UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2007
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 000-51447
EXPEDIA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-2705720
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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3150 139
th
Avenue SE
Bellevue, WA 98005
(Address of principal executive office) (Zip Code)
(425) 679-7200
(Registrants telephone number, including area code)
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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
The number of shares outstanding of each of the registrants classes of common stock as
of July 27, 2007 was:
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Common stock, $0.001 par value per share
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279,331,287 shares
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Class B common stock, $0.001 par value per share
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25,599,998 shares
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Expedia, Inc.
Form 10-Q
For the Quarter Ended June 30, 2007
Contents
Part I. Item 1. Consolidated Financial Statements
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
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Three months ended
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Six months ended
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June 30,
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June 30,
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2007
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2006
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2007
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2006
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Revenue
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$
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689,923
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$
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598,458
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$
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1,240,434
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$
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1,092,356
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Cost of revenue (1)
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143,646
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128,449
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264,944
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247,763
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Gross profit
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546,277
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470,009
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975,490
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844,593
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Operating expenses:
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Selling and marketing (1)
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255,905
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198,666
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478,173
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399,692
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General and administrative (1)
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75,733
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71,053
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151,896
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144,414
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Technology and content (1)
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41,511
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33,288
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83,763
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68,832
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Amortization of intangible assets
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19,503
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30,120
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40,699
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60,291
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Amortization of non-cash distribution and marketing
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627
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8,867
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Operating income
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153,625
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136,255
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220,959
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162,497
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Other income (expense):
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Interest income
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10,552
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7,034
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17,821
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10,635
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Interest expense
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(9,902
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)
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(475
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)
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(21,078
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)
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(2,373
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)
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Other, net
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5,936
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10,466
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441
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14,123
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Total other income (expense), net
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6,586
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17,025
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(2,816
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)
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22,385
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Income before income taxes and minority interest
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160,211
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153,280
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218,143
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184,882
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Provision for income taxes
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(64,076
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)
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(56,158
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)
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(87,688
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)
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(65,816
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)
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Minority interest in (income) loss of consolidated subsidiaries, net
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1
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(1,640
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)
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457
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(249
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)
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Net income
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$
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96,136
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$
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95,482
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$
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130,912
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$
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118,817
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Net earnings per share available to common stockholders:
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Basic
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$
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0.32
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$
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0.28
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$
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0.43
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$
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0.34
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Diluted
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0.30
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0.27
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0.41
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0.33
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Shares used in computing earnings per share:
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Basic
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303,035
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346,014
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305,426
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345,896
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Diluted
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320,196
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359,090
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321,966
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362,130
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(1)
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Includes stock-based compensation as follows:
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Cost of revenue
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$
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646
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$
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1,586
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$
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1,529
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$
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4,811
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Selling and marketing
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2,804
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3,446
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6,039
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8,697
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General and administrative
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7,004
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8,753
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14,673
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18,440
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Technology and content
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3,518
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3,436
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7,591
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9,160
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Total stock-based compensation
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$
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13,972
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$
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17,221
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$
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29,832
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$
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41,108
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See accompanying notes.
2
EXPEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
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June 30,
|
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December 31,
|
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2007
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2006
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,011,404
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$
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853,274
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Restricted cash and cash equivalents
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21,710
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11,093
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Accounts and notes receivable, net of allowance of $4,884 and $4,874
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313,335
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211,430
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Prepaid merchant bookings
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100,380
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39,772
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Deferred income taxes, net
|
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|
5,145
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|
|
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4,867
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Prepaid expenses and other current assets
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74,410
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62,249
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Total current assets
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1,526,384
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1,182,685
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Property and equipment, net
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149,048
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137,144
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Long-term investments and other assets
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86,723
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59,289
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Intangible assets, net
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1,006,146
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|
|
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1,028,774
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Goodwill
|
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5,907,286
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5,861,292
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TOTAL ASSETS
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$
|
8,675,587
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$
|
8,269,184
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
|
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Accounts payable, merchant
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$
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779,029
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$
|
600,192
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|
Accounts payable, other
|
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|
153,407
|
|
|
|
120,545
|
|
Deferred merchant bookings
|
|
|
1,018,183
|
|
|
|
466,474
|
|
Deferred revenue
|
|
|
12,798
|
|
|
|
10,317
|
|
Income taxes payable
|
|
|
58,520
|
|
|
|
30,902
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
|
194,802
|
|
|
|
171,695
|
|
|
|
|
|
|
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Total current liabilities
|
|
|
2,216,739
|
|
|
|
1,400,125
|
|
Long-term debt
|
|
|
500,000
|
|
|
|
500,000
|
|
Deferred income taxes, net
|
|
|
369,954
|
|
|
|
369,297
|
|
Other long-term liabilities
|
|
|
90,672
|
|
|
|
33,716
|
|
Minority interest
|
|
|
62,655
|
|
|
|
61,756
|
|
|
|
|
|
|
|
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Commitments and contingencies
|
|
|
|
|
|
|
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Stockholders equity:
|
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|
|
|
|
|
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Preferred stock $.001 par value
|
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Authorized shares: 100,000,000
|
|
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|
|
|
|
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Series A shares issued and outstanding: 846 and 846
|
|
|
|
|
|
|
|
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Common stock $.001 par value
|
|
|
332
|
|
|
|
328
|
|
Authorized shares: 1,600,000,000
|
|
|
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|
|
|
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Shares issued: 331,592,022 and 328,066,276
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|
|
|
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Shares outstanding: 279,110,811 and 305,901,048
|
|
|
|
|
|
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Class B common stock $.001 par value
|
|
|
26
|
|
|
|
26
|
|
Authorized shares: 400,000,000
|
|
|
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|
|
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Shares issued and outstanding: 25,599,998 and 25,599,998
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|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
5,970,840
|
|
|
|
5,903,200
|
|
Treasury stock Common stock, at cost
|
|
|
(989,173
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)
|
|
|
(321,155
|
)
|
Shares: 52,481,211 and 22,165,228
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
437,252
|
|
|
|
309,912
|
|
Accumulated other comprehensive income
|
|
|
16,290
|
|
|
|
11,979
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,435,567
|
|
|
|
5,904,290
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|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
8,675,587
|
|
|
$
|
8,269,184
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|
|
|
|
|
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|
See accompanying notes.
