholders, principals and agents harmless from and against any and all claims, demands, losses, penalties, fines, fees, charges, assessments, liabilities, damages, judgments, orders, decrees, actions, administrative or other proceedings, costs and expenses (including court costs, reasonable attorneys' fees, and expert witness fees), including consequential damages, and any diminution in value or loss or interference with the transfer, use or enjoyment of the Premises, Property or complex consisting of One, Two and Three Bala Plaza ("Complex") or other property or business or affecting title thereto, howsoever caused, which directly or indirectly relate to or result wholly or in part from, or are alleged to relate to or arise wholly or in part from: (i) any violation or breach of this Lease or any applicable law, ordinance, rule or regulation by any Tenant Parties (as defined below), (ii) damage, loss or injury to persons, property or business occurring in, about or from the Premises, (iii) damage, loss or injury to persons, property or business directly or indirectly arising out of any Tenant Party's use of the Premises or Property or Complex, or out of any other act or omission of any Tenant Parties. For purposes of this provision, "Tenant Parties" shall mean Tenant, any other occupant of the Premises and any of their respective agents, employees, invitees, transferees and contractors. Without limiting the generality of the foregoing, Tenant specifically acknowledges that the undertaking herein shall apply to claims in connection with or arising out of (A) any alterations performed pursuant to Article 9, including without limitation the installation, maintenance, use or removal of any telecommunication lines, (B) the transportation, use, storage, maintenance, 6 7 generation, manufacturing, handling, disposal, release, discharge, spill or leak of any hazardous substance as such term is defined in any federal, state or local environmental law, and (C) violations of Tenant's responsibilities respecting the Americans with Disabilities Act as described in Article 30 (whether or not any of such matters shall have been theretofore approved by Landlord). Notwithstanding the foregoing to the contrary, the foregoing indemnity shall not apply to claims finally determined by a court of competent jurisdiction to have been caused solely by the gross negligence or willful misconduct of the party seeking to be indemnified. (b) Required Insurance. Tenant shall maintain at its expense during the term of this Lease with respect to the Premises and Tenant's use thereof and of the Property: (i) Worker's Compensation Insurance in the amounts required by statute, and Employer Liability Insurance in at least the following amounts: (a) Bodily Injury by Accident - $500,000 per accident, (b) Bodily Injury by Disease - - $500,000 per employee, and (c) Aggregate Limit - $500,000 per policy year. (ii) Property Damage Insurance for the protection of Tenant and Landlord, as their interests may appear, covering any alterations or improvements in excess of any work provided or paid for by Landlord under this Lease, Tenant's personal property, business records, fixtures and equipment, and other insurable risks in amounts not less than the full insurable replacement cost of such property and full insurable value of such other interests of Tenant, with coverage at least as broad as the most recent editions published by Insurance Services Office, Inc. or any successor organization ("ISO"), of: (a) Building and Personal Property Coverage Form (CP0010), (b) Causes of Special Loss Form (CP1030), and (c) Sprinkler Leakage - Earthquake Extension (CP1039). (iii) Liability insurance as follows: (I) Commercial General Liability Insurance ("CGL") at least as broad as the most recent ISO edition of Commercial General Liability Coverage Form (CG0001) with limits of at least the following amounts: (a) Death or Bodily Injury - $1,000,000, (b) Property Damage or Destruction (including loss of use thereof) - $1,000,000, (c) Products/Completed Operations - $1,000,000, (d) Personal or Advertising injury - $1,000,000, (e) Each Occurrence Limit - $1,000,000, and (f) General Aggregate Limit - $2,000,000 per policy year, and (II) Umbrella Liability Insurance with a limit of at least $15,000,000 (which may be carried in one or more policies). Such CGL and Umbrella policies shall include endorsements: (1) for contractual liability covering Tenant's indemnity obligations under this Lease, and (2) adding Landlord, the management company for the Property, and other parties designated by Landlord, as Additional Insureds, on a form at least as broad as the most recent edition of Additional Insured - Manager or Lessor of Premises Endorsement Form (CG2011) published by ISO. (c) Certificates, Subrogation and Other Matters. Upon the request of Landlord from time to time during the term of this Lease, Tenant shall provide Landlord with certificates evidencing the coverage required hereunder. Such certificates shall: (i) be on ACORD Form 27 or such 7 8 other form approved or required by Landlord, (ii) state that such insurance coverage may not be changed, canceled or non-renewed without at least thirty (30) days' prior written notice to Landlord, and (iii) include, as attachments, duplicate originals or copies of the Additional Insured endorsements to Tenant's CGL policy required above (once the same are provided to Tenant). Tenant shall provide renewal certificates to Landlord at least thirty (30) days prior to expiration of such policies. Except as expressly provided to the contrary herein, coverage hereunder shall apply to events occurring during the policy year regardless of when a claim is made. Provided Landlord does so (or is doing so) with respect to the majority of the tenants in the Complex, Landlord may periodically require that Tenant reasonably increase or expand the aforementioned coverage. Except as provided to the contrary herein, any insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance. If Tenant obtains insurance under "blanket policies," Tenant shall obtain an endorsement providing that the insurance limits required hereunder are not subject to reduction or impairment by claims or losses at other locations. Tenant's insurance policies shall be primary to all policies of Landlord and any other Additional Insureds (whose policies shall be deemed excess and non-contributory). All insurance required hereunder shall be provided by responsible insurers licensed in the Commonwealth of Pennsylvania, and shall have a general policy holder's rating of at least A and a financial rating of at least IX in the then current edition of Best's Insurance Reports. The parties mutually hereby waive all rights and claims against each other for all losses covered by their respective insurance policies, and waive all rights of subrogation of their respective insurers. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder. Landlord disclaims any representation as to whether the foregoing coverages will be adequate to protect Tenant, and Tenant agrees to carry such additional coverage as may be necessary or appropriate." 5. Restatement of Waiver of Claims. Article 17 of the Lease is hereby amended and restated in its entirety as follows: "17. WAIVER OF CLAIMS. Except for claims arising from Landlord's intentional or grossly negligent acts which are not covered or required to be covered by Tenant's insurance hereunder, Tenant waives all claims against Landlord for injury or death to persons, damage to property or to any other interest of Tenant sustained by Tenant or any party claiming by or through Tenant resulting from: (i) any occurrence in or upon the Premises, (ii) leaking of roofs, bursting, stoppage or leaking of water, gas, sewer or steam pipes or equipment, including sprinklers, (iii) wind, rain, snow, ice, flooding (including flooding of basements and other subsurface areas), freezing, fire, explosion, earthquake, excessive heat or cold, dampness, fire or other casualty, (iv) the Property, Premises, or any of the Building systems and equipment being defective, out of repair, or failing, and (v) vandalism, malicious mischief, theft, misappropriation or other acts or omissions of any parties including Tenant's employees, other tenants, and their respective agents, employees, invitees and contractors (and Tenant shall give Landlord immediate notice of any such occurrences). To the extent that Tenant is required to or does carry insurance hereunder, Tenant agrees that Tenant's property loss risks shall be borne by such 8 9 insurance, and Tenant agrees to seek recovery only from its insurance caters in the event of such losses; for purposes hereof, any deductible amount shall be treated as though it were recoverable under such policies. This provision is in addition to, and not in limitation of, other provisions of this Lease limiting Landlord's liability." 6. Restatement of Certain Remedies. Paragraph 25(i) of the Lease is hereby amended and restated in their entirety as follows: "(i) CONFESSION OF JUDGMENT FOR MONETARY AMOUNTS. (a) TENANT HEREBY EXPRESSLY AUTHORIZES THE PROTHONOTARY, CLERK OR ANY ATTORNEY OF ANY COURT OF RECORD TO ACCEPT SERVICE OF PROCESS FOR, TO APPEAR FOR, AND TO CONFESS JUDGMENT AGAINST TENANT AND ALL PERSONS CLAIMING UNDER TENANT IN ANY AND ALL ACTIONS BROUGHT HEREUNDER BY LANDLORD AGAINST TENANT TO ENFORCE PAYMENT OF ANY SUMS OWING HEREUNDER BY TENANT TO LANDLORD (AS RENT, ACCELERATED RENT OR OTHERWISE), WITH FIVE PERCENT (5%) ADDED THERETO AS ATTORNEY'S COLLECTION FEE, WITHOUT ANY LIABILITY ON THE PART OF SAID ATTORNEY, FOR WHICH THIS LEASE SHALL BE SUFFICIENT WARRANT, AND TENANT AGREES THAT UPON THE ENTRY OF SUCH JUDGMENT FOR POSSESSION A WRIT OF EXECUTION OR OTHER APPROPRIATE PROCESS MAY ISSUE FORTHWITH (WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER). IN ANY SUCH ACTION, LANDLORD SHALL FIRST CAUSE TO BE FILED IN SUCH ACTION AN AFFIDAVIT MADE BY LANDLORD OR SOMEONE ACTING FOR IT SETTING FORTH FACTS NECESSARY TO AUTHORIZE THE ENTRY OF JUDGMENT, OF WHICH FACTS SUCH AFFIDAVIT SHALL BE CONCLUSIVE EVIDENCE, AND IF A TRUE COPY OF THIS LEASE BE FILED IN SUCH ACTION (AND OF THE TRUTH OF THE COPY SUCH AFFIDAVIT SHALL BE SUFFICIENT EVIDENCE), IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY, ANY RULE OF COURT, CUSTOM OR PRACTICE TO THE CONTRARY NOTWITHSTANDING. TENANT AND ALL PERSONS CLAIMING UNDER TENANT HEREBY RELEASE LANDLORD FROM ANY CLAIMS ARISING FROM ANY ERRORS OR DEFECTS WHATSOEVER IN ENTERING SUCH ACTION OR JUDGMENT, IN CAUSING SUCH WRIT OF EXECUTION OR OTHER PROCESS TO BE ISSUED OR IN ANY PROCEEDING THEREON OR CONCERNING THE SAME, AND HEREBY AGREE THAT NO WRIT OF ERROR OR OBJECTION SHALL BE MADE OR TAKEN THERETO. THIS WARRANT OF ATTORNEY SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF, BUT JUDGMENT MAY BE CONFESSED FROM TIME TO TIME AS OFTEN AS OCCASION THEREFORE SHALL EXIST. SUCH POWERS 9 10 MAY BE EXERCISED DURING AS WELL AS AFTER THE EXPIRATION OR TERMINATION OF THE TERM AND DURING AND AT ANY TIME AFTER ANY EXTENSION OR RENEWAL OF THE TERM OF THIS LEASE. (b) CONFESSION OF JUDGMENT FOR POSSESSION. TENANT HEREBY EXPRESSLY AUTHORIZES THE PROTHONOTARY, CLERK OR ANY ATTORNEY OF ANY COURT OF RECORD TO ACCEPT SERVICE OF PROCESS FOR, TO APPEAR FOR, AND TO CONFESS JUDGMENT AGAINST TENANT AND ALL PERSONS CLAIMING UNDER TENANT IN ANY AND ALL ACTIONS BROUGHT HEREUNDER BY LANDLORD AGAINST TENANT TO RECOVER POSSESSION OF THE PREMISES (IN EJECTMENT OR OTHERWISE), WITHOUT ANY LIABILITY ON THE PART OF SAID ATTORNEY, FOR WHICH THIS LEASE SHALL BE SUFFICIENT WARRANT, AND TENANT AGREES THAT UPON THE ENTRY OF SUCH JUDGMENT FOR POSSESSION A WRIT OF POSSESSION OR OTHER APPROPRIATE PROCESS MAY ISSUE FORTHWITH (WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER). IN ANY SUCH ACTION, LANDLORD SHALL FIRST CAUSE TO BE FILED IN SUCH ACTION AN AFFIDAVIT MADE BY LANDLORD OR SOMEONE ACTING FOR IT SETTING FORTH FACTS NECESSARY TO AUTHORIZE THE ENTRY OF JUDGMENT, OF WHICH FACTS SUCH AFFIDAVIT SHALL BE CONCLUSIVE EVIDENCE, AND IF A TRUE COPY OF THIS LEASE BE FILED IN SUCH ACTION (AND OF THE TRUTH OF THE COPY SUCH AFFIDAVIT SHALL BE SUFFICIENT EVIDENCE), IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AS A WARRANT OF ATTORNEY, ANY RULE OF COURT, CUSTOM OR PRACTICE TO THE CONTRARY NOTWITHSTANDING. TENANT AND ALL PERSONS CLAIMING UNDER TENANT HEREBY RELEASE LANDLORD FROM ANY CLAIMS ARISING FROM ANY ERRORS OR DEFECTS WHATSOEVER IN ENTERING SUCH ACTION OR JUDGMENT, IN CAUSING SUCH WRIT OF POSSESSION OR OTHER PROCESS TO BE ISSUED OR IN ANY PROCEEDING THEREON OR CONCERNING THE SAME, AND HEREBY AGREE THAT NO WRIT OF ERROR OR OBJECTION SHALL BE MADE OR TAKEN THERETO. THIS WARRANT OF ATTORNEY SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF, BUT JUDGMENT MAY BE CONFESSED FROM TIME TO TIME AS OFTEN AS OCCASION THEREFORE SHALL EXIST. SUCH POWERS MAY BE EXERCISED DURING AS WELL AS AFTER THE EXPIRATION OR TERMINATION OF THE TERM AND DURING AND AT ANY TIME AFTER ANY EXTENSION OR RENEWAL OF THE TERM OF THIS LEASE. (c) THIS PARAGRAPH 25(i) SETS FORTH WARRANTS OF ATTORNEY FOR AN ATTORNEY TO CONFESS JUDGMENT AGAINST TENANT. IN GRANTING THESE WARRANTS OF ATTORNEY TO CONFESS JUDGMENT 10 11 AGAINST TENANT, TENANT, FOLLOWING CONSULTATION WITH (OR DECISION NOT TO CONSULT WITH) SEPARATE COUNSEL FOR TENANT AND WITH KNOWLEDGE OF THE LEGAL EFFECT HEREOF, HEREBY KNOWINGLY, INTELLIGENTLY AND VOLUNTARILY WAIVES UNCONDITIONALLY ANY AND ALL RIGHTS TENANT HAS OR MAY HAVE TO PREJUDGMENT AND PRE-EXECUTION NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES OF AMERICA, THE COMMONWEALTH OF PENNSYLVANIA, OR ELSEWHERE. TENANT SPECIFICALLY ACKNOWLEDGES THAT LANDLORD HAS RELIED ON THE WARRANTS OF ATTORNEY SET FORTH IN THIS PARAGRAPH 25(i) IN ENTERING INTO THIS LEASE WITH TENANT AND THAT THE LANDLORD-TENANT RELATIONSHIP CREATED HEREBY IS COMMERCIAL IN NATURE. (d) Landlord hereby agrees that so long as Philadelphia Consolidated Holding Corp., its parent, affiliate or subsidiary, is Tenant under this Lease, Landlord will not exercise the remedy under this paragraph 25(i)." 7. Brokers. Tenant represents and warrants that Tenant has not dealt with any broker, agent, finder or other person in connection with the negotiation for or the obtaining of this Amendment, and that no broker, agent, finder or other person brought about the transaction contemplated by this Amendment, other than Tower Realty Management Corporation and EBI Commercial. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, lawsuits, liabilities, damages and costs, including attorneys' fees, incurred by Landlord by reason of any breach of the foregoing warranty. Landlord shall pay Tower Realty Management Corporation and EBI Commercial their respective commissions earned in connection with this Amendment pursuant to separate agreements. Landlord shall indemnify, defend and hold Tenant harmless from any claim of any other broker, agent, finder or other person with whom Landlord may have dealt in connection with this Amendment. 8. Ratification of Lease. Except as specifically modified by this Amendment, all of the provisions of the Lease are hereby ratified and confirmed to be in full force and effect, and shall remain in full force and effect, including, without limitation, all remedies reserved to Landlord, with which remedies Tenant hereby acknowledges complete familiarity, and which remedies are incorporated herein by reference as though set forth in their entirety. 9. Binding Effect. This Amendment shall be binding upon, and shall inure to the benefit of Landlord and Tenant and their respective permitted successors and assigns. 10. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 11 12 IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be executed by their respective duly authorized officers as of the day and year first above written. BALA PLAZA, INC. By: /s/ Joe Grubb ----------------------------------- Name: Joe Grubb Its: Authorized Signatory (Corporate Seal) Attest: /s/ Tim Cahill ------------------------------- Name: Tim Cahill Its: Authorized Signatory PHILADELPHIA CONSOLIDATED HOLDING CORP. By: /s/ Jack T. Carballo ----------------------------------- Name: Jack T. Carballo Title: Vice President (Corporate Seal) Attest: /s/ Christine Kleppe ------------------------------- Name: Christine Kleppe Title: Administrative Assistant /s/ Craig B Keller Craig B Keller Vice President 12 13 EXHIBIT A [Attach Floor Plan of Additional Space Identifying Both Manugistics Space and Osteopathic Medical Center Space] A-1 14 EXHIBIT B CONFIRMATION OF ADDITIONAL SPACE COMMENCEMENT DATE THIS CONFIRMATION OF ADDITIONAL SPACE COMMENCEMENT DATE is made as of the ______ day of ____________, _____,between BALA PLAZA, INC., a Delaware corporation ("Landlord"), and PHILADELPHIA CONSOLIDATED HOLDING CORP., a Pennsylvania corporation ("Tenant"). WITNESSETH WHEREAS, Landlord and Tenant entered into a Second Amendment to Lease, dated as of ____________________________, _______ ("Second Amendment") (capitalized terms used but not defined herein shall have the meanings assigned to them in the Second Amendment); WHEREAS, the Second Amendment provides that Landlord and Tenant shall execute a confirmation of the actual [Manugistics Space/Osteopathic Medical Center Space] Commencement Date when such date has been determined in accordance with the provisions of the Second Amendment; NOW THEREFORE, the parties hereto, intending to be legally bound hereby, agree that the [Manugistics Space/Osteopathic Medical Center Space] Commencement Date occurred on ___________________, ____________________. Tenant acknowledges that: (i) it is in possession of the Premises, including the [Manugistics Space/Osteopathic Medical Center Space]; (ii) the Lease (as amended by through and including the Second Amendment) is in full force and effect; and (iii) Landlord is not in default under the Lease. B-1 15 IN WITNESS WHEREOF, this CONFIRMATION OF ADDITIONAL SPACE COMMENCEMENT DATE has been executed as of the day and year first above written. BALA PLAZA, INC. By: ------------------------------------- Name: Its: Authorized Signatory (Corporate Seal) Attest: --------------------------------- Name: Its: Authorized Signatory PHILADELPHIA CONSOLIDATED HOLDING CORP. By: ------------------------------------- Name: Title: (Corporate Seal) Attest: --------------------------------- Name: Title: B-2 16 EXHIBIT "A" ONE BALA PLAZA DEMISED AREA PLAN ================================================================================ SECOND FLOOR [GRAPHIC OMITTED] 17 CONSENT OF LANDLORD AND PRIME TENANT TO SUB-SUBLEASE AND AGREEMENT The Prudential Insurance Company of America, a New Jersey corporation ("Prudential") entered into a certain Lease (as amended, the "Lease"), dated April 3, 1992, with Osteopathic Medical Center of Philadelphia ("Prime Tenant") pursuant to which Prudential leased to Prime Tenant the premises known as approximately 31,772 square feet of rentable area (the "Prime Lease Premises") in the building known as One Bala Plaza (the "Building") located on land in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property") as more particularly described in the Lease. By Sublease Agreement dated May 19, 1994 (the "Sublease"), Prime Tenant subleased to Manugistics, Inc. ("Manugistics") a portion of the Prime Lease Premises consisting of approximately 9,492 square feet of rentable area on the second (2nd) floor of the Building (the "Premises"). Bala Plaza, Inc., a Delaware corporation ("Landlord"), thereafter succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Lease was assigned to Landlord. Manugistics now desires to sub-sublease the Premises to Philadelphia Consolidated Holding Corp., a Pennsylvania corporation ("PIC"), pursuant to a certain Agreement of Sub-Sublease ("Sub-Sublease"). Manugistics and PIC have requested Landlord's and Prime Tenant's consent to the Sub-Sublease, and, subject to the terms and conditions set forth herein, Landlord and Prime Tenant are willing to grant such consent. (Manugistics also desires to sublease certain premises adjoining the Premises to PIC, which premises are more fully described in that certain Lease, dated November 14, 1996, between Landlord, as landlord, and Manugistics, as tenant, and Manugistics and PIC are contemporaneously seeking Landlord's consent thereto. Such sublease shall be referred to herein as the "Manugistics Sublease.") Landlord and Prime Tenant each hereby consent to the execution by Manugistics and PIC of the Sub-Sublease attached hereto as Exhibit "A", and to use of the Premises for general and administrative office purposes, upon the following terms, covenants, and conditions to which all parties hereto agree to be bound: 1. Upon the execution by Manugistics and PIC of the Sub-Sublease, Manugistics shall deliver to Landlord and Prime Tenant a true copy of it. The parties hereto acknowledge that the Sub-Sublease is subject to and subordinate to all provisions of the Lease and the Sublease. Except to the extent set forth in Sections 3 and 11 below, nothing therein shall be deemed a waiver of any of the terms of the Lease or the Sublease. 2. The entry into the Sub-Sublease shall in no way be deemed to have waived or 18 modified Prime Tenant's obligation to perform all of the terms, covenants and conditions of the Lease required to performed by Prime Tenant, including without limitation the obligation to pay rent thereunder. The entry into the Sub-Sublease shall in no way be deemed to have waived or modified Manugistics's obligation to perform all of the terms, covenants and conditions of the Sublease required to performed by Manugistics, including without limitation the obligation to pay rent thereunder. Nothing in the Sub-Sublease shall in any way whatsoever expand the liability or obligations of(i) Landlord, whether to Prime Tenant, Manugistics, PIC or any other person or entity, or (ii) Prime Tenant, whether to Landlord, Manugistics, PIC or any other person or entity. 3. Any termination of the Lease for any cause whatever shall automatically terminate the Sublease and the Sub-Sublease and all of Manugistics' and PIC's, respectively, rights thereunder; provided, however, that Landlord shall provide copies to PIC of any default notices delivered by Landlord to Prime Tenant pertaining to the Lease and shall permit PIC, acting on behalf of Manugistics under the Sublease (to which Manugistics hereby consents), to cure Prime Tenant's default provided such cure is accomplished on or before the date which is two (2) business days after the expiration of any cure period provided to Prime Tenant under the Lease (or, in the event there is no such cure period, on or before the date which is two (2) business days after the date of Landlord's default notice); provided further, however, that in the event of any such termination Landlord shall recognize the rights of PIC under that certain Second Amendment to Lease (the "Amendment"), dated of even date herewith, between Landlord, as landlord, and PIC, as tenant, pursuant to which the Premises will be added to, and become a part of, certain premises leased by PIC directly from Landlord (under that certain lease, dated as of August, 1995). In the event Landlord, for the account of Prime Tenant, takes possession of the Premises without terminating the Sublease and the Sub-Sublease following a default by Prime Tenant under the Lease and requires Manugistics to pay rent due under the Sublease directly to Landlord, (i) Landlord shall not be liable for any prepaid rents nor any security deposits paid by Manugistics, (ii) Landlord shall not be subject to any offsets or defenses that Manugistics might have against Prime Tenant, (iii) Landlord shall not be liable for any concessions or allowances that Prime Tenant has agreed to grant or give, (iv) Landlord shall not be liable for any other defaults of Prime Tenant under the Sublease, and (v) Manugistics shall attorn to Landlord upon Landlord's request. Without limiting the generality of the preceding paragraph, Prime Tenant agrees that, in the event Prime Tenant defaults under the Lease (beyond any applicable notice and cure period) and PIC, acting on behalf of Manugistics under the Sublease, cures such default by performing Prime Tenant's obligation directly to Landlord, PIC may seek to recover, in a direct action against Prime Tenant, all sums paid by PIC in effectuating such cure, together with interest at the Default Rate (as defined in the Sub-Sublease). Any termination of the Sublease for any cause whatever shall operate as an assignment to Prime Tenant of the Sub-Sublease as if Prime Tenant was the sub-sublessor thereunder. In such event, or in the event Prime Tenant takes possession of the Premises without terminating the 2 19 Sublease (following a default under the Sublease), Prime Tenant shall recognize the rights of PIC under the Sub-Sublease as if it were a direct lease between Prime Tenant and PIC, and shall not disturb PIC's possession of the Premises; provided, however, that (i) Prime Tenant shall not be liable for any prepaid rents nor any security deposits paid by PIC, (ii) Prime Tenant shall not be subject to any offsets or defenses that PIC might have against Manugistics, (iii) Prime Tenant shall not be liable for any concessions or allowances that Manugistics has agreed to grant or give, (iv) Prime Tenant shall not be liable for any other defaults of Manugistics under the Sub-Sublease, (v) and PIC shall attorn to Prime Tenant upon Prime Tenant's request. 4. Except as set forth in Section 3 above, PIC shall have no rights against Landlord or Prime Tenant by reason of this Consent and Agreement, and all of PIC's rights and liabilities shall derive from the terms of the Sub-Sublease, the Sublease or the Amendment, as applicable. 5. This Consent and Agreement shall not be deemed an expressed or implied affirmation or representation of any factual statements or recitations contained in the Sub-Sublease, whether relating to the Lease, the Sublease or otherwise, it being understood that PIC is fully responsible for reviewing and familiarizing itself with all of the terms and conditions of the Lease and the Sublease. 6. The Sub-Sublease may not be assigned or amended, nor may the Premises be further subleased, without the consent of Landlord and Prime Tenant. This Consent and Agreement shall not constitute a waiver of the provisions of the Lease regarding assignment and subletting without the prior written consent of Landlord or the provisions of the Sublease regarding assignment and subletting without the prior written consent of Prime Tenant, and Landlord and Prime Tenant each reserves the right to withhold its consent to any future sublease or assignment in accordance with such provisions. 7. Under no circumstances may Manugistics require PIC or, except as set forth in Section 3 above, may PIC on its own, perform its obligations under the Sub-Sublease directly to Landlord or Prime Tenant, including without limitation paying any rent due under the Sub-Sublease directly to Landlord or Prime Tenant, without the prior written consent of Landlord or Prime Tenant (as applicable), which consent with respect to Landlord may be withheld in Landlord's sole and absolute discretion, and which consent with respect to Prime Tenant may be withheld in Prime Tenant's sole and absolute discretion. Notwithstanding the foregoing, (i) PIC shall pay directly to Landlord any charges incurred by or imposed upon PIC for services rendered or materials supplied to the Premises (excluding charges for additional rent due under Article 5 of the Lease), (ii) PIC shall be liable, jointly and severally with Manugistics and Prime Tenant, for all charges accruing on and after the Commencement Date (as defined in the Sub-Sublease) imposed in connection with the services described in Article 5 of the Lease (and which Landlord may require Manugistics or PIC to pay directly to Landlord pursuant to Section 9 below), and (iii) except as set forth in Section 3 above, the acceptance by Landlord of payment for the charges described in clause (i) or (ii) (or any other payment) from PIC, or from anyone else liable under the Lease, shall not be deemed a waiver by Landlord of any provisions of the Lease or this 3 20 Consent and Agreement. 8. Subject to the provisions of this Section, Prime Tenant hereby assigns and transfers to Landlord Prime Tenant's interest in all rentals and income arising from the Sublease. Landlord, by executing this document, agrees that until a default shall occur in the performance of Prime Tenant's obligations under the Lease, Prime Tenant may receive, collect and enjoy the rents accruing under the Sublease (except to the extent Landlord is entitled to a portion thereof under the terms of the Lease). However, if Prime Tenant defaults under the Lease, then Landlord may, at its option, receive and collect, directly from Manugistics, all rent owing and to be owed under the Sublease. Landlord shall not by reason of this assignment of the rentals and income arising from the Sublease, nor by reason of the collection of the rents from Manugistics be deemed liable to Manugistics for any failure of Prime Tenant to perform and comply with any obligations of Prime Tenant under the Sublease. Subject to the provisions of this Section, Manugistics hereby assigns and transfers to Prime Tenant Manugistics's interest in all rentals and income arising from the Sub-Sublease. Prime Tenant, by executing this document, agrees that until a default shall occur in the performance of Manugistics's obligations under the Sublease, Manugistics may receive, collect and enjoy the rents accruing under the Sub-Sublease (except to the extent Prime Tenant is entitled to a portion thereof under the terms of the Sublease). However, if Manugistics defaults under the Sublease, then Prime Tenant may, at its option, receive and collect, directly from PIC, all rent owing and to be owed under the Sub-Sublease. Prime Tenant shall not by reason of this assignment of the rentals and income arising from the Sub-Sublease, nor by reason of the collection of the rents from PIC be deemed liable to PIC for any failure of Manugistics to perform and comply with any obligations of Manugistics under the Sub-Sublease. Manugistics and PIC agree that if Prime Tenant defaults under the Lease and Landlord exercises its rights pursuant to the preceding paragraph, then this paragraph shall be deemed to be restated, and the assignment and agreements remade, with "Landlord" being inserted for "Prime Tenant." 9. Prime Tenant hereby irrevocably authorizes and directs Manugistics, upon receipt of any written notice from Landlord stating that a default exists in the performance of Prime Tenant's obligations under the Lease to pay to Landlord the rents due and to become due under the Sublease. (Landlord acknowledges that it shall not deliver such statement and request if PIC cures Prime Tenant's default within the two (2) business day period described in Section 3 above.) Prime Tenant agrees that Manugistics shall have the right to rely upon any such statement and request from Landlord, and that Manugistics shall pay such rents to Landlord without any obligation or rights to inquire as to whether such default exists and notwithstanding any notice from or claim from Prime Tenant to the contrary, and Prime Tenant shall have no right or claim against Manugistics for any such rents so paid by Manugistics. In the event PIC does elect to cure a default by Prime Tenant under the Lease involving the payment of rent, Prime Tenant agrees that the payment of rent due under the Lease to Landlord shall discharge Manugistics' obligation to pay rent under the Sublease to Prime Tenant as if the notice from Landlord contemplated by this Section 9 had been given, and Manugistics agrees that the 4 21 discharge of its obligations to pay rent under the Sublease shall likewise discharge PIC's obligation to pay rent under the Sub-Sublease to Manugistics (unless it is subsequently determined that such rent was not due to Landlord). Manugistics hereby irrevocably authorizes and directs PIC, upon receipt of any written notice from Prime Tenant stating that a default exists in the performance of Manugistics's obligations under the Sublease to pay to Prime Tenant the rents due and to become due under the Sub-Sublease. Manugistics agrees that PIC shall have the right to rely upon any such statement and request from Prime Tenant, and that PIC shall pay such rents to Prime Tenant without any obligation or rights to inquire as to whether such default exists and notwithstanding any notice from or claim from Manugistics to the contrary, and Manugistics shall have no right or claim against PIC for any such rents so paid by PIC. In addition, upon its receipt of such notice from Prime Tenant, PIC shall have the right, but not the obligation, to cure any default (within the applicable notice and cure period, if any) by Manugistics under the Sublease, and Prime Tenant will accept such performance from PIC. Manugistics and PIC agree that if Prime Tenant defaults under the Lease and Landlord exercises its rights pursuant to the preceding paragraph, then this paragraph shall be deemed to be restated, and the authorization and agreements remade, with "Landlord" being inserted for "Prime Tenant." 10. Manugistics' obligation to indemnify and hold Prime Tenant harmless as set forth in Section 12 of the Sublease shall include indemnification from any damages, claims, fines, penalties, costs or expenses arising from or in connection with the use and occupancy of the Premises, or any portion thereof, by PIC, its agents, employees or contractors. Prime Tenant's obligation to indemnify and hold Landlord harmless as set forth in Section 16 of the Lease shall include indemnification from any damages, claims, fines, penalties, costs or expenses arising from or in connection with the use and occupancy of the Premises, or any portion thereof, by Manugistics, PIC, and their respective agents, employees or contractors. 11. Except for any telecommunications lines or computer cabling presently existing in the Premises, which PIC shall be obligated to remove if Landlord so requires in accordance with the Lease, Landlord hereby agrees that as of the date hereof there are no existing alterations to the Premises that must be removed upon the expiration of the Sub-Sublease. With respect to any future alterations, each of Prime Tenant and Manugistics authorizes Landlord to approve, on behalf of each of them, respectively, any alterations to the Premises proposed by PIC. In the event Landlord gives such approval (which shall be governed by the applicable provisions of the Lease), then each of Prime Tenant and Manugistics shall be deemed to have approved such alterations as well, so long as they are typical office space alterations. Notwithstanding any such approval, PIC shall be obligated to remove the same if Landlord so requires in accordance with the Lease. 12. To the extent there are any conflicts between the terms of the Sub-Sublease and this Consent and Agreement, the terms of this Consent and Agreement shall control. 5 22 13. Manugistics shall be liable for all costs and expenses incurred by Landlord in connection with the Sub-Sublease, including without limitation the reasonable legal fees and administrative expenses incurred in connection with this Consent and Agreement, which costs and expenses are equal to $3,750. 14. Copies of all notices to be given by Manugistics and PIC under the Sub-Sublease shall be provided to Landlord and Prime Tenant via United States mail or via a nationally recognized overnight courier (such as Federal Express) at the following address: Landlord: Bala Plaza, Inc. c/o Tower Realty Management Corporation 255 Shoreline Drive, Suite 600 Redwood City, California 94065 Attention: Bala Plaza Asset Manager With a copy to: Tower Realty Management Corporation One Bala Plaza Suite 501 Bala Cynwyd, PA 19004 Attention: Property Manager Prime Tenant: Osteopathic Medical Center of Philadelphia 4180 City Line Avenue Philadelphia, PA 19131 Attention: Samuel H. Steinberg, Executive Vice President or to such other person at such other address designated by notice sent to Manugistics and PIC. Notices delivered by overnight courier shall be deemed given upon receipt. Mailed notices shall be sent by United States certified or registered mail, postage prepaid, return receipt requested. Such notice shall be deemed to have been given three (3) business days after posting in the United States mail. Landlord shall provide to PIC copies of all notices given by Landlord to Prime Tenant under the Lease at the address set forth in the Sub-Sublease or such other address designated by notice sent to Landlord by PIC. 15. Manugistics shall indemnify and hold Landlord and Prime Tenant harmless 6 23 against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or finder in connection with the sub-sublease of the Premises. 16. Landlord, Prime Tenant, Manugistics and PIC agree that, notwithstanding any provision of this Consent and Agreement to the contrary, all rights and obligations of each of them hereunder, and Landlord's and Prime Tenant's consent to the Sub-Sublease, are contingent upon (a) the execution and delivery by Manugistics and PIC of the Manugistics Sublease, (b) the execution and delivery by Landlord, Manugistics and PIC of the Consent and Agreement related thereto, and (c) the execution and delivery by Landlord and PIC of the Amendment. Six duplicate originals of each such document shall be executed by all parties other than Landlord and delivered to Landlord (but shall not be binding upon Landlord until executed and returned). Upon Landlord's execution of same, Landlord shall arrange for delivery thereof and confirm in writing that the contingency set forth in this Section 16 has been satisfied. 7 24 IN WITNESS WHEREOF, Landlord, and Prime Tenant, Manugistics and PIC have executed this Consent and Agreement as of the date first above written. BALA PLAZA, INC. By: /s/ Joe Grubb ------------------------------------- Name: Joe Grubb Its: Authorized Signatory (Corporate Seal) Attest: /s/ Tim Cahill --------------------------------- Name: Tim Cahill Its: Authorized Signatory OSTEOPATHIC MEDICAL CENTER OF PHILIADELPHIA By: /s/ Samuel H. Steinberg ------------------------------------- Name: Samuel H. Steinberg Title: Exec. V.P. (Corporate Seal) Attest: /s/ Peter Doulis --------------------------------- Name: Peter Doulis Title: VP for Finance/CEO MANUGISTICS, INC. By: /s/ Kenneth S. Thompson ------------------------------------- Name: Kenneth S. Thompson Title: Executive Vice President (Corporate Seal) Attest: /s/ Peter Q. Repetti --------------------------------- Name: Peter Q. Repetti Title: Sr. Vice President, CFO PHILADELPHIA CONSOLIDATED HOLDINGS CORP. By: /s/ Jack T. Carballo ------------------------------------- Name: Jack T. Carballo Title: Vice President (Corporate Seal) Attest: /s/ Christine Klippe --------------------------------- Name: Christine Klippe Title: Administrative Assistant /s/ Craig B Keller Craig B Keller Vice President 8 25 EXHIBIT A AGREEMENT OF SUB-SUBLEASE This Agreement of Sub-Sublease ("Agreement") is made this _____ day of June, 1998, by and between MANUGISTICS, INC., a Delaware corporation ("Manugistics"), and PHILADELPHIA INSURANCE COMPANIES, a Pennsylvania corporation ("PIC"). BACKGROUND A. By that certain Lease dated April 3, 1992 (the "Lease"), a copy of which is attached hereto as Exhibit "A", between The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), as landlord, and Osteopathic Medical Center of Philadelphia ("Prime Tenant"), as tenant, Prime Tenant leased from Prudential the premises known as approximately 31,772 square feet of rentable area (the "Prime Lease Premises") in the building known as One Bala Plaza (the "Building") located on land in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property"), as more particularly described in the Lease, at the rental and upon the terms and conditions set forth in the Lease. Bala Plaza, Inc., a Delaware corporation ("Landlord"), thereafter succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Lease was assigned to Landlord. B. By Sublease Agreement dated May 19, 1994 (the "Sublease"), a copy of which is attached hereto as Exhibit "B", between Prime Tenant, as sublandlord, and Manugistics, as subtenant, Manugistics subleased from Prime Tenant a portion of the Premises, being approximately 9,492 square feet of rentable area on the second (2nd) floor of the Building (the "Premises"). C. Manugistics desires to sub-sublease the Premises to PIC, and PIC desires to sub-sublease the Premises from Manugistics, upon the terms and conditions set forth herein. The Premises is substantially shown on Exhibit "C" attached hereto. D. Manugistics also desires to sublease certain premises adjoining the Premises to PIC, which premises are more fully described in that certain Lease, dated November 14, 1996, between Landlord, as landlord, and Manugistics, as tenant, and Manugistics and PIC are contemporaneously seeking Landlord's consent thereto. Such sublease shall be referred to herein as the "Manugistics Sublease." E. Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings established in the Lease and/or the Sublease. NOW, THEREFORE, in consideration of the covenants herein contained, the parties hereto, intending to be legally bound hereby, do covenant and agree as follows: A-1 26 1. Premises. Manugistics hereby sub-subleases to PIC, and PIC hereby subsubleases from Manugistics, the Premises for the period commencing July 1, 1998 ("Commencement Date") and ending on June 30, 2002 ("Expiration Date") upon the terms and conditions set forth herein, and at all times subject to the Lease and the Sublease. The "Rent Commencement Date" shall be August 1, 1998. PIC, for the benefit of Landlord, Prime Tenant and Manugistics, hereby agrees that the Lease (other than Sections 45 through 50) and Sublease (other than Sections 2, 7, 16, 17 and 19) is incorporated herein by reference, and PIC agrees further to be bound by all of the terms, covenants and conditions on the part of "Tenant" to be done, performed and observed under the Lease and on the part of "Sublessee" to be done, performed and observed under the Sublease, with respect to the Premises, provided, however, that (i) nothing herein shall bind PIC to the obligations of Prime Tenant or Manugistics under the Lease or Sublease, respectively, with respect to the amount of rent or additional rent (which amounts shall be as set forth in Section 2 and 3 hereof and shall be paid by PIC to Manugistics) and (ii) if Landlord approves PIC's proposed alterations to the Premises, then Prime Tenant and Manugistics shall be deemed to have approved such alterations, so long as they are typical office space alterations (but PIC shall be obligated to remove the same if Landlord so requires in accordance with the Lease). This Agreement is contingent upon obtaining the prior written consent of Landlord. If such consents are not obtained on or before July 15, 1998, this Agreement shall be null and void. Manugistics shall deliver possession of the Premises to PIC, and PIC shall accept possession of the Premises in its "as is" condition as of the Commencement Date, without requiring any alterations, improvements or decorations to be made by Manugistics or at Manugistics' expense. The leasing of the Premises hereunder shall include all workstations without chairs, nine (9) desks without chairs, and the large conference table with chairs, all as existing in the Premises and in their "as is" condition as of the date of this Agreement. 2. Rent. Commencing on the Rent Commencement Date, PIC shall pay Manugistics base rent ("Base Rent") as follows:
ANNUAL BASE RENT MONTHLY BASE PER RENTABLE SQUARE PERIOD RENT FOOT - ------ ---- ---- August 1, 1998 to and $14,633.50 $18.50 including June 30, 1999 July 1, 1999 to and including $15,029.00 $19.00 June 30, 2000 July 1, 2000 to and including $15,424.50 $19.50 June 30, 2001
A-2 27 July 1, 2001 to and including $15,820.00 $20.00 June 30, 2002
Monthly Base Rent shall be payable in advance, on the first day of each month during said term, to Manugistics, at 2115 East Jefferson Street, Rockville, Maryland 20852, Attention: _______________ ; or such other place as Manugistics may designate, without any set off, counterclaim or deduction whatsoever, except that PIC shall pay the first monthly installment within three (3) business days after Landlord's approval of this Sub-Sublease. If the obligation of PIC to pay rent hereunder begins on a day other than on the first day of a calendar month, rent from such date until the first day of the following calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the monthly installment for each day payable in advance. 3. Additional Rent. Commencing on the Rent Commencement Date, PIC shall pay to Manugistics, as additional rent hereunder, one hundred percent (100%) of all additional rent obligations of Manugistics pursuant to Section 3(b) of the Sublease in accordance with the terms thereof (and Manugistics shall forthwith pay the same to Prime Tenant); provided, however, that the Base Year for determining such additional rent shall be calendar year 1998. In addition, PIC shall pay to Manugistics, as additional rent, all costs for electricity (as reasonably determined by Manugistics) used in connection with any additional supplemental air-conditioning units within the Premises not contemplated by Section 3(b)(ii) of the Sublease. Upon notice from PIC, Manugistics shall deliver notices to Prime Tenant asserting Manugistics' audit and review rights pursuant to Section 3(b) of the Sublease, for the benefit of PIC. 4. Overdue Interest. If PIC fails to pay any installment of rent or additional rent under Sections 2 and 3 of this Agreement, respectively, and such failure continues for a period of five (5) days after it is due and payable, PIC shall pay Manugistics interest at the rate of eighteen percent (18%) per annum or, if same is usurious, the highest legal rate (as applicable, the "Default Rate"). 5. Use. PIC shall use and occupy the Premises as general and administrative offices and for no other purposes. PIC shall comply with all applicable laws (as more particularly set forth in Section 30 of the Lease. PIC, at its expense, shall maintain and repair the Premises and the fixtures and equipment therein or appurtenant thereto in first class condition and repair, will suffer no waste or injury thereto, and at the expiration or other termination of this Agreement, PIC shall surrender the Premises broom clean and in the same order and condition as on the Commencement Date, excepting (i) ordinary wear and tear, (ii) casualty not required to be insured by PIC, (iii) condemnation, and (iv) alterations which PIC is not required by Landlord to remove. A-3 28 6. Assignment and Sublease. PIC agrees not to assign, mortgage, pledge or otherwise encumber this Agreement, nor to sublet the Premises or any part thereof, without in each instance obtaining the prior written consent of Landlord, Prime Tenant and Manugistics. Notwithstanding the foregoing, without the consent of Landlord, Prime Tenant or Manugistics but upon notice to each, PIC may assign this Agreement to its parent, affiliate or subsidiary, or to a corporation which is a successor to PIC by merger or consolidation or by acquisition of all or substantially all of the assets or stock of PIC, provided that (i) the assignment also covers all of PIC's rights, titles and interests in, to and under each of (A) the Manugistics Sublease and (B) that certain lease (the "PIC Lease"), dated as of August, 1995, between Landlord, as landlord, and PIC, as tenant, pursuant to which certain premises are leased by PIC directly from Landlord (and the sublease and consent referenced in Article 49 thereof), (ii) the assignee assumes, in full, the obligations of PIC under the Manugistics Sublease and the PIC Lease (and the sublease and consent referenced in Article 49 thereof), and (iii) such assignment shall be under and subject to the terms of this Agreement, the Manugistics Sublease and the PIC Lease (and the sublease and consent referenced in Article 49 thereof), as applicable, and shall not relieve PIC of any of its obligations under this Agreement, the Manugistics Sublease and the PIC Lease (and the sublease and consent referenced in Article 49 thereof). 7. Services. Notwithstanding anything in this Agreement to the contrary, PIC agrees that neither Manugistics nor Prime Tenant shall be obligated to furnish for PIC any services of any nature whatsoever, including, without limitation, the furnishing of heat, electrical energy, air conditioning, elevator service, cleaning, window washing, or rubbish removal services. PIC, however, shall be entitled to enjoy such services to the extent they are provided by Landlord pursuant to the terms of the Lease. A-4 29 8. Insurance. a. PIC shall maintain at its expense during the term of this Sub-Sublease with respect to the Premises and PIC's use thereof and of the Property: (1) Worker's Compensation Insurance in the amounts required by statute, and Employer Liability Insurance in at least the following amounts: (a) Bodily Injury by Accident - $500,000 per accident, (b) Bodily Injury by Disease - - $500,000 per employee, and (c) Aggregate Limit - $500,000 per policy year. (2) Property Damage Insurance for the protection of PIC and Manugistics, as their interests may appear, covering any alterations or improvements in excess of those contemplated by Section 2(b) above, PIC's personal property, business records, fixtures and equipment, and other insurable risks in amounts not less than the full insurable replacement cost of such property and full insurable value of such other interests of PIC, with coverage at least as broad as the most recent editions published by Insurance Services Office, Inc. or any successor organization ("ISO"), of: (a) Building and Personal Property Coverage Form (CP0010), (b) Causes of Special Loss Form (CP1030), and (c) Sprinkler Leakage - Earthquake Extension (CP1039). (3) Liability insurance as follows: (I) Commercial General Liability Insurance ("CGL") at least as broad as the most recent ISO edition of Commercial General Liability Coverage Form (CG0001) with limits of at least the following amounts: (a) Death or Bodily Injury - $1,000,000, (b) Property Damage or Destruction (including loss of use thereof) - $l,000,000 (c) Products/Completed Operations - $1,000,000, (d) Personal or Advertising injury - $1,000,000, (e) Each Occurrence Limit - $1,000,000, and (f) General Aggregate Limit - $2,000,000 per policy year, and (II) Umbrella Liability Insurance with a limit of at least $15,000,000 (which may be carried in one or more policies). Such CGL and Umbrella policies shall include endorsements: (1) for contractual liability covering PIC's indemnity obligations under this Sub-Sublease, and (2) adding Manugistics, Prime Tenant, Landlord, the management company for the Property, and any other parties reasonably designated by Manugistics, as Additional Insureds, on a form at least as broad as the most recent edition of Additional Insured-Manager or Lessor of Premises Endorsement Form (CG2011) published by ISO. b. Upon the request of Manugistics from time to time during the term of this Sub-Sublease, PIC shall provide Manugistics with certificates evidencing the coverage required hereunder. Such certificates shall: (i) be on ACORD Form 27 or such other form approved or required by Manugistics, (ii) state that such insurance coverage may not be changed, canceled or non-renewed without at least thirty (30) days' prior written notice to Manugistics, and (iii) include, as attachments, duplicate originals or copies of the Additional Insured endorsements to PIC's CGL policy required above (once the same are provided to Tenant). PIC shall provide renewal certificates to Manugistics at least thirty (30) days prior to expiration of such policies. Except as expressly provided to the contrary herein, coverage hereunder shall apply to events A-5 30 occurring during the policy year regardless of when a claim is made. Manugistics may periodically require that PIC reasonably increase or expand the aforementioned coverage. Except as provided to the contrary herein, any insurance carried by Manugistics or PIC shall be for the sole benefit of the party carrying such insurance. If PIC obtains insurance under "blanket policies," PIC shall obtain an endorsement providing that the insurance limits required hereunder are not subject to reduction or impairment by claims or losses at other locations. PIC's insurance policies shall be primary to all policies of Manugistics and any other Additional Insureds (whose policies shall be deemed excess and non-contributory). All insurance required hereunder shall be provided by responsible insurers licensed in the Commonwealth of Pennsylvania, and shall have a general policy holder's rating of at least A and a financial rating of at least IX in the then current edition of Best's Insurance Reports. The parties mutually hereby waive all rights and claims against each other for all losses covered by their respective insurance policies, and waive all rights of subrogation of their respective insurers. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder. Manugistics disclaims any representation as to whether the foregoing coverages will be adequate to protect PIC, and PIC agrees to carry such additional coverage as may be necessary or appropriate. 9. Hold Harmless. Neither Manugistics nor PIC shall do or cause to be done, or suffer or permit any act or thing to be done, which may cause the Lease or the Sublease to be canceled, terminated, forfeited or prejudiced or which may make the other party liable for any damages, claims, fines, penalties, costs or expenses thereunder. Each of Manugistics and PIC shall indemnify and save harmless the other from all suits, actions, judgments, damages, claims, liabilities, awards, losses, fines penalties, costs, charges and expenses, including attorneys fees, that either may sustain by reason of the other's failure to perform the terms of this Agreement, the Lease or the Sublease or by reason of the breach by the other of any of the terms, covenants or conditions of this Agreement, the Lease or the Sublease except those arising out of the negligent acts or omissions of the party being indemnified. Landlord and Prime Tenant (so long as Prime Tenant is not in default under the Lease) are each an intended third-party beneficiary of this Section 9. 10. Defaults. The provisions of the Sublease relating to defaults and remedies (including without limitation the applicable notice and/or cure periods) are incorporated herein by reference as a separate paragraph of this Agreement and, for purposes of determining the parties defaults and remedies hereunder, said provisions shall apply between Manugistics and PIC reading "Sublessor" to mean Manugistics and "Sublessee" to mean PIC. 11. Security Deposit. Simultaneously with the execution of this Agreement by PIC, PIC shall deposit with Manugistics the sum of Fourteen Thousand Six Hundred Thirty-Three and 50/lOOths Dollars ($14,633.50) (the "Security Deposit") to be held by Manugistics without interest payable to PIC. The Security Deposit shall be security for the payment and performance by PIC of all PIC's obligations, covenants, conditions and agreements under this Agreement. In the event of any default by PIC hereunder, Manugistics shall have the right, but shall not be A-6 31 obligated, to apply all or any portion of the Security Deposit to cure such default, in which event PIC shall be obligated to promptly deposit with Manugistics that portion of the Security Deposit used to cure such default. So long as PIC is not in default hereunder, Manugistics shall return any unused portion of the Security Deposit to PIC within thirty (30) days after expiration of the term of this Agreement. PIC shall have no right, title or interest in or with respect to any Security Deposit, or any portion thereof, held by Landlord under the Lease. 12. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. This Agreement constitutes the entire agreement between the parties hereto and may not be modified except by an instrument in writing signed by the parties hereto. 13. Notices. Whenever it shall be necessary or desirable for either party to this Agreement to serve any notice or demand on the other party, such notice or demand shall be served by certified mail, return receipt requested, or by overnight courier (such as Federal Express), next day delivery, at the addresses set forth above or at such other address as shall be designated by the parties in accordance with this Section. Each party shall provide to the other copies of all notices received by each from Landlord or Prime Tenant. 14. Amendments. No amendments shall be made to this Agreement without the prior written approval of Landlord in accordance with the terms of the Lease. 15. Brokers. PIC represents to Manugistics that, other than EBI Commercial and Grubb & Ellis (collectively, "Brokers"), PIC has not dealt with any broker, finder or agent in connection with the Premises or the negotiation and execution of this Sublease. PIC shall indemnify and hold Manugistics harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any other broker, finder or agent claiming by, through or under PIC. Manugistics represents to PIC that, other than Brokers, Manugistics has not dealt with any broker, finder or agent in connection with the Premises or the negotiation and execution of this Sub-Sublease. Manugistics shall be responsible for all commissions or other compensation owing to Brokers pursuant to a separate agreement and shall indemnify and hold PIC harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker, finder or agent claiming by, through or under Manugistics, including without limitation Brokers. A-7 32 IN WITNESS WHEREOF, Manugistics and PIC have executed this Agreement of Sub-Sublease as of the date first above written. MANUGISTICS, INC., a Delaware corporation By: ----------------------------------- Name: Title: (Corporate Seal) Attest: ------------------------------- Name: Title: PHILADELPHIA CONSOLIDATED HOLDINGS CORP., a Pennsylvania corporation By: ----------------------------------- Name: Title: (Corporate Seal) Attest: ------------------------------- Name: Title: A-8 33 EXHIBIT "A" [Attach Copy of Lease] A-9 34 EXHIBIT "B" [Attach Copy of Sublease] A-10 35 EXHIBIT "C" [Attach Plan of Premises] A-11 36 AGREEMENT OF SUB-SUBLEASE This Agreement of Sub-Sublease ("Agreement") is made this 6th day of July,1998, by and between MANUGISTICS, INC., a Delaware corporation ("Manugistics"), and PHILADELPHIA INSURANCE COMPANIES, a Pennsylvania corporation ("PIC"). BACKGROUND A. By that certain Lease dated April 3, 1992 (the "Lease"), a copy of which is attached hereto as Exhibit "A", between The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), as landlord, and Osteopathic Medical Center of Philadelphia ("Prime Tenant"), as tenant, Prime Tenant leased from Prudential the premises known as approximately 31,772 square feet of rentable area (the "Prime Lease Premises") in the building known as One Bala Plaza (the "Building") located on land in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property"), as more particularly described in the Lease, at the rental and upon the terms and conditions set forth in the Lease. Bala Plaza, Inc., a Delaware corporation ("Landlord"), thereafter succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Lease was assigned to Landlord. B. By Sublease Agreement dated May 19, 1994 (the "Sublease"), a copy of which is attached hereto as Exhibit "B", between Prime Tenant, as sublandlord, and Manugistics, as subtenant, Manugistics subleased from Prime Tenant a portion of the Premises, being approximately 9,492 square feet of rentable area on the second (2nd) floor of the Building (the "Premises"). C. Manugistics desires to sub-sublease the Premises to PIC, and PIC desires to sub-sublease the Premises from Manugistics, upon the terms and conditions set forth herein. The Premises is substantially shown on Exhibit "C" attached hereto. D. Manugistics also desires to sublease certain premises adjoining the Premises to PiC, which premises are more frilly described in that certain Lease, dated November 14, 1996, between Landlord, as landlord, and Manugistics, as tenant, and Manugistics and PIC are contemporaneously seeking Landlord's consent thereto. Such sublease shall be referred to herein as the "Manugistics Sublease." E. Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings established in the Lease and/or the Sublease. NOW, THEREFORE, in consideration of the covenants herein contained, the parties hereto, intending to be legally bound hereby, do covenant and agree as follows: 37 i. Premises. Manugistics hereby sub-subleases to PIC, and PIC hereby sub-subleases from Manugistics, the Premises for the period commencing July 1, 1998 ("Commencement Date") and ending on June 30, 2002 ("Expiration Date") upon the terms and conditions set forth herein, and at all times subject to the Lease and the Sublease. The "Rent Commencement Date" shall be August 1, 1998. PIC, for the benefit of Landlord, Prime Tenant and Manugistics, hereby agrees that the Lease (other than Sections 45 through 50) and Sublease (other than Sections 2, 7, 16, 17 and 19) is incorporated herein by reference, and PIC agrees further to be bound by all of the terms, covenants and conditions on the part of "Tenant" to be done, performed and observed under the Lease and on the part of "Sublessee" to be done, performed and observed under the Sublease, with respect to the Premises, provided, however, that (i) nothing herein shall bind PIC to the obligations of Prime Tenant or Manugistics under the Lease or Sublease, respectively, with respect to the amount or rent or additional rent (which amounts shall be as set forth in Section 2 and 3 hereof and shall be paid by PIC to Manugistics) and (ii) if Landlord approves PIC's proposed alterations to the Premises, then Prime Tenant and Manugistics shall be deemed to have approved such alterations, so long as they are typical office space alterations (but PIC shall be obligated to remove the same if Landlord so requires in accordance with the Lease). This Agreement is contingent upon obtaining the prior written consent of Landlord. If such consents are not obtained on or before July 15, 1998, this Agreement shall be null and void. Manugistics shall deliver possession of the Premises to PIC, and PIC shall accept possession of the Premises in its "as is" condition as of the Commencement Date, without requiring any alterations, improvements or decorations to be made by Manugistics or at Manugistics' expense. The leasing of the Premises hereunder shall include all workstations without chairs, nine (9) desks without chairs, and the large conference table with chairs, all as existing in the Premises and in their "as is" condition as of the date of this Agreement. ii. Rent. Commencing on the Rent Commencement Date, PIC shall pay Manugistics base rent ("Base Rent") as follows:
ANNUAL BASE RENT MONTHLY BASE PER RENTABLE SQUARE PERIOD RENT FOOT - ------ ---- ---- August 1, 1998 to and $14,633.50 $18.50 Including June 30, 1999 July 1, 1999 to and including $15,029.00 $19.00 June 30, 2000
2 38 July 1, 2000 to and including $15,424.50 $19.50 June 30, 2001 July 1, 2001 to and including $15,820.00 $20.00 June 30, 2002
Monthly Base Rent shall be payable in advance, on the first day of each month during said term, to Manugistics, at 2115 East Jefferson Street, Rockville, Maryland 20852, Attention: Real Estate/Lease Administrator or such other place as Manugistics may designate, without any set off, counterclaim or deduction whatsoever, except that PIC shall pay the first monthly installment within three (3) business days after Landlord's approval of this Sub-Sublease. If the obligation of PIC to pay rent hereunder begins on a day other than on the first day of a calendar month, rent from such date until the first day of the following calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the monthly installment for each day payable in advance. iii. Additional Rent. Commencing on the Rent Commencement Date, PIC shall pay to Manugistics, as additional rent hereunder, one hundred percent (100%) of all additional rent obligations of Manugistics pursuant to Section 3(b) of the Sublease in accordance with the terms thereof (and Manugistics shall forthwith pay the same to Prime Tenant); provided, however, that the Base Year for determining such additional rent shall be calendar year 1998. In addition, PIC shall pay to Manugistics, as additional rent, all costs for electricity (as reasonably determined by Manugistics) used in connection with any additional supplemental air-conditioning units within the Premises not contemplated by Section 3(b)(ii) of the Sublease. Upon notice from PIC, Manugistics shall deliver notices to Prime Tenant asserting Manugistics' audit and review rights pursuant to Section 3(b) of the Sublease, for the benefit of PIC. iv. Overdue Interest. If PIC fails to pay any installment of rent or additional rent under Sections 2 and 3 of this Agreement, respectively, and such failure continues for a period of five (5) days after it is due and payable, PIC shall pay Manugistics interest at the rate of eighteen percent (18%) per annum or, if same is usurious, the highest legal rate (as applicable, the "Default Rate"). v. Use. PIC shall use and occupy the Premises as general and administrative offices and for no other purposes. PIC shall comply with 3 39 all applicable laws (as more particularly set forth in Section 30 of the Lease. PIC, at its expense, shall maintain and repair the Premises and the fixtures and equipment therein or appurtenant thereto in first class condition and repair, will suffer no waste or injury thereto, and at the expiration or other termination of this Agreement, PIC shall surrender the Premises broom clean and in the same order and condition as on the Commencement Date, excepting (i) ordinary wear and tear, (ii) casualty not required to be insured by PIC, (iii) condemnation, and (iv) alterations which PIC is not required by Landlord to remove. vi. Assignment and Sublease. PIC agrees not to assign, mortgage, pledge or otherwise encumber this Agreement, nor to sublet the Premises or any part thereof, without in each instance obtaining the prior written consent of Landlord, Prime Tenant and Manugistics. Notwithstanding the foregoing, without the consent of Landlord, Prime Tenant or Manugistics but upon notice to each, PIC may assign this Agreement to its parent, affiliate or subsidiary, or to a corporation which is a successor to PIC by merger or consolidation or by acquisition of all or substantially all of the assets or stock of PIC, provided that (i) the assignment also covers all of PIC's rights, titles and interests in, to and under each of (A) the Manugistics Sublease and (B) that certain lease (the "PIC Lease"), dated as of August, 1995, between Landlord, as landlord, and PIC, as tenant, pursuant to which certain premises are leased by PIC directly from Landlord (and the sublease and consent referenced in Article 49 thereof), (ii) the assignee assumes, in full, the obligations of PIC under the Manugistics Sublease and the PIC Lease (and the sublease and consent referenced in Article 49 thereof), and (iii) such assignment shall be under and subject to the terms of this Agreement, the Manugistics Sublease and the PIC Lease (and the sublease and consent referenced in Article 49 thereof), as applicable, and shall not relieve PIC of any of its obligations under this Agreement, the Manugistics Sublease and the PIC Lease (and the sublease and consent referenced in Article 49 thereof). vii. Services. Notwithstanding anything in this Agreement to the contrary, PIC agrees that neither Manugistics nor Prime Tenant shall be obligated to furnish for PIC any services of any nature whatsoever, including, without limitation, the furnishing of heat, electrical energy, air conditioning, elevator service, cleaning, window washing, or rubbish removal services. PIC, however, shall be entitled to enjoy such services to the extent they are provided by Landlord pursuant to the terms of the Lease. 4 40 viii. Insurance. (1) PIC shall maintain at its expense during the term of this Sub-Sublease with respect to the Premises and PIC's use thereof and of the Property: (a) Worker's Compensation Insurance in the amounts required by statute, and Employer Liability Insurance in at least the following amounts: (a) Bodily Injury by Accident - $500,000 per accident, (b) Bodily Injury by Disease - $500,000 per employee, and (c) Aggregate Limit - $500,000 per policy year. (b) Property Damage Insurance for the protection of PIC and Manugistics, as their interests may appear, covering any alterations or improvements in excess of those contemplated by Section 2(b) above, PIC's personal property, business records, fixtures and equipment, and other insurable risks in amounts not less than the full insurable replacement cost of such property and full insurable value of such other interests of PIC, with coverage at least as broad as the most recent editions published by Insurance Services Office, Inc. or any successor organization ("ISO"), of: (a) Building and Personal Property Coverage Form (CP0010), (b) Causes of Special Loss Form (CP1030), and (c) Sprinkler Leakage - Earthquake Extension (CP1039). (c) Liability insurance as follows: (I) Commercial General Liability Insurance ("CGL") at least as broad as the most recent ISO edition of Commercial General Liability Coverage Form (CG0001) with limits of at least the following amounts: (a) Death or Bodily Injury - $1,000,000, (b) Property Damage or Destruction (including loss of use thereof) - $1,000,000, (c) Products/Completed Operations - $1,000,000, (d) Personal or Advertising injury - $1,000,000, (e) Each Occurrence Limit - $1,000,000, and (f) General Aggregate Limit - $2,000,000 per policy year, and (II) Umbrella Liability Insurance with a limit of at least $15,000,000 (which may be carried in one or more policies). Such CGL and Umbrella policies shall include endorsements: (1) for contractual liability covering PIC's indemnity obligations under this Sub-Sublease, and (2) 5 41 adding Manugistics, Prime Tenant, Landlord, the management company for the Property, and any other parties reasonably designated by Manugistics, as Additional Insureds, on a form at least as broad as the most recent edition of Additional Insured Manager or Lessor of Premises Endorsement Form (CG2011) published by ISO. (2) Upon the request of Manugistics from time to time during the term of this Sub-Sublease, PIC shall provide Manugistics with certificates evidencing the coverage required hereunder. Such certificates shall: (i) be on ACORD Form 27 or such other form approved or required by Manugistics, (ii) state that such insurance coverage may not be changed, canceled or non-renewed without at least thirty (30) days' prior written notice to Manugistics, and (iii) include, as attachments, duplicate originals or copies of the Additional Insured endorsements to PIC's CGL policy required above (once the same are provided to Tenant). PIC shall provide renewal certificates to Manugistics at least thirty (30) days prior to expiration of such policies. Except as expressly provided to the contrary herein, coverage hereunder shall apply to events occurring during the policy year regardless of when a claim is made. Manugistics may periodically require that PIC reasonably increase or expand the aforementioned coverage. Except as provided to the contrary herein, any insurance carried by Manugistics or PIC shall be for the sole benefit of the party carrying such insurance. If PIC obtains insurance under "blanket policies," PIC shall obtain an endorsement providing that the insurance limits required hereunder are not subject to reduction or impairment by claims or losses at other locations. PIC's insurance policies shall be primary to all policies of Manugistics and any other Additional Insureds (whose policies shall be deemed excess and non-contributory). All insurance required hereunder shall be provided by responsible insurers licensed in the Commonwealth of Pennsylvania, and shall have a general policy holder's rating of at least A and a financial rating of at least IX in the then current edition of Best's Insurance Reports. The parties mutually hereby waive all rights and claims against each other for all losses covered by their respective insurance policies, and waive all rights of subrogation of their respective insurers. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder. Manugistics disclaims any representation as to whether the foregoing coverages will be adequate to protect PIC, 6 42 and PIC agrees to carry such additional coverage as may be necessary or appropriate. ix. Hold Harmless. Neither Manugistics nor PIC shall do or cause to be done, or suffer or permit any act or thing to be done, which may cause the Lease or the Sublease to be canceled, terminated, forfeited or prejudiced or which may make the other party liable for any damages, claims, fines, penalties, costs or expenses thereunder. Each of Manugistics and PIC shall indemnify and save harmless the other from all suits, actions, judgments, damages, claims, liabilities, awards, losses, fines penalties, costs, charges and expenses, including attorneys fees, that either may sustain by reason of the other's failure to perform the terms of this Agreement, the Lease or the Sublease or by reason of the breach by the other of any of the terms, covenants or conditions of this Agreement, the Lease or the Sublease except those arising out of the negligent acts or omissions of the party being indemnified. Landlord and Prime Tenant (so long as Prime Tenant is not in default under the Lease) are each an intended third-party beneficiary of this Section 9. x. Defaults. The provisions of the Sublease relating to defaults and remedies (including without limitation the applicable notice and/or cure periods) are incorporated herein by reference as a separate paragraph of this Agreement and, for purposes of determining the parties defaults and remedies hereunder, said provisions shall apply between Manugistics and PIC reading "Sublessor" to mean Manugistics and "Sublessee" to mean PIC. xi. Security Deposit. Simultaneously with the execution of this Agreement by PIC, PIC shall deposit with Manugistics the sum of Fourteen Thousand Six Hundred Thirty-Three and 50/lOOths Dollars ($14,633.50) (the "Security Deposit") to be held by Manugistics without interest payable to PIC. The Security Deposit shall be security for the payment and performance by PIC of all PIC's obligations, covenants, conditions and agreements under this Agreement. In the event of any default by PIC hereunder, Manugistics shall have the right, but shall not be obligated, to apply all or any portion of the Security Deposit to cure such default, in which event PIC shall be obligated to promptly deposit with Manugistics that portion of the Security Deposit used to cure such default. So long as PIC is not in default hereunder, Manugistics shall return any unused portion of the Security Deposit to PIC within thirty (30) days after expiration of the term of this Agreement. 7 43 PIC shall have no right, title or interest in or with respect to any Security Deposit, or any portion thereof, held by Landlord under the Lease. xii. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. This Agreement constitutes the entire agreement between the parties hereto and may not be modified except by an instrument in writing signed by the parties hereto. xiii. Notices. Whenever it shall be necessary or desirable for either party to this Agreement to serve any notice or demand on the other party, such notice or demand shall be served by certified mail, return receipt requested, or by overnight courier (such as Federal Express), next day delivery, at the addresses set forth above or at such other address as shall be designated by the parties in accordance with this Section. Each party shall provide to the other copies of all notices received by each from Landlord or Prime Tenant. xiv. Amendments. No amendments shall be made to this Agreement without the prior written approval of Landlord in accordance with the terms of the Lease. xv. Brokers. PIC represents to Manugistics that, other than EBI Commercial and Grubb & Ellis (collectively, "Brokers"), PIC has not dealt with any broker, finder or agent in connection with the Premises or the negotiation and execution of this Sublease. PIC shall indemnify and hold Manugistics harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any other broker, finder or agent claiming by, through or under PIC. Manugistics represents to PIC that, other than Brokers, Manugistics has not dealt with any broker, finder or agent in connection with the Premises or the negotiation and execution of this Sub-Sublease. Manugistics shall be responsible for all commissions or other compensation owing to Brokers pursuant to a separate agreement and shall indemnify and hold PIC harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker, finder or agent claiming by, through or under Manugistics, including without limitation Brokers. 8 44 IN WITNESS WHEREOF, Manugistics and PIC have executed this Agreement of Sub-Sublease as of the date first above written. MANUGISTICS, INC., a Delaware corporation By: /s/ Kenneth S. Thompson -------------------------------- Name: Kenneth S. Thompson Title: Executive Vice President (Corporate Seal) Attest: /s/ Peter Q. Repetti ---------------------------- Name: Peter Q. Repetti Title: Sr. Vice President, CFO PHILADELPHIA CONSOLIDATED HOLDINGS CORP., a Pennsylvania corporation By: /s/ Jack T. Carballo -------------------------------- Name: Jack T. Carballo Title: Vice President (Corporate Seal) Attest: /s/ Christine Kleppe ---------------------------- Name: Christine Kleppe Title: Administrative Assistant /s/ Craig P. Heller Craig P. Heller Vice President 9 45 EXHIBIT "A" [Attach Copy of Lease] A-1 46 EXHIBIT "B" [Attach Copy of Sublease] B-1 47 EXHIBIT "C" [Attach Plan of Premises] C-1 48 LEASE BALA CYNWYD, PENNSYLVANIA 1. PARTIES This Lease, made as of this 3rd day of April, 1992, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation having an office at 1700 Market Street, Suite 3200, Philadelphia, Pennsylvania 19103 (hereinafter "Landlord"), and OSTEOPATHIC MEDICAL CENTER OF PHILADELPHIA, a Pennsylvania corporation having its principal offices at 4150 City Line Avenue, Philadelphia, Pennsylvania 19131 (hereinafter "Tenant"). 2. PREMISES For and in consideration of the rent to be paid and the covenants and agreements to be performed by Tenant as hereinafter set forth, Landlord does hereby lease, demise and let unto Tenant that portion of the 6th floor, shown outlined and hatched in black on the 6th floor plan attached hereto and containing approximately 22,280 rentable square feet and that portion of the 2nd floor, shown outlined and hatched in black on the 2nd floor plan attached hereto and containing approximately 9,492 rentable square feet (hereinafter, collectively, "Premises"), in Landlord's building known as One Bala Plaza and located in Bala Cynwyd, Pennsylvania (hereinafter "Building"). 3. TERM The term of this Lease shall be for ten (10) years, commencing on July 1, 1992, and expiring at midnight on June 30, 2002, unless renewed or sooner terminated as hereinafter provided. 4. RENT (a) Base Rent - During the entire term of this Lease, Tenant shall pay to Landlord, as yearly rent, the following sums (hereinafter "Base Rent"), in equal monthly installments in advance on the first day of each calendar month, without setoff or deduction:
ANNUAL MONTHLY BASE RATE RATE PERIOD BASE RENT BASE RENT PER SQUARE FOOT - ------ --------- --------- --------------- 7/1/92-6/30/98 $635,440.00 $52,953.33 $20.00 7/1/98-6/30/2000 $698,984.00 $58,248.66 $22.00 7/l/2000-6/30/2002 $762,528.00 $63,544.00 $24.00