3
EXPEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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|
|
Six months ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
130,912
|
|
|
$
|
118,817
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
28,050
|
|
|
|
22,673
|
|
Amortization of intangible assets,
non-cash distibution and marketing
and stock-based compensation
|
|
|
70,531
|
|
|
|
110,266
|
|
Deferred income taxes
|
|
|
722
|
|
|
|
(5,595
|
)
|
Unrealized (gain) loss on derivative instruments, net
|
|
|
4,544
|
|
|
|
(12,212
|
)
|
Equity in (income) loss of unconsolidated affiliates
|
|
|
3,554
|
|
|
|
(586
|
)
|
Minority interest in income (loss) of consolidated subsidiaries, net
|
|
|
(457
|
)
|
|
|
249
|
|
Foreign exchange gain on cash and cash equivalents, net
|
|
|
(4,686
|
)
|
|
|
(13,690
|
)
|
Other
|
|
|
2,913
|
|
|
|
479
|
|
Changes in operating assets and liabilities, net of effects from acquisitions:
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
(93,517
|
)
|
|
|
(26,514
|
)
|
Prepaid merchant bookings and prepaid expenses
|
|
|
(70,854
|
)
|
|
|
(51,314
|
)
|
Accounts payable, other and other current
liabilities
|
|
|
118,734
|
|
|
|
50,854
|
|
Accounts payable, merchant
|
|
|
178,076
|
|
|
|
91,263
|
|
Deferred merchant bookings
|
|
|
551,691
|
|
|
|
418,720
|
|
Deferred revenue
|
|
|
2,400
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
922,613
|
|
|
|
708,913
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(38,974
|
)
|
|
|
(34,029
|
)
|
Acquisitions, net of cash acquired
|
|
|
(59,622
|
)
|
|
|
(4,891
|
)
|
Increase in long-term investments and deposits
|
|
|
(29,594
|
)
|
|
|
(1,632
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(128,190
|
)
|
|
|
(40,552
|
)
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Short-term borrowings, net
|
|
|
|
|
|
|
(230,668
|
)
|
Changes in restricted cash and cash equivalents
|
|
|
(11,614
|
)
|
|
|
(4,479
|
)
|
Proceeds from exercise of equity awards
|
|
|
34,885
|
|
|
|
23,938
|
|
Excess tax benefit on equity awards
|
|
|
1,608
|
|
|
|
781
|
|
Treasury stock activity
|
|
|
(668,018
|
)
|
|
|
(127,195
|
)
|
Other, net
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(642,746
|
)
|
|
|
(337,623
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
6,453
|
|
|
|
15,187
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
158,130
|
|
|
|
345,925
|
|
Cash and cash equivalents at beginning of period
|
|
|
853,274
|
|
|
|
297,416
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,011,404
|
|
|
$
|
643,341
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
19,775
|
|
|
$
|
3,328
|
|
Income tax payments, net
|
|
|
5,888
|
|
|
|
33,055
|
|
See accompanying notes.
4
Notes to Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 1 Basis of Presentation
Description of Business
Expedia, Inc. and its subsidiaries provide travel products and services to leisure and
corporate travelers in the United States and abroad. These travel products and services are offered
through a diversified portfolio of brands including: Expedia.com
®
,
Hotels.com
®
, Hotwire.com
tm
, our private label programs (Worldwide
Travel Exchange and Interactive Affiliate Network), Classic Vacations, Expedia
®
Corporate Travel (ECT), eLong
tm
, Inc. (eLong) and TripAdvisor
®
.
In addition, many of these brands have related international points of sale. We refer to Expedia,
Inc. and its subsidiaries collectively as Expedia, the Company, us, we and our in these
consolidated financial statements.
Basis of Presentation
These accompanying financial statements present our results of operations, financial
position and cash flows on a consolidated basis. The unaudited consolidated financial statements
include Expedia, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have
a variable interest and are the primary beneficiary of future cash profits or losses. We have
eliminated significant intercompany transactions and accounts.