In the event the term of this Lease commences on a day other than the first day of a calendar month or expires on a day other than the last day of a calendar month, Tenant shall pay to Landlord a 49 pro rata portion of the monthly installment of Base Rent for such partial month. (b) Additional Rent - Whenever under the terms of this Lease any sum of money is required to be paid by Tenant in addition to the Base Rent herein reserved, and said additional sum is not designated as "additional rent", then if not paid when due, said sum shall nevertheless be deemed "additional rent" and be collectible as such with any installment of Base Rent thereafter falling due hereunder, but nothing herein contained shall be deemed to suspend or delay the payment of any such sum at the time the same became due and payable hereunder, or limit any other remedy of Landlord. (c) All payments of Base Rent and additional rent shall be paid when due, without demand, at the office of Premisys Real Estate Services, Inc., 1 Bala Plaza - Suite E501, Bala Cynwyd, Pennsylvania 19004, or at such other place as Landlord may from time to time direct. All checks shall be made payable to Premisys Real Estate Services, Inc., Agent. (d) Security Deposit - (Intentionally Omitted) 5. OPERATION AND MAINTENANCE COSTS, REAL ESTATE TAXES AND ADDITIONAL RENT (a) The costs and expenses of the operation, maintenance and repair of the Building (hereinafter "Operation and Maintenance Costs") shall include, without limitation, the cost and expense to Landlord of the following items: (1) All wages, salaries and fees of all employees and agents engaged in the management, operation, repair, replacement, maintenance and security of the Building, including taxes, insurance and all other employee benefits relating thereto; (2) All supplies and materials used in the management, operation, repair, replacement, maintenance and security of the Building; (3) All utilities consumed by the Building and the servicing thereof, including, without limitation, gas, water, sewer, electricity, power, lighting, heating, air-conditioning and ventilation; (4) All maintenance and service contracts for the operation, repair, replacement, maintenance, and security of the Building, including, without limitation, window cleaning, security system, heating, ventilating and air-conditioning system, fire sprinkler system, elevator and landscaping; - 2 - 50 (5) All fire and extended coverage (with all risk coverage) insurance and comprehensive general liability insurance for the Building (including all common areas) and Landlord's personal property and fixtures used in connection therewith; (6) All repairs (including necessary replacements) and general maintenance of the Building; (7) All janitorial services for the Building; (8) The cost of any capital improvements (i) which are made for the primary purpose of reducing Operation and Maintenance Costs, but only to the extent of the actual reduction in Operating Expenses in each Comparison Year, or (ii) which may be required by governmental authority under any governmental law or regulation that was not applicable to the Building as of the date of this Lease, which cost shall be amortized over the period used by Landlord for Federal Income Tax purposes, together with interest on the unamortized balance at the rate equal to the Prime Rate being charged by Mellon Bank East, Philadelphia, Pennsylvania or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements; and (9) All other costs and expenses necessarily and reasonably incurred by Landlord in the proper operation and maintenance of a first class office building; provided, however, that the following shall be excluded from the term "Operation and Maintenance Costs": (i) expenses for any capital improvements made to the Building, except as provided in paragraph 5 (a) (8) above; (ii) expenses for repairs or other work occasioned by fire, windstorm or other insured casualty; (iii) expenses incurred in leasing or procuring new tenants (e.g., for lease commissions, advertising expenses and expenses of renovating (including improving, decorating and painting) space for new or existing tenants); (iv) legal expenses in enforcing the terms of any lease; (v) interest and amortization payments on any mortgage or mortgages; (vi) Real Estate Taxes, which are covered separately under paragraph (b) below; (vii) electricity for which Landlord receives reimbursement from Building tenants; (viii) depreciation; (ix) cost of any fines or penalties, including any costs in connection therewith, imposed by any governmental authority on account of Landlord's violation of any law or building code applicable to the ownership of the Building; (x) cost of testing, surveying, clean up or otherwise remedying hazardous wastes or asbestos-containing materials as required by a federal, state or local governmental authority; (xi) items and services for which Tenant reimburses Landlord or pays third parties or that - 3 - 51 Landlord provides selectively to one or more tenants of the Building other than Tenant without reimbursement; (xii) non-recurring costs incurred to remedy any defects in Original construction materials or installations; and (xiii) cost of Landlord's home office or any other office general overhead. (b) All "Real Estate Taxes" which, for the purposes of this Article, shall mean all gross real property taxes, charges and assessments which are levied, assessed upon or imposed by any governmental authority during any calendar year of the term hereof with respect to the land and the Building and any improvements, fixtures and equipment and all other property of Landlord, real or personal, located in or on the Building and used in connection with the operation of the Building and any tax which shall be levied or assessed in addition to or in lieu of such real or personal property taxes (including, without limitation, any municipal income tax), and any license fees, tax measured by or imposed upon rents, or other tax or charge upon Landlord's business of leasing the Building, but shall not include any federal or state income tax, or any franchise, capital stock, estate or inheritance taxes. In the event that the tax statement from the taxing authority does not allocate assessments with respect to the Building and assessments relating to any other improvements located upon the land upon which the Building is situated, Landlord shall make a reasonable determination of the proper allocation of such assessment. (c) (i) "Base Year" shall be defined as calendar year 1992; (ii) "Comparison Year" shall be defined as each calendar year (or part thereof) following the Base Year and included in the original term of this Lease and any renewal thereof; and (iii) "Tenant's Percentage" shall be 8.696%, which is the ratio that the rentable square foot area of the Premises (i.e. 31,772 rentable square feet) bears to the total rentable square foot area of office space in the Building (i.e. 365,256 rentable square feet). For each Comparison Year, Tenant shall pay Landlord, as additional rent, Tenant's Percentage of: (1) Any increase in the Real Estate Taxes for each Comparison Year over the Real Estate Taxes for the Base Year; and (2) Any increase in Operation and Maintenance Costs for each Comparison Year over the Operation and Maintenance Costs for the Base Year. - 4 - 52 (d) During each Comparison Year commencing on January 1, 1993, Landlord and Tenant agree that Tenant shall pay monthly, in advance, an amount equal to one-twelfth of Tenant's estimated annual Operation and Maintenance Costs additional rent due for each Comparison Year. For each Comparison Year, Landlord shall make an estimate of Tenant's Operation and Maintenance Costs additional rent and notify Tenant as to such estimate on or about December 15th of the preceding year. (e) On or about May 1 of each Comparison Year commencing with the 2nd Comparison Year, Landlord shall submit to Tenant a statement setting forth the actual Operation and Maintenance Costs for the Building for the preceding Comparison Year and Tenant's Percentage thereof. Within thirty (30) days after delivery of such statement to Tenant, an adjustment shall thereupon be made between Landlord and Tenant to reflect any difference between Tenant's estimated payments under paragraph (d) above and Tenant's Percentage of the actual Operation and Maintenance Costs for the Building. In no event, however, shall the monthly rent paid by Tenant be less than the Base Rent set forth in Section 4 (a) above. (f) Tenant shall pay Landlord Tenant's Percentage of the increase in the Real Estate Taxes for each Comparison Year over the Real Estate Taxes for the Base Year, within 30 days after Landlord's billing therefor. (g) All sums due under this Article 5 shall be appropriately apportioned and prorated for any portion of the year during which this Lease shall be in force. In the event that this Lease shall expire at any time other than at the end of a calendar year, then within thirty (30) days after statements reflecting the actual Operation and Maintenance Costs for the year in which such expiration occurs are submitted by Landlord to Tenant, either Landlord or Tenant shall pay to the other party the adjustment sum due. The provisions of this paragraph (g) shall survive the expiration of this Lease. (h) If the Building is less than 95% occupied during any portion or all of the Base Year or any Comparison Year, then Landlord shall adjust the Operation and Maintenance Costs for any such Year to an amount which reflects what the Operation and Maintenance Costs would have been for such Year had the Building been 95% occupied throughout such Year. (i) Upon at least five (5) business days' notice to Landlord, Tenant shall be entitled to examine Landlord's books and records within one hundred twenty (120) days after Tenant's receipt of Landlord's statement under subparagraph (e) above. Unless Tenant takes written exception to any item in Landlord's statement within one hundred twenty (120) days after the - 5 - 53 furnishing of the statement, such statement shall be considered as final and accepted by Tenant. Any amount due Landlord as shown on any such statement shall be paid by Tenant within thirty (30) days after it is furnished to Tenant. If Tenant shall dispute in writing any specific item or items in Landlord's statement of Operation and Maintenance Costs, and such dispute is not resolved between Landlord and Tenant within one hundred twenty (120) days after the date the statement was rendered, either party may, during the thirty (30) days next following the expiration of the one hundred twenty (120) days, refer such disputed item or items to an independent certified public accountant mutually acceptable to Landlord and Tenant, for a determination which shall be final, conclusive and binding upon Landlord and Tenant. Tenant agrees to pay all costs involved in such determination unless it is determined that Landlord's original calculation of Operation and Maintenance Costs was in error by more than ten (10%) percent, in which event Landlord shall pay the entire amount of the costs involved in such determination. Pending the determination of any dispute with respect to the statement submitted by Landlord, Tenant shall pay when due the sums shown as due on such statement. If it shall be determined that any portion of such sums were not properly chargeable to Tenant, then Landlord shall credit the appropriate sum to Tenant. 6. LATE PAYMENT In the event that Tenant shall fail to pay Base Rent or any additional rent within ten (10) days after its due date, Tenant shall pay an automatic late charge to Landlord of $.10 for each dollar overdue. Such late charge shall be deemed additional rent for all purposes under this Lease. Notwithstanding the foregoing, Landlord shall give Tenant twice each Lease year (May 1 - April 30) a notice of late payment and Tenant shall have ten (10) days after receipt of such notice to make payment before the first and second late charges for such Lease year are imposed. 7. USE OF PREMISES Tenant shall use and occupy the Premises for purposes of offices, including medical (excluding any laboratory use) and doctors' offices, and conference rooms for training and educational purposes. Landlord represents that the foregoing uses are legal and that Landlord has obtained all necessary governmental permits and approvals therefor. Tenant shall not use or occupy the Premises for any other legal purpose or business, without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed provided that the other legal purpose or business is permitted by the Certificate of Occupancy for the Building. Tenant shall observe and comply with the rules and regulations set forth on Exhibit B attached hereto and made a part hereof (hereinafter "Rules and Regulations"). The Rules and Regulations shall uniformly apply - 6 - 54 to Tenant and all other tenants and their respective employees, agents, licensees, invitees, subtenants and contractors. 8. COMMON AREAS All parking areas, walkways, elevators, stairs, driveways, alleys, public corridors, fire escapes, and other areas, facilities and improvements which may be provided by Landlord from time to time for the general use, in common, of Tenant and other tenants and their employees, agents, invitees and licensees, shall at all times be subject to the exclusive control and management of Landlord. Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all such common areas, facilities and improvements. 9. ALTERATIONS AND TRADE FIXTURES, REMOVAL (a) Except as expressly set forth in Article 45 of the Rider, Tenant has examined the Premises and agrees to accept them in their present "as is" condition, and Tenant agrees that neither Landlord nor Agent has made any representation as to the present or future condition of the Premises. In the event that Tenant shall desire to perform any additional work in or about the Premises or make additional alterations or additions thereto prior to the commencement date, then within thirty (30) days after the date of execution of this Lease, Tenant shall deliver to Landlord detailed plans and specifications prepared by and at the expense of Tenant. Landlord shall review such plans and specifications and, within ten (10) days after receipt thereof from Tenant, return same to Tenant either marked approved, marked to show the corrections required (in which event such marked-up plans and specifications shall be deemed approved as marked-up), or marked disapproved with the reasons therefor. If Landlord disapproves Tenant's plans and specifications, Tenant shall have twenty (20) days from the date of such disapproval to submit revised plans and specifications subject to subsequent mark-ups or disapprovals and corrections in the above manner. Upon approval by Landlord of Tenant's plans and specifications, Tenant shall proceed with due diligence to commence the work to be performed by Tenant and shall complete same prior to the commencement date. (b) During the term of this Lease, Tenant shall not make any alterations or additions to the Premises which are structural in nature or which affect the Building systems, without the prior written consent of Landlord. All such work consented to by Landlord, to be done or performed in or about the Premises by Tenant, shall be performed (i) at Tenant's sole cost and expense, (ii) in accordance with the plans and specifications prepared by and at the expense of Tenant and approved by Landlord, and (iii) by contractors, subcontractors and materialmen approved by Landlord. Upon completion of any such work which requires the review of plans and specifications and continuous observance of - 7 - 55 construction, Tenant shall pay to Landlord's Building Manager an amount equal to five (5%) percent of the cost of such work, to reimburse Landlord's Building Manager for said review and observance and the coordination and final inspection of the work. During the course of performance of said work, Tenant will carry or cause to be carried Comprehensive General Liability insurance, with a limit of at least $2,000,000.00, naming Landlord and Landlord's Building managing agent as additional insureds and further providing that such insurance cannot be cancelled without at least thirty (30) days' prior written notice to Landlord and Landlord's agent. The above provisions of paragraph (b) shall not apply to the initial tenant improvement work to be performed by Landlord under Article 45 of the Rider. (c) Any consent by Landlord permitting Tenant to do any or cause any work to be done in or about the Premises shall be and hereby is conditioned upon Tenant's work being performed by workmen and mechanics working in harmony and not interfering with labor employed by Landlord, Landlord's mechanics or their contractors or by any other tenants or their contractors. To that end, said work shall be done by union labor having the same union affiliations as other workmen performing work for other tenants or Landlord and their contractors, if required by Landlord. If at any time any of the workmen or mechanics performing any of Tenant's work shall not be of the same union affiliation or shall be unable to work in harmony or shall interfere with any labor employed by Landlord, other tenants or their respective mechanics and contractors, then the permission granted by Landlord to Tenant permitting Tenant to do or cause any work to be done in or about the Premises, may be withdrawn by Landlord upon forty-eight (48) hours' written notice to Tenant. (d) All alterations, interior decorations, improvements or additions made to the Premises by Tenant, except for movable furniture, equipment and trade fixtures, shall immediately become Landlord's property. Tenant shall have the right but not the obligation to remove all movable furniture, equipment and trade fixtures installed by Tenant in the Premises, except lighting fixtures and air-conditioning equipment, provided that Tenant repairs any damage caused to the Premises by said removal. All of said movable furniture, equipment and trade fixtures remaining on the Premises after said expiration date, or any sooner termination date due to any default of Tenant, shall be deemed to be abandoned property and shall automatically become the property of Landlord. 10. MECHANICS' LIENS Prior to Tenant performing any construction or other work in or about the Premises for which a lien could be filed against the Premises or the Building, Tenant shall have its contractor execute a Waiver of Mechanics' Lien, - 8 - 56 satisfactory to Landlord, and provide Landlord with the original copy thereof. Notwithstanding the foregoing, if any mechanics' or other lien shall be filed against the Premises or the Building purporting to be for labor or materials furnished or to be furnished at the request of Tenant, then at its expense, Tenant shall cause such lien to be removed of record by payment, bond or otherwise, within thirty (30) days after Tenant receives notice of the filing thereof. If Tenant shall fail to cause such lien to be removed of record within such 30-day period, Landlord may cause such lien to be removed of record by payment, bond or otherwise, without investigation as to the validity thereof or as to any offsets or defenses thereto, in which event Tenant shall reimburse Landlord in the amount paid by Landlord, including expenses, within ten (10) days after Landlord's billing therefor. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, costs, damages, liabilities and expenses (including attorney fees) which may be brought or imposed against or incurred by Landlord by reason of any such lien or removal of record. 11. CONDITION OF PREMISES Tenant acknowledges and agrees that, except for Landlord's work set forth in Article 45 of the Rider, there have been no representations or warranties made by or on behalf of Landlord with respect to the Premises or the Building or with respect to the suitability of either for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were in satisfactory condition, order and repair at such time. 12. BUILDING SERVICES (a) Landlord shall provide, within its Building standards for each item, the following services and facilities: (1) Heating, ventilating and air conditioning, Monday to Friday from 8:00 A.M. to 6:00 P.M. and on Saturdays from 8:00 A.M. to 1:00 P.M. (hereinafter "Business Hours"), except on the Building holidays (hereinafter "Holidays"). Tenant agrees to cooperate fully with Landlord and to abide by all the rules and regulations which Landlord may reasonably prescribe for the proper functioning and protection of the heating, ventilating and air conditioning systems. (2) Electricity for normal office use, including normal office equipment, in the Premises, during Business Hours (3-1/2 watts per rentable square foot is deemed normal office use). Tenant agrees to pay for the installation of a separate electric meter for all electrical usage other than normal office use. Tenant agrees to pay Landlord for all - 9 - 57 electricity registered on said meter at the current general service rate. (3) Cleaning and maintenance of common areas in the Building, including bathroom facilities. (4) Continuous passenger elevator service during Business Hours, and service via at least one car at all other times; freight elevator service from 8:00 A.M. to 4:00 P.M., Monday through Friday, except Holidays. (5) Janitorial services, including cleaning of Premises, in accordance with Landlord's Building standard schedule, annexed hereto as Exhibit C and made a part hereof. Landlord shall not be required to furnish cleaning services to any kitchens, lunchrooms or non-Building standard lavatories in the Premises. (6) Water for lavatory and drinking purposes. Tenant shall reimburse Landlord for all additional cleaning expenses incurred by Landlord, including but not limited to, garbage and trash removal expense over and above the normal cleaning provided by Landlord, due to the presence of a lunchroom or kitchen or food and beverage dispensing machines within the Premises. No food or beverage dispensing machines shall be installed by Tenant in the Premises without the prior written consent of Landlord. (b) Landlord does not warrant that the services provided for in paragraph 12 (a) above shall be free from any slowdown, interruption or stoppage due to the order of any governmental bodies and regulatory agencies, or caused by the maintenance, repair, replacement or improvement of any of the equipment involved in the furnishing of any such services, or caused by changes of services, alterations, strikes, lockouts, labor controversies, fuel shortages, accidents, acts of God or the elements or any other cause beyond the reasonable control of Landlord. No such slowdown, interruption or stoppage of any such services shall ever be construed as an eviction, actual or constructive, of Tenant, nor shall same cause any abatement of annual Base Rent or additional rent or in any manner or for any purpose relieve Tenant from any of its obligations under this Lease. Landlord agrees to use due reasonable diligence to resume the service upon any such slowdown, interruption or stoppage. Notwithstanding the foregoing, in the event Tenant is deprived of the use and occupancy (and actually vacates) a portion or all of the Premises as a result of such stoppage or interruption for a period of at least two (2) business days, then from and after the next day until the service is restored, Tenant shall be entitled to an abatement in Base Rent, pro rata. - 10 - 58 In the event Tenant is deprived of the use and occupancy (and actually vacates) all of the Premises as a result of such stoppage or interruption for a period of ninety (90) days, then at anytime thereafter, Tenant may elect to terminate this Lease upon notice to Landlord. 13. ASSIGNMENT AND SUBLETTING (a) Except as expressly permitted pursuant to this Article, Tenant shall not assign or hypothecate this Lease or any interest therein or sublet the Premises or any part thereof, without the prior written consent of Landlord which shall not be unreasonably withheld or delayed. Any of the foregoing acts without such consent shall be voidable and shall, at the option of Landlord, be an event of default under this Lease. Neither this Lease nor any interest therein shall be assignable as to the interest of Tenant by operation of law, without the written consent of Landlord. Notwithstanding the foregoing, a corporate Tenant may, without the consent of Landlord but upon notice to Landlord, assign this Lease to its parent, affiliate or subsidiary, provided the assignee assumes, in full, the obligations of Tenant under this Lease, and provided further that such assignment shall not relieve Tenant of any of its obligations under this Lease. (b) If at any time or from time to time during the term of this Lease, Tenant desires to assign this Lease or sublet all or a portion of the Premises, Tenant shall notify Landlord of such intent. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after receipt of Tenant's notice, of reacquiring the Premises or portion thereof proposed to be sublet or assigned and terminating the Lease with respect thereto. If Landlord does not exercise such option, Tenant may assign this Lease or sublet such space to any third party, subject to the following terms and conditions: (1) Tenant shall obtain the consent of Landlord, which consent shall not be unreasonably withheld; Landlord shall base its decision upon exclusive uses given to other Building tenants, the financial condition of the proposed assignee and the character of the proposed assignee or subtenant and the proposed use of the Premises. (2) Tenant may not sublease the Premises or any portion thereof or assign this Lease to an existing tenant in the Building. (3) No sublease or assignment shall be valid and no subtenant or assignee shall take possession of the premises subleased or assigned until an executed counterpart of such - 11 - 59 sublease or assignment of this Lease has been delivered to Landlord. (4) No subtenant shall have a further right to sublet. (5) No assignee shall have a further right to assign the Lease, except in accordance with the provisions of this Article 13. (6) In no event shall Tenant be entitled to have more than two (2) subtenants simultaneously in the Premises. The occupancy of portions of the Premises pursuant to the provisions of paragraph (f) below shall not be considered a sublease under this subparagraph (b) (6). (c) Tenant shall pay Landlord, as additional rent, one half (1/2) of any sums or other economic consideration received by Tenant as a result of any subletting or assignment (except payments received which are attributable to the amortization of the cost of leasehold improvements made to the sublet or assigned portion of the Premises by Tenant for the subtenant or assignee, and other reasonable expenses incident to the subletting or assignment, including standard leasing commissions), whether denominated rentals under the sublease or otherwise, which exceed, in the aggregate, the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to that portion of the Premises subject to such sublease or assignment). If such subleasing or assignment has been made without the consent of Landlord as provided herein, Landlord shall be entitled to all economic consideration received by Tenant in accordance with the provisions of this subparagraph 13 (c), but the receipt of such monies shall not be deemed to be a waiver of the provisions of this Article 13 with respect to assignment and subletting, or the acceptance of such assignee or subtenant as Tenant hereunder. (d) Regardless of Landlord's consent, no subletting or assignment shall release Tenant of Tenant's obligations or alter the primary liability of Tenant to pay the Base Rent and additional rent and to perform all other obligations to be performed by Tenant under this Lease. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms of this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. (e) In the event that the Premises or any part thereof have been sublet by Tenant and Tenant is in default under this Lease - 12 - 60 pursuant to the provisions of Article 24 hereof, then Landlord may collect rent from the subtenant and apply the amount collected to the Base Rent and additional rent herein reserved but no such collection shall be deemed a waiver of the provisions of this Article 13 with respect to subletting or the acceptance of such subtenant as Tenant hereunder or a release of Tenant under the Lease. (f) Landlord agrees that from time-to-time during the term of this Lease, Tenant may allow doctors affiliated with Tenant to use and occupy offices in the Premises and such occupancy shall not require Landlord's consent or otherwise be subject to the provisions of this Article 13. 14. ACCESS TO PREMISES Landlord, its employees and agents shall have the right to enter the Premises at all reasonable times during Business Hours and at anytime in case of an emergency for the purpose of examining or inspecting the Premises, showing the Premises to prospective purchasers, mortgagees and (during the last year of the Lease term only) prospective tenants of the Building, and making such alterations, repairs, Improvements or additions to the Premises or to the Building as Landlord may determine to be necessary or desirable. If representatives of Tenant shall not be present to open and permit entry into the Premises at anytime when such entry by Landlord is necessary or permitted hereunder, Landlord may enter by means of a master key (or forcibly in the event of an emergency) without liability to Tenant and without such entry constituting an eviction of Tenant or termination of this Lease. Such entry into the Premises by Landlord shall not unreasonably interfere with Tenant's use of the Premises. 15. REPAIRS (a) At its sole cost and expense, Landlord shall make all repairs necessary to maintain the Building roof, plumbing, heating, ventilating, air conditioning and electrical systems (except light fixtures), and all other Building systems, windows, floors (except carpeting), Building foundation and structural walls and all other structural portions of the Premises provided, however, that Landlord shall not be obligated to make any of such repairs until Landlord has received written notice from Tenant that such repair is needed. Landlord shall be responsible for the maintenance and repair of all common areas and facilities in the Building provided that Tenant shall be responsible for the repair of any damage to the common areas and facilities caused by the negligence of Tenant and its agents, servants and employees. In no event shall Landlord be obligated under this paragraph to repair any damage caused by any act, omission, accident or negligence of Tenant or its employees, agents, invites, licensees, subtenants, or contractors. - 13 - 61 (b) Except for Landlord's repairs under paragraph (a) above, at its sole cost and expense, Tenant shall make all other repairs necessary to maintain and keep the Premises and the fixtures therein in neat and orderly condition. If Tenant refuses or neglects to make such repairs, or fails to diligently prosecute the same to completion, after notice from Landlord of the need therefor, Landlord may make such repairs at the expense of Tenant and such expense, along with a ten (10%) percent service charge, shall be collectible as additional rent. At Tenant's expense, Landlord shall make all repairs to the light fixtures in the Premises, including replacement bulbs and ballasts. (c) Landlord shall not be liable for any interference with Tenant's business arising from the making of any repairs in the Premises under paragraph (a) above. Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business. There shall be no abatement of Base Rent because of such repairs. 16. INDEMNIFICATION AND LIABILITY INSURANCE (a) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all costs, expenses (including reasonable counsel fees), liabilities, losses, damages, suits, actions, fines, penalties, claims or demands of any kind and asserted by or on behalf of any person or governmental authority, arising out of or in any way connected with, and Landlord shall not be liable to Tenant on account of, (i) any failure by Tenant to perform any of the agreements, terms, covenants or conditions of this Lease required to be performed by Tenant, (ii) any failure by Tenant to comply with any statutes, ordinances, regulations or orders of any governmental authority, or (iii) any accident, death or personal injury, or damage to or loss or theft of property, which shall occur in or about the Premises occasioned wholly or in part by reason of any act or omission of Tenant, or any of its agents, contractors, licensees, invites, employees or subtenants. (b) During the term of this Lease and any renewal thereof, Tenant shall obtain and promptly pay all premiums for Comprehensive General Liability Insurance with broad form extended coverage, including Contractual Liability, covering claims for bodily injury (including death resulting therefrom) and loss or damage to property occurring upon, in or about the Premises, with a minimum combined single limit of at least $1,000,000.00. All such policies and renewals thereof shall identify Landlord and Landlord's Building managing agent as additional insureds. All policies of insurance shall provide (i) that no material change or cancellation of said policies shall be made without at least thirty (30) days' prior written notice to - 14 - 62 Landlord and Tenant, and (ii) that any loss shall be payable notwithstanding any act or negligence of Tenant or Landlord which might otherwise result in the forfeiture of said insurance. On or before the commencement date of the term of this Lease, and thereafter not less than fifteen (15) days prior to the expiration dates of said policy or policies, Tenant shall furnish Landlord with renewal certificates of the policies of insurance required under this paragraph. Tenant's insurance policies shall be issued by insurance companies authorized to do business in the Commonwealth of Pennsylvania with a financial rating of at least an A- as rated in the most recent edition of Best's Insurance Reports and have been in business for the past five years. The aforesaid insurance limits may be reasonably increased by Landlord from time to time during the term of this Lease, but no more frequently than once during each 5-year period of the Lease term, including any renewal thereof. (c) Tenant and Landlord, respectively, hereby release each other from any and all liability or responsibility to the other for all claims of anyone claiming by, through or under it or them by way of subrogation or otherwise for any loss or damage to property owned by Landlord and Tenant respectively in the Premises and covered by the Pennsylvania Standard Form of Fire Insurance Policy with extended coverage endorsement, whether or not such insurance is maintained by the other party. 17. WAIVER OF CLAIMS Landlord and Landlord's agents, servants, and employees shall not be liable for, and Tenant hereby releases and relieves Landlord, its agents, servants, and employees from, all liability in connection with any and all damage to or loss of property, or loss or interruption of business occurring to Tenant, its agents, servants, employees, invitees, licensees, and subtenants, in or about or arising out of the Premises, from, without limitation, (a) any fire or other casualty, accident, occurrence or condition in or upon the Premises or the Building; (b) any failure of the plumbing, sprinkler, electrical, heating, ventilating and air conditioning systems and equipment, or any other systems and equipment in the Premises and the Building, and the elevators, stairways, railings or walkways of the Building; (c) any steam, gas, oil, water, rain or snow that may leak into or flow from any part of the Premises or the Building from the drains, pipes or plumbing, sewer or other installation of same; (d) the falling of any fixture or any wall or ceiling materials; (e) broken glass; (f) any acts or omissions of the other tenants or occupants of the Building; (g) any acts or omissions (excluding gross negligence) of Landlord, its agents, servants and employees; and (h) theft, Act of God, public enemy, injunction, riot, strike, insurrection, war, court order, or any order of any governmental authorities having jurisdiction over the Premises. - 15 - 63 18. QUIET ENJOYMENT Landlord covenants and agrees with Tenant that upon Tenant paying the Base Rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly enjoy the Premises hereby demised, subject, nevertheless, to the terms and conditions of this Lease, including but not limited to, Article 34 hereof and to the ground leases, underlying leases and mortgages hereinafter mentioned. 19. NEGATIVE COVENANTS OF TENANT Tenant agrees that it will not do or suffer to be done, any act, matter or thing objectionable to Landlord's fire insurance companies whereby the fire insurance or any other insurance now in force or hereafter placed on the Premises or any part thereof or on the Building by Landlord shall become void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date when Tenant took possession of the Premises. In case of a breach of this covenant, in addition to all other remedies of Landlord hereunder, Tenant agrees to pay to Landlord, as additional rent, any and all increases in premiums on insurance carried by Landlord on the Premises or any part thereof or on the Building caused in any way by the occupancy of Tenant. 20. FIRE OR OTHER CASUALTY (a) If the Premises are damaged by fire or other casualty, the damages shall be repaired by and at the expense of Landlord and restored to the condition which existed immediately prior to such damage and the Base Rent and additional rent shall be apportioned from the date of such fire or other casualty until substantial completion of the repairs, according to the part of the Premises which is usable by Tenant. Landlord agrees to repair such damage within a reasonable period of time after receipt from Tenant of written notice of such damage, subject to any delays caused by Acts of God, labor strikes or other events beyond Landlord's control. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof. Tenant acknowledges notice that (i) Landlord shall not obtain insurance of any kind on Tenant's furniture or furnishings, equipment, fixtures, alterations, improvements and additions, (ii) it is Tenant's obligation to obtain such insurance at Tenant's sole cost and expense, and (iii) Landlord shall not be obligated to repair any damage thereto or replace the same. (b) If, in the reasonable opinion of Landlord, the Premises are (i) rendered substantially untenantable by reason of such fire or other casualty, or (ii) twenty (20%) per cent or more of the Premises is damaged by said fire or other casualty and less than six (6) months would remain in the current Lease term upon - 16 - 64 substantial completion of the repairs and restoration, Landlord shall have the right, upon written notice to Tenant within thirty (30) days after said occurrence, to elect not to repair and restore the Premises, and in such event, this Lease and the tenancy hereby created shall cease as of the date of said occurrence, the Base Rent and additional rent to be adjusted and apportioned as of said date. (c) If, in the reasonable opinion of Landlord, the Building shall be substantially damaged by fire or other casualty, regardless of whether or not the Premises were damaged by such occurrence, Landlord shall have the right, upon written notice to Tenant within thirty (30) days after said occurrence, to terminate this Lease, and in such event, this Lease and the tenancy hereby created shall cease and the Base Rent and additional rent shall be adjusted and apportioned as of the date of said termination unless terminated as of the date of said occurrence in accordance with paragraph 20 (b) above. 21. SUBORDINATION This Lease is and shall be subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which the Premises are a part, and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or lessee or by any mortgagee, but in confirmation of such subordination, Tenant shall execute, within fifteen (15) days after request, any certificate that Landlord may reasonably require acknowledging such subordination. Landlord represents that as of the date of this Lease, there are no mortgages or ground or underlying leases affecting the land and/or Building. As a condition of Tenant's agreement to subordinate this Lease to any ground or underlying lease or any mortgage affecting the land and/or Building, Landlord agrees to obtain a standard Non-Disturbance Agreement from any future ground or underlying lessor or any future mortgagee of the land and/or Building, in a form reasonably satisfactory to Tenant. 22. CONDEMNATION (a) If the whole of the Premises shall be condemned or taken permanently for any public or quasi-public use or purpose, under any statute or by right of eminent domain, or by private purchase in lieu thereof, then in that event, at the option of either Landlord or Tenant exercised by notice to the other within thirty (30) days after the date when possession is taken, the term of this Lease shall cease and terminate as of the date when - 17 - 65 possession is taken pursuant to such proceeding or purchase. The Base Rent and additional rent shall be adjusted and apportioned as of the time of such termination and any Base Rent and additional rent paid for a period thereafter shall be refunded. In the event a material portion only of the Premises or a material portion of the Building, shall be so taken (even though the Premises may not have been affected by the taking of some other portion of the Building), Landlord may elect to terminate this Lease as of the date when possession is taken pursuant to such proceeding or purchase or Landlord may elect to repair and restore the portion not taken at its own expense, and thereafter the Base Rent and additional rent shall be reduced proportionately to reflect the portion of the Premises not taken. (b) In the event of any total or partial taking of the Premises or the Building, Landlord shall be entitled to receive the entire award in any such proceeding and Tenant hereby assigns any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof and Tenant hereby waives all rights against Landlord and the condemning authority, except that Tenant shall have the right to claim and prove in any such proceeding and to receive any award which may be made to Tenant, if any, specifically for damages for loss of good will, movable trade fixtures, equipment, moving expenses, and damages for loss of leasehold. 23. ESTOPPEL CERTIFICATE At any time and from time to time and within ten (10) days after written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement in writing duly executed by Tenant certifying that (i) this Lease is in full force and effect, without modification or amendment (or, if there have been any modifications or amendments, that this Lease is in full force and effect as modified and amended and setting forth the dates of the modifications and amendments), (ii) the dates to which annual Base Rent and additional rent have been paid, and (iii) to the knowledge of Tenant no default exists under this Lease or specifying each such default; it being the intention and agreement of Landlord and Tenant that any such statement by Tenant may be relied upon by a prospective purchaser or a prospective mortgagee of the Building, or by others, in any matter affecting the Premises. 