We have prepared the accompanying unaudited consolidated financial statements in accordance
with accounting principles generally accepted in the United States (GAAP) for interim financial
reporting. We have included all adjustments necessary for a fair presentation of the results of the
interim period. These adjustments consist of normal recurring items. Our interim unaudited
consolidated financial statements are not necessarily indicative of results that may be expected
for any other interim period or for the full year. These interim unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial statements and
related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006,
previously filed with the Securities and Exchange Commission (SEC).
Accounting Estimates
We use estimates and assumptions in the preparation of our interim unaudited consolidated
financial statements in accordance with GAAP. Our estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of our interim unaudited consolidated financial statements. These estimates and assumptions
also affect the reported amount of net income during any period. Our actual financial results could
differ significantly from these estimates. The significant estimates underlying our interim
unaudited consolidated financial statements include revenue recognition, recoverability of
long-lived and intangible assets and goodwill, income taxes, occupancy tax, stock-based
compensation and accounting for derivative instruments.
Reclassifications
We have reclassified prior period financial statements to conform to the current period
presentation.
In our consolidated statement of cash flows for the six months ended June 30, 2006, we
reclassified net foreign exchange gains and losses on cash of U.S. functional subsidiaries held in
foreign currencies from operating cash flows to effect of exchange rate changes on cash and cash
equivalents to appropriately reflect foreign currency impacts on cash and cash equivalents for the
periods presented.
5
Notes to Consolidated Financial Statements (Continued)
Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and
services. For example, traditional leisure travel bookings are generally the highest in the first
three quarters of the year as travelers plan and book their spring, summer and holiday travel. The
number of bookings typically decreases in the fourth quarter. Because revenue in the merchant
business is generally recognized when the travel takes place rather than when it is booked, revenue
typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in
the first quarter and highest in the third quarter.
Note 2 Summary of Significant Accounting Policies
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes
, we record income taxes under the liability method. Deferred tax assets
and liabilities reflect our estimate of the future tax consequences of temporary differences
between the carrying amounts of assets and liabilities for book and tax purposes. We determine
deferred income taxes based on the differences in accounting methods and timing between financial
statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability
for each temporary difference based on the enacted tax rates in effect for the years in which we
expect to realize the underlying items of income and expense. We consider many factors when
assessing the likelihood of future realization of our deferred tax assets, including our recent
earnings experience by jurisdiction, expectations of future taxable income, and the carryforward
periods available to us for tax reporting purposes, as well as other relevant factors. We may
establish a valuation allowance to reduce deferred tax assets to the amount we believe is more
likely than not to be realized. Due to inherent complexities arising from the nature of our
businesses, future changes in income tax law, tax sharing agreements or variances between our
actual and anticipated operating results, we make certain judgments and estimates. Therefore,
actual income taxes could materially vary from these estimates.
For the period January 1, 2005 through the date of our separation from IAC/InterActiveCorp
(IAC) on August 9, 2005 (the Spin-Off), we were a member of the IAC consolidated tax group.
Accordingly, IAC filed a federal income tax return and certain state income tax returns on a
combined basis with us for that period. IAC paid the entire combined income tax liability related
to these filings. As such, our estimated income tax liability for that period was transferred to
IAC upon Spin-Off. Under the terms of the Tax Sharing Agreement, IAC could make certain elections
in preparation of these tax returns, which changed the amount of income taxes owed for the period
before the Spin-Off. We recorded those changes as adjustments to stockholders equity in accordance
with Emerging Issues Task Force No. 94-10,
Accounting by a Company for the Income Tax Effects of
Transactions Among or With its Shareholders under FASB Statement 109.
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48)
.
As a result of the adoption of FIN 48, we recognized an approximately $18.9 million
increase in the liability for uncertain tax positions, of which $14.7 million of the increase was
accounted for as an increase to the January 1, 2007 balance of goodwill as the underlying tax
positions related to business combinations and $4.2 million as a reduction to the January 1, 2007
balance of retained earnings. These amounts do not include the federal tax benefit associated with
these positions, which are immaterial.
As of January 1, 2007, we had $65.5 million of liabilities for uncertain tax positions, which
included $14.0 million of positions that, if recognized, would decrease our provision for income
taxes. We recognize interest and penalties related to our liabilities for these positions in
income tax expense. As of January 1, 2007, we had approximately $5.4 million accrued for the
potential payment of estimated interest and penalties. There were no material changes to these
amounts during the six months ended June 30, 2007.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. We are no longer subject to tax examinations by tax authorities for years prior to
1998.
6
Notes to Consolidated Financial Statements (Continued)
Certain Risks and Concentrations
Our business is subject to certain risks and concentrations including dependence on
relationships with travel suppliers, primarily airlines and hotels, dependence on third-party
technology providers, exposure to risks associated with online commerce security and credit card
fraud. In particular, we depend on our overall relationships with the major airlines. We also
depend on global distribution system partners and third-party service providers for certain
fulfillment services, including one third-party service provider for which we accounted for
approximately 47% of its total revenue for the year ended December 31, 2006 and approximately 41%
of its total revenue for the three months ended March 31, 2007.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. SFAS 157 applies when another standard requires or
permits assets or liabilities to be measured at fair value. Accordingly, SFAS 157 does not require
any new fair value measurements. SFAS 157 is effective in fiscal years beginning after November 15,
2007. We are in the process of determining the impact, if any, of this statement on our results
from operations, financial position or cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial LiabilitiesIncluding an Amendment of SFAS Statement No. 115
(SFAS 159), which is
effective for fiscal years beginning after November 15, 2007. SFAS 159 permits an entity to choose
to measure many financial instruments and certain other items at fair value at specified election
dates. Subsequent unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings. We are in the process of determining the impact, if any, of
this statement on our results from operations, financial position or cash flows.
Note 3 Debt
Short-term Borrowings
In July 2005, we entered into a $1.0 billion five-year unsecured revolving credit
facility with a group of lenders, which is unconditionally guaranteed by certain Expedia
subsidiaries. The facility bears interest based on our financial leverage; the interest rate is
determined based on market interest rates under the terms of the revolving credit facility
agreement.
The amount of stand-by letters of credit issued under the facility reduces the amount
available to us. As of June 30, 2007 and December 31, 2006, there was $52.5 million and $52.0
million of outstanding stand-by letters of credit issued under the facility. As of June 30, 2007
and December 31, 2006, there were no amounts outstanding under the facility.
Long-term Debt
In August 2006, we privately placed $500.0 million of senior unsecured notes due 2018. In
March 2007, we completed an offer to exchange these notes for registered notes having substantially
the same financial terms and covenants as the original notes (the unregistered and registered notes
collectively, the Notes). The Notes bear a fixed rate interest of 7.456% with interest payable
semi-annually in February and August of each year. The amount of accrued interest related to the
Notes was $14.0 million and $13.4 million as of June 30, 2007 and December 31, 2006. The Notes are
repayable in whole or in part on August 15, 2013, at the option of the holders of such Notes, at
100% of the principal amount plus accrued interest. We may redeem the Notes in accordance with the
terms of the agreement, in whole or in part, at any time at our option.
The Notes are senior unsecured obligations guaranteed by certain domestic Expedia subsidiaries
and rank equally in right of payment with all of our existing and future unsecured and
unsubordinated obligations. For further information, see Note 12 Guarantor and Non-Guarantor
Supplemental Financial Information.
7
Notes to Consolidated Financial Statements (Continued)
Note 4 Derivative Instruments
The fair value of our derivative financial instruments generally represents the estimated
amounts we would expect to receive or pay upon termination of the contracts as of the reporting
date.
As a result of the Spin-Off, we assumed certain obligations of IAC related to IACs Ask Jeeves
Convertible Subordinated Notes (Ask Jeeves Notes). As of June 30, 2007 and December 31, 2006, the
related derivative liability balance was $13.8 million included in other current liabilities and
$15.9 million included in other long-term liabilities on our consolidated balance sheets. During
the six months ended June 30, 2007, certain of these notes were converted and we released
approximately 0.3 million shares of our common stock from escrow with a fair value of $6.3 million
to satisfy the conversion requirements. During the three months ended June 30, 2007 and 2006, we
recognized a net loss of $2.9 million and a net gain of $8.0 million related to these Ask Jeeves
Notes. During the six months ended June 30, 2007 and 2006, we recognized a net loss of $4.2 million
and a net gain of $12.1 million related to these Ask Jeeves Notes.
As of June 30, 2007, we estimate that we could be required to release from escrow up to 0.5
million shares of our common stock (or pay cash in equal value, in lieu of issuing such shares).
The Ask Jeeves Notes are due June 1, 2008; upon maturity of these notes, our obligation to satisfy
demands for conversion ceases.
We enter into cross-currency swaps to hedge against the change in value of certain
intercompany loans denominated in currencies other than the lending subsidiaries functional
currency. These swaps have been designated as cash flow hedges and are re-measured at fair value
each reporting period. As of June 30, 2007 and December 31, 2006, the related derivative liability
balances were $17.9 million and $13.1 million and were included in other long-term liabilities on
our consolidated balance sheets.
Note 5 Stockholders Equity
Share Repurchases
On July 25, 2007, we filed an amended tender offer pursuant to which we offered to
repurchase up to 25,000,000 shares of our common stock in an amended tender offer at a price per
share not less than $27.50 and not greater than $30.00. The shares subject to the tender offer
represent approximately 9% of the number of shares of common stock outstanding and approximately 8%
of the total number of shares of common stock and Class B common stock outstanding as of the
announcement date. The tender offer will expire, unless extended, on August 8, 2007.
During the three months ended March 31, 2007, we completed a tender offer pursuant to which we
acquired 30 million tendered shares of our common stock at a purchase price of $22.00 per share,
for a total cost of $660 million plus fees and expenses relating to the tender offer.