24. DEFAULT The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (a) The failure of Tenant to take possession of the Premises within thirty (30) days after the commencement date of this Lease. - 18 - 66 (b) The vacation or abandonment of the Premises by Tenant (except pursuant to a sublease or assignment approved by Landlord) coupled with nonpayment of Base Rent and/or additional rent. (c) A failure by Tenant to pay, when due, any installment of Base Rent, additional rent or any other sum required to be paid by Tenant under this Lease, where such failure continues for more than ten (10) days after Tenant has received written notice of the delinquent payment from Landlord. (d) A failure by Tenant to observe and perform any other provision or covenant of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) days after Tenant receives written notice thereof from Landlord provided, however, that if the nature of the default is such that the same cannot reasonably be cured within such 30-day period, Tenant shall not be deemed to be in default if Tenant shall commence the cure of the default within such 30-day period and thereafter diligently prosecutes the same to completion. (e) The filing of a petition by or against Tenant for adjudication as a bankrupt or insolvent or for its reorganization or for the appointment of a receiver or trustee of Tenant's property pursuant to any local, state or federal bankruptcy or insolvency law; or an assignment by Tenant for the benefit of creditors; or the taking possession of the property of Tenant by any local, state or federal governmental officer or agency or court-appointed official for the dissolution or liquidation of Tenant or for the operating, either temporary or permanent, of Tenant's business, provided, however, that if any such action is commenced against Tenant the same shall not constitute a default if Tenant causes the same to be dismissed within sixty (60) days after the filing thereof. 25. REMEDIES Upon the occurrence of any event of default set forth in Article 24 above: (a) Landlord may perform for the account of Tenant the cure of any such default of Tenant and immediately recover as additional rent any expenditures made and the amount of any obligations incurred in connection therewith, plus fifteen (15%) percent per annum interest from the date of any such expenditures. (b) Landlord may accelerate all Base Rent and additional rent due for the balance of the term of this Lease and declare the same, along with all sums past due, to be immediately due and payable. In determining the amount of any future additional rent payments due Landlord as a result of increases in Operation and Maintenance Costs, Landlord may make such determination based upon the amount of Operation and Maintenance Costs additional - 19 - 67 rent paid by Tenant for the entire Comparison Year immediately prior to such default. (c) Landlord may immediately proceed to collect or bring action for the whole rent or such part thereof as aforesaid, as well as for liquidated damages provided for hereinafter, as being rent in arrears, or may enter judgment therefor in an amicable action as herein elsewhere provided for in case of rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such rent, or Landlord may institute any other proceedings, whether similar to the foregoing or not, to enforce payment thereof. (d) Landlord may re-enter and repossess the Premises breaking open locked doors, if necessary, and may use as much force as necessary to effect such entrance without being liable to any action or prosecution for such entry or the manner thereof, and Landlord shall not be liable for the loss of any property in the Premises. Landlord may remove all of Tenant's goods and property from the Premises. Landlord shall have no liability for any damage to such goods and property and Landlord shall not be responsible for the storage or protection of the same upon removal. (e) Landlord may re-enter and repossess the Premises or any part thereof and attempt to relet all or any part of the Premises for and upon such terms and to such persons, firms or corporations and for such period or periods as Landlord, in its sole discretion, shall determine, including a term beyond the termination of this Lease. Landlord shall consider any tenant offered by Tenant in connection with such reletting. For the purpose of such reletting, Landlord may decorate or make reasonable repairs, changes, alterations or additions in or to the Premises to the extent deemed by Landlord desirable or convenient; and the cost of such repairs, changes, alterations or additions shall be charged to and be payable by Tenant as additional rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord. Any sums collected by Landlord from any new tenant obtained on account of Tenant shall be credited against the balance of the Base Rent and additional rent due hereunder as aforesaid. Tenant shall pay to Landlord monthly, on the days when the Base Rent and additional rent would have been payable under this Lease, the amount due hereunder less the net amount obtained by Landlord from such new tenant. (f) At its option, Landlord may serve notice upon Tenant that this Lease and the then unexpired term hereof shall cease and expire and become absolutely void on the date specified in such notice, to be not less than ten (10) days after the date of such notice, without any right on the part of Tenant to save the forfeiture by payment of any sum due or by the performance of any term, provision, covenant, agreement or condition broken; and, - 20 - 68 thereupon and at the expiration of the time limit in such notice, this Lease and the term hereof granted, as well as the entire right, title and interest of Tenant hereunder, shall wholly cease and expire and become void in the same manner and with the same force and effect (except as to Tenant's liability) as if the date fixed in such notice were the expiration date of the term of this Lease. Thereupon, Tenant shall immediately quit and surrender the Premises to Landlord and Landlord may enter into and repossess the Premises by summary proceedings, detainer, ejectment or otherwise and remove all occupants thereof and, at Landlord's option, any property therein, without being liable to indictment, prosecution or damages therefor. (g) In the event of termination of this Lease pursuant to the provisions of paragraph 25 (f) above, Tenant shall pay to Landlord all Base Rent, additional rent and other charges payable hereunder due and unpaid to the date of termination, together with liquidated damages in an amount equal to twenty-five percent (25%) of the balance of the Base Rent, additional rent and other charges required to be paid under this Lease from the date of said termination to the expiration date of the term of this Lease, as if the same had not been terminated, the said Base Rent and additional rent for the balance of the term of this Lease and other charges to be computed in the same manner as provided in paragraph 25 (b) above. In the event any judgment has been entered against Tenant for any amount in excess of the total amount required to be paid by Tenant to Landlord hereunder, then the damages assessed under said judgment shall be reassessed and a credit granted to the extent of such excess. Landlord and Tenant acknowledge that the damages to which Landlord is entitled in the event of a breach of this Lease and termination by Landlord are not easily computed and are subject to many variable factors. Therefore, Landlord and Tenant have agreed to the liquidated damages as herein provided in order to avoid extended litigation in the event of default by Tenant and termination of this Lease. In the event Landlord exercises the remedy under this paragraph and Tenant pays Landlord the entire amount of the liquidated damages, Landlord shall be deemed to have made an election of remedies and except for regaining possession the Premises, Landlord shall not be entitled to exercise any other remedy under this Article 25. (h) In the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants or terms of this Lease, Landlord shall have the right to seek an injunction to restrain the same and the right to invoke any remedy allowed by law or in equity, whether or not other remedies, indemnity or reimbursements are herein provided. The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised - 21 - 69 by Landlord, shall be deemed to be in exclusion of any of the others. (i) In the event of any default, Tenant hereby empowers any prothonotary or attorney of any court of record to appear for Tenant in any and all actions which may be brought for Base Rent, additional rent, or other charges or expenses agreed to be paid by Tenant under this Lease and to sign for Tenant an agreement for entering in any competent court an amicable action or actions for the recovery of Base Rent, additional rent, or other charges or expenses and, in said suits or in said amicable action or actions, to confess judgment against Tenant for all or any part of such Base Rent, additional rent, or other charges or expenses, including, at Landlord's option, the Base Rent for the entire unexpired balance of the term of this Lease, computed as aforesaid, and any other charges, payments, costs and expenses reserved as rent or agreed to be paid by Tenant, as well as liquidated damages, and for interest and costs together with an attorney's commission of five (5%) percent thereof. Said authority shall not be exhausted by any one exercise thereof, but judgment may be confessed as aforesaid from time to time and as often as any of said Base Rent, additional rent or other charges reserved as rent shall fall due or be in arrears, and such powers may be exercised as well after the expiration of the original term or during any extension or renewal of this Lease. It shall not be necessary for Landlord to file the original of this Lease, but Landlord may file a true copy thereof at the time of the entry of such judgment or judgments. Landlord agrees not to use the remedy under this paragraph (i) so long as Osteopathic Medical Center of Philadelphia is Tenant under this Lease. (j) When this Lease shall be determined by condition broken, either during the original term of this Lease or any renewal thereof, and also when and as soon as the term hereby created or any renewal thereof shall have expired, it shall be lawful for any attorney as attorney for the Tenant to file an agreement for entering in any competent court an amicable action and judgment in ejection against Tenant and all persons or entities claiming under Tenant for the recovery by Landlord of possession of the Premises, for which this Lease shall be sufficient warrant; whereupon, if Landlord so desires, a writ of habere facias possessionem may issue forthwith, without any prior writ or proceeding whatsoever, and provided that, if for any reason after such action shall have been commenced the same shall be determined and the possession of the Premises hereby demised shall remain in or be restored to Tenant, Landlord shall have the right, upon any subsequent default or defaults or upon the termination or expiration of this Lease, to bring one or more amicable action or actions to recover possession of the Premises. In any amicable action of ejectment, Landlord shall first cause - 22 - 70 to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, and, if a true copy of this Lease (and of the truth of the copy such affidavit shall be sufficient evidence) be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. 26. REQUIREMENT OF STRICT PERFORMANCE The failure or delay on the part of Landlord to enforce or exercise at any time any of the provisions, rights or remedies in the Lease shall in no way be construed to be a waiver thereof, or in any way to affect the validity of this Lease or any part thereof, or the right of Landlord to thereafter enforce each and every such provision, right or remedy. No waiver of any breach of this Lease shall be held to be a waiver of any other or subsequent breach. The receipt by Landlord of Base Rent or additional rent at a time when the Base Rent or additional rent is in default under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of a lesser amount than the Base Rent or additional rent due shall not be construed to be other than a payment on account of the Base Rent or additional rent then due, and any statement on Tenant's check or any letter accompanying Tenant's check to the contrary shall not be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the Base Rent or additional rent due or to pursue any other remedies provided in this Lease. No act or thing done by Landlord or Landlord's agents or employees during the term of this Lease shall be deemed an acceptance of a surrender of the Premises and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. 27. RELOCATION OF TENANT (Intentionally Omitted) 28. SURRENDER OF PREMISES; HOLDING OVER (a) The Lease shall terminate and Tenant shall deliver up and surrender possession of the Premises to Landlord on the last day of the term hereof, and Tenant hereby waives the right to any notice of termination or notice to quit. Upon the expiration or sooner termination of this Lease, Tenant covenants to deliver up and surrender possession of the Premises in the same condition in which Tenant has agreed to maintain and keep the same during the term of this Lease in accordance with the provisions of this Lease, normal wear and tear excepted. (b) Upon the failure of Tenant to surrender possession of the Premises to Landlord upon the expiration or sooner termination of this Lease, Tenant shall pay to Landlord, as liquidated damages, an amount equal to one hundred fifty (150%) percent of the then current Base Rent and additional rent - 23 - 71 required to be paid by Tenant under this Lease, applied to any period in which Tenant shall remain in possession after the expiration or sooner termination of this Lease. Acceptance by Landlord of Base Rent or additional rent after such expiration or earlier termination shall not constitute a consent to a holdover hereunder or result in a renewal. The foregoing provisions of this paragraph are in addition to and do not affect Landlord's right of reentry or any other rights of Landlord hereunder or otherwise provided by law. 29. DELAY IN POSSESSION In the event that the Premises are not ready for Tenant's occupancy at the commencement date of this Lease, because Landlord has not substantially completed the tenant improvement work described in Article 45 of the Rider (unless such tenant improvement work is being done by Tenant or Tenant's contractor, in which case there shall be no suspension or proration of Base Rent or additional rent), or because of the failure or refusal of the present occupant of the Premises to vacate and surrender up the same, or because of any restrictions, limitations or delays caused by Government regulations or Governmental agencies, this Lease and the term hereof shall not be affected thereby, nor shall Tenant be entitled to make any claim for or receive any damages whatsoever from Landlord, but the entire term of this Lease shall not commence and the Base Rent, additional rent and other sums herein provided to be paid by Tenant shall not become due until the date the Premises are substantially completed by Landlord and ready for Tenant's occupancy or the date possession of the Premises is delivered to Tenant, as the case may be. In clarification of the foregoing, the expiration date of the Lease term, the applicable dates for renewal (Article 47) and the two-year period applicable to the rights of first offer (Article 48) shall be extended by the period of delay of the commencement date. In the event Tenant accepts possession of the Premises (or any part thereof) prior to July 1, 1992 for the regular conduct of its business, such occupancy shall be under and subject to all the terms, covenants and conditions contained in the Lease, except that Tenant shall not be required to pay any Base Rent or additional rent during said period prior to July 1, 1992 and the term shall be extended by the number of days from the commencement date of such occupancy to June 30, 1992. 30. COMPLIANCE WITH LAWS AND ORDINANCES At its sole cost and expense, Tenant shall promptly fulfill and comply with all laws, ordinances, regulations and requirements of the City, County, State and Federal Governments and any and all departments thereof having jurisdiction over the Building, and of the National Board of Fire Underwriters or any other similar body now or hereafter constituted, but only to the extent that such laws, ordinances, regulations and requirements govern the particular manner in which Tenant uses the Premises. - 24 - 72 31. NOTICES All notices or demands under this Lease shall be in writing and shall be given or served by either Landlord or Tenant to or upon the other, either personally or by Registered or Certified Mail, Return Receipt Requested, postage prepaid, and addressed as follows: TO LANDLORD: The Prudential Insurance Company of America Newark Realty Group Office 3 Gateway Center - 13th Floor Newark, New Jersey 07102 Attention: General Manager - Pennsylvania Properties WITH A COPY TO: Premisys Real Estate Services, Inc. One Bala Plaza Bala Cynwyd, Pennsylvania 19004 TO TENANT: Osteopathic Medical Center of Philadelphia One Bala Plaza Bala Cynwyd, Pennsylvania 19004 Att: Mr. Lewis H. Abel, CPA, VP & CFO All notices and demands shall be deemed given or served upon the date of receipt thereof by Landlord or Tenant, as the case may be. Either Landlord or Tenant may change its address to which notices and demands shall be delivered or mailed by giving written notice of such change to the other as herein provided. 32. WARRANTY OF TENANT Tenant warrants to Landlord that Tenant dealt and negotiated solely and only with Jackson-Cross Company and Landlord for this Lease and with no other broker, firm, company or person. For good and valuable consideration, Tenant hereby agrees to indemnify, defend and hold Landlord harmless from and against any and all claims, suits, proceedings, damages, obligations, liabilities, counsel fees, costs, losses, expenses, orders and judgments imposed upon, incurred by or asserted against Landlord by reason of the falsity or error of Tenant's warranty. 33. FORCE MAJEURE Landlord shall be excused for the period of any delay in the performance of any of its obligations under this Lease, when prevented from so doing by cause or causes beyond Landlord's control, which shall include, without limitation, all labor disputes, inability to obtain any materials or services, civil commotion, or acts of God. 34. LANDLORD'S OBLIGATIONS Landlord's obligations hereunder shall be binding upon Landlord only for the period of - 25 - 73 time that Landlord is in ownership of the Building, and upon termination of that ownership, except as to any obligations which have then matured, including Landlord's obligation for the performance of the tenant improvement work in the Premises under Article 45 of the Rider, Tenant shall look solely to Landlord's successor in interest in the Building for the satisfaction of each and every obligation of Landlord hereunder, provided that such successor has assumed, in writing, the obligations of Landlord under this Lease. If any security deposit has been made by Tenant, Landlord shall transfer such security deposit to the purchaser and thereupon Landlord shall be discharged from any further liability with respect thereto. 35. LANDLORD'S LIABILITY Landlord shall have no personal liability under any of the terms, conditions or covenants of this Lease and Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of any claim, remedy or cause of action accruing to Tenant as a result of the breach of any provision of this Lease by Landlord. Landlord represents that as of this Lease, there are no mortgages affecting the land and/or Building. 36. SUCCESSORS The respective rights and obligations of Landlord and Tenant under this Lease shall bind and shall inure to the benefit of Landlord and Tenant and their legal representatives, heirs, successors and assigns, provided, however, that no rights shall inure to the benefit of any successor of Tenant unless Landlord's written consent to the transfer to such successor has first been obtained as provided in Article 13 above. 37. GOVERNING LAW This Lease shall be construed, governed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 38. SEVERABILITY If any provisions of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions of this Lease shall in no way be affected or impaired and such remaining provisions shall continue in full force and effect. 39. CAPTIONS Any headings preceding the text of the several Articles of this Lease are inserted solely for convenience of reference and shall not constitute a part of this Lease or affect its meaning, construction or effect. 40. GENDER As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall mean to include any other gender - 26 - 74 41. EXECUTION This Lease shall become effective when it has been signed by a duly authorized officer or representative of Landlord and Tenant and delivered to the other party. 42. EXHIBITS AND RIDER Attached to this Lease and made part hereof are Exhibits A, A-l, A-2, B and C and Rider Articles 45 to 50 inclusive. 43. ENTIRE AGREEMENT This Lease, including the Exhibits and the Rider, contains all the agreements, conditions, understandings, representations and warranties made between Landlord and Tenant with respect to the subject matter hereof, and may not be modified orally or in any manner other than by an agreement in writing signed by both Landlord and Tenant or their respective successors in interest. 44. CORPORATE AUTHORITY If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the duly adopted resolution of the Board of Directors of said corporation or in accordance with the By-Laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease the day and year first above written. (LANDLORD) ATTEST: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Michael J. Hughes By: /s/ Lawrence V. Fagnoni ------------------------- --------------------------- Michael J. Hughes Lawrence V. Fagnoni, Vice President Assistant Secretary ATTEST: (TENANT) OSTEOPATHIC MEDICAL CENTER OF PHILADELPHIA By: /s/ [ILLEGIBLE] By: /s/ Lewis H. Abel ------------------------- --------------------------- Lewis H. Abel, CPA Vice President and Chief Financial Officer (Seal) If Tenant is a corporation, Lease must be executed by the President or the vice President as well as the Secretary and properly sealed. - 27 - 75 Rider Annexed to and Made Part of the Lease Dated as of April 3, 1992 Between The Prudential Insurance Company of America, as Landlord, and Osteopathic Medical Center of Philadelphia, as Tenant 45. LANDLORD'S WORK AND CONTRIBUTION Supplementing the provisions of Article 9 above, at Landlord's expense up to a maximum of $953,160.00, Landlord agrees to construct the Premises in Landlord's Building Standard manner, in accordance with Tenant's interior design drawings which shall be prepared by Medifac and shall be approved by Tenant and submitted to Landlord, time being of the essence. Landlord's contribution of up to a maximum of $953,160.00 shall cover construction costs and fees, labor and materials, construction permits and reasonable overhead, the design fee payable to Medifac and the construction management fee (in the maximum amount of one and one fourth (1 1/4%) percent of the total construction cost) payable to Premisys Real Estate Services, Inc. As Landlord disburses the allowance of $953,160.00, Landlord shall promptly advise Tenant of the amounts being disbursed from time to time, including a running total of advances to date. In the event the cost of construction of the Premises exceeds $953,160.00, then at its option, Tenant shall either (i) pay Landlord the entire amount of the excess, in lump sum, within twenty (20) days after Landlord's billing therefor, or (ii) reduce the amount of the Base Rent abatement under Article 46 below by the amount of the excess. In the event the cost of construction of the Premises is less than $953,160.00, then Tenant may use the unspent portion of Landlord's contribution toward the purchase of furniture and equipment to be installed in the Premises, which shall be paid to Tenant within twenty (20) days after Landlord's receipt of paid bills or invoices and other satisfactory evidence of Tenant's payment of the cost of the furniture and equipment. In the event the cost of construction of the Premises and the purchase of furniture and equipment installed by Tenant in the Premises is less than $953,160.00, Tenant shall be entitled to a credit toward the next Base Rent accruing under the Lease in the amount of the unspent portion of Landlord's contribution. At Landlord's sole expense, which shall not be covered by Landlord's contribution in the above paragraph, Landlord shall (i) Perform all necessary demolition, including removal or abatement of any friable asbestos in accordance with applicable law; (ii) Supply and install sprinklers throughout the Premises; -28- 76 (iii) Renovate the men's and ladies bathrooms on the 6th Floor, in accordance with design specifications by Cope Linder Associates, with finishes consistent with other mens' and ladies' rooms in the Building; (iv) Upgrade the Building mechanical systems per Plan Ml from Brandt, Ricci, Riley; (v) Replace the solar film and window blinds, as required, on the second and sixth floors; (vi) Install fire detection system in Building corridors, as required by state and local codes; (vii) Patch and prepare for finishing the existing fire-rated partitions and columns and any surface distorted by demolition, excluding ceiling; and (viii) Install hardware on existing exit doors, in accordance with state and local codes. In the event Tenant vacates the Premises and there is a default in the payment of Base Rent under the Lease, or in the event Landlord obtains possession of the Premises or terminates the Lease by reason of a default by Tenant under the Lease, Tenant shall pay to Landlord, upon demand, as additional rent hereunder, the full unamortized amounts (based on an amortization period of ten (10) years and including interest at 8.00% per annum on the outstanding principal balance) of (i) Landlord's contribution and payment of up to $953,160.00 in construction costs and fees (and furniture and equipment if applicable) under the above paragraphs; and (ii) the Base Rent abatement in the amount of $635,440.00, provided in Article 46 below. 46. BASE RENT ABATEMENT Notwithstanding the provisions of paragraph (a) of Article 4 above, Landlord hereby grants Tenant a Base Rent abatement in the total amount of $635,440.00 which shall be applied toward the first twelve (12) months of Base Rent accruing under the Lease. Landlord and Tenant agree that no portion of the Base Rent paid by Tenant during the portion of the term of this Lease occurring after the expiration of any period during which such Rent was abated shall be allocated, for income tax purposes, by Landlord or Tenant to such rent abatement period, nor is such Rent intended by Landlord and Tenant to be allocable, for income tax purposes, to any abatement period. 47. OPTION TO RENEW Landlord hereby grants Tenant an option to renew the term of the Lease, upon the following terms and conditions: (a) The renewal term shall be for five (5) years, commencing July 1, 2002 and expiring June 30, 2007; (b) Tenant must exercise the option, if at all, upon notice to Landlord, on or before February 28, 2002; -29- 77 (c) At the time Tenant delivers its notice of election to renew to Landlord, this Lease shall be in full force and effect and Tenant shall not then be in default under any of the terms and conditions of the Lease beyond any applicable cure period; (d) The renewal term shall be upon the same terms, covenants and conditions contained in the Lease, except that the annual Base Rent shall be the then current Fair Market Rent for comparable space in the Building as of the effective commencement date of the renewal, but in no event shall the annual Base Rent for the renewal term be less than the annual Base Rent plus total accrued additional rent for Real Estate Taxes and Operation and Maintenance Costs increases under Article 5 of the Lease payable by Tenant during the last year of the initial term of this Lease; and (e) There shall be no further privilege of renewal. 48. TENANT'S RIGHTS OF FIRST OFFER Second Floor Landlord hereby grants Tenant the Right of First Offer to lease Suite 208 (containing 1,768 rentable square feet), Suite 209 (containing 353 rentable square feet) and Suite 211 (containing 718 rentable square feet) on the 2nd floor of the Building, shown outlined and cross-hatched on the 2nd floor plan annexed hereto collectively ("First Offer Space"), upon the following terms and conditions: (a) Suite 209 is currently occupied under a lease expiring December 31, 1992. Suites 208 and 211 are currently vacant. Landlord will give Tenant written notice that Landlord is about to enter into negotiations to lease all or a portion of the First Offer Space to a third party and Tenant shall have twenty (20) days after receipt of such notice to notify Landlord of its exercise of the Right hereunder; (b) At the time Tenant delivers to Landlord its notice of exercise of the Right, Tenant shall not be in default under any of the provisions of the Lease beyond any applicable cure period; (c) Base Rent for the First Offer Space shall be at the same Base Rent Rates payable by Tenant for the Premises under Article 4 above if the effective date occurs during the first two (2) Lease years and thereafter at the Fair Market rent for comparable space in the Building as of the date of Tenant's exercise of its Right of First Offer. -30- 78 (d) Tenant's Percentage under Article 5 above shall be increased proportionately; (e) The effective date of the addition of the First Offer Space to the Premises shall be the 31st day after Tenant's acceptance of Landlord's notice under (a) above; (f) Tenant agrees to accept the First Offer Space in "as is" condition, in the physical state and condition thereof on the effective date under (e) above, provided that if the effective date occurs during the first two (2) Lease years, Tenant shall be entitled to receive a pro rata portion of Landlord's tenant improvement allowance of $30.00 per rentable square under Article 45 above, using a ratio whose numerator is the number of months remaining in the initial Lease term for the First Offer Space and whose denominator is 120 months; (g) Except for the provisions of paragraphs (c), (d), and (f) above, Tenant's lease of the First offer Space shall be upon the same terms and conditions contained in the Lease; and (h) Upon Tenant's failure to exercise its Right of First Offer with respect to the First Offer Space, or any part thereof from time to time, within the time period provided under (a) above, Landlord shall have the right to pursue its negotiations for a lease of the First Offer Space, or part thereof, as the case may be, with the third party. Fifth Floor Landlord hereby grants Tenant the Right of First Offer to lease the 10,491 rentable square feet of space on the 5th floor of the Building, shown outlined and cross-hatched on the 5th floor plan annexed hereto ("First Offer Space"), upon the following terms and conditions: (a) The First Offer Space is currently occupied under a lease expiring February 28, 1994. Landlord will give Tenant written notice, no later than January 1, 1994, that Landlord is about to enter into negotiations to lease all or a portion of the First Offer Space to a third party and Tenant shall have twenty (20) days after receipt of such notice to notify Landlord of its exercise of the Right hereunder; -31- 79 (b) At the time Tenant delivers to Landlord its notice of exercise of the Right, Tenant shall not be in default under any of the provisions of the Lease beyond any applicable cure period; (c) Base Rent for the First Offer Space shall be at the same Base Rent Rates payable by Tenant for the Premises under Article 4 above if the effective date occurs during the first two (2) Lease years and thereafter at the Fair Market rent for comparable space in the Building as of the date of Tenant's exercise of its Right of First Offer. (d) Tenant's Percentage under Article 5 above shall be increased by 2.8722%; (e) The effective date of the addition of the First Offer Space to the Premises shall be the 31st day after Tenant's acceptance of Landlord's notice under (a) above; (f) Tenant agrees to accept the First Offer Space in "as is" condition, in the physical state and condition thereof on the effective date under (e) above, provided that if the effective date occurs during the first two (2) Lease years, Tenant shall be entitled to receive a pro rata portion of Landlord's tenant improvement allowance of $30.00 per rentable square under Article 45 above, using a ratio whose numerator is the number of months remaining in the initial Lease term for the First Offer Space and whose denominator is 120 months; (g) Except for the provisions of paragraphs (c), (d), and (f) above, Tenant's lease of the First offer Space shall be upon the same terms and conditions contained in the Lease; and (h) Upon Tenant's failure to exercise its Right of First Offer with respect to the First Offer Space, or any part thereof from time to time, within the time period provided under (a) above, Landlord shall have the right to pursue its negotiations for a lease of the First Offer Space, or part thereof, as the case may be, with the third party. Sixth Floor Landlord hereby grants Tenant the Right of First Offer to lease Suite 620 (containing 2,356 rentable square feet), -32- 80 and Suite 619 (containing 826 rentable square feet) on the 6th floor of the Building, shown outlined and cross-hatched on the 6th floor plan annexed hereto (collectively "First Offer Space"), upon the following terms and conditions: (a) Suite 619 is currently occupied under a lease expiring July 14, 1992 and Suite 620 is currently occupied under a lease expiring December 31, 1993. Landlord will give Tenant written notice that Landlord is about to enter into negotiations to lease all or a portion of the First Offer Space to a third party and Tenant shall have twenty (20) days after receipt of such notice to notify Landlord of its exercise of the Right hereunder; (b) At the time Tenant delivers to Landlord its notice of exercise of the Right, Tenant shall not be in default under any of the provisions of the Lease beyond any applicable cure period; (c) Base Rent for the First Offer Space shall be at the same Base Rent Rates payable by Tenant for the Premises under Article 4 above if the effective date occurs during the first two (2) Lease years and thereafter at the Fair Market rent for comparable space in the Building as of the date of Tenant's exercise of its if Right of First Offer. (d) Tenant's Percentage under Article 5 above shall be increased proportionately; (e) The effective date of the addition of the First Offer Space to the Premises shall be the 31st day after Tenant's acceptance of Landlord's notice under (a) above; (f) Tenant agrees to accept the First Offer Space in "as is" condition, in the physical state and condition thereof on the effective date under (e) above, provided that if the effective date occurs during the first two (2) Lease years, Tenant shall be entitled to receive a pro rata portion of Landlord's tenant improvement allowance of $30.00 per rentable square under Article 45 above, using a ratio whose numerator is the number of months remaining in the initial Lease term for the First Offer Space and whose denominator is 120 months; -33- 81 (g) Except for the provisions of paragraphs (c), (d), and (f) above, Tenant's lease of the First offer Space shall be upon the same terms and conditions contained in the Lease; and (h) Upon Tenant's failure to exercise its Right of First Offer with respect to the First Offer Space, or any part thereof from time to time, within the tune period provided under (a) above, Landlord shall have the right to pursue its negotiations for a lease of the First Offer Space, or part thereof, as the case may be, with the third party. 49. PARKING At no charge to Tenant, Tenant shall be entitled to the use of nine (9) reserved parking spaces for cars and one (1) reserved parking space for Tenant's van in the private parking lot adjoining the Building throughout the term. Landlord shall provide the parking space for Tenant's van as near as practicable to the Building's loading dock. 50. HEATING, VENTILATING AND AIR CONDITIONING SYSTEM With respect to the Heating, Ventilating and Air Conditioning system and service provided under Article 12 above, Landlord shall provide: 1. Reheat coils in the supply air duct work for the morning warm up cycle. This duct work will extend throughout Tenant's space to provide supply air to a quantity or Variable Air Volume boxes (VAV). 2. The volume of air to Tenant's space will range from 10,000 - 11,000 CFM and the unit S-9 will be rebalanced to provide the proper amount of air. 3. Induction units along the outside wall will be modified with a two (2) way valve and thermostat for each column bay. 4. If cooling is required when Building chilled water is off, unit S-9 will supply 100% outside air by means of an economizer. 5. Air conditioning loads have been calculated to include an electrical allowance of 4.0 watts per square foot. 6. Temperature range of 72 F to 76 F, is based upon: Outdoor -- 93.0 D.B./75% W.B. Indoor -- 75.0 D.B./50% R.H. -34- 82 ONE BALA PLAZA Demised Area Plan [GRAPHIC OMITTED] The Space Management System (c) 1982 Space/Data Group Project# 83093 Date Issued: MAY 31, 1990 Floor: 2 ----------- ------------ ---- 83 ONE BALA PLAZA Demised Area Plan [GRAPHIC OMITTED] The Space Management System (c) 1982 Space/Data Group Project# 83093 Date Issued: MAY 31, 1990 Floor: 5 ----------- ------------ ---- 84 EXHIBIT "B" RULES AND REGULATIONS DEFINITIONS 1. Wherever in these Rules and Regulations the word "Tenant" is used, it shall be deemed to apply to and include Tenant and his agents, employees, invitees, licensees, subtenants and contractors, and to be of such number and gender as the circumstances require. The word "room" is deemed to include the space covered by this Lease. The word "Landlord" shall be taken to include the employees and agents of Landlord. CONSTRUCTION 2. The streets, parking areas, sidewalks, entrances, lobbies, halls, passages, elevators, stairways and other common areas provided by Landlord shall not be obstructed by Tenant, or used by him for any other purpose than for ingress and egress. WASHROOMS 3. Toilet rooms, water-closets and other water apparatus shall not be used for any purposes other than those for which they were constructed. INSURANCE REGULATIONS 4. Tenant shall not do anything in the rooms, or bring or keep anything therein, which will in any way increase or tend to increase the risk of fire or the rate of fire insurance, or which will conflict with the regulations of the Fire Department or the fire laws, or with any insurance policy on the Building or any part thereof, or with any law, ordinance, rule or regulation affecting the occupancy and use of the rooms, now existing or hereafter enacted or promulgated by any public authority or by the Board of Fire Underwriters. GENERAL PROHIBITIONS 5. In order to insure proper use and care of the Premises, Tenant shall not: a) Keep animals or birds in the rooms. b) Use rooms as sleeping apartments. -1- 85 SUBLEASE AGREEMENT THIS SUBLEASE ("Sublease") is made this 19th day of May, 1994, by and between OSTEOPATHIC MEDICAL CENTER OF PHILADELPHIA, a Pennsylvania corporation ("Sublessor") and MANUGISTICS, INC., a Delaware corporation ("Sublessee"). BACKGROUND A. Sublessor leases certain premises (the "Leased Premises") located in the office building (the "Building") known as One Bala Plaza, and located in Bala Cynwyd, Pennsylvania, pursuant to a lease (the "Prime Lease") dated April 3, 1992 between The Prudential Insurance Company of America ("Lessor") as landlord, and Sublessor as tenant. A true and correct copy of the Prime Lease is attached hereto and made a part hereof as Exhibit "A". B. The Leased Premises consists of approximately 22,280 rentable square feet located on the sixth floor of the Building (the "Sixth Floor Space") and approximately 9,492 rentable square feet located on the second floor of the Building (the "Second Floor Space"). C. Sublessor desires to sublet the Second Floor Space to Sublessee and Sublessee desire to sublease the Second Floor Space from Sublessor under the terms and subject to the conditions hereinafter set forth. TERMS NOW, THEREFORE, for and in consideration of the foregoing Background and the mutual covenants, promises, conditions and 86 agreements herein contained, the parties hereto, intending to be legally bound hereby, covenant and agree as follows: 1. Definitions. Those capitalized terms not defined herein shall have the same meanings ascribed to them in the Prime Lease. 2. Sublease Term. Sublessor hereby leases to Sublessee and Sublessee hereby rents from Sublessor the Second Floor Space for a term (the "Sublease Term") commencing on the date (the "Sublease Commencement Date") Sublessor delivers possession of the Second Floor Space to Sublessee, with Sublessor's Work (as hereafter defined) substantially completed. Subject to delays as set forth in Section 7 hereof, the Second Floor Space shall be delivered to Sublessee, with Sublessor's Work substantially completed, three and one-half months from the first day of the month immediately following the month in which this Sublease has been fully executed. Sublessor shall endeavor to give Sublessee written notice at least seven (7) days in advance of the date Sublessor expects the Second Floor Space to be substantially completed. When the Sublease Commencement Date has been established, Sublessor and Sublessee shall execute and deliver an instrument in form satisfactory to both parties specifying the Sublease Commencement Date. The Sublease Term shall automatically terminate at midnight on June 30, 2002, without the necessity of notice from either party. -2- 87 3. Rent. (a) Base Rent. Sublessee shall pay to Sublessor as annual base rent ("Base Rent") for the Second Floor Space, in advance, in successive monthly installments on the first (1st) day of each and every calendar month without prior notice or demand, abatement, set-off or deduction whatsoever, the sums set forth on Exhibit "B" attached hereto and made a part hereof. The first monthly installment of Base Rent shall be due and payable upon full execution of this Sublease. In the event the Sublease Term commences on a day other than the first day of a calendar month, Sublessee shall pay to Sublessor a pro rata portion of the monthly installment of Base Rent for such partial month. (b) Additional Rent. (i) Operation and Maintenance Costs; Taxes. For purposes hereof, the term "Base Year" shall be defined as calendar year 1994; "Comparison Year" shall be defined as each calendar year (or part thereof) following the Base Year; and "Tenant's Percentage" shall be 30%, which is the ratio that the rentable square feet of the Second Floor Space (i.e. 9,492) bears to the total rentable square feet of the Leased Premises (i.e. 31,772). For each Comparison Year during the Sublease Term, Sublessee shall pay directly to Sublessor prior to the date that the corresponding payment for Operation and Maintenance Costs is due under the Prime Lease, Sublessee's Percentage of (1) any increase in Operation and Maintenance Costs (as defined in the Prime Lease) for the Leased Premises for each Comparison Year -3- 88 over the Operation and Maintenance Costs which were due and payable under the Prime Lease for the Base Year; and (2) any increase in Real Estate Taxes (as defined in the Prime Lease) for the Leased Premises for each Comparison Year over the Real Estate Taxes which were due and payable under the Prime Lease for the Base Year. Sublessor agrees to submit a copy of Lessor's billing statements for Operation and Maintenance Costs and Real Estate Taxes to Sublessee promptly upon receipt of same, but in any event not later than ten (10) days prior to the due date for such payment. Sublessee acknowledges that pursuant to the provisions of Section 5(i) of the Prime Lease, Sublessor has the right to examine Lessor's books and records with respect to Operation and Maintenance Costs within one hundred twenty (120) days following Sublessor's receipt of Lessor's billing statement. Accordingly, Sublessee agrees to notify Sublessor in writing at least thirty (30) days prior to the expiration of said one hundred twenty (120) day period if Sublessee desires to review Lessor's books and records and shall indicate in such notice, the basis of the dispute. Upon receipt of such notification, Sublessor agrees to notify Lessor of such dispute in accordance with the provisions of said Section 5(i). In connection with the review of Lessor's books and records, Sublessor agrees to provide whatever assistance may be reasonably requested by Sublessee (at no cost to Sublessor) and shall, if deemed necessary, conduct the review itself on behalf of both Sublessor and Sublessee, provided Sublessee shall pay all costs associated with such review and -4- 89 shall reimburse Sublessor for any reasonable out-of-pocket costs or expenses incurred by Sublessor. Unless Sublessee notifies Sublessor in accordance with the time periods hereinabove set forth, such statement shall be considered as final and accepted by Sublessee. (ii) Utilities. As part of Sublessor's Work, Sublessor shall install a separate electric meter in the Second Floor Space to monitor Sublessee's usage of the supplemental cooling unit to be installed in the workroom as required by the Lessor. Sublessee agrees to pay directly to Sublessor prior to the date the corresponding payment is due under the Prime Lease, all utility charges or other fees related to such usage. (iii) Other Charges. Sublessee shall pay directly to Sublessor prior to the date the corresponding payment is due under the Prime Lease, Sublessee's Percentage of all other items of additional rent or other sums due under the Prime Lease, except for any late charges or other payments imposed by the Prime Lease which are due by reason of Sublessor's default but which are not attributable to a default on the part of Sublessee. Notwithstanding the foregoing, Sublessee shall be responsible for the full amount of all charges or other payments imposed by the Prime Lease which are due by reason of Sublessee's default under this Sublease. (c) Place of Payment. All Base Rent and Additional Rent and/or any other charge herein reserved, included, or agreed to be treated as rent (all Base Rent, Additional Rent and such -5- 90 other charges, are sometimes hereinafter collectively referred to as "Rent") shall be payable at the office of Sublessor, or at such other place as Sublessor may from time to time designate by notice in writing. 4. Late Charges. In addition to the remedies available to Sublessor in the event of default, if Sublessee shall fail to pay any item of Rent within seven (7) days after its due date, Sublessee shall pay a late charge in an amount equal to ten percent (10%) of the amount due to cover the extra expense involved in handling delinquent payments. The parties agree that this is not a penalty but is a reasonable estimate of the additional expense Sublessor will incur in the event of Sublessee's late payment. 5. Use. Sublessee shall use and occupy the Second Floor Space for the purposes permitted under the Prime Lease and for no other purpose. Sublessee shall observe and comply with all Rules and Regulations of the Building. 6. Application of Prime Lease. (a) Sublessee's Obligations. This Sublease is expressly subject and subordinate to all of the terms and conditions of the Prime Lease, and to all amendments, renewals and extensions thereof, and all of the terms, provisions and covenants as contained in the Prime Lease are incorporated herein by reference, except as herein expressly set forth. Sublessee hereby covenants and agrees to observe all of the terms, conditions, covenants imposed upon the Tenant under the Prime -6- 91 Lease and to perform all of the duties and obligations imposed upon the Tenant thereunder, except with regard to the payment of Base Rent and Additional Rent as set forth herein. To the extent any provision of this Sublease is inconsistent with any provisions of the Prime Lease, this Sublease shall govern except that if the standard for performance is more stringent under either the Prime Lease or this Sublease, the more stringent provisions shall prevail and Sublessee shall be obligated to comply therewith. Sublessee acknowledges that any default by it under this Sublease may constitute a default by Sublessor as Tenant under the Prime Lease, and that Sublessee's liability to Sublessor shall include, but not be limited to, any damages or liabilities arising from Sublessee's default hereunder incurred by Sublessor to Lessor under the Prime Lease. (b) No Duty to Render Services. Sublessor is not and shall not be required to render any services or utilities of any kind whatsoever to Sublessee or to perform any obligation of Landlord under the Prime Lease. Sublessor shall not be liable to Sublessee for any default or failure on behalf of the Lessor under the Prime Lease in the performance or nonperformance by the Lessor of any of its covenants and obligations under the Prime Lease. (c) Insurance. During the Sublease Term, Sublessee agrees to maintain all insurance as required on the part of the Tenant under the Prime Lease, and shall name as additional insureds, as their interests may appear, both the Lessor and -7- 92 Sublessor. Prior to the Sublease Commencement Date, Sublessee shall deliver to Sublessor a certificate of insurance evidencing the existence of such insurance. At least thirty (30) days before any insurance policy shall expire, Sublessee shall deliver to Sublessor replacement certificates of insurance. (d) Inspections. Sublessor shall have the right to enter the Second Floor Space upon twenty-four (24) hours prior notice to Sublessee for purposes of inspection and for the other purposes for which rights of entry are reserved under the Prime Lease, except that such prior notice shall not be required in the case of emergency. 7. Tenant Improvements. (a) Performance of Sublessor's Work; Allowance. Sublessor has agreed to perform certain leasehold improvement work ("Sublessor's Work") to the Second Floor Space in accordance with the plans (the "Plans") prepared by Space Design, Inc. Sublessee hereby acknowledges its receipt and approval of the Plans. It is understood and agreed that Sublessee's telephone, data and furniture installations shall not be included as part of Sublessor's Work. Sublessor's Work shall be performed using building standard materials, quantities and procedures then in use by Lessor. Sublessor shall pay for a portion of the "Cost of Work" (as defined below) in an amount not to exceed $64,730.00 (the "Allowance"). In the event the Cost of Work exceeds the amount of the Allowance, Sublessee shall pay such excess costs as Additional Rent, promptly when due. Sublessee shall not be -8- 93 entitled to any credit, abatement or payment from Sublessor in the event that the amount of the Allowance exceeds the Cost of the Work. For purposes hereof, the term "Cost of the Work" shall mean and include any and all costs of Sublessor's Work, including, without limitation, the cost of the Plans (not to exceed $3,000.00), all labor (including overtime), all materials constituting Sublessor's Work, and Lessor's supervisory fees charged in connection with Sublessor's Work. It is understood and agreed that, with the exception of Sublessor's Work, Sublessor shall have no obligation to perform any work, repairs, improvements or alterations to the Second Floor Space at the time of letting or at any time thereafter. (b) Substantial Completion. Sublessor shall cause Sublessor's Work to be "substantially completed" on or before the anticipated Sublease Commencement Date as specified in Section 2 hereof, subject to delays caused by strikes, lockouts, boycotts or other labor problems, casualties, discontinuance of any utility or other service required for performance of Sublessor's Work or any other matter beyond the control of Sublessor (or beyond the control of Sublessor's contractors or subcontractors). Sublessor's Work shall be deemed to be "substantially completed" for purposes of this Sublease on the date Space Design, Inc. issues a written certificate to Sublessor and Sublessee certifying that the Sublessor's Work has been substantially completed (i.e. completed except for minor punchlist items listed in such architect's certificate), or when Sublessee first takes -9- 94 occupancy of the Second Floor Space, whichever first occurs. In the event Sublessor's Work is not deemed to be substantially completed on or before the anticipated Sublease Commencement Date as specified in Section 2 hereof, (i) Sublessor agrees to use reasonable efforts to complete Sublessor's Work as soon as practicable thereafter, (ii) this Sublease shall remain in full force and effect, and (iii) Sublessor shall not be deemed to be in breach or default of this Sublease as a result thereof and Sublessor shall have no liability to Sublessee as a result of any delay in occupancy (whether for damages, abatement of Base Rent or Additional Rent or otherwise). 8. Alterations/Repairs. (a) Sublessee shall not make any alterations, improvements or additions to the Second Floor Space unless Sublessee strictly adheres to the obligations of Sublessor as Tenant as set forth in Section 9 of the Prime Lease. (b) Sublessee shall keep the Second Floor Space in a neat and orderly condition and shall make all repairs to the Second Floor Space required of Sublessor as Tenant as set forth in Section 15 of the Prime Lease. 9. Assignment or Subletting. Sublessee shall not be permitted to assign this Sublease, mortgage or encumber Sublessee's interest in this Sublease or sublet all or any portion of the Second Floor Space without the prior written consent of Sublessor, which consent may be withheld in Sublessor's sole and absolute discretion. -10- 95 10. Default of Sublessee and Remedies of Sublessor. If Sublessee shall at any time be in default in the payment of Rent or of any other sum required to be paid by Sublessee under this Sublease, or in the performance of or compliance with any of the terms, covenants, conditions or provisions of this Sublease or the Prime Lease, or violate the provisions of Section 9 above, or if Sublessee shall be adjudicated as bankrupt, or shall make an assignment for the benefit of creditors, or shall file a bill in equity or otherwise initiate proceedings for the appointment of a receiver of Sublessee's assets, or shall file any proceeding in bankruptcy or for reorganization or an arrangement under any federal or state law, then and in addition to any other rights or remedies Sublessor may have under this Sublease and at law and in equity, shall have the following rights: (a) Sublessor shall have the same rights and remedies against Sublessee for default of this Sublease as the Lessor would have against Sublessor as Tenant under the Prime Lease, including without limitation the rights of rental acceleration, Sublease termination, retaking possession and damages. (b) If Sublessee shall be in default in the payment of Rent or any other sum required to be paid by Sublessee under this Sublease beyond any applicable grace period, Sublessee shall pay interest on the delinquent amounts at the lesser of the maximum rate permitted by law, if any, or eighteen percent (18%) per annum from the date due to the date paid. -11- 96 (c) UPON ANY EVENT OF DEFAULT HEREUNDER WHICH REMAINS UNCURED AFTER THE EXPIRATION OF THE APPLICABLE NOTICE AND CURE PERIOD PROVIDED IN THIS SUBLEASE, SUBLESSEE HEREBY EMPOWERS ANY PROTHONOTARY OR ATTORNEY OF ANY COURT OF RECORD TO APPEAR FOR SUBLESSEE IN ANY AND ALL ACTIONS WHICH MAY BE BROUGHT FOR RENT, OR OTHER CHARGES OR EXPENSES AGREED TO BE PAID BY SUBLESSEE HEREUNDER, AND TO CONFESS JUDGMENT AGAINST SUBLESSEE IN ANY COMPETENT COURT FOR THE RECOVERY OF RENT OR OTHER CHARGES OR EXPENSES; AND IN SUCH SUITS OR ACTIONS TO CONFESS JUDGMENT AGAINST SUBLESSEE FOR ALL OR ANY PART OF THE RENT INCLUDING, AT SUBLESSOR'S OPTION, THE RENT FOR THE ENTIRE UNEXPIRED BALANCE OF THE SUBLEASE TERM, AND ANY OTHER CHARGES, PAYMENTS, COSTS AND EXPENSES RESERVED AS RENT OR AGREED TO BE PAID BY THE SUBLESSEE; AND FOR INTEREST AND COSTS TOGETHER WITH AN ATTORNEY'S COMMISSION EQUAL TO THE GREATER OF $2,000.00 OR FIVE PERCENT (5%) OF THE AMOUNT SO CONFESSED. SAID AUTHORITY SHALL NOT BE EXHAUSTED BY ONE EXERCISE THEREOF, BUT JUDGMENT MAY BE CONFESSED AS AFORESAID FROM TIME TO TIME AND AS OFTEN AS ANY SAID RENT OR OTHER CHARGES RESERVED AS RENT OR LIQUIDATED DAMAGES SHALL FALL DUE OR BE IN ARREARS. SUCH POWERS MAY BE EXERCISED AFTER THE EXPIRATION OF THE SUBLEASE TERM. (d) IN THE EVENT THAT, AND WHEN THIS SUBLEASE SHALL BE DETERMINED TERM, COVENANT, LIMITATION OR CONDITION BROKEN, AS AFORESAID, DURING THE SUBLEASE TERM, AND ALSO WHEN AND AS SOON AS THE SUBLEASE TERM HEREBY CREATED SHALL HAVE EXPIRED, IT SHALL BE LAWFUL FOR ANY ATTORNEY, AS ATTORNEY FOR SUBLESSEE TO CONFESS -12- 97 JUDGMENT IN EJECTMENT IN ANY COMPETENT COURT AGAINST SUBLESSEE AND ALL PERSONS CLAIMING UNDER SUBLESSEE FOR THE RECOVERY BY SUBLESSOR OF POSSESSION OF THE SECOND FLOOR SPACE, WITHOUT ANY LIABILITY ON THE PART OF THE SAID ATTORNEY, FOR WHICH THIS SUBLEASE SHALL BE A SUFFICIENT WARRANT; WHEREUPON, IF SUBLESSOR SO DESIRES, A WRIT OF POSSESSION WITH CLAUSES FOR COSTS MAY ISSUE FORTHWITH WITH OR WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER. IF FOR ANY REASON AFTER SUCH ACTION HAS BEEN COMMENCED, THE SAME SHALL BE DETERMINED AND THE POSSESSION OF THE SECOND FLOOR SPACE REMAINS IN OR IS RESTORED TO SUBLESSEE, THE SUBLESSOR SHALL HAVE THE RIGHT IN THE EVENT OF ANY SUBSEQUENT DEFAULT OR DEFAULTS TO CONFESS JUDGMENT IN EJECTMENT AGAINST SUBLESSEE IN THE MANNER AND FORM HEREINBEFORE SET FORTH, TO RECOVER POSSESSION OF THE SECOND FLOOR SPACE FOR SUCH SUBSEQUENT DEFAULT. NO SUCH DETERMINATION OF THIS SUBLEASE NOR RECOVERING POSSESSION OF THE SECOND FLOOR SPACE SHALL DEPRIVE SUBLESSOR OF ANY REMEDIES OR ACTION AGAINST SUBLESSEE FOR RENT OR FOR DAMAGES DUE OR TO BECOME DUE FOR THE BREACH OF ANY CONDITION OR COVENANT; NOR THE RESORT TO ANY WAIVER OF THE RIGHT TO INSIST UPON THE FORFEITURE, AND TO OBTAIN POSSESSION IN THE MANNER PROVIDED HEREIN. (e) In any action of ejectment or for Rent in arrears, Sublessor shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment of which facts such affidavit shall be conclusive evidence; and if a true copy -13- 98 of this Sublease is filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. (f) No waiver by Sublessor of any breach by Sublessee of any of Sublessee's obligation, agreements or covenants herein shall be a waiver of any subsequent breach or of any obligation, agreement of covenant, nor shall any forbearance by Sublessor to seek a remedy for any breach by Sublessee be a waiver by Sublessor of any rights and remedies with respect to such or any subsequent breach. (g) If Sublessee shall be in default in the performance of any of its obligations hereunder, Sublessor may (but shall not be obligated to do so), in addition to any other rights it may have in law or equity, cure such default on behalf of Sublessee. In such event, Sublessee shall reimburse Sublessor upon demand, as additional rent, for any costs incurred by Sublessor in curing said defaults, including without limitation reasonable attorneys' fees from the date Sublessor incurs such costs, along with interest from the date Sublessor cures any such default until the date such sum is paid, at the rate of eighteen percent (18%) per annum. 11. Grace Period. If Sublessee shall be in default of any of the terms and provisions of this Sublease, and if the Prime Lease shall allow a grace period for cure of a default of a similar type and nature, then Sublessee shall be entitled to a -14- 99 grace period which is five (5) days less than the corresponding grace period in the Prime Lease. 12. Indemnification of Sublessor and Lessor. Sublessee agrees to indemnify, defend and save Sublessor and Lessor harmless from and against any and all claims by or on behalf of any persons, firms or corporations arising from the occupancy, conduct, operation or management of the Second Floor Space or from any work or thing whatsoever done or not done in and on the Second Floor Space, or arising from any breach or default on the part of Sublessee in the performance of any covenant or agreement on the part of Sublessee to be performed pursuant to the terms of this Sublease, or under the law, or arising from any act, neglect or negligence of Sublessee, or any of its agents, contractors, subtenants, servants, employees, or licensees, or arising from any accident, injury or damage whatsoever caused to any person, firm, corporation or property occurring during the term of this Sublease, in or about the Second Floor Space, and from and against all costs, expenses and liabilities incurred in connection with any such claim or action or proceeding brought thereon (including without limitation the fees of attorneys, investigators and experts). 13. Notices. All notices, requests and demands to be given hereunder shall be in writing, sent by (i) certified mail, return receipt requested, postage prepaid; or (ii) recognized overnight courier service; or (iii) by telecopy, to Sublessor and Sublessee at the addresses set forth below: -15- 100 If to Sublessor: Osteopathic Medical Center of Philadelphia One Bala Plaza Suite 600 Bala Cynwyd, PA 19004 Attention: Mr. Lewis H. Abel, C.P.A., Chief Operating Officer If to Sublessee: Manugistics, Inc. 2115 East Jefferson Street Rockville, Maryland 20852 Attention: Legal Department After the Sublease Commencement Date, all notices to Sublessee may be sent as aforesaid to the address of the Second Floor Space. Either party, by notice similarly given, may change the person and/or address to which future notices shall be sent. 14. Surrender. At the expiration or earlier termination of this Sublease, Sublessee covenants that it will peaceably and quietly leave and surrender the Second Floor Space, and will leave the Second Floor Space in broom clean condition and in the same condition as Sublessee is required to maintain the same during the term of this Sublease. 15. Sublessor's Property. It is understood and agreed that this Sublease shall not include any of Sublessor's furniture, equipment, storage racks, phone systems, modular work stations, trade fixtures or any other items of personality or belongings of Sublessor currently installed or located in the Second Floor Space, all of which shall be removed by Sublessor at its expense prior to the Sublease Commencement Date. 16. Rights of First Offer. Pursuant to the provisions of Section 48 of the Prime Lease, Sublessor has been granted a right -16- 101 of first offer to lease the following additional space located on the second floor of the Building: (a) Suite 208 (containing 1768 rentable square feet; (b) Suite 209 (containing 353 rentable square feet); and (c) Suite 211 (containing 718 rentable square feet) (said additional space is hereinafter collectively known as the "First Offer Space"). In the event that any portion of the First Offer Space is offered to Sublessor, Sublessor agrees that it shall not exercise its rights to lease such space, but instead shall notify Sublessee promptly upon receipt of Lessor's offer so as to afford Sublessee the opportunity to lease such additional space directly from Lessor. Any lease of such additional space shall be a direct lease between Lessor and Sublessee, and it is understood and agreed that Sublessor shall have no obligation whatsoever in connection therewith. Sublessee acknowledges and understands that if Sublessee desires to lease such additional space upon the terms contained in Lessor's offer, Sublessee must notify Lessor of same within twenty (20) days following the date Sublessor received the offer from Lessor, and to otherwise comply with the requirements of Section 48 of the Prime Lease. Sublessee further acknowledges and understands that even if such notice by Sublessee is timely given, Lessor may have no contractual or legal obligation to lease such additional space to Sublessee. Sublessee's obligations and liability under this Sublease shall not in any way be affected by virtue of Lessor's decision, if any, not to lease such additional space to Sublessee. -17- 102 17. Signage. Sublessor shall, at its expense, cause Lessor to install standard suite entrance signage for the Second Floor Space and to add Sublessee to the directory of tenants for the Building. 18. Fire or Other Casualty/Waiver of Subrogation. Sublessor and Sublessee hereby releases the other and all persons claiming under it, and Sublessee hereby also releases Lessor, to the extent of its insurance coverage, from any and all liability for any loss or damage caused by fire or any of the extended coverage casualties, or any other insured casualty, even if such fire or other casualty shall be brought about by the fault or negligence of the other party, or any persons claiming under it, provided, however, this release shall be in force and effect only with respect to loss or damage occurring during such time as releasor's policies of fire and extended coverage insurance shall contain a clause to the effect that this release shall not affect said policies or the right of releasor to recover thereunder. Sublessor and Sublessee each agrees that its fire and extended coverage and other insurance policies will include such a clause (Sublessee's policies to include such clause releasing both Sublessor and Lessor) so long as the same is obtainable and is includable without extra cost, or if extra cost is chargeable therefor, so long as the other party pays such extra cost. If extra cost is chargeable therefor, each party will advise the other thereof and the amount thereof, and the other party, at its election, may pay the same but shall not be obligated to do so. -18- 103 Sublessor shall not be obligated to pay the extra cost for such a clause in Sublessee's policy in favor of Lessor, but Lessor may elect to pay the same. 19. Brokers. The parties recognize Grubb & Ellis Company as the broker who procured this Sublease and agree that Sublessor shall be solely responsible for the payment of all brokerage commissions to said broker, and that Sublessee shall have no responsibility for such commission. If Sublessee has dealt with any other person or real estate broker in respect to the leasing, subleasing or renting space in the Building, Sublessee shall be solely responsible for the payment of any fee due said person or firm and Sublessee shall protect, indemnify, hold harmless and defend Sublessor from any cost, expense or liability (including attorneys' fees and costs) in respect thereto. 20. Waiver. It is understood and agreed by and among Sublessor and Sublessee that each of them hereby waives trial by jury in any action, proceeding or counterclaim brought by either of them against the other on any matters whatsoever arising out of or in any way connected with this Sublease or the use or occupancy of the Second Floor Space, or otherwise. It is further agreed by and between the parties hereto that in the event Sublessor commences any summary proceedings for non-payment of Rent, Sublessee will not interpose any counterclaim of whatever nature or description in any such proceeding. 21. Entire Agreement. This Sublease together with the Prime Lease and all exhibits hereto and thereto contains the -19- 104 entire agreement between the parties hereto and there are no collateral agreements or understandings. This Sublease shall not be modified in any manner except by an instrument in writing executed by both Sublessor and Sublessee. 22. Successors and Assigns. Subject to the provisions of Section 9 above, this Sublease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 23. Governing Law. This Sublease shall be governed and construed in accordance with the substantive laws (without reference to choice of laws rules) of the Commonwealth of Pennsylvania. 24. Time. Time is of the essence in this Sublease and with regard to all provisions herein contained. 25. Severability. If any provision hereof shall be found to be illegal, void or unenforceable, this Sublease shall be construed as if said provisions were not herein contained, so as to give full force and effect, as nearly as possible, to the original intent of the parties hereto. 26. Relationship. Nothing herein contained shall be deemed to create any partnership or joint venture between the parties hereto, and the relationship of the parties shall be solely that of Sublessor and Sublessee. 27. Lessor's Approval. This Sublease is contingent upon -20- 105 the prior written approval of Lessor. IN WITNESS WHEREOF, the parties have executed this Sublease as of the date and year first above written. SUBLESSOR: OSTEOPATHIC MEDICAL CENTER OF PENNSYLVANIA, a Pennsylvania corporation By: /s/ Lewis H. Abel ---------------------------------------- Lewis H. Abel, Vice President and Chief Operating Officer SUBLESSEE: MANUGISTICS, INC., a Delaware corporation By: /s/ William Kaluza ---------------------------------------- William Kaluza SENIOR VICE PRESIDENT & CFO -21- 106 EXHIBIT "B" Rent Schedule
Annual Monthly Base Rent Period Base Rent Base Rent Per Square Foot - ------ --------- --------- --------------- The Sublease Commencement Date through June 30, 1998 $149,499.00 $ 12,458.25 $ 15.75 July 1, 1998 through June 30, 2000 $163,737.00 $ 13,644.75 $ 17.25 July 1, 2000 through June 30, 2002 $177,975.00 $ 14,831.25 $ 18.75
107 EXHIBIT "B" ONE BALA PLAZA DEMISED AREA PLAN - -------------------------------------------------------------------------------- SECOND FLOOR [GRAPHIC OMITTED] 108 CONSENT OF LANDLORD TO SUBLEASE AND AGREEMENT The Prudential Insurance Company of America, a New Jersey corporation ("Prudential") entered into a certain Lease (the "Lease"), dated November 14, 1996, with Manugistics, Inc., a Delaware corporation ("Sublessor"), pursuant to which Prudential leased to Sublessor the premises known as Suite 208 (the "Premises"), containing approximately 2,812 rentable square feet of space, in the building known as One Bala Plaza (the "Building") located on land in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property") as more particularly described in the Lease. Bala Plaza, Inc., a Delaware corporation ("Landlord"), thereafter succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Lease was assigned to Landlord. Sublessor now desires to sublease the Premises to Philadelphia Consolidated Holding Corp., a Pennsylvania corporation ("Subtenant"), pursuant to a certain Agreement of Sublease (the "Sublease"). Sublessor and Subtenant have requested Landlord's consent to the Sublease, and, subject to the terms and conditions set forth herein, Landlord is willing to grant such consent. (Sublessor also desires to sub-sublease certain premises adjoining the Premises to Subtenant, which premises are more fully described in that certain Sublease, dated May 19, 1994, between Osteopathic Medical Center of Philadelphia, as sublessor, and Sublessor, as subtenant, and Sublessor and Subtenant are contemporaneously seeking Landlord's consent thereto. Such sub-sublease shall be referred to herein as the "Sub-Sublease.") Landlord hereby consents to the execution by Sublessor and Subtenant of the Sublease attached hereto as Exhibit "A", and to use of the Premises for general and administrative office purposes, upon the following terms, covenants, and conditions to which all parties hereto agree to be bound: 1. Upon the execution by Sublessor and Subtenant of the Sublease, Sublessor shall deliver to Landlord a true copy of it. The parties hereto acknowledge that the Sublease is subject to and subordinate to all provisions of the Lease. Except to the extent set forth in Sections 3 and 11 below, nothing therein shall be deemed a waiver of any of the terms of the Lease. 2. The entry into the Sublease shall in no way be deemed to have waived or modified Sublessor's obligation to perform all of the terms, covenants and conditions of the Lease required to be performed by Sublessor, including without limitation the obligation of Sublessor to pay rent thereunder. Nothing in the Sublease shall in any way whatsoever expand the liability or obligations of Landlord, whether to Sublessor, Subtenant or any other person or entity. 109 3. Any termination of the Lease for any cause whatever shall automatically terminate the Sublease and all of Subtenant's rights thereunder; provided, however, that Landlord shall provide copies to Subtenant of any default notices delivered by Landlord to Sublessor pertaining to the Lease and shall permit Subtenant to cure Sublessor's default provided such cure is accomplished on or before the date which is two (2) business days after the expiration of any cure period provided to Sublessor under the Lease (or, in the event there is no such cure period, on or before the date which is two (2) business days after the date of Landlord's default notice); provided further, however, that in the event of any such termination Landlord shall recognize the rights of Subtenant under that certain Second Amendment to Lease (the "Amendment"), dated of even date herewith, between Landlord, as landlord, and Subtenant, as tenant, pursuant to which the Premises will be added to, and become a part of, certain premises leased by Subtenant directly from Landlord (under that certain lease, dated as of August, 1995). In the event Landlord, for the account of Sublessor, takes possession of the Premises without terminating the Lease following a default by Sublessor thereunder and requires Subtenant to pay rent due under the Sublease directly to Landlord (as more particularly set forth in Section 9 below), (i) Landlord shall not be liable for any prepaid rents nor any security deposits paid by Subtenant, (ii) Landlord shall not be subject to any offsets or defenses that Subtenant might have against Sublessor, (iii) Landlord shall not be liable for any concessions or allowances that Sublessor has agreed to grant or give, (iv) Landlord shall not be liable for any other defaults of Sublessor under the Sublease, and (v) Subtenant shall attorn to Landlord upon Landlord's request. In the event Subtenant cures a default of Sublessor in accordance with the preceding paragraph, such cure shall not constitute a waiver of such default, and Subtenant shall be subrogated to all rights and remedies which Landlord has or may have under the Lease. 4. Except as set forth in Section 3 above, Subtenant shall have no rights against Landlord by reason of this Consent and Agreement, and all of Subtenant's rights and liabilities shall derive from the terms of the Sublease or Amendment, as applicable. 5. This Consent and Agreement shall not be deemed an expressed or implied affirmation or representation of any factual statements or recitations contained in the Sublease, whether relating to the Lease or otherwise, it being understood that Subtenant is fully responsible for reviewing and familiarizing itself with all of the terms and conditions of the Lease. 6. The Sublease may not be assigned or amended, nor may the Premises be further subleased, without the consent of Landlord. This Consent and Agreement shall not constitute a waiver of the provisions of the Lease regarding assignment and subletting without the prior written consent of Landlord, and Landlord reserves the right to withhold its consent to any future sublease or assignment in accordance with such provisions. 7. Under no circumstances may Sublessor require Subtenant or, except as set forth in Section 3 above, may Subtenant on its own, perform its obligations under the Sublease directly to Landlord, including without limitation paying any rent due under the Sublease directly to 2 110 Landlord, without the prior written consent of Landlord, which consent may be withheld in Landlord's sole and absolute discretion. Notwithstanding the foregoing, (i) Subtenant shall pay directly to Landlord any charges incurred by or imposed upon Subtenant for services rendered or materials supplied to the Premises (excluding charges for additional rent due under Article 5 of the Lease), (ii) Subtenant shall be liable, jointly and severally with Sublessor, for all charges accruing on and after the Commencement Date (as defined in the Sublease) imposed in connection with the services described in Article 5 of the Lease (and which Landlord may require Subtenant to pay directly to Landlord pursuant to Section 9 below), and (iii) except as set forth in Section 3 above, the acceptance by Landlord of payment for the charges described in clause (i) or (ii) (or any other payment) from Subtenant, or from anyone else liable under the Lease, shall not be deemed a waiver by Landlord of any provisions of the Lease or this Consent and Agreement. 8. Subject to the provisions of this Section, Sublessor hereby assigns and transfers to Landlord Sublessor's interest in all rentals and income arising from the Sublease. Landlord, by executing this document, agrees that until a default shall occur in the performance of Sublessor's obligations under the Lease, Sublessor may receive, collect and enjoy the rents accruing under the Sublease (except to the extent Landlord is entitled to a portion thereof under the terms of the Lease). However, if Sublessor defaults under the Lease, then Landlord may, at its option, receive and collect, directly from Subtenant, all rent owing and to be owed under the Sublease. Landlord shall not by reason of this assignment of the rentals and income arising from the Sublease, nor by reason of the collection of the rents from Subtenant be deemed liable to Subtenant for any failure of Sublessor to perform and comply with any obligations of Sublessor under the Sublease. 9. Sublessor hereby irrevocably authorizes and directs Subtenant, upon receipt of any written notice from Landlord stating that a default exists in the performance of Sublessor's obligations under the Lease, to pay to Landlord the rents due and to become due under the Sublease. (Landlord acknowledges that it shall not deliver such statement and request if Subtenant cures Sublessor's default within the two (2) business day period described in Section 3 above.) Sublessor agrees that Subtenant shall have the right to rely upon any such statement and request from Landlord, and that Subtenant shall pay such rents to Landlord without any obligation or rights to inquire as to whether such default exists and notwithstanding any notice from or claim from Sublessor to the contrary, and Sublessor shall have no right or claim against Subtenant for any such rents so paid by Subtenant. In the event Subtenant does elect to cure a default by Sublessor under the Lease involving the payment of rent, Sublessor agrees that the payment of rent due under the Lease to Landlord shall discharge Subtenant's obligation to pay rent under the Sublease to Sublessor as if the notice from Landlord contemplated by this Section 9 had been given (unless it is subsequently determined that such rent was not due to Landlord). 10. Sublessor's obligation to indemnify and hold Landlord harmless as set forth in Section 16 of the Lease shall include indemnification from any damages, claims, fines, penalties, costs or expenses arising from or in connection with the use and occupancy of the Premises, or any portion thereof, by Subtenant, its agents, employees or contractors. 3 111 11. Except for any telecommunications lines or computer cabling presently existing in the Premises, which Subtenant shall be obligated to remove if Landlord so requires in accordance with the Lease, Landlord hereby agrees that as of the date hereof there are no existing alterations to the Premises that must be removed upon the expiration of the Sublease. With respect to any future alterations, Sublessor authorizes Landlord to approve, on behalf of Sublessor, any alterations to the Premises proposed by Subtenant. In the event Landlord gives such approval (which shall be governed by the applicable provisions of the Lease), then Sublessor shall be deemed to have approved such alterations as well, so long as they are typical office space alterations. Notwithstanding any such approval, Subtenant shall be obligated to remove the same if Landlord so requires in accordance with the Lease. 12. To the extent there are any conflicts between the terms of the Sublease and this Consent and Agreement, the terms of this Consent and Agreement shall control. 13. Sublessor shall be liable for all costs and expenses incurred by Landlord in connection with the Sublease, including without limitation the reasonable legal fees and administrative expenses incurred in connection with this Consent and Agreement, which costs and expenses are equal to $3,750. 14. Copies of all notices to be given by Sublessor and Subtenant under the Sublease shall be provided to Landlord via United States mail or via a nationally recognized overnight courier (such as Federal Express) at the following address: Bala Plaza, Inc. c/o Tower Realty Management Corporation 255 Shoreline Drive, Suite 600 Redwood City, California 94065 Attention: Bala Plaza Asset Manager With a copy to: Tower Realty Management Corporation One Bala Plaza Suite 501 Bala Cynwyd, PA 19004 Attention: Property Manager or to such other person at such other address designated by notice sent to Sublessor and Subtenant. Notices delivered by overnight courier shall be deemed given upon receipt. Mailed notices shall be sent by United States certified or registered mail, postage prepaid, return receipt requested. Such notice shall be deemed to have been given three (3) business days after posting in the United States mail. 4 112 Landlord shall provide to Subtenant copies of all notices given by Landlord to Sublessor under the Lease at the address set forth in the Sublease or such other address designated by notice sent to Landlord by Subtenant. 15. Sublessor shall indemnify and hold Landlord harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker or finder in connection with the sublease of the Premises. 16. Landlord, Sublessor and Subtenant agree that, notwithstanding any provision of this Consent and Agreement to the contrary, all rights and obligations of each of them hereunder, and Landlord's consent to the Sublease, are contingent upon (a) the execution and delivery by Sublessor and Subtenant of the Sub-Sublease, (b) the execution and delivery by Landlord, Osteopathic Medical Center of Philadelphia, Sublessor and Subtenant of the Consent and Agreement related thereto, and (c) the execution and delivery by Landlord and Subtenant of the Amendment. Six duplicate originals of each such document shall be executed by all parties other than Landlord and delivered to Landlord (but shall not be binding upon Landlord until executed and returned). Upon Landlord's execution of same, Landlord shall arrange for delivery thereof and confirm in writing that the contingency set forth in this Section 16 has been satisfied. 