Stock-based Awards
Stock-based compensation expense relates primarily to expense for stock options and
restricted stock units (RSUs). Since February 2003, we have awarded RSUs as our primary form of
employee stock-based compensation. Our stock-based awards generally vest over five years.
As of June 30, 2007, we had stock-based awards outstanding representing approximately 29
million shares of our common stock consisting of approximately 9 million RSUs and stock options to
purchase approximately 20 million common shares with a $16.57 weighted average exercise price and
weighted average remaining life of 2.9 years.
Annual employee RSU grants typically occur during the first quarter of each year. During the
six months ended June 30, 2007, we granted 3.2 million RSUs. Net of cancellations, expirations and
forfeitures occurring during this period, RSUs increased 2.2 million.
8
Notes to Consolidated Financial Statements (Continued)
For the three and six months ended June 30, 2007, stock-based compensation expense was $14.0
million and $29.8 million, consisting of $11.1 million and $23.2 million in expense primarily
related to RSUs and $2.9 million and $6.6 million in stock option expense.
Comprehensive Income
Comprehensive income was $98.8 million and $97.5 million for the three months ended June
30, 2007 and 2006, and $135.2 million and $120.2 million for the six months ended June 30, 2007 and
2006. The primary differences between net income as reported and comprehensive income were foreign
currency translation adjustments and net gains (losses) on cross-currency hedge contracts.
Note 6 Earnings Per Share
The following table presents our basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands, except per share data)
|
|
Net income
|
|
$
|
96,136
|
|
|
$
|
95,482
|
|
|
$
|
130,912
|
|
|
$
|
118,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
0.28
|
|
|
$
|
0.43
|
|
|
$
|
0.34
|
|
Diluted
|
|
|
0.30
|
|
|
|
0.27
|
|
|
|
0.41
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
303,035
|
|
|
|
346,014
|
|
|
|
305,426
|
|
|
|
345,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock
|
|
|
8,909
|
|
|
|
7,330
|
|
|
|
8,604
|
|
|
|
8,643
|
|
Warrants to purchase common stock
|
|
|
6,084
|
|
|
|
3,189
|
|
|
|
5,541
|
|
|
|
4,178
|
|
Other dilutive securities
|
|
|
2,168
|
|
|
|
2,557
|
|
|
|
2,395
|
|
|
|
3,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
320,196
|
|
|
|
359,090
|
|
|
|
321,966
|
|
|
|
362,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7 Other Income (Expense)
The following table presents the components of other, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Unrealized gain (loss) on derivative instruments, net
|
|
$
|
(3,153
|
)
|
|
$
|
7,912
|
|
|
$
|
(4,544
|
)
|
|
$
|
12,212
|
|
Federal excise tax refunds
|
|
|
12,058
|
|
|
|
|
|
|
|
12,058
|
|
|
|
|
|
Foreign exchange rate gains (losses), net
|
|
|
(285
|
)
|
|
|
1,888
|
|
|
|
(3,185
|
)
|
|
|
1,532
|
|
Equity in income (loss) of unconsolidated affiliates
|
|
|
(2,259
|
)
|
|
|
699
|
|
|
|
(3,554
|
)
|
|
|
586
|
|
Other
|
|
|
(425
|
)
|
|
|
(33
|
)
|
|
|
(334
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,936
|
|
|
$
|
10,466
|
|
|
$
|
441
|
|
|
$
|
14,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Excise Tax Refunds
During the second quarter of 2007, we recorded refunds based on notification from the
Internal Revenue Service (IRS) totaling $14.7 million related to Federal Excise Tax (FET) taxes
remitted to the IRS but not collected from customers for
9
Notes to Consolidated Financial Statements (Continued)
airline ticket sales by one of our
subsidiaries in the third quarter of 2001 through the third quarter of 2004, plus accrued interest
thereon. We recorded $2.6 million to revenue as that amount relates to taxes remitted on airline
ticket sales subsequent to our acquisition of the subsidiary. We recorded $12.1 million to other,
net as such amount relates to taxes remitted on airline ticket sales prior to the acquisition and
all interest earned on all underlying tax remittances. We have received payment of $13.5 million of
the total refund from the IRS in July 2007.
Note 8 Acquisitions and Other Investments
During the six months ended June 30, 2007, we acquired all or part of four travel-related
companies. The purchase price of these and other acquisition related costs totaled $85.7 million,
all of which we paid in cash and recorded $34.2 million in goodwill and $17.6 million of intangible
assets with definite lives. The results of operations of each of the acquired businesses have been
included in our consolidated results from each transaction closing date forward. The effect of
these acquisitions on consolidated net revenue and operating income during the three and six months
ended June 30, 2007 was not significant. Based on the 2007 and 2008 financial performance of one of
the acquired companies, we are obligated to pay an additional purchase price ranging from $0 to a
maximum of approximately $100 million.
We have also entered into a commitment to provide one of these companies a $10 million
revolving operating line of credit and a credit facility for up to $20 million. As of the end of
2008, any amounts due under the credit facility are convertible, at our option, into shares of the
company at a premium to the then fair market value. No amounts were drawn against either facility
as of June 30, 2007.