5 113 IN WITNESS WHEREOF, Landlord, Sublessor and Subtenant have executed this Consent and Agreement as of the 6th day of July, 1998. Landlord: BALA PLAZA, INC. By: /s/ Joe Grubb --------------------------------------- Name: Joe Grubb Title: Its Authorized Signatory (Corporate Seal) Attest: /s/ Tim Cahill --------------------------------------- Name: Tim Cahill Title: Its Authorized Signatory Sublessor: MANUGISTICS, INC. By: /s/ Kenneth S. Thompson --------------------------------------- Name: Kenneth S. Thompson Title: Executive Vice President (Corporate Seal) Attest: /s/ Peter Q. Repetti --------------------------------------- Name: Peter Q. Repetti Title: Sr. Vice President, CFO Subtenant: PHILADELPHIA CONSOLIDATED HOLDINGS CORP. By: /s/ Jack T. Carballo --------------------------------------- Name: Jack T. Carballo Title: Vice President (Corporate Seal) Attest: /s/ Christine Kleppe --------------------------------------- Name: Christine Kleppe Title: Administrative Assistant 6 114 EXHIBIT A AGREEMENT OF SUBLEASE This Agreement of Sublease ("Agreement") is made this ____ day of June, 1998, by and between MANUGISTICS, INC. ("Sublessor"), a Delaware corporation and PHILADELPHIA CONSOLIDATED HOLDING CORP., a Pennsylvania corporation ("Subtenant"). BACKGROUND A. By that certain Lease dated November 14, 1996 (the "Lease"), a copy of which is attached hereto as Exhibit "A", between The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), as landlord, and Sublessor, as tenant, Sublessor leased from Prudential the premises known as Suite 208 (the "Premises"), containing approximately 2,812 rentable square feet of space, in the building known as One Bala Plaza (the "Building") located on land in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property"), as more particularly described in the Lease, at the rental and upon the terms and conditions set forth in the Lease. Bala Plaza, Inc., a Delaware corporation ("Landlord"), thereafter succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Lease was assigned to Landlord. B. Sublessor desires to sublease the Premises to Subtenant, upon the terms and conditions set forth herein. The Premises is substantially shown on Exhibit "B" attached hereto. C. Sublessor also desires to sub-sublease certain premises adjoining the Premises to Subtenant, which premises are more fully described in that certain Sublease, dated May 19, 1994, between Osteopathic Medical Center of Philadelphia, as sublessor, and Sublessor, as subtenant, and Sublessor and Subtenant are contemporaneously seeking Landlord's consent thereto. Such sub-sublease shall be referred to herein as the "Sub-Sublease." D. Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings established in the Lease. NOW, THEREFORE, in consideration of the covenants herein contained, the parties hereto, intending to be legally bound hereby, do covenant and agree as follows: 1. Premises. Sublessor hereby leases to Subtenant, and Subtenant hereby subleases from Sublessor, the Premises, for the period commencing July 1, 1998 ("Commencement Date") and ending on June 30, 2002 ("Expiration Date") upon the terms and conditions set forth herein and at all times subject to the Lease. The "Rent Commencement Date" shall be August 1, 1998. Subtenant, for the benefit of Sublessor and Landlord, hereby agrees that the Lease (other than Section 45 thereof) is incorporated herein by reference, and Subtenant agrees further to be bound by all of the terms, covenants and conditions on the part of "Tenant" to be done, performed and observed under the Lease; provided, however, that (i) nothing herein shall bind Subtenant to the A-1 115 obligations of Sublessor under the Lease with respect to the amount of rent and additional rent (which amounts shall be as set forth in Sections 2 and 3 hereof and shall be paid by Subtenant to Sublessor), and (ii) if Landlord approves any of Subtenant's proposed alterations to the Premises, then Sublessor shall be deemed to have approved such alterations, so long as they are typical office space alterations (but Subtenant shall be obligated to remove the same if Landlord so requires in accordance with the Lease). This Agreement is contingent upon obtaining the prior written consent of Landlord. If such consent is not obtained by July 15, 1998, this Agreement shall be null and void. Sublessor shall deliver possession of the Premises to Subtenant, and Subtenant shall accept possession of the Premises, in its "as is" condition, without requiring any alterations, improvements or decorations to be made by Sublessor or at Sublessor's expense; provided, however, that Sublessor shall remove all existing workstations and any other furniture or equipment located at the Premises. 2. Rent. Commencing on the Rent Commencement Date, Subtenant shall pay Sublessor base rent ("Base Rent") as follows: ANNUAL BASE RENT MONTHLY BASE PER RENTABLE SQUARE PERIOD RENT FOOT - ------ ---- ---- August 1, 1998 to and $4,335.17 $ 18.50 including June 30, 1999 July 1, 1999 to and including $4,452.33 $ 19.00 June 30, 2000 July 1, 2000 to and including $4,569.50 $ 19.50 June 30, 2001 July 1, 2001 to and including $4,686.67 $ 20.00 June 29, 2002 Monthly Base Rent shall be payable in advance, on the first day of each month during said term, to Sublessor, at 2115 East Jefferson Street, Rockville, Maryland 20852, Attention: _______________; or such other place as Sublessor may designate, without any set off, counterclaim or deduction whatsoever, except that Subtenant shall pay the first monthly installment within three (3) business days after Landlord's approval of this Sublease. If the obligation of Subtenant to pay rent hereunder begins on a day other than on the first day of a calendar month, rent from such date until the first day of the following calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the monthly installment for each day payable in advance. A-2 116 3. Additional Rent. Commencing on the Commencement Date, Subtenant shall pay to Sublessor, as additional rent hereunder, one hundred percent (100%) of all additional rent obligations of Sublessor pursuant to Article 5 of the Lease in accordance with the terms thereof (and Sublessor shall forthwith pay the same to Landlord); provided, however, that the Base Year for determining such additional rent shall be calendar year 1998. 4. Overdue Interest. If Subtenant fails to pay any installment of rent or additional rent under Sections 2 and 3 of this Agreement, respectively, and such failure continues for a period of five (5) days after it is due and payable, Subtenant shall pay Sublessor interest at the rate of eighteen percent (18%) per annum or, if same is usurious, the highest legal rate (as applicable, the "Default Rate"). 5. Use. Subtenant shall use and occupy the Premises as general and administrative offices and for no other purposes. Subtenant shall comply with all applicable laws (as more particularly set forth in Section 30 of the Lease). Subtenant, at its expense, shall maintain and repair the Premises and the fixtures and equipment therein or appurtenant thereto in first class condition and repair, will suffer no waste or injury thereto, and at the expiration or other termination of this Agreement, Subtenant shall surrender the Premises broom clean and in the same order and condition as on the Commencement Date, excepting (i) ordinary wear and tear, (ii) casualty not required to be insured by Subtenant, (iii) condemnation, and (iv) alterations which Subtenant is not required by Landlord to remove. 6. Assignment and Sublease. Subtenant agrees not to assign, mortgage, pledge or otherwise encumber this Agreement, nor to sublet the Premises or any part thereof, without in each instance obtaining the prior written consent of Landlord and Sublessor. Notwithstanding the foregoing, without the consent of Landlord or Sublessor but upon notice to both, Subtenant may assign this Agreement to its parent, affiliate or subsidiary, or to a corporation which is a successor to Subtenant by merger or consolidation or by acquisition of all or substantially all of the assets or stock of Subtenant, provided that (i) the assignment also covers all of Subtenant's rights, titles and interests in, to and under each of (A) the Sub-Sublease and (B) that certain lease (the "Philadelphia Insurance Lease"), dated as of August, 1995, between Landlord, as landlord, and Subtenant, as tenant, pursuant to which certain premises are leased by Subtenant directly from Landlord (and the sublease and consent referenced in Article 49 thereof), (ii) the assignee assumes, in full, the obligations of Subtenant under the Sub-Sublease and the Philadelphia Insurance Lease (and the sublease and consent referenced in Article 49 thereof), and (iii) such assignment shall be under and subject to the terms of this Agreement, the Sub-Sublease and the Philadelphia Insurance Lease (and the sublease and consent referenced in Article 49 thereof), as applicable, and shall not relieve Subtenant of any of its obligations under this Agreement, the Sub-Sublease and the Philadelphia Insurance Lease (and the sublease and consent referenced in Article 49 thereof). 7. Services. Notwithstanding anything in this Agreement to the contrary, Subtenant agrees that Sublessor shall not be obligated to furnish for Subtenant any services of any nature A-3 117 whatsoever, including, without limitation, the furnishing of heat, electrical energy, air conditioning, elevator service, cleaning, window washing, or rubbish removal services. Subtenant, however, shall be entitled to enjoy such services to the extent they are provided by Landlord pursuant to the terms of the Lease. 8. Insurance. a. Subtenant shall maintain at its expense during the term of this Sublease with respect to the Premises and Subtenant's use thereof and of the Property: (1) Worker's Compensation Insurance in the amounts required by statute, and Employer Liability Insurance in at least the following amounts: (a) Bodily Injury by Accident - $500,000 per accident, (b) Bodily Injury by Disease - - $500,000 per employee, and (c) Aggregate Limit - $500,000 per policy year. (2) Property Damage Insurance for the protection of Subtenant and Sublessor, as their interests may appear, covering any alterations or improvements in excess of those contemplated by Section 2(b) above, Subtenant's personal property, business records, fixtures and equipment, and other insurable risks in amounts not less than the full insurable replacement cost of such property and full insurable value of such other interests of Subtenant, with coverage at least as broad as the most recent editions published by Insurance Services Office, Inc. or any successor organization ("ISO"), of: (a) Building and Personal Property Coverage Form (CP0010), (b) Causes of Special Loss Form (CP1030), and (c) Sprinkler Leakage - Earthquake Extension (CP1039). (3) Liability insurance as follows: (I) Commercial General Liability Insurance ("CGL") at least as broad as the most recent ISO edition of Commercial General Liability Coverage Form (CGOOO1) with limits of at least the following amounts: (a) Death or Bodily Injury - $1,000,000, (b) Property Damage or Destruction (including loss of use thereof) - $1,000,000, (c) Products/Completed Operations - $1,000,000, (d) Personal or Advertising injury - $1,000,000, (e) Each Occurrence Limit - $1,000,000, and (f) General Aggregate Limit - $2,000,000 per policy year, and (II) Umbrella Liability Insurance with a limit of at least $15,000,000 (which may be carried in one or more policies). Such CGL and Umbrella policies shall include endorsements: (1) for contractual liability covering Subtenant's indemnity obligations under this Lease, and (2) adding Sublessor, Landlord, the management company for the Property, and any other parties reasonably designated by Sublessor, as Additional Insureds, on a form at least as broad as the most recent edition of Additional Insured - Manager or Lessor of Premises Endorsement Form (CG2O11) published by ISO. b. Upon the request of Sublessor from time to time during the term of this Sublease, Subtenant shall provide Sublessor with certificates evidencing the coverage required hereunder. Such certificates shall: (i) be on ACORD Form 27 or such other form approved or required by Sublessor, (ii) state that such insurance coverage may not be changed, canceled or A-4 118 non-renewed without at least thirty (30) days' prior written notice to Sublessor, and (iii) include, as attachments, duplicate originals or copies of the Additional Insured endorsements to Subtenant's CGL policy required above (once the same are provided to Tenant). Subtenant shall provide renewal certificates to Sublessor at least thirty (30) days prior to expiration of such policies. Except as expressly provided to the contrary herein, coverage hereunder shall apply to events occurring during the policy year regardless of when a claim is made. Sublessor may periodically require that Subtenant reasonably increase or expand the aforementioned coverage. Except as provided to the contrary herein, any insurance carried by Sublessor or Subtenant shall be for the sole benefit of the party carrying such insurance. If Subtenant obtains insurance under "blanket policies," Subtenant shall obtain an endorsement providing that the insurance limits required hereunder are not subject to reduction or impairment by claims or losses at other locations. Subtenant's insurance policies shall be primary to all policies of Sublessor and any other Additional Insureds (whose policies shall be deemed excess and non-contributory). All insurance required hereunder shall be provided by responsible insurers licensed in the Commonwealth of Pennsylvania, and shall have a general policy holder's rating of at least A and a financial rating of at least IX in the then current edition of Best's Insurance Reports. The parties mutually hereby waive all rights and claims against each other for all losses covered by their respective insurance policies, and waive all rights of subrogation of their respective insurers. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder. Sublessor disclaims any representation as to whether the foregoing coverages will be adequate to protect Subtenant, and Subtenant agrees to carry such additional coverage as may be necessary or appropriate. 9. Hold Harmless. Neither Sublessor nor Subtenant shall do or cause to be done, or suffer or permit any act or thing to be done, which may cause the Lease to be canceled, terminated, forfeited or prejudiced or which may make the other party liable for any damages, claims, fines, penalties, costs or expenses thereunder. Each of the Sublessor and Subtenant shall indemnify and save harmless the other from all suits, actions, judgments, damages, claims, liabilities, awards, losses, fines penalties, costs, charges and expenses, including attorneys fees, that either may sustain by reason of the other's failure to perform the terms of this Agreement or the Lease or by reason of the breach by the other of any of the terms, covenants or conditions of this Agreement or the Lease except those arising out of the negligent acts or omissions of the party being indemnified. Without limiting the generality of the preceding paragraph, Sublessor agrees that, in the event Sublessor defaults under the Lease (beyond any applicable notice and cure period) and Subtenant cures such default by performing Sublessor's obligation directly to Landlord, Subtenant's damages shall include, without limitation, all sums paid by Subtenant in effectuating such cure, together with interest at the Default Rate (unless it is subsequently determined that such sums were not due to Landlord). Likewise, in the event the Lease is terminated in accordance with the terms thereof, Subtenant's damages shall include, without limitation, all sums paid by Subtenant in excess of those due and owing under the Sublease (specifically A-5 119 including rent), together with interest at the Default Rate (unless it is subsequently determined that such sums were not due to Landlord). 10. Defaults. The provisions of the Lease relating to defaults and remedies (including without limitation the applicable notice and/or cure periods) are incorporated herein by reference as a separate paragraph of this Agreement and, for purposes of determining the parties defaults and remedies hereunder, said provisions shall apply between Sublessor and Subtenant reading "Landlord" to mean Sublessor and "Tenant" to mean Subtenant. 11. Security Deposit. Simultaneously with the execution of this Agreement by Subtenant, Subtenant shall deposit with Sublessor the sum of Four Thousand Three Hundred Thirty-Five and 17/100ths Dollars ($4,335.17) (the "Security Deposit") to be held by Sublessor without interest payable to Subtenant. The Security Deposit shall be security for the payment and performance by Subtenant of all Subtenant's obligations, covenants, conditions and agreement sunder this Agreement. In the event of any default by Subtenant hereunder, Sublessor shall have the right, but shall not be obligated, to apply all or any portion of the Security Deposit to cure such default, in which event Subtenant shall be obligated to promptly deposit with Sublessor that portion of the Security Deposit used to cure such default. So long as Subtenant is not in default hereunder, Sublessor shall return any unused portion of the Security Deposit to Subtenant within thirty (30) days after expiration of the term of this Agreement. 12. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. This Agreement constitutes the entire agreement between the parties hereto and may not be modified except by an instrument in writing signed by the parties hereto. 13. Notices. Whenever it shall be necessary or desirable for either party to this Agreement to serve any notice or demand on the other party, such notice or demand shall be served by certified mail, return receipt requested, or by overnight courier (such as Federal Express), next day delivery, at the addresses set forth above or at such other address as shall be designated by the parties in accordance with this Section. Each party shall provide to the other copies of all notices received by each from Landlord. 14. Amendments. No amendments shall be made to this Agreement without the prior written approval of Landlord in accordance with the terms of the Lease. 15. Brokers. Subtenant represents to Sublessor that, other than EBI Commercial and Grubb & Ellis (collectively, "Brokers"), Subtenant has not dealt with any broker, finder or agent in connection with the Premises or the negotiation and execution of this Sublease. Subtenant shall indemnify and hold Sublessor harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any other broker, finder or claiming by, through or under Subtenant. Sublessor represents to Subtenant that, other than Brokers, Sublessor has not dealt with any broker, finder or agent in connection with the Premises A-6 120 or the negotiation and execution of this Sublease. Sublessor shall be responsible for all commissions or other compensation owing to Brokers pursuant to separate agreements and shall indemnify and hold Subtenant harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker, finder or agent claiming by, through or under Sublessor, including without limitation Brokers. A-7 121 IN WITNESS WHEREOF, Sublessor and Subtenant have executed this Agreement of Sublease as of the date first above written. Sublessor: MANUGISTICS, INC., a Delaware corporation By: ---------------------------------------- Name: Title: (Corporate Seal) Attest: ------------------------------------ Name: Title: Subtenant: PHILADELPHIA CONSOLIDATED HOLDING CORP., a Pennsylvania corporation By: ---------------------------------------- Name: Title: (Corporate Seal) Attest: ------------------------------------ Name: Title: A-8 122 EXHIBIT "A" [Attach Copy of Lease] A-9 123 EXHIBIT "B" [Attach Plan of Premises] A-10 124 AGREEMENT OF SUBLEASE This Agreement of Sublease ("Agreement") is made this 6th day of July, 1998 by and between MANUGISTICS, INC. ("Sublessor"), a Delaware corporation and PHILADELPHIA CONSOLIDATED HOLDING CORP., a Pennsylvania corporation ("Subtenant"). BACKGROUND A. By that certain Lease dated November 14, 1996 (the "Lease"), a copy of which is attached hereto as Exhibit "A", between The Prudential Insurance Company of America, a New Jersey corporation ("Prudential"), as landlord, and Sublessor, as tenant, Sublessor leased from Prudential the premises known as Suite 208 (the "Premises"), containing approximately 2,812 rentable square feet of space, in the building known as One Bala Plaza (the "Building") located on land in Bala Cynwyd, Lower Merion Township, Montgomery County, Pennsylvania (the "Property"), as more particularly described in the Lease, at the rental and upon the terms and conditions set forth in the Lease. Bala Plaza, Inc., a Delaware corporation ("Landlord"), thereafter succeeded to the right, title and interest of Prudential in and to the Building and the Property, and all of Prudential's right, title and interest as the "Landlord" under the Lease was assigned to Landlord. B. Sublessor desires to sublease the Premises to Subtenant, upon the terms and conditions set forth herein. The Premises is substantially shown on Exhibit "B" attached hereto. C. Sublessor also desires to sub-sublease certain premises adjoining the Premises to Subtenant, which premises are more fully described in that certain Sublease, dated May 19, 1994, between Osteopathic Medical Center of Philadelphia, as sublessor, and Sublessor, as subtenant, and Sublessor and Subtenant are contemporaneously seeking Landlord's consent thereto. Such sub-sublease shall be referred to herein as the "Sub-Sublease." D. Capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meanings established in the Lease. NOW, THEREFORE, in consideration of the covenants herein contained, the parties hereto, intending to be legally bound hereby, do covenant and agree as follows: 1. Premises. Sublessor hereby leases to Subtenant, and Subtenant hereby subleases from Sublessor, the Premises, for the period commencing July 1, 1998 ("Commencement Date") and ending on June 30, 2002 ("Expiration Date") upon the terms and conditions set forth herein and at all times subject to the Lease. The "Rent Commencement Date" shall be August 1, 1998. Subtenant, for the benefit of Sublessor and Landlord, hereby agrees that the Lease (other than Section 45 thereof) is incorporated herein by reference, and Subtenant agrees further to be bound by all of the terms, covenants and conditions on the part of "Tenant" to be done, performed and observed under the Lease; provided, however, that (i) nothing herein shall bind Subtenant to the 125 obligations of Sublessor under the Lease with respect to the amount of rent and additional rent (which amounts shall be as set forth in Sections 2 and 3 hereof and shall be paid by Subtenant to Sublessor), and (ii) if Landlord approves any of Subtenant's proposed alterations to the Premises, then Sublessor shall be deemed to have approved such alterations, so long as they are typical office space alterations (but Subtenant shall be obligated to remove the same if Landlord so requires in accordance with the Lease). This Agreement is contingent upon obtaining the prior written consent of Landlord. If such consent is not obtained by July 15, 1998, this Agreement shall be null and void. Sublessor shall deliver possession of the Premises to Subtenant, and Subtenant shall accept possession of the Premises, in its "as is" condition, without requiring any alterations, improvements or decorations to be made by Sublessor or at Sublessor's expense; provided, however, that Sublessor shall remove all existing workstations and any other furniture or equipment located at the Premises. 2. Rent. Commencing on the Rent Commencement Date, Subtenant shall pay Sublessor base rent ("Base Rent") as follows:
ANNUAL BASE RENT MONTHLY BASE PER RENTABLE SQUARE PERIOD RENT FOOT - ------ ---- ---- August l, l998 to and $4,335.17 $18.50 including June 30, 1999 July 1, 1999 to and including $4,452.33 $19.00 June 30, 2000 July 1, 2000 to and including $4,569.50 $19.50 June 30, 2001 July 1, 2001 to and including $4,686.67 $20.00 June 29, 2002
Monthly Base Rent shall be payable in advance, on the first day of each month during said term, to Sublessor, at 2115 East Jefferson Street, Rockville, Maryland 20852, Attention: Real Estate/Lease Administrator; or such other place as Sublessor may designate, without any set off, counterclaim or deduction whatsoever, except that Subtenant shall pay the first monthly installment within three (3) business days after Landlord's approval of this Sublease. If the obligation of Subtenant to pay rent hereunder begins on a day other than on the first day of a calendar month, rent from such date until the first day of the following calendar month shall be prorated at the rate of one-thirtieth (1/30th) of the monthly installment for each day payable in advance. 2 126 3. Additional Rent. Commencing on the Commencement Date, Subtenant shall pay to Sublessor, as additional rent hereunder, one hundred percent (100%) of all additional rent obligations of Sublessor pursuant to Article 5 of the Lease in accordance with the terms thereof (and Sublessor shall forthwith pay the same to Landlord); provided, however, that the Base Year for determining such additional rent shall be calendar year 1998. 4. Overdue Interest. If Subtenant fails to pay any installment of rent or additional rent under Sections 2 and 3 of this Agreement, respectively, and such failure continues for a period of five (5) days after it is due and payable, Subtenant shall pay Sublessor interest at the rate of eighteen percent (18%) per annum or, if same is usurious, the highest legal rate (as applicable, the "Default Rate"). 5. Use. Subtenant shall use and occupy the Premises as general and administrative offices and for no other purposes. Subtenant shall comply with all applicable laws (as more particularly set forth in Section 30 of the Lease). Subtenant, at its expense, shall maintain and repair the Premises and the fixtures and equipment therein or appurtenant thereto in first class condition and repair, will suffer no waste or injury thereto, and at the expiration or other termination of this Agreement, Subtenant shall surrender the Premises broom clean and in the same order and condition as on the Commencement Date, excepting (i) ordinary wear and tear, (ii) casualty not required to be insured by Subtenant, (iii) condemnation, and (iv) alterations which Subtenant is not required by Landlord to remove. 6. Assignment and Sublease. Subtenant agrees not to assign, mortgage, pledge or otherwise encumber this Agreement, nor to sublet the Premises or any part thereof, without in each instance obtaining the prior written consent of Landlord and Sublessor. Notwithstanding the foregoing, without the consent of Landlord or Sublessor but upon notice to both, Subtenant may assign this Agreement to its parent, affiliate or subsidiary, or to a corporation which is a successor to Subtenant by merger or consolidation or by acquisition of all or substantially all of the assets or stock of Subtenant, provided that (i) the assignment also covers all of Subtenant's rights, titles and interests in, to and under each of (A) the Sub-Sublease and (B) that certain lease (the "Philadelphia Insurance Lease"), dated as of August, 1995, between Landlord, as landlord, and Subtenant, as tenant, pursuant to which certain premises are leased by Subtenant directly from Landlord (and the sublease and consent referenced in Article 49 thereof), (ii) the assignee assumes, in full, the obligations of Subtenant under the Sub-Sublease and the Philadelphia Insurance Lease (and the sublease and consent referenced in Article 49 thereof), and (iii) such assignment shall be under and subject to the terms of this Agreement, the Sub-Sublease and the Philadelphia Insurance Lease (and the sublease and consent referenced in Article 49 thereof), as applicable, and shall not relieve Subtenant of any of its obligations under this Agreement, the Sub-Sublease and the Philadelphia Insurance Lease (and the sublease and consent referenced in Article 49 thereof). 7. Services. Notwithstanding anything in this Agreement to the contrary, Subtenant agrees that Sublessor shall not be obligated to furnish for Subtenant any services of any nature 3 127 whatsoever, including, without limitation, the furnishing of heat, electrical energy, air conditioning, elevator service, cleaning, window washing, or rubbish removal services. Subtenant, however, shall be entitled to enjoy such services to the extent they are provided by Landlord pursuant to the terms of the Lease. 8. Insurance. a. Subtenant shall maintain at its expense during the term of this Sublease with respect to the Premises and Subtenant's use thereof and of the Property: (1) Worker's Compensation Insurance in the amounts required by statute, and Employer Liability Insurance in at least the following amounts: (a) Bodily Injury by Accident - $500,000 per accident, (b) Bodily Injury by Disease - - $500,000 per employee, and (c) Aggregate Limit - $500,000 per policy year. (2) Property Damage Insurance for the protection of Subtenant and Sublessor, as their interests may appear, covering any alterations or improvements in excess of those contemplated by Section 2(b) above, Subtenant's personal property, business records, fixtures and equipment, and other insurable risks in amounts not less than the full insurable replacement cost of such property and full insurable value of such other interests of Subtenant, with coverage at least as broad as the most recent editions published by Insurance Services Office, Inc. or any successor organization ("ISO"), of: (a) Building and Personal Property Coverage Form (CP00l0), (b) Causes of Special Loss Form (CP1030), and (c) Sprinkler Leakage - Earthquake Extension (CP1039). (3) Liability insurance as follows: (I) Commercial General Liability Insurance ("CGL") at least as broad as the most recent ISO edition of Commercial General Liability Coverage Form (CG0001) with limits of at least the following amounts: (a) Death or Bodily Injury - $1,000,000, (b) Property Damage or Destruction (including loss of use thereof) - $1,000,000, (c) Products/Completed Operations - $1,000,000, (d) Personal or Advertising injury - $1,000,000, (e) Each Occurrence Limit - $1,000,000, and (f) General Aggregate Limit - $2,000,000 per policy year, and (II) Umbrella Liability Insurance with a limit of at least $15,000,000 (which may be carried in one or more policies). Such CGL and Umbrella policies shall include endorsements: (1) for contractual liability covering Subtenant's indemnity obligations under this Lease, and (2) adding Sublessor, Landlord, the management company for the Property, and any other parties reasonably designated by Sublessor, as Additional Insureds, on a form at least as broad as the most recent edition of Additional Insured - Manager or Lessor of Premises Endorsement Form (CG2011) published by ISO. b. Upon the request of Sublessor from time to time during the term of this Sublease, Subtenant shall provide Sublessor with certificates evidencing the coverage required hereunder. Such certificates shall: (i) be on ACORD Form 27 or such other form approved or required by Sublessor, (ii) state that such insurance coverage may not be changed, canceled or 4 128 non-renewed without at least thirty (30) days' prior written notice to Sublessor, and (iii) include, as attachments, duplicate originals or copies of the Additional Insured endorsements to Subtenant's CGL policy required above (once the same are provided to Tenant). Subtenant shall provide renewal certificates to Sublessor at least thirty (30) days prior to expiration of such policies. Except as expressly provided to the contrary herein, coverage hereunder shall apply to events occurring during the policy year regardless of when a claim is made. Sublessor may periodically require that Subtenant reasonably increase or expand the aforementioned coverage. Except as provided to the contrary herein, any insurance carried by Sublessor or Subtenant shall be for the sole benefit of the party carrying such insurance. If Subtenant obtains insurance under "blanket policies," Subtenant shall obtain an endorsement providing that the insurance limits required hereunder are not subject to reduction or impairment by claims or losses at other locations. Subtenant's insurance policies shall be primary to all policies of Sublessor and any other Additional Insureds (whose policies shall be deemed excess and non-contributory). All insurance required hereunder shall be provided by responsible insurers licensed in the Commonwealth of Pennsylvania, and shall have a general policy holder's rating of at least A and a financial rating of at least IX in the then current edition of Best's Insurance Reports. The parties mutually hereby waive all rights and claims against each other for all losses covered by their respective insurance policies, and waive all rights of subrogation of their respective insurers. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder. Sublessor disclaims any representation as to whether the foregoing coverages will be adequate to protect Subtenant, and Subtenant agrees to carry such additional coverage as may be necessary or appropriate. 9. Hold Harmless. Neither Sublessor nor Subtenant shall do or cause to be done, or suffer or permit any act or thing to be done, which may cause the Lease to be canceled, terminated, forfeited or prejudiced or which may make the other party liable for any damages, claims, fines, penalties, costs or expenses thereunder. Each of the Sublessor and Subtenant shall indemnify and save harmless the other from all suits, actions, judgments, damages, claims, liabilities, awards, losses, fines penalties, costs, charges and expenses, including attorneys fees, that either may sustain by reason of the other's failure to perform the terms of this Agreement or the Lease or by reason of the breach by the other of any of the terms, covenants or conditions of this Agreement or the Lease except those arising out of the negligent acts or omissions of the party being indemnified. Without limiting the generality of the preceding paragraph, Sublessor agrees that, in the event Sublessor defaults under the Lease (beyond any applicable notice and cure period) and Subtenant cures such default by performing Sublessor's obligation directly to Landlord, Subtenant's damages shall include, without limitation, all sums paid by Subtenant in effectuating such cure, together with interest at the Default Rate (unless it is subsequently determined that such sums were not due to Landlord). Likewise, in the event the Lease is terminated in accordance with the terms thereof, Subtenant's damages shall include, without limitation, all sums paid by Subtenant in excess of those due and owing under the Sublease (specifically 5 129 including rent), together with interest at the Default Rate (unless it is subsequently determined that such sums were not due to Landlord). 10. Defaults. The provisions of the Lease relating to defaults and remedies (including without limitation the applicable notice and/or cure periods) are incorporated herein by reference as a separate paragraph of this Agreement and, for purposes of determining the parties defaults and remedies hereunder, said provisions shall apply between Sublessor and Subtenant reading "Landlord" to mean Sublessor and "Tenant" to mean Subtenant. 11. Security Deposit. Simultaneously with the execution of this Agreement by Subtenant, Subtenant shall deposit with Sublessor the sum of Four Thousand Three Hundred Thirty-Five and 17/100ths Dollars ($4,335.17) (the "Security Deposit") to be held by Sublessor without interest payable to Subtenant. The Security Deposit shall be security for the payment and performance by Subtenant of all Subtenant's obligations, covenants, conditions and agreements under this Agreement. In the event of any default by Subtenant hereunder, Sublessor shall have the right, but shall not be obligated, to apply all or any portion of the Security Deposit to cure such default, in which event Subtenant shall be obligated to promptly deposit with Sublessor that portion of the Security Deposit used to cure such default. So long as Subtenant is not in default hereunder, Sublessor shall return any unused portion of the Security Deposit to Subtenant within thirty (30) days after expiration of the term of this Agreement. 12. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. This Agreement constitutes the entire agreement between the parties hereto and may not be modified except by an instrument in writing signed by the parties hereto. 13. Notices. Whenever it shall be necessary or desirable for either party to this Agreement to serve any notice or demand on the other party, such notice or demand shall be served by certified mail, return receipt requested, or by overnight courier (such as Federal Express), next day delivery, at the addresses set forth above or at such other address as shall be designated by the parties in accordance with this Section. Each party shall provide to the other copies of all notices received by each from Landlord. 14. Amendments. No amendments shall be made to this Agreement without the prior written approval of Landlord in accordance with the terms of the Lease. 15. Brokers. Subtenant represents to Sublessor that, other than EBI Commercial and Grubb & Ellis (collectively, "Brokers"), Subtenant has not dealt with any broker, finder or agent in connection with the Premises or the negotiation and execution of this Sublease. Subtenant shall indemnify and hold Sublessor harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any other broker, finder or claiming by, through or under Subtenant. Sublessor represents to Subtenant that, other than Brokers, Sublessor has not dealt with any broker, finder or agent in connection with the Premises 6 130 or the negotiation and execution of this Sublease. Sublessor shall be responsible for all commissions or other compensation owing to Brokers pursuant to separate agreements and shall indemnify and hold Subtenant harmless against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any broker, finder or agent claiming by, through or under Sublessor, including without limitation Brokers. 7 131 IN WITNESS WHEREOF, Sublessor and Subtenant have executed this Agreement of Sublease as of the date first above written. Sublessor: MANUGISTICS, INC., a Delaware corporation By: /s/ Kenneth S. Thompson ------------------------------------ Name: Kenneth S. Thompson Title: Executive Vice President (Corporate Seal) Attest: /s/ Peter Q. Repetti --------------------------------- Name: Peter Q. Repetti Title: Sr. Vice President, CEO Subtenant: PHILADELPHIA CONSOLIDATED HOLDING CORP., a Pennsylvania corporation By: /s/ Jack T. Carballo ------------------------------------ Name: Jack T. Carballo Title: Vice President (Corporate Seal) Attest: /s/ Christine Kleppe --------------------------------- Name: Christine Kleppe Title: Administrative Assistant Attest: /s/ Craig P. Keller --------------------------------- Name: Craig P. Keller Title: Vice President 8 132 EXHIBIT "A" [Attach Copy of Lease] A-1 133 LEASE BALA CYNWYD, PENNSYLVANIA BETWEEN THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, AS LANDLORD, AND MANUGISTICS, INC., AS TENANT 134 TABLE OF ARTICLES (Revised 11/14/96) ARTICLE: PAGE 1. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4. Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5. Operating and Maintenance Costs and Real Estate Taxes Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . 2 6. Late Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7. Use of Premises. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8. Common Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9. Alterations and Trade Fixtures, Removal. . . . . . . . . . . . . . . 7 10. Mechanics' Liens . . . . . . . . . . . . . . . . . . . . . . . . . . 9 11. Condition of Premises. . . . . . . . . . . . . . . . . . . . . . . .10 12. Building Services. . . . . . . . . . . . . . . . . . . . . . . . . .10 13. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . .12 14. Access to Premises . . . . . . . . . . . . . . . . . . . . . . . . .15 15. Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 16. Indemnification of Landlord and Liability Insurance. . . . . . . . .16 17. Waiver of Claims . . . . . . . . . . . . . . . . . . . . . . . . . .18 18. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . .18 19. Negative Covenants of Tenant . . . . . . . . . . . . . . . . . . . .18 20. Fire or Other Casualty . . . . . . . . . . . . . . . . . . . . . . .19 21. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . .20 22. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 23. Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . . .21 24. Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 25. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 26. Requirement of Strict Performance . . . . . . . . . . . . . . . . .28 27. Relocation of Tenant . . . . . . . . . . . . . . . . . . . . . . . .28 28. Surrender of Premises; Holding Over. . . . . . . . . . . . . . . . .29 29. Delay in Possession . . . . . . . . . . . . . . . . . . . . . . . .30 30. Compliance with Laws and Ordinances. . . . . . . . . . . . . . . . .30 31. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 32. Warranty of Tenant . . . . . . . . . . . . . . . . . . . . . . . . .31 33. Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . .32 34. Landlord's Obligations . . . . . . . . . . . . . . . . . . . . . . .32 35. Landlord's Liability . . . . . . . . . . . . . . . . . . . . . . . .32 36. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 37. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . .32 38. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 39. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 135 40. Gender . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .33 41. Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 42. Exhibits and Rider . . . . . . . . . . . . . . . . . . . . . . . . .33 43. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .33 44. Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . .33 RIDER ARTICLES: PAGE 45. Landlord's Work and Contributions . . . . . . . . . . . . . . . . . . . 35 EXHIBITS: A - Floor Plan of Premises B - Rules and Regulations C - Building Holidays D - Schedule of Cleaning Services E - Confirmation of Lease Term Agreement 136 LEASE BALA CYNWYD, PENNSYLVANIA 1. PARTIES This Lease, made this 14th day of November, 1996, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation having an office at 8 Campus Drive, 4th Floor, Arbor Circle South, Parsippany, NJ 07054 (hereinafter "Landlord"), and Manugistics, Inc., a Delaware Corporation having its principal offices at 2115 East Jefferson Street, Rockville, Maryland 20852 (hereinafter "Tenant"). 2. PREMISES For and in consideration of the rent to be paid and the covenants and agreements to be performed by Tenant as hereinafter set forth, Landlord does hereby lease, demise and let unto Tenant that portion of the 2nd floor, shown outlined and hatched in black on the floor plan attached hereto as Exhibit A and containing approximately 2,812 rentable square feet (hereinafter "Premises"), in Landlord's building known as One Bala Plaza and located in Bala Cynwyd, Pennsylvania (hereinafter "Building"). 3. TERM The term of this Lease shall be for five (5) years five (5) months, commencing on February 1, 1997 (hereinafter "Commencement Date") and expiring at midnight on June 30, 2002 (hereinafter "Expiration Date"), unless renewed or sooner terminated as hereinafter provided and subject to the provisions of Article 29 below. 4. BASE RENT (a) Base Rent - During the entire term of this Lease, Tenant shall pay to Landlord, as yearly rent (hereinafter "Base Rent"), the following sums in equal monthly installments in advance on the first day of each calendar month, without setoff or deduction:
ANNUAL MONTHLY BASE RENT RATE PERIOD BASE RENT BASE RENT PER SQUARE FOOT ------ --------- --------- --------------- 02/01/97 - 06/30/00 $61,864.00 $5,155.33 $22.00 07/01/00 - 06/30/02 $67,488.00 $5,624.00 $24.00
137 In the event the term of this Lease commences on a day other than the first day of a calendar month or expires on a day other than the last day of a calendar month, Tenant shall pay to Landlord a pro rata portion of the monthly installment of Base Rent for such partial month. (b) Additional Rent - Whenever under the terms of this Lease any sum of money is required to be paid by Tenant in addition to the Base Rent herein reserved, said additional sum shall be deemed "additional rent" and be collectible as such with any installment of Base Rent thereafter falling due hereunder. (c) All payments of Base Rent and additional rent shall be paid when due, without demand, at the office of Premisys Real Estate Services, Inc., One Bala Plaza - Suite E501, Bala Cynwyd, Pennsylvania 19004, or at such other place as Landlord may from time to time direct. All checks shall be made payable to Premisys Real Estate Services, Inc., Agent. (d) Security Deposit - Landlord acknowledges receipt from Tenant of the sum of Five Thousand One Hundred Fifty Five 33/100 ($5,155.33) Dollars ("Security Deposit") to be held as collateral security for the payment of the Base Rent, additional rent and all other sums of money payable by Tenant under this Lease, and for the faithful performance of all other covenants and agreements of Tenant under this Lease. The Security Deposit, without interest, shall be repaid to Tenant within ninety (90) days after the expiration date of this Lease, provided Tenant shall have made all such payments and performed all such covenants and agreements. Upon any undisputed default by Tenant hereunder, continuing beyond the expiration of the applicable notice and cure period, at Landlord's sole option, Landlord may apply all or part of the Security Deposit on account of such default, and thereafter Tenant shall promptly restore the original amount of the Security Deposit. 5. OPERATION AND MAINTENANCE COSTS AND REAL ESTATE TAXES ADDITIONAL RENT (a) The costs and expenses of the operation, maintenance and repair of the Building (hereinafter "Operation and Maintenance Costs") shall include, without limitation, the cost and expense to Landlord of the following items: -2- 138 (1) All wages, salaries and fees of all employees and agents engaged in the management, operation, repair, replacement, maintenance and security of the Building, including taxes, insurance and all other employee benefits relating thereto; (2) All supplies and materials used in the management, operation, repair, replacement, maintenance and security of the Building; (3) All utilities consumed by the Building and the servicing thereof, including, without limitation, gas, water, sewer and electricity for lighting, heating, ventilating and air-conditioning; (4) All maintenance and service contracts for the operation, repair, replacement, maintenance, and security of the Building, including, without limitation, window cleaning, security system, heating, ventilating and air-conditioning system, fire sprinkler system, elevators and landscaping; (5) All fire and extended coverage (with all risk coverage) insurance and comprehensive general liability insurance for the Building (including all common areas) and Landlord's personal property and fixtures used in connection therewith; (6) All repairs (including necessary replacements) and general maintenance of the Building; (7) All cleaning and janitorial services for the Building; (8) The cost of any capital improvements (i) which are made for the primary purpose of reducing Operation and Maintenance Costs or (ii) which may be required by governmental authority under any governmental law or regulation that was not applicable to the Building as of the date of this Lease, which cost shall be amortized over the expected useful life of the capital improvement are reasonably determined by Landlord in accordance with standard accounting practice, together with interest on the unamortized balance at the rate equal to the Prime Rate being charged by Mellon Bank East, Philadelphia, -3- 139 Pennsylvania or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements; and (9) All other costs and expenses necessarily and reasonably incurred by Landlord in the proper operation and maintenance of a first-class office building. (b) All "Real Estate Taxes" which, for the purposes of this Article, shall mean all gross real property taxes, charges and assessments (including any special assessments) which are levied, assessed or imposed by any governmental authority with respect to the land and the Building and any improvements, fixtures and equipment and all other property of Landlord, real or personal, located in or on the Building and used in connection with the operation of the Building and any tax which shall be levied or assessed in addition to and/or in lieu of such real or personal property taxes (including, without limitation, any municipal income tax, any license fees, tax measured by or imposed upon rents, or other tax or charge upon Landlord's business of leasing the Building), but shall not include any federal or state income tax, or any franchise, capital stock, estate or inheritance taxes. In the event that the tax statement from the taxing authority does not allocate assessments with respect to the Building and assessments relating to any other improvements located upon the land upon which the Building is situated, Landlord shall make a reasonable determination of the proper allocation of such assessment based on standard accounting practices - (c) (i) "Base Year" shall be defined as calendar year 1996; (ii) "Comparison Year" shall be defined as each calendar year (or part thereof) following the Base Year and included in the original term of this Lease and any renewal thereof; and (iii) "Tenant's Percentage" shall be 0.7699%, which is the ratio that the rentable square foot area of the Premises (i.e. 2,812 rentable square feet) bears to the total rentable square foot area of -4- 140 office space in the Building (i.e. 365,256 rentable square feet) For each Comparison Year, Tenant shall pay Landlord, as additional rent, Tenant's Percentage of: (1) Any increase in the Real Estate Taxes for each Comparison Year over the Real Estate Taxes for the Base Year; and (2) Any increase in Operation and Maintenance Costs for each Comparison Year over the Operation and Maintenance Costs for the Base Year. (d) During each Comparison Year commencing on January 1, 1997, Landlord and Tenant agree that Tenant shall pay monthly, in advance, an amount equal to one-twelfth of Tenant's estimated annual Real Estate Taxes and Operation and Maintenance Costs additional rent due for each Comparison Year. For each Comparison Year, Landlord shall make an estimate of Tenant's Real Estate Taxes and Operation and Maintenance Costs additional rent and notify Tenant as to such estimate on or about December 15th of the preceding year. (e) On or about May 1 of each Comparison Year commencing with the 2nd Comparison Year, Landlord shall submit to Tenant a statement setting forth the actual Real Estate Taxes and Operation and Maintenance Costs for the Building for the preceding Comparison Year and Tenant's Percentage of the increase thereof above the Real Estate Taxes and Operation and Maintenance Costs for the Base Year. Within thirty (30) days after delivery of such statement to Tenant, an adjustment shall thereupon be made between Landlord and Tenant to reflect any difference between Tenant's estimated payments under paragraph (d) above and Tenant's Percentage of the increase in the actual Real Estate Taxes and Operation and Maintenance Costs for the preceding Comparison Year above the Operation and Maintenance Costs for the Base Year. In no event, however, shall the monthly rent paid by Tenant be less than the Base Rent set forth in Section 4 (a) above. -5- 141 (f) All sums due under this Article 5 shall be appropriately apportioned and prorated for any portion of the year during which this Lease shall be in force. In the event that this Lease shall expire at any time other than at the end of a calendar year, then within thirty (30) days after statements reflecting the actual Operation and Maintenance Costs for the year in which such expiration occurs are submitted by Landlord to Tenant, either Landlord or Tenant shall pay to the other party the adjustment sum due. The provisions of this paragraph (f) shall survive the Expiration Date of this Lease. (g) If the Building is less than 95% occupied during any portion or all of the Base Year or any Comparison Year, then Landlord shall adjust the Operation and Maintenance Costs for any such Year to an amount which reflects what the Operation and Maintenance Costs would have been for such Year had the Building been 95% occupied throughout such Year. 6. LATE CHARGES In the event that Tenant shall fail to pay Base Rent or any additional rent within five (5) days after its due date, Tenant shall pay an automatic late charge to Landlord of $.05 for each dollar overdue. In addition, in the event that Tenant shall fail to pay Base Rent or any additional rent within thirty (30) days after its due date, then from and after the thirty-first (31st) day until the date Tenant finally pays the Base Rent or additional rent, Tenant shall pay Landlord an additional late charge at the rate of fifteen (15%) percent per annum with respect to the delinquent amount. Such late charges shall be deemed additional rent for all purposes under this Lease. 7. USE OF PREMISES Tenant shall use and occupy the Premises for purposes of executive and general offices. Tenant shall not use or occupy the Premises for any other purpose or business, without the prior written consent of Landlord. Tenant shall observe and comply with the rules "and regulations set forth on Exhibit attached hereto and made a part hereof (hereinafter "Rules and Regulations"). The Rules and Regulations shall uniformly apply to Tenant and all other Building tenants and their respective employees, agents, licensees, invitees, subtenants and contractors. -6- 142 8. COMMON AREAS All parking areas, walkways, elevators, stairs, driveways, alleys, public corridors, fire escapes, and other areas, facilities and improvements which may be provided by Landlord from time to time for the general use, in common, of Tenant and other Building tenants and their employees, agents, invitees and licensees, shall at all times be subject to the exclusive control and management of Landlord, including Landlord's right to alter, modify, or relocate such areas, facilities and improvements. Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all such common areas, facilities and improvements. 9. ALTERATIONS AND TRADE FIXTURES, REMOVAL (a) During the term of this Lease, Tenant shall not make any alterations or additions to the Premises which (i) involve new or relocated partitions, (ii) are structural in nature, or (iii) affect the Building systems, without the prior written consent of Landlord. In the event that Tenant shall desire to perform any such alterations or additions in the Premises, Tenant shall deliver to Landlord detailed plans and specifications prepared by and at the expense of Tenant. Landlord shall review such plans and specifications and return same to Tenant either marked approved, marked to show the corrections required (in which event such marked-up plans and specifications shall be deemed approved as marked-up), or marked disapproved with the reasons therefor. If Landlord disapproves Tenant's plans and specifications, Tenant shall have twenty (20) days from the date of such disapproval to submit revised plans and specifications subject to subsequent mark-ups or disapprovals and corrections in the above manner. Upon approval by Landlord of Tenant's plans and specifications, Tenant shall proceed with due diligence to commence the work to be performed by Tenant and shall complete same in a diligent manner. All such work consented to by Landlord, to be done or performed in or about the Premises by Tenant, shall be performed (i) at Tenant's sole cost and expense, and (ii) by contractors and subcontractors reasonably approved by Landlord. Upon completion of any such work which requires the review of plans and specifications and continuous observance of construction, Tenant shall pay to Landlord's Building Manager an amount equal to five (5%) percent of the cost of such work, to reimburse Landlord's Building Manager for said review and -7- 143 observance and the coordination and final inspection of the work. During the course of performance of any alteration work or additions (whether or not Landlord's consent is required), Tenant will carry or cause to be carried Comprehensive General Liability insurance, with a limit of at least $2,000,000.00, naming Landlord and Landlord's Building managing agent as additional insureds and further providing that such insurance shall not be canceled without at least thirty (30) days' prior written notice to Landlord and Landlord's agent. Tenant shall use it's best efforts to obtain a standard one year guarantee by each of Tenant's prime contractors for the benefit of Landlord and Tenant that all work performed and materials and equipment furnished by such contractors will conform to the requirements of the plans and specifications as to the kind, quality, function of the equipment and characteristics of material and workmanship and will remain so for a period of at least one year from the date that the work has been completed. In the event any defects in materials, equipment or workmanship shall appear prior to the expiration of such period, upon receiving written notice thereof from Landlord or Tenant, the contractor will immediately correct and repair the same at the expense of such contractor. Said guarantees shall be effective whether or not any part of the aforesaid work has been subcontracted by the contractor. In the event either Landlord or Tenant installs any supplemental Heating, Ventilating and Air Conditioning System ("HVAC System") in the Premises, either prior to the Commencement Date or during the term of the Lease, Tenant hereby expressly understands and agrees that Tenant shall be solely responsible for the maintenance and repair of the HVAC System. (b) Any consent by Landlord permitting Tenant to do any alteration work in or about the Premises shall be and hereby is conditioned upon Tenant's work being performed by workmen and mechanics working in harmony and not interfering with labor employed by Landlord, Landlord's contractors or by any other tenants or their contractors. To that end, said work shall be done by union labor having the same union affiliations as other workmen performing work for other tenants or Landlord and their contractors, if required by Landlord. If at any time any of the workmen or mechanics performing any of Tenant's work shall not be of the same union affiliation or shall be unable to work in harmony or shall interfere with any labor employed by Landlord, other tenants or their respective mechanics the contractors, then -8- 144 the permission granted by Landlord to Tenant permitting Tenant to do any work in or about the Premises, may be withdrawn by Landlord upon forty-eight (48) hours' written notice to Tenant. (c) All alterations, installations, additions and improvements made and installed by Tenant and/or at Tenant's expense, in the Premises which are of a permanent nature and which cannot be removed without damage to the Premises or Building shall become and be the property of Landlord, and shall remain upon and be surrendered with the Premises as a part thereof at the end of the term of this Lease, except that Landlord shall have the right to notify Tenant prior to the Expiration Date and require Tenant to remove any of such alterations, installations, additions and improvements and, in the event of service of such notice, at Tenant's sole cost and expense, Tenant shall promptly remove the same in accordance with such request and restore the Premises to its original condition, ordinary wear and tear and casualty excepted. In the event Tenant fails to remove any of such alterations, installations, additions and improvements following receipt of Landlord's notice, Landlord may, at its option, arrange for such removal in which event Tenant shall be obligated to reimburse Landlord for the entire cost of the removal and this obligation shall survive the Expiration Date of this Lease. (d) Tenant shall have the right but not the obligation to remove all movable furniture, equipment and trade fixtures installed by Tenant in the Premises, except lighting fixtures and air-conditioning equipment, provided that Tenant repairs any damage caused to the Premises by said removal. All of said movable furniture, equipment and trade fixtures remaining in the Premises after the Lease expiration date, or any sooner termination date due to any default of Tenant, shall be deemed to be abandoned property and shall automatically become the property of Landlord. 10. MECHANICS' LIENS Prior to Tenant performing any alterations, additions or construction work in or about the Premises for which a lien could be filed against the Premises or the Building, Tenant shall have its contractor execute a Waiver of Mechanics' Lien, in form satisfactory to Landlord, and provide Landlord with the original copy thereof. -9- 145 Notwithstanding the foregoing, if any mechanics' or other lien shall be filed against the Premises or the Building purporting to be for labor or materials furnished or to be furnished at the request of Tenant, then at its expense, Tenant shall cause such lien to be removed of record by payment, bond or otherwise, within thirty (30) days after the filing thereof. If Tenant shall fail to cause such lien to be removed of record within such 30-day period, Landlord may cause such lien to be removed of record by payment, bond or otherwise, without investigation as to the validity thereof or as to any offsets or defenses thereto, in which event Tenant shall reimburse Landlord in the amount paid by Landlord, including expenses, within ten (10) days after Landlord's billing therefor. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, costs, damages, liabilities and expenses (including attorney fees) which may be brought or imposed against or incurred by Landlord by reason of any such lien or removal of record. 11. CONDITION OF PREMISES Tenant acknowledges and agrees that, except for Landlord's work set forth in Article 45 of the Rider, there have been no representations or warranties made by or on behalf of Landlord with respect to the Premises or the Building or with respect to the suitability of either for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were in satisfactory condition, order and repair at such time. 12. BUILDING SERVICES (a) Landlord shall provide, within its Building standards, the following services and facilities: (1) Heating, ventilating and air conditioning, Monday to Friday from 8:00 A.M. to 6:00 P.M. and on Saturdays from 8:00 A.M. to 1:00 P.M. (hereinafter "Business Hours"), except on the holidays set forth on Exhibit C (hereinafter "Holidays"). Tenant agrees to cooperate fully with Landlord and to abide by all the rules and regulations which Landlord may reasonably prescribe for the proper functioning and protection of the heating, ventilating and air conditioning systems. -10- 146 (2) Electricity for normal office use, including normal office equipment, in the Premises, during Business Hours (a demand capacity of 3-1/2 watts per rentable square foot is deemed normal office use). In the event Landlord reasonably determines that Tenant is exceeding normal office use of electricity, Landlord may install a separate electric meter in the Premises to register all electrical usage above normal office use. Tenant agrees to pay Landlord for the cost of the installation of the meter and for all electricity registered on said meter at the current general service rate. (3) Cleaning and maintenance of common areas in the Building, including bathroom facilities; (4) Continuous passenger elevator service during Business Hours, and service via at least one car at all other times; freight elevator service from 8:00 A.M. to 4:00 P.M., Monday through Friday, except Holidays; (5) Janitorial services, including cleaning of Premises, in accordance with Landlord's Building standard schedule, which is annexed hereto as Exhibit D. Landlord shall not be required to furnish cleaning services to any kitchens, lunchrooms or lavatories in the Premises; and (6) Water for lavatory and drinking purposes. Tenant shall reimburse Landlord for all additional cleaning expenses incurred by Landlord, including but not limited to, garbage and trash removal expense over and above the normal cleaning provided by Landlord, due to the presence of a lunchroom or kitchen or food and beverage dispensing machines within the Premises. No food or beverage dispensing machines shall be installed by Tenant in the Premises without the prior written consent of Landlord. (b) Landlord does not warrant that the services provided for in paragraph 12 (a) above shall be free from any slowdown, interruption or stoppage due to the order of any governmental bodies and regulatory agencies, or caused by the maintenance, repair, replacement or improvement of any of the equipment involved in the furnishing of any such services, or caused by -11- 147 changes of services, alterations, strikes, lockouts, labor controversies, fuel shortages, accidents, acts of God or the elements or any other cause beyond the reasonable control of Landlord. No such slowdown, interruption or stoppage of any such services shall ever be construed as an eviction, actual or constructive, of Tenant, nor shall same cause any abatement of annual Base Rent or additional rent or in any manner or for any purpose relieve Tenant from any of its obligations under this Lease. Landlord agrees to use reasonable diligence to resume the service upon any such slowdown, interruption or stoppage. 13. ASSIGNMENT AND SUBLETTING (a) Except as expressly permitted pursuant to this Article, Tenant shall not assign or hypothecate this Lease or any interest therein or sublet the Premises or any part thereof, without the prior written consent of Landlord. Any of the foregoing acts without Landlord's consent shall be voidable and shall, at the option of Landlord, be an event of default under this Lease. Neither this Lease nor any interest therein shall be assignable as to the interest of Tenant by operation of law, without the prior written consent of Landlord. If Tenant is a corporation, an unincorporation association or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership, in the aggregate in excess of twenty-five (25%) percent, shall be deemed an assignment within the meaning and provisions of this Article 13. Notwithstanding the foregoing, without the consent of Landlord but upon notice to Landlord, a corporate Tenant may assign this Lease to its parent, affiliate or subsidiary, provided that the assignee assumes, in full, the obligations of Tenant under this Lease, and provided further that such assignment shall not relieve Tenant of any of its obligations under this Lease. (b) If at any time or from time to time during the term of this Lease, Tenant desires to assign this Lease or sublet all or a portion of the Premises, Tenant shall notify Landlord of such intent and submit to Landlord a copy of the proposed assignment or sublease. Landlord shall have the option, exercisable by notice given to Tenant within thirty (30) days after receipt of Tenant's notice, of recapturing the Premises or portion thereof proposed to be sublet or assigned and terminating the Lease with respect thereto, effective on a date selected by Landlord which -12- 148 shall be no sooner than sixty (60) days and no later than one hundred twenty (120) days after Landlord's receipt of Tenant's notice. If Landlord does not exercise such option, Tenant may assign this Lease or sublet such space to any third party, subject to the following terms and conditions: (1) Tenant shall obtain the consent of Landlord, which consent shall not be unreasonably withheld; Landlord shall base its decision upon exclusive uses given to other Building tenants, the financial condition and character of the proposed assignee or subtenant and the proposed use of the Premises; (2) Tenant may not sublease the Premises or any portion thereof or assign this Lease to an existing tenant in the Building or the other 2 buildings in the 3-building complex known as One, Two and Three Bala Plaza without Landlord's written permission; (3) No sublease or assignment shall be valid and no subtenant or assignee shall take possession of the premises subleased or assigned until a fully executed original of such sublease or assignment of this Lease has been delivered to Landlord; (4) No subtenant shall have a further right to sublet; (5) No assignee shall have a further right to assign the Lease, except in accordance with the provisions of this Article 13; (6) In no event shall Tenant be entitled to have more than one subtenants simultaneously in the Premises without Landlord's written permission; (7) Tenant shall not (i) advertise or publicize in any way the availability of the Premises or any portion thereof without prior notice to and approval by Landlord, including the proposed rental, or (ii) list the Premises or any portion thereof for subletting, whether through a broker, agent representative, or otherwise, at a rental rate less than the Base Rent and Additional Rent at which Landlord is -13- 149 then offering to lease other vacant space in the Building or the other 2 buildings in the Bala Cynwyd Complex; and (8) Tenant may not assign this Lease or sublease all or any portion of the Premises if the proposed assignee or subtenant is currently negotiating or within the last 12 months has negotiated with Landlord for a lease of space in the Building or the other 2 buildings in the 3-building complex known as One, Two and Three Bala Plaza without Landlord's written permission. (c) Tenant shall pay Landlord, as additional rent any sums or other economic consideration received by Tenant as a result of any subletting or assignment (except payments received which are attributable to the amortization of the cost of leasehold improvements made to the Premises by Tenant for the subtenant or assignee, and other reasonable expenses incident to the subletting or assignment, including standard leasing commissions), whether defined as rentals under the sublease or otherwise, which exceed, in the aggregate, the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to that portion of the Premises subject to a sublease). If such subleasing or assignment has been made without the consent of Landlord as provided herein, Landlord shall be entitled to all economic consideration received by Tenant in accordance with the provisions of this subparagraph 13 (c), but the receipt of such monies shall not be deemed to be a waiver of the provisions of this Article 13 with respect to assignment and subletting, or the acceptance of such assignee or subtenant as Tenant hereunder. (d) Regardless of Landlord's consent, no subletting or assignment shall release Tenant of Tenant's obligations or alter the primary liability of Tenant to pay the Base Rent and additional rent and to perform all other obligations to be performed by Tenant under this Lease. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms of this Lease, Landlord may -14- 150 proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. (e) In the event that the Premises or any part thereof have been sublet by Tenant and Tenant is in default under this Lease pursuant to the provisions of Article 24 hereof, then Landlord may collect rent from the subtenant and apply the amount collected to the Base Rent and additional rent herein reserved but no such collection shall be deemed a waiver of the provisions of this Article 13 with respect to subletting or the acceptance of such subtenant as Tenant hereunder or a release of Tenant under the Lease. 14. ACCESS TO PREMISES Landlord, its employees and agents shall have the right to enter the Premises at all reasonable times during Business Hours and at anytime in case of an emergency for the purpose of examining or inspecting the Premises, showing the Premises to prospective purchasers, mortgagees and prospective tenants of the Building, and making such alterations, repairs, improvements or additions to the Premises or to the Building as Landlord may determine to be necessary or desirable. If representatives of Tenant shall not be present to open and permit entry into the Premises at anytime when such entry by Landlord is necessary or permitted hereunder, Landlord may enter by means of a master key (or forcibly in the event of an emergency) without liability to Tenant and without such entry constituting an eviction of Tenant or termination of this Lease. Such entry into the Premises by Landlord shall not unreasonably interfere with Tenant's use of the Premises. 15. REPAIRS (a) At its cost (which cost shall be an Operation and Maintenance Cost under Article 5 above), Landlord shall make all repairs necessary to maintain the plumbing, heating, ventilating, air conditioning and electrical systems (except light fixtures), windows, floors (except carpeting) and all other structural portions of the Premises provided, however, that Landlord shall not be obligated to make any of such repairs until Landlord has received written notice from Tenant that such repair is needed. Landlord shall be responsible for the maintenance and repair of all common areas and facilities in the Building provided that Tenant shall be responsible for the repair of any damage to the -15- 151 Premises or the Building common areas and facilities caused by the negligence of Tenant and its agents, servants, employees, invitees, licensees, subtenants, or contractors. (b) Except for Landlord's repairs under paragraph (a) above, at its sole cost and expense, Tenant shall make all other reasonable repairs necessary to maintain and keep the Premises and the fixtures therein in reasonably neat and orderly condition. If Tenant refuses or neglects to make such reasonable repairs, or fails to diligently prosecute the same to completion, after notice from Landlord of the need therefor, Landlord may make such repairs at the expense of Tenant and such expense, along with a fifteen (15%) percent service charge, shall be collectible as additional rent. At Tenant's expense, Landlord shall make all repairs to the light fixtures in the Premises, including replacement bulbs and ballasts. (c) Landlord shall not be liable for any interference with Tenant's business arising from the making of any repairs in the Premises under paragraph (a) above. Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business. There shall be no abatement of Base Rent because of such repairs. 16. INDEMNIFICATION OF LANDLORD AND LIABILITY INSURANCE (a) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all costs, expenses (including reasonable counsel fees), liabilities, losses, damages, suits, actions, finest penalties, claims or demands of any kind and asserted by or on behalf of any person or governmental authority, arising out of or in any way connected with (i) any failure by Tenant to perform any of the agreements, terms, covenants or conditions of this Lease required to be performed by Tenant, (ii) any failure by Tenant to comply with any statutes, ordinances, regulations or orders of any governmental authority, or (iii) any accident, bodily injury (including death resulting therefrom), or damage to or loss or theft of property, which shall occur in or about the Premises occasioned wholly or in part by reason of any act or omission of Tenant, or any of its agents, contractors, licensees, invitees, employees or subtenants. -16- 152 (b) During the term of this Lease and any renewal thereof, Tenant shall obtain and promptly pay all premiums for Comprehensive General Liability Insurance with broad form extended coverage, including Contractual Liability, covering claims for bodily injury (including death resulting therefrom) and loss or damage to property occurring upon, in or about the Premises, with a minimum combined single limit of at least $1,000,000.00. All such policies and renewals thereof shall identify Landlord and Landlord's Building managing agent as additional insureds. All policies of insurance shall provide (i) that no material change or cancellation of said policies shall be made without at least thirty (30) days' prior written notice to Landlord and Tenant, and (ii) that any loss shall be payable notwithstanding any act or negligence of Tenant or Landlord which might otherwise result in the forfeiture of said insurance. On or before the commencement date of the term of this Lease, and thereafter not less than fifteen (15) days prior to the expiration dates of said policy or policies, Tenant shall furnish Landlord with renewal certificates of the policies of insurance required under this paragraph. Tenant's insurance policies shall be issued by insurance companies authorized to do business in the Commonwealth of Pennsylvania with a financial rating of at least an A+ as rated in the most recent edition of Best's Insurance Reports and have been in business for the past five years. The aforesaid insurance limits may be reasonably increased by Landlord from time to time during the term of this Lease with notice to Tenant. (c) Tenant and Landlord, respectively, hereby release each other from any and all liability or responsibility to the other for all claims of anyone claiming by, through or under them by way of subrogation or otherwise for any loss or damage to property owned by Landlord and Tenant respectively in the Premises and covered by the Pennsylvania Standard Form of Fire Insurance Policy with extended coverage endorsement, whether or not such insurance is maintained by the other party. -17- 153 17. WAIVER OF CLAIMS Except in the event of the gross negligence of Landlord and its servants and employees, Landlord and Landlord's agents, servants, and employees shall not be liable for, and Tenant hereby releases and relieves Landlord, its agents, servants, and employees from, all liability in connection with any and all damage to or loss of property, or loss or interruption of business occurring to Tenant, its agents, servants, employees, invitees, licensees, and subtenants, in or about the Premises, from, without limitation, (a) any fire or other casualty, accident, occurrence or condition in or upon the Premises or the Building; (b) any defect in or failure of the plumbing, sprinkler, electrical, heating, ventilating and air conditioning systems and equipment, or any other systems and equipment in the Premises and the Building; (c) any steam, gas, oil, water, rain or snow that may leak into or flow from any part of the Premises or the Building; (d) the falling of any fixture or any wall or ceiling materials; (e) broken glass; (f) latent or patent defects; (g) any acts or omissions of the other tenants or occupants of the Building; (h) any acts or omissions (excluding gross negligence) of Landlord, its agents, servants and employees; and (i) theft, Act of God, public enemy, injunction, riot, strike, insurrection, war, court order, or any order of any governmental authorities having jurisdiction over the Premises. 18. QUIET ENJOYMENT Landlord covenants and agrees with Tenant that upon Tenant paying the Base Rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly enjoy the Premises hereby demised, subject to the terms and conditions of this Lease and to the ground leases, underlying leases and mortgages in Article 21 below. 19. NEGATIVE COVENANTS OF TENANT Tenant agrees that it will not do or suffer to be done, any act, matter or thing objectionable to Landlord's fire insurance companies whereby the fire insurance or any other insurance now in force or hereafter placed on the Premises or any part thereof or on the Building by Landlord shall become void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date when Tenant took possession of the Premises. In case of a breach of this covenant, in addition to all other remedies of Landlord hereunder, Tenant agrees to pay to Landlord, as additional rent, -18- 154 any and all increases in premiums on insurance carried by Landlord on the Premises or any part thereof or on the Building caused in any way by the occupancy of Tenant. 20. FIRE OR OTHER CASUALTY (a) If the Premises are damaged by fire or other casualty, the damages shall be repaired by and at the expense of Landlord and restored to the condition which existed immediately prior to such damage and the Base Rent and additional rent shall be apportioned from the date of such fire or other casualty until substantial completion of the repairs, according to the part of the Premises which is usable by Tenant. Landlord agrees to repair such damage within a reasonable period of time after receipt from Tenant of written notice of such damage, subject to any delays caused by Acts of God, labor strikes or other events beyond Landlord's control. Landlord shall not be liable for any inconvenience to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof. Tenant hereby acknowledges that (i) Landlord shall not be obligated to obtain insurance of any kind on Tenant's furniture or furnishings, equipment, trade fixtures, alterations, improvements and additions, (ii) it is Tenant's obligation to obtain such insurance at Tenant's sole cost and expense, and (iii) Landlord shall not be obligated to repair any damage thereto or replace the same. (b) If, in the reasonable opinion of Landlord, the Premises are (i) substantially damaged (i.e. more than 50%) by reason of such fire or other casualty, or (ii) twenty (20%) per cent or more of the Premises is damaged by said fire or other casualty and less than two (2) years would remain in the current Lease term upon substantial completion of the repairs and restoration, Landlord shall have the right, upon written notice to Tenant within thirty (30) days after said occurrence, to elect not to repair and restore the Premises, and in such event, this Lease and the tenancy hereby created shall cease as of the date of said occurrence, the Base Rent and additional rent to be adjusted and apportioned as of said date. -19- 155 (c) If, in the reasonable opinion of Landlord, the Building shall be substantially damaged (i.e. more than 25%) by fire or other casualty, regardless of whether or not the Premises were damaged by such occurrence, Landlord shall have the right, upon written notice to Tenant within thirty (3O) days after said occurrence, to terminate this Lease, and in such event, this Lease and the tenancy hereby created shall cease and the Base Rent and additional rent shall be adjusted and apportioned as of the date of said termination unless terminated as of the date of said occurrence in accordance with paragraph 20 (b) above. 