Note 9 Commitments and Contingencies
Lease Commitments
We have contractual obligations in the form of operating leases for office space and
related office equipment for which we record the related expense on a monthly basis. Certain leases
contain periodic rent escalation adjustments and renewal options. Operating lease obligations
expire at various dates with the latest maturity in 2018. In June 2007, we entered into a
ten-year lease for approximately 348,000 square feet of office space located in Bellevue,
Washington. Cash payments related to this lease begin in November 2008.
Our estimated future minimum rental payments under operating leases with noncancelable lease
terms that expire after June 30, 2007 are $12.9 million for the remainder of 2007, $24.9 million
for 2008, $22.9 million for 2009, $20.3 million for 2010, $18.9 million for 2011 and $103.3 million
for 2012 and thereafter.
Legal Proceedings
In the ordinary course of business, we are a party to various lawsuits. In the opinion of
management, we do not expect these lawsuits to have a material impact on the liquidity, results of
operations or financial condition of Expedia. We also evaluate other potential contingent matters,
including value-added tax, federal excise tax, transient occupancy or accommodation taxes and
similar matters. We do not believe that the aggregate amount of liability that could be reasonably
possible with respect to these matters would have a material adverse affect on our financial
results.
Litigation Relating to Hotel Occupancy Taxes.
Lawsuits have been filed by thirty-seven cities
and counties involving hotel occupancy taxes. In addition, there have been five consumer lawsuits
filed relating to taxes and fees. The municipality and consumer lawsuits are in various stages
ranging from responding to the complaint to discovery. We continue to defend these lawsuits
vigorously. To date, seven of the municipality lawsuits have been dismissed. These dismissals
have been without prejudice and, generally, allow the municipality to seek administrative remedies
prior to pursuing further litigation. As a result of this litigation and other attempts by certain
jurisdictions to levy such taxes, we have established a reserve for the potential settlement of
issues related to hotel occupancy taxes in the amount of $18.2 million and $17.5 million at June
30, 2007 and December 31, 2006, respectively. Our reserve is based on our best estimates and the
ultimate resolution of these issues may be greater or less than the liabilities recorded.
10
Notes to Consolidated Financial Statements (Continued)
Note 10 Related Party Transactions
Commercial Agreements with IAC
Since the Spin-Off, we have continued to work with some of IACs businesses pursuant to a
variety of commercial agreements. These commercial agreements generally include (i) distribution
agreements, pursuant to which certain subsidiaries of IAC distribute their respective products and
services via arrangements with Expedia, and vice versa, (ii) services agreements, pursuant to which
certain subsidiaries of IAC provide Expedia with various services and vice versa and (iii) office
space lease agreements. The distribution agreements typically involve the payment of fees, usually
on a fixed amount-per-transaction, revenue share or commission basis, from the party seeking
distribution of the product or service to the party that is providing the distribution. Net
operating expenses related to these transactions were less than $1 million during the six months
ended June 30, 2007.
Note 11 Segment Information
We have two reportable segments: North America and Europe. We determined our
segments based on how our chief operating decision makers manage our business, make operating
decisions and evaluate operating performance. Our primary operating metric for evaluating segment
performance is Operating Income Before Amortization (defined below), which includes allocations
of certain expenses, primarily cost of revenue and facilities, to the segments. We base the
allocations primarily on transaction volumes and other usage metrics; this methodology is
periodically evaluated and may change. We do not allocate certain shared expenses to reportable
segments such as partner services, product development, accounting, human resources and legal. We
include these expenses in Corporate and Other.
Our North America segment provides a full range of travel services to customers in the United
States, Canada and Mexico. This segment operates through a variety of brands including Classic
Vacations, Expedia.com, Hotels.com, Hotwire.com and TripAdvisor. Our Europe segment provides travel
services primarily through localized Expedia websites
in Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the United
Kingdom, as well as localized versions of Hotels.com in various European countries.
Corporate and Other includes ECT, Expedia Asia Pacific and unallocated corporate functions and
expenses. ECT provides travel products and services to corporate customers in North America and
Europe. Expedia Asia Pacific provides online travel information and reservation services primarily
through eLong in the Peoples Republic of China, localized Expedia websites in Australia and Japan,
as well as localized versions of Hotels.com in various Asian countries. In addition, we record
amortization of intangible assets and any related impairment, as well as stock-based compensation
expense in Corporate and Other.
11
Notes to Consolidated Financial Statements (Continued)
The following table presents our segment information for the three and six months ended June
30, 2007 and 2006. As a significant portion of our property and equipment is not allocated to our
operating segments, we do not report the assets or related depreciation expense as it would not be
meaningful, nor do we regularly provide such information to our chief operating decision makers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and
|
|
|
|
|
|
|
North America
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
505,379
|
|
|
$
|
145,437
|
|
|
$
|
39,107
|
|
|
$
|
689,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization
|
|
$
|
226,796
|
|
|
$
|
42,979
|
|
|
$
|
(82,675
|
)
|
|
$
|
187,100
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(19,503
|
)
|
|
|
(19,503
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(13,972
|
)
|
|
|
(13,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
226,796
|
|
|
$
|
42,979
|
|
|
$
|
(116,150
|
)
|
|
$
|
153,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and
|
|
|
|
|
|
|
North America
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Revenue
|
|
$
|
455,925
|
|
|
$
|
112,036
|
|
|
$
|
30,497
|
|
|
$
|
598,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization
|
|
$
|
212,110
|
|
|
$
|
39,826
|
|
|
$
|
(67,713
|
)
|
|
$
|
184,223
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(30,120
|
)
|
|
|
(30,120
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(17,221
|
)
|
|
|
(17,221
|
)
|
Amortization of non-cash distribution and marketing
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
211,483
|
|
|
$
|
39,826
|
|
|
$
|
(115,054
|
)
|
|
$
|
136,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and
|
|
|
|
|
|
|
North America
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Revenue
|
|
$
|
911,780
|
|
|
$
|
255,427
|
|
|
$
|
73,227
|
|
|
$
|
1,240,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization
|
|
$
|
390,811
|
|
|
$
|
68,625
|
|
|
$
|
(167,946
|
)
|
|
$
|
291,490
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(40,699
|
)
|
|
|
(40,699
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(29,832
|
)
|
|
|
(29,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
390,811
|
|
|
$
|
68,625
|
|
|
$
|
(238,477
|
)
|
|
$
|
220,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and
|
|
|
|
|
|
|
North America
|
|
|
Europe
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Revenue
|
|
$
|
837,850
|
|
|
$
|
197,304
|
|
|
$
|
57,202
|
|
|
$
|
1,092,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income Before Amortization
|
|
$
|
359,284
|
|
|
$
|
55,170
|
|
|
$
|
(141,691
|
)
|
|
$
|
272,763
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(60,291
|
)
|
|
|
(60,291
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(41,108
|
)
|
|
|
(41,108
|
)
|
Amortization of non-cash distribution and marketing
|
|
|
(8,867
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
350,417
|
|
|
$
|
55,170
|
|
|
$
|
(243,090
|
)
|
|
$
|
162,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Notes to Consolidated Financial Statements (Continued)
We have revised certain 2006 revenue and expense allocations between our segments to reflect
current allocations for certain points of sale. There was no impact on total consolidated revenue
or operating income before amortization as a result of these changes.
Definition of Operating Income Before Amortization (OIBA)
We provide OIBA as a supplemental measure to GAAP. We define OIBA as operating income
plus: (1) amortization of non-cash distribution and marketing expense, (2) stock-based compensation
expense, (3) amortization of intangible assets and goodwill and intangible asset impairment, if
applicable and (4) certain one-time items, if applicable.
OIBA is the primary operating metric used by which management evaluates the performance of our
business, on which internal budgets are based, and by which management is compensated. Management
believes that investors should have access to the same set of tools that management uses to analyze
our results. This non-GAAP measure should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP. We
endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the
comparable GAAP measures, GAAP financial statements, and descriptions of the reconciling items and
adjustments, to derive the non-GAAP measure. We present a reconciliation of this non-GAAP financial
measure to GAAP below.
OIBA represents the combined operating results of Expedia, Inc.s businesses, taking into
account depreciation, which we believe is an ongoing cost of doing business, but excluding the
effects of other non-cash expenses that may not be indicative of our core business operations. We
believe this measure is useful to investors for the following reasons:
|
|
|
It corresponds more closely to the cash operating income generated from our core
operations by excluding significant non-cash operating expenses;
|
|
|
|
|
It aids in forecasting and analyzing future operating income as stock-based compensation,
non-cash distribution and marketing expenses and intangible assets amortization, assuming no
subsequent acquisitions, are likely to decline going forward; and
|
|
|
|
|
It provides greater insight into management decision making at Expedia, as OIBA is our
primary internal metric for evaluating the performance of our business.
|
OIBA has certain limitations in that it does not take into account the impact of certain
expenses to our consolidated statements of income, including stock-based compensation, non-cash
payments to partners, acquisition-related accounting and certain one-time items, if applicable. Due
to the high variability and difficulty in predicting certain items that affect net income, such as
tax rates, stock price and interest rates, we are unable to provide a reconciliation to net income
on a forward-looking basis without unreasonable efforts.