21. SUBORDINATION This Lease is and shall be subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which the Premises are a part, and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. Tenant agrees that in the event any person, firm, corporation or other entity acquires the right to possession of the real property of which the Premises are a part including any mortgagee or holder of any estate or interest having priority over this Lease, Tenant shall, if requested by such person, firm, corporation or other entity, attain to and become the tenant of such person, firm, corporation or other entity, upon the same terms and conditions set forth in this Lease for the balance of the term of this Lease. Notwithstanding the foregoing, any mortgagee may, at any time, subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery, and in that event, such mortgagee shall have the same rights with respect to this Lease as though it had been executed prior to the execution and delivery of the mortgage. This clause shall be self-operative and no further instrument of subordination or attornment shall be required by any ground or underlying lessor or lessee or by any mortgagee, but in confirmation of such subordination and/or attornment, Tenant shall execute any certificate that Landlord may reasonably require acknowledging such subordination and/or attornment, within fifteen (15) days after Landlord's request. -20- 156 22. CONDEMNATION (a) If the entire Premises shall be condemned or taken permanently for any public or quasi-public use or purpose, under any statute or by right of eminent domain, or by private purchase in lieu thereof, then in that event, at the option of either Landlord or Tenant exercised by notice to the other within thirty (30) days after the date when possession is taken, the term of this Lease shall cease and terminate as of the date when possession is taken pursuant to such proceeding or purchase. The Base Rent and additional rent shall be adjusted and apportioned as of the time of such termination and any Base Rent and additional rent paid for a period thereafter shall be refunded. In the event a material portion of the Building shall be so taken (even though the Premises may not have been affected by the taking), Landlord may elect to terminate this Lease as of the date when possession is taken pursuant to such proceeding or purchase or Landlord may elect to repair and restore the portion not taken at its own expense, and thereafter the Base Rent and additional rent shall be reduced proportionately to reflect the portion of the Premises not taken. (b) In the event of any total or partial taking of the Premises, Landlord shall be entitled to receive the entire award in any such proceeding and Tenant hereby assigns any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof and Tenant hereby waives all rights against Landlord and the condemning authority, except that to the extent permitted by applicable law, Tenant shall have the right to claim and prove in any such proceeding and to receive any award which may be made to Tenant, if any, specifically for loss of good will, movable trade fixtures, equipment and moving expenses. 23. ESTOPPEL CERTIFICATE At any time and from time to time and within ten (10) days after written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement in writing duly executed by Tenant certifying that (i) this Lease is in full force and effect, without modification or amendment (or, if there have been any modifications or amendments, that this Lease is in full force and effect as modified and amended and setting forth the dates of the modifications and amendments), (ii) the dated to which annual -21- 157 Base Rent and additional rent have been paid, and (iii) to the knowledge of Tenant no default exists under this Lease or specifying each such default; it being the intention and agreement of Landlord and Tenant that any such statement by Tenant may be relied upon by a prospective purchaser or a prospective mortgagee of the Building, or by others, in any matter affecting the Premises. 24. DEFAULT The occurrence of any of the following shall constitute a default and breach of this Lease by Tenant: (a) The failure of Tenant to take possession of the Premises within thirty (30) days after the commencement date of this Lease; (b) The vacation or abandonment of the Premises by Tenant (except pursuant to a sublease or assignment approved by Landlord); (c) A failure by Tenant to pay, when due, any installment of Base Rent, additional rent or any other sum required to be paid by Tenant under this Lease, where such failure continues for more than ten (10) days after Tenant has received written notice of the delinquent payment from or on behalf of Landlord; provided, however, Landlord shall not be required to give any such written notice, and Tenant shall not be entitled to any such cure period, more than twice in any twelve (12) month period; (d) A failure by Tenant to observe and perform any other provision or covenant of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) days after Tenant receives written notice thereof from or on behalf of Landlord provided, however, that if the nature of the default is such that the same cannot reasonably be cured within such 30-day period, Tenant shall not be deemed to be in default if Tenant shall commence the cure of the default within such 30-day period and thereafter diligently prosecutes the same to completion; and -22- 158 (e) The filing of a petition by or against Tenant for adjudication as a bankrupt or insolvent or for its reorganization or for the appointment of a receiver or trustee of Tenant's property pursuant to any local, state or federal bankruptcy or insolvency law; or an assignment by Tenant for the benefit of creditors; or the seizure of Tenant's property by any local, state or federal governmental officer or agency or court-appointed official for the dissolution or liquidation of Tenant or for the operating, either temporary or permanent, of Tenant's business, provided, however, that if any such action is commenced against Tenant the same shall not constitute a default if Tenant causes the same to be dismissed within sixty (60) days after the filing thereof. 25. REMEDIES Upon the occurrence of any event of default set forth in Article 24 above: (a) Landlord may, upon prior written notice to Tenant, perform for the account of Tenant the cure of any such default of Tenant and immediately recover as additional rent any expenditures made and the amount of any obligations incurred in connection therewith, plus fifteen (15%) per cent per annum interest from the date of any such expenditures; (b) Landlord may accelerate all Base Rent and additional rent due for the balance of the term of this Lease and declare the same, along with all sums past due, to be immediately due and payable. In determining the amount of any future additional rent payments due Landlord as a result of increases in Operation and Maintenance Costs, Landlord may make such determination based upon the amount of Operation and Maintenance Costs additional rent paid by Tenant for the entire Comparison Year immediately prior to such default; (c) Landlord may immediately proceed to collect or bring action for such Base Rent and additional rent for such part thereof as aforesaid, as well as for liquidated damages provided for hereinafter, as being rent in arrears, or may enter judgment therefor as herein elsewhere provided for in case of rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such Base Rent and additional rent, or Landlord may institute any other proceedings, whether similar to the foregoing or not, to enforce payment thereof; -23- 159 (d) Landlord, may re-enter and repossess the Premises breaking open locked doors, if necessary, and may use as much force as necessary to effect such entrance without being liable to any action or prosecution for such entry or the manner thereof, and Landlord shall not be liable for the loss of any property in the Premises. Landlord may remove all of Tenant's goods and property from the Premises. Landlord shall have no liability for any damage to such goods and property and Landlord shall not be responsible for the storage or protection of the same upon removal; (e) Upon prior notice and in accordance with Pennsylvania law, Landlord may re-enter and repossess the Premises or any part thereof and attempt to relet all or any part of the Premises for and upon such terms and to such persons, firms or corporations and for such period or periods as Landlord, in its sole discretion, shall determine, including a term beyond the termination of this Lease. Landlord shall consider any tenant offered by Tenant in connection with such reletting. For the purpose of such reletting, Landlord may decorate or make reasonable repairs, changes, alterations or additions in or to the Premises to the extent deemed by Landlord desirable or convenient and the cost of such repairs, changes, alterations or additions shall be charged to and be payable by Tenant as additional rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord. Any sums collected by Landlord from any new tenant obtained on account of Tenant shall be credited against the balance of the Base Rent and additional rent due hereunder as aforesaid. Tenant shall pay to Landlord monthly, on the days when the Base Rent and additional rent would have been payable under this Lease, the amount due hereunder less the net amount obtained by Landlord from such new tenant; (f) At its option, Landlord may serve notice upon Tenant that this Lease and the then unexpired term hereof shall cease and expire and become absolutely void on the date specified in such notice, to be not less than ten (10) days after the date of such notice, without any right on the part of Tenant to save the forfeiture by payment of any sum due or by the performance of any term, provision, covenant, agreement or condition broken; and, thereupon and at the expiration of the time limit in such notice, this Lease and the term hereof granted, as well as the entire right, title and interest of Tenant hereunder, shall wholly cease -24- 160 and expire and become void in the same manner and with the same force and effect except as to Tenant's liability) as if the date fixed in such notice were the expiration date of the term of this Lease. Thereupon, Tenant shall immediately quit and surrender the Premises to Landlord and Landlord may enter into and repossess the Premises by summary proceedings, detainer, ejectment or otherwise and remove all occupants thereof and, at Landlord's option, any property therein, without being liable to indictment, prosecution or damages therefor; (g) In the event of termination of this Lease pursuant to the provisions of paragraph 25 (f) above, Tenant shall pay to Landlord all Base Rent, additional rent and other charges payable hereunder due and unpaid to the date of termination, together with liquidated damages in an amount equal to twenty-five percent (25%) of the balance of the Base Rent, additional rent and other charges required to be paid under this Lease from the date of said termination to the expiration date of the term of this Lease, as if the same had not been terminated, the said Base Rent and additional rent for the balance of the term of this Lease and other charges to be computed in the same manner as provided in paragraph 25 (b) above. In the event any judgment has been entered against Tenant for any amount in excess of the total amount required to be paid by Tenant to Landlord hereunder, then the damages assessed under said judgment shall be reassessed and a credit granted to the extent of such excess. Landlord and Tenant acknowledge that the damages to which Landlord is entitled in the event of a breach of this Lease and termination by Landlord are not easily computed and are subject to many variable factors. Therefore, Landlord and Tenant have agreed to the liquidated damages as herein provided in order to avoid extended litigation in the event of default by Tenant and termination of this Lease; In the event Landlord exercises the remedy under this paragraph and Tenant pays Landlord the entire amount of the liquidated damages, Landlord shall be deemed to have made an election of remedies and except for regaining possession the Premises, Landlord shall not be entitled to exercise any other remedy under this Article 25. -25- 161 (h) In the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants or terms of this Lease, Landlord shall have the right to seek an injunction to restrain the same and the right to invoke any remedy allowed by law or in equity, whether or not other remedies, indemnity or reimbursements are herein provided. The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised by Landlord, shall be deemed to be in exclusion of any of the others; (i) In the event of any default, Tenant, in consideration of the execution of this Lease by Landlord and of the covenants and agreements on the part of Landlord herein contained, and fully comprehending the relinquishment of certain rights including rights of pre-judgment notice and hearing, hereby expressly authorizes and empowers (which power is coupled with an interest) any prothonotary or attorney of any Court of Record to accept service of process for, to appear for, and to confess judgment against Tenant (i) to recover possession from time to time of the Premises (and Tenant agrees that upon the entry of each judgment for said possession a Writ of Possession or other appropriate process may issue forthwith) and/or (ii) to enforce payment from time to time for Base Rent, additional rent, or other charges or expenses payable under this Lease, including, at Landlord's option, the Base Rent for the entire unexpired balance of the term of this Lease, computed as aforesaid, and any other charges, payments, costs and expenses reserved as rent or agreed to be paid by Tenant, as well as liquidated damages, and for interest and costs together with an attorney's commission of five (5%) per cent thereof; (j) Tenant further hereby expressly authorizes and empowers (which power is coupled with an interest) Landlord, upon the occurrence of a default hereunder and so long as the same is continuing, to enter upon the Premises, distrain upon and remove therefrom all inventory, equipment, machinery, trade fixtures, and personal property of whatsoever kind or nature, whether owned by Tenant or others, and to proceed, without judicial decree, writ of execution or assistance of constables, to conduct a private sale, by auction or sealed bid, of such personal property, at which sale Landlord may bid without restriction. Tenant hereby waives the benefit of all laws, whether now in -26- 162 force of hereafter enacted, exempting any personal property of the Premises from safe or levy, whether execution thereon is had by order of any court or through private sale as herein authorized. Tenant waives the right to issue a Writ of Replevin under the Pennsylvania Rules of Civil Procedure, under the laws of the Commonwealth of Pennsylvania or under any law previously enacted and now in force or which hereinafter may be enacted for the recovery of any articles or any nature whatsoever seized under a distress for rent, or levy upon an execution for rent, liquidated damages or otherwise; Landlord hereby agrees that so long as Manugistics, Inc. is Tenant under this Lease, it will not exercise the remedy under this paragraph (j); and (k) In any action by confession for ejectment, for rent due and owing or for distraint, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, of which facts such affidavit shall be conclusive evidence, and if a true copy of this Lease be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. The authority to confess judgment against Tenant hereunder shall not be exhausted by one (1) exercise thereof, but judgment may be confessed as provided herein from time to time as often as any default occurs under this Lease, and such authority may be exercised as well after the expiration of the term of this Lease and/or during or after the expiration of any extended or renewal term; and Landlord hereby agrees that so long as Manugistics, Inc. is Tenant under this Lease, it will not exercise the remedy under this paragraph (k); and -27- 163 (1) Tenant shall pay upon demand all of Landlord's costs, charges and expenses, including the fees and out-of-pocket expenses of legal counsel, agents and others retained by Landlord incurred in enforcing Tenant's obligations hereunder or incurred by Landlord in any litigation, negotiation or transaction in which Tenant causes Landlord, without Landlord's fault, to become involved or concerned, together with interest at 15% per annum from the date incurred by Landlord to the date of payment by Tenant. 26. REQUIREMENT OF STRICT PERFORMANCE The failure or delay on the part of Landlord to enforce or exercise at any time any of the provisions, rights or remedies in the Lease shall in no way be construed to be a waiver thereof, or in any way to affect the validity of this Lease or any part thereof, or the right of Landlord to thereafter enforce each and every such provision, right or remedy. No waiver of any breach of this Lease shall be held to be a waiver of any other or subsequent breach. The receipt by Landlord of Base Rent or additional rent at a time when the Base Rent or additional rent is in default under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of a lesser amount than the Base Rent or additional rent due shall not be construed to be other than a payment on account of the Base Rent or additional rent then due, and any statement on Tenant's check or any letter accompanying Tenant's check to the contrary shall not be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the Base Rent or additional rent due or to pursue any other remedies provided in this Lease. No act or thing done by Landlord or Landlord's agents or employees during the term of this Lease shall be deemed an acceptance of a surrender of the Premises and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. 27. RELOCATION OF TENANT At its sole expense, upon at least ninety (90) days' prior written notice to Tenant, Landlord may require Tenant to move from the Premises to another suite in the Building of comparable size and decor in order to permit Landlord to consolidate the Premises with other adjoining space leased or to be leased to an existing or prospective tenant. In the event of any such relocation, Landlord will pay (i) all the expenses of preparing and decorating the new premises so that -28- 164 they will be substantially similar to the Premises, (ii) the expense of moving Tenant's office furnishings, furniture and equipment to the new premises, and (iii) the expense of printing and sending announcements, postage for announcements, and printing new stationary provided that Tenant's suite number is indicated on the stationary, plus voice and data communication networks. Occupancy of the new premises shall be under and pursuant to the terms of this Lease. Tenant will be relocated at such time and in such manner as to minimize interference with the conduct of Tenant's business. 28. SURRENDER OF PREMISES; HOLDING OVER (a) The Lease shall terminate and Tenant shall deliver up and surrender possession of the Premises to Landlord on the last day of the term hereof, and Tenant hereby waives the right to any notice of termination or notice to quit. Upon the expiration or sooner termination of this Lease, Tenant covenants to deliver up and surrender possession of the Premises in the same condition in which Tenant has agreed to maintain and keep the same during the term of this Lease in accordance with the provisions of this Lease, normal wear and tear excepted. (b) Upon the failure of Tenant to surrender possession of the Premises to Landlord upon the expiration or sooner termination of this Lease, Tenant shall pay to Landlord, as liquidated damages, an amount equal to twice the then current Base Rent and additional rent required to be paid by Tenant under this Lease, applied to any period in which Tenant shall remain in possession after the expiration or sooner termination of this Lease. Acceptance by Landlord of Base Rent or additional rent after such expiration or earlier termination shall not constitute a consent to a holdover hereunder or result in a renewal. The foregoing provisions of this paragraph are in addition to and do not affect Landlord's right of reentry or any other rights of Landlord hereunder or otherwise provided by law. -29- 165 29. DELAY IN POSSESSION (a) In the event that the Premises are not ready for Tenant's occupancy at the Commencement Date of this Lease, because Landlord has not substantially completed the tenant improvement work described in Article 45 of the Rider (unless such tenant improvement work is being done by Tenant or Tenant's contractor, in which case there shall be no delay in the Commencement Date and no suspension or proration of Base Rent or additional rent), or because of the failure or refusal of the present occupant of the Premises to vacate and surrender up the same, or because of any restrictions, limitations or delays caused by Government regulations or Governmental agencies, this Lease and the term hereof shall not be affected thereby, nor shall Tenant be entitled to make any claim for or receive any damages whatsoever from Landlord, but the entire term of this Lease shall not commence and the Base Rent, additional rent and other sums herein provided to be paid by Tenant shall not become due until the date the Premises are substantially completed by Landlord and ready for Tenant's occupancy or the date possession of the Premises is delivered to Tenant, as the case may be. (b) In the event of a delay in the Commencement Date of this Lease, Landlord and Tenant agree to execute a confirmation of lease term agreement, substantially in the form of Exhibit E hereto, to confirm the Commencement Date and Expiration Date of the Lease. 30. COMPLIANCE WITH LAWS AND ORDINANCES At its sole cost and expense, Tenant shall promptly fulfill and comply with all laws, ordinances, regulations and requirements of the City, County, State and Federal Governments and any and all departments thereof having jurisdiction over the Building, and of the National Board of Fire Underwriters or any other similar body now or hereafter constituted, affecting Tenant's occupancy of the Premises or the business conducted therein. Any obligations of Tenant as an employer to modify or alter any part of the Premises for the benefit of Tenant's employees under any law, rule or regulation, including without limitation the Americans with Disabilities Act of 1990, shall be the sole responsibility and at the sole cost of Tenant. -30- 166 31. NOTICES All notices or demands under this Lease shall be in writing and shall be given or served by either Landlord or Tenant to or upon the other, either personally or by Registered or Certified Mail, Return Receipt Requested, postage prepaid, and addressed as follows: TO LANDLORD: The Prudential Insurance Company of America 8 Campus Drive, 4th Floor Arbor Circle South Parsippany, NJ 07054 Attention: Law Department WITH A COPY TO: Premisys Real Estate Services, Inc. One Bala Plaza - Suite E501 Bala Cynwyd, Pennsylvania 19004 TO TENANT: Manugistics, Inc. 2115 East Jefferson Street Rockville, Maryland 20852 Attn: Legal Department All notices and demands shall be deemed given or served upon the date of receipt thereof by Landlord or Tenant, as the case may be. Either Landlord or Tenant may change its address to which notices and demands shall be delivered or mailed by giving written notice of such change to the other as herein provided. 32. WARRANTY OF TENANT Tenant warrants to Landlord that Tenant has dealt and negotiated solely and only with Premisys Real Estate Services, Inc. for this Lease and with no other broker, firm, company or person. For good and valuable consideration, Tenant hereby agrees to indemnify, defend and hold Landlord harmless from and against any and all claims, suits, proceedings, damages, obligations, liabilities, counsel fees, costs, losses, expenses, orders and judgments imposed upon, incurred by or asserted against Landlord by reason of the falsity or error of Tenant's warranty. -31- 167 33. FORCE MAJEURE Landlord shall be excused for the period of any delay in the performance of any of its obligations under this Lease, when prevented from so doing by any cause or causes beyond Landlord's control, which shall include, without limitation, all labor strikes and disputes, stoppage or interruption of utility services to the Building, inability to obtain any materials or services, civil commotion, or acts of God. 34. LANDLORD'S OBLIGATIONS Landlord's obligations hereunder shall be binding upon Landlord only for the period of time that Landlord is in ownership of the Building, and upon termination of that ownership, except as to any obligations which have then matured, Tenant shall look solely to Landlord's successor in interest in the Building for the satisfaction of each and every obligation of Landlord hereunder. If any security deposit has been made by Tenant, Landlord shall transfer such security deposit to the purchaser and thereupon Landlord shall be discharged from any further liability with respect thereto. 35. LANDLORD'S LIABILITY Landlord shall have no personal liability under any of the terms, conditions or covenants of this Lease and Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of any claim, remedy or cause of action accruing to Tenant as a result of the breach of any provision of this Lease by Landlord. 36. SUCCESSORS The respective rights and obligations of Landlord and Tenant under this Lease shall bind and shall inure to the benefit of Landlord and Tenant and their legal representatives, heirs, successors and assigns, provided, however, that no rights shall inure to the benefit of any successor of Tenant unless Landlord's written consent to the transfer to such successor has first been obtained as provided in Article 13 above. 37. GOVERNING LAW This Lease shall be construed, governed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. -32- 168 38. SEVERABILITY If any provisions of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions of this Lease shall in no way be affected or impaired and such remaining provisions shall continue in full force and effect. 39. CAPTIONS Any headings preceding the text of the several Articles of this Lease are inserted solely for convenience of reference and shall not constitute a part of this Lease or affect its meaning, construction or effect. 40. GENDER As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall mean to include any other gender. 41. EXECUTION This Lease shall become effective when it has been signed by a duly authorized officer or representative of Landlord and Tenant and delivered to the other party. 42. EXHIBITS AND RIDER Attached to this Lease and made part hereof are Exhibits A, B, C, D and E and Rider Article 45 inclusive. 43. ENTIRE AGREEMENT This Lease, including the Exhibits and the Rider, contains all the agreements, conditions, understandings, representations and warranties made between Landlord and Tenant with respect to the subject matter hereof, and may not be modified orally or in any manner other than by an agreement in writing signed by and delivered to both Landlord and Tenant. 44. CORPORATE AUTHORITY If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the duly adopted resolution of the Board of Directors of said corporation or in accordance with the By-Laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. -33- 169 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease the day and year first above written. (LANDLORD) THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: Premisys Real Estate Services, Inc., as Agent By: /s/ John Goodwin ------------------------------------- John Goodwin, Regional Vice President (TENANT) WITNESS OR ATTEST: Manugistics, Inc. By: /s/ Helen Kastasia By: /s/ William M. Gibson -------------------------------- ------------------------------------- William M. Gibson President & CEO (Seal) If Tenant is a corporation, Lease must be executed by the President or the Vice President as well as the Secretary and properly sealed. If Tenant is a partnership, all partners must execute the Lease and if Tenant is an individual or a partnership, all signatures must be witnessed. -34- 170 Rider Annexed to and Made Part of the Lease Dated November 14, 1996 Between The Prudential Insurance Company of America, as Landlord, and Manugistics, Inc., as Tenant 45. LANDLORD'S WORK AND CONTRIBUTIONS At Landlord's expense up to a maximum of $56,240.00, Landlord agrees to construct the Premises in Landlord's Building Standard manner, in accordance with Tenant's interior design drawings and Final Plans and Specifications which shall be prepared by Space Design Incorporated and at Landlord's expense (as part of Landlord's $56,240.00 allowance) and shall be submitted to Landlord on or before September 15, 1996, time being of the essence. Landlord's contribution of up to a maximum of $56,240.00 shall cover all design and construction costs and fees, including a 1.25% construction management fee payable to Premisys Real Estate Services, Inc., Landlord's Property Manager, labor and materials, construction permits and reasonable overhead (collectively "Total Cost"). In the event the Total Cost of the design and construction of the Premises exceeds $56,240.00, then Tenant shall pay Landlord the entire amount of the excess, in lump sum, within thirty (30) days after Landlord's billing therefor following substantial completion of Landlord's work. In the event Tenant vacates the Premises and there is a default in the payment of Base Rent under the Lease, or in the event Landlord obtains possession of the Premises or terminates the Lease by reason of a default by Tenant under the Lease, Tenant shall pay to Landlord, upon demand, as additional rent hereunder, the full unamortized amounts (based on an amortization period of five (5) years eight (8) months and including interest at 11.00% per annum on the outstanding principal balance) of Landlord's contribution and payment of up to $56,240.00 in construction costs. -35- 171 EXHIBIT "B" RULES AND REGULATIONS DEFINITIONS 1. Wherever in these Rules and Regulations the word "Tenant" is used, it shall be deemed to apply to and include Tenant and his agents, employees, invitees, licensees, subtenants and contractors, and to be of such number and gender as the circumstances require. The word "Landlord" shall include the employees and agents of Landlord. CONSTRUCTION 2. The streets, parking areas, sidewalks, entrances, lobbies, halls, passageways, elevators, stairways and other common areas provided by Landlord shall not be obstructed by Tenant, or used for any purpose other than for ingress and egress. WASHROOMS 3. Toilet rooms, water-closets and other water apparatus shall not be used for any purposes other than those for which they were constructed. INSURANCE REGULATIONS 4. Tenant shall not do anything in the Premises, or bring or keep anything therein, which will in any way increase or tend to increase the risk of fire or the rate of fire insurance, or which will conflict with the regulations of the Fire Department or the fire laws, or with any insurance policy on the Building or any part thereof, or with any present or future law, ordinance, rule or regulation affecting the occupancy and use of the Premises or Building, enacted or promulgated by any public authority or by the Board of Fire Underwriters. -1- 172 GENERAL PROHIBITIONS 5. In order to insure proper use and care of the Premises, Tenant shall not: a) Keep animals or birds in the Premises. b) Use the Premises for sleeping purposes. c) Allow any sign, advertisement or notice to be affixed to the Building, inside or outside, or viewed through any window from outside the Building and/or the Premises, without Landlord's written consent. Signs on interior doors will be painted only by a contractor designated by Landlord, the cost of the painting to be paid by Tenant. d) Make improper or loud noises or disturbances of any kind; sing, play or operate any musical instrument, radio or television without the prior written consent of Landlord, or otherwise do anything to disturb other Building tenants or tend to injure the reputation of the Building. e) Mark or defile elevators, water-closets, toilet rooms, walls, windows, doors or any other part of the Building. f) Place anything on the outside of the Building, including roof setbacks, window ledges and other projections; or drop anything from the windows, stairways, or parapets; or place trash or other matter in the halls, stairways, elevators or light wells of the Building. g) Operate any machinery or equipment in the Premises other than normal office equipment. h) Interfere with the Building's heating, ventilating and air conditioning system. i) Allow anyone but Landlord's employees or contractors to clean the Premises. -2- 173 j) Use any electric heating device or equipment without the prior written consent of Landlord. k) Install call boxes, or any kind of wire in or on the Building without Landlord's permission and direction. 1) Manufacture any product or commodity, or prepare or dispense food, tobacco, drugs, flowers, or other commodities or articles without the prior written consent of Landlord. m) Secure duplicate keys for the Premises or toilets, except from Landlord. n) Place any weights in any portion of the Premises or the Building beyond the safe carrying capacity of the structure. o) Enter any mechanical or electrical areas, telephone closets, loading areas, roof or Building storage areas without the prior written consent of Landlord. p) Place door mats in public corridors without the prior written consent of Landlord. PUBLICITY 6. Tenant shall not use the name of the Building in any way in connection with his business except as the address thereof. MOVEMENT OF EQUIPMENT 7. Landlord reserves the right to designate the time when and the method whereby freight, small office equipment, furniture, safes and other like articles may be brought into, moved or removed from the Building or the Premises, and to designate the location for temporary disposition of such items. In no event shall any of the foregoing items be taken from Tenant's Premises for the purpose of removing same from the Building without the express written consent of both Landlord and Tenant. -3- 174 REGULATION CHANGES 8. Landlord shall have the right to make such other and further reasonable rules and regulations as in the judgment of Landlord, may from time to time be reasonably necessary for the safety, appearance, care, and cleanliness of the Building and for the preservation of good order therein. Landlord agrees to enforce such other rules and regulations uniformly against all tenants in the Building. Landlord shall not be responsible to Tenant for any violation of rules and regulations by other Building tenants. PUBLIC ENTRANCE 9. Landlord reserves the right to exclude the general public from the Building upon such days and at such hours as in Landlord's judgment will be for the best interest of the Building and its tenants. Persons entering the Building after 6:00 P.M. on business days and at all times on weekends and holidays must sign the register maintained for that purpose in the Building Lobby. -4- 175 EXHIBIT C HOLIDAYS New Years Day Memorial Day Independence Day Labor Day Thanksgiving Day Day After Thanksgiving* Christmas Day * HVAC available on this day -1- 176 EXHIBIT D STANDARD CLEANING SPECIFICATIONS - TENANT AREAS DAILY Clean common area bathrooms, including sinks, toilets, floors and mirrors. Fully vacuum all carpets from wall to wall. Using approved spotter, spot clean carpet area. Empty all trash receptacles and replace liners as necessary. Remove all collected trash to designated area. Empty and damp wipe ashtrays. Dust all furniture, fixtures, equipment and accessories. Spot clean all walls, light switches and doors. Spot clean all partition glass. Clean and sanitize all sinks and wipe dry. Dust mop all hard surface floors with treated dust mop. Mop all stains and spills, especially coffee and drink spills. Detail clean threshold plates removing all visible soil. WEEKLY Vacuum all fabric office furniture, including chairs and couches. D-1 177 Using a high speed floor machine, spray buff all hard surface areas. Clean all partition glass. Dust wood paneled walls. MQNTHLY Dust all surfaces above normal reach, including sills, ledges, moldings, shelves, door frames, pictures and vents. Dust all chair and table legs and rugs, baseboards, ledges, moldings, and other low reach areas. Dust all venetian blinds. QUARTERLY Spot clean all horizontal and vertical surfaces removing fingerprints, smudges and stains. Vacuum draperies. Strip hard surface floor and recoat with three coats of floor polish. EIGHT TIMES PER YEAR Machine scrub hard surface floor and apply one coat of polish, allow to dry, then buff. TWO TIMES PER YEAR Clean building windows both inside and outside. D-2 178 EXHIBIT E CONFIRMATION OF LEASE TERM AGREEMENT AGREEMENT, made as of the day of , 1996, between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, having an office at Three Gateway Center, 13th Floor, 100 Mulberry Street, Newark, New Jersey 07102-4077 ("Landlord") and Manugistics, Inc. , a Delaware corporation , having its principal offices at 2115 East Jefferson Street, Rockville, MD, 20852 ("Tenant"). WITNESSETH WHEREAS: A. Landlord and Tenant entered into a written lease dated as of , 1996 ("Lease"), covering a portion of the Floor in the building known as Bala Plaza and located in Bala Cynwyd, Pennsylvania. B. Landlord and Tenant desire to amend the Lease to confirm the commencement and expiration dates of the Lease term. NOW, THEREFORE, in consideration of the following mutual terms and conditions, the Lease is hereby amended as follows: FIRST: Landlord and Tenant hereby acknowledge and confirm that: (i) The Lease term commenced on , 1995 and will expire at midnight on , ; (ii) Tenant's annual and monthly Base Rent payments shall be as follows: ANNUAL MONTHLY BASE RENT RATE PERIOD BASE RENT BASE RENT PER SQUARE FOOT - ------ --------- --------- --------------- 179 [(iii) The notice, commencement and expiration dates of Tenant's option to renew under Article of the Lease are _______________________, ____________________ and ___________________________, respectively.] SECOND: Except for the provisions of this CONFIRMATION OF LEASE TERM AGREEMENT, all the terms, covenants and conditions contained in the Lease shall remain in full force and effect. IN WITNESS WHEREOF, this AGREEMENT has been executed as of the day and year first above written. LANDLORD: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: Premisys Real Estate Services, Inc., as Agent By: --------------------------------------------- , Vice President Manugistics, Inc.: TENANT: /s/ William M. Gibsen ------------------------------------------------ William M. Gibsen President & CEO By: --------------------------------------------- 180 EXHIBIT "B" ONE BALA PLAZA DEMISED AREA PLAN SECOND FLOOR [GRAPHIC OMITTED] EX-11 4 SCHEDULE OF COMPUTATION 1 Philadelphia Consolidated Holding Corp. and Subsidiaries Computation of Earnings Per Share (Dollars and Share Data in Thousands, Except Per Share Data)
As of and For the Years Ended December 31, ------------------------------------------------------ 1998 1997 1996(1) ------- ------- ------- Weighted-Average Common Shares Outstanding 12,249 12,194 11,880 Weighted-Average Share Equivalents Outstanding 2,680 2,736 2,373 ------- ------- ------- Weighted-Average Shares and Share Equivalents Outstanding 14,929 14,930 14,253 ======= ======= ======= Net Income $20,028 $16,870 $13,374 ======= ======= ======= Basic Earnings Per Share $1.63 $1.38 $1.13 ======= ======= ======= Diluted Earnings Per Share $1.34 $1.13 $0.94 ======= ======= =======
(1) 1996 share information restated to reflect a two for one split of the Company's common stock distributed in November 1997. EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Philadelphia Consolidated Holding Corp. on Forms S-8 (File Nos. 33-96604, 333-29643 and 333-29647) of our reports dated February 5, 1999 on our audits of the consolidated financial statements and financial statement schedules of Philadelphia Consolidated Holding Corp. and Subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in this Annual Report on Form 10-K. /s/ PriceWaterhouseCoopers LLP - ------------------------------ 2400 Eleven Penn Center Philadelphia, Pennsylvania March 26, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 283,718 0 0 72,768 0 0 356,486 31,573 999 16,853 469,198 151,150 64,787 0 0 0 0 0 44,796 92,687 469,198 122,687 15,448 474 219 66,374 38,422 2,212 27,050 7,022 20,028 0 0 0 20,028 1.63 1.34 108,928 69,544 (3,170) 13,402 26,870 135,030 0 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES DIFFER FROM THE AMOUNTS REPORTED IN THE CONSOLIDATED FINANCIAL STATEMENTS BECAUSE OF THE INCLUSION HEREIN OF REINSURANCE RECEIVABLES OF $16,120 AND $13,502 AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY
EX-99.1 7 REPORT OF INDEPENDENT ACCOUNTANTS 1 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Philadelphia Consolidated Holding Corp. and Subsidiaries is included on page 26 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 25 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ PriceWaterhouseCoopers LLP - ------------------------------ 2400 Eleven Penn Center Philadelphia, Pennsylvania February 5, 1999 -----END PRIVACY-ENHANCED MESSAGE-----