13
Notes to Consolidated Financial Statements (Continued)
Reconciliation of OIBA to Operating Income and Net Income
The following table presents a reconciliation of OIBA to operating income and net income
for the three and six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
OIBA
|
|
$
|
187,100
|
|
|
$
|
184,223
|
|
|
$
|
291,490
|
|
|
$
|
272,763
|
|
Amortization of intangible assets
|
|
|
(19,503
|
)
|
|
|
(30,120
|
)
|
|
|
(40,699
|
)
|
|
|
(60,291
|
)
|
Stock-based compensation
|
|
|
(13,972
|
)
|
|
|
(17,221
|
)
|
|
|
(29,832
|
)
|
|
|
(41,108
|
)
|
Amortization of non-cash distribution and marketing
|
|
|
|
|
|
|
(627
|
)
|
|
|
|
|
|
|
(8,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
153,625
|
|
|
|
136,255
|
|
|
|
220,959
|
|
|
|
162,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
650
|
|
|
|
6,559
|
|
|
|
(3,257
|
)
|
|
|
8,262
|
|
Other, net
|
|
|
5,936
|
|
|
|
10,466
|
|
|
|
441
|
|
|
|
14,123
|
|
Provision for income taxes
|
|
|
(64,076
|
)
|
|
|
(56,158
|
)
|
|
|
(87,688
|
)
|
|
|
(65,816
|
)
|
Minority interest in (income) loss of consolidated subsidiaries, net
|
|
|
1
|
|
|
|
(1,640
|
)
|
|
|
457
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96,136
|
|
|
$
|
95,482
|
|
|
$
|
130,912
|
|
|
$
|
118,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12 Guarantor and Non-Guarantor Supplemental Financial Information
Condensed consolidating financial information of Expedia, Inc. (the Parent), our
subsidiaries that are guarantors of the Notes (the Guarantor Subsidiaries), and our subsidiaries
that are not guarantors of the Notes (the Non-Guarantor Subsidiaries) is shown below. The Notes
are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of
payment with all of our existing and future unsecured and unsubordinated obligations. The
guarantees are full, unconditional, joint and several. In this financial information, the Parent
and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the
equity method.
14
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
|
|
|
$
|
630,896
|
|
|
$
|
148,161
|
|
|
$
|
(89,134
|
)
|
|
$
|
689,923
|
|
Cost of revenue
|
|
|
|
|
|
|
120,640
|
|
|
|
24,366
|
|
|
|
(1,360
|
)
|
|
|
143,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
510,256
|
|
|
|
123,795
|
|
|
|
(87,774
|
)
|
|
|
546,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
249,668
|
|
|
|
94,080
|
|
|
|
(87,843
|
)
|
|
|
255,905
|
|
General and administrative
|
|
|
|
|
|
|
56,740
|
|
|
|
18,822
|
|
|
|
171
|
|
|
|
75,733
|
|
Technology and content
|
|
|
|
|
|
|
32,002
|
|
|
|
9,611
|
|
|
|
(102
|
)
|
|
|
41,511
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
17,456
|
|
|
|
2,047
|
|
|
|
|
|
|
|
19,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
154,390
|
|
|
|
(765
|
)
|
|
|
|
|
|
|
153,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
pre-tax earnings (loss) of consolidated subsidiaries
|
|
|
109,410
|
|
|
|
(1,616
|
)
|
|
|
|
|
|
|
(107,794
|
)
|
|
|
|
|
Other, net
|
|
|
(13,431
|
)
|
|
|
19,092
|
|
|
|
916
|
|
|
|
9
|
|
|
|
6,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
95,979
|
|
|
|
17,476
|
|
|
|
916
|
|
|
|
(107,785
|
)
|
|
|
6,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
95,979
|
|
|
|
171,866
|
|
|
|
151
|
|
|
|
(107,785
|
)
|
|
|
160,211
|
|
Provision for income taxes
|
|
|
156
|
|
|
|
(61,914
|
)
|
|
|
(2,318
|
)
|
|
|
|
|
|
|
(64,076
|
)
|
Minority interest in loss of consolidated subsidiaries, net
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
96,135
|
|
|
$
|
109,952
|
|
|
$
|
(2,166
|
)
|
|
$
|
(107,785
|
)
|
|
$
|
96,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
Expedia, Inc.
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
|
|
|
$
|
556,742
|
|
|
$
|
105,657
|
|
|
$
|
(63,941
|
)
|
|
$
|
598,458
|
|
Cost of revenue
|
|
|
|
|
|
|
109,809
|
|
|
|
19,984
|
|
|
|
(1,344
|
)
|
|
|
128,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
446,933
|
|
|
|
85,673
|
|
|
|
(62,597
|
)
|
|
|
470,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
200,527
|
|
|
|
60,790
|
|
|
|
(62,651
|
)
|
|
|
198,666
|
|
General and administrative
|
|
|
|
|
|
|
59,502
|
|
|
|
11,497
|
|
|
|
54
|
|
|
|
71,053
|
|
Technology and content
|
|
|
|
|
|
|
25,995
|
|
|
|
7,293
|
|
|
|
|
|
|
|
33,288
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
28,133
|
|
|
|
1,987
|
|
|
|
|
|
|
|
30,120
|
|
Amortization of non-cash distribution and marketing
|
|
|
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
132,149
|
|
|
|
4,106
|
|
|
|
|
|
|
|
136,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in pre-tax earnings of consolidated subsidiaries
|
|
|
87,667
|
|
|
|
4,723
|
|
|
|
|
|
|
|
(92,390
|
)
|
|
|
|
|
Other, net
|
|
|
7,437
|
|
|
|
8,511
|
|
|
|
1,077
|
|
|
|
|
|
|
|
17,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
95,104
|
|
|
|
13,234
|
|
|
|
1,077
|
|
|
|
(92,390
|
)
|
|
|
17,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
95,104
|
|
|
|
145,383
|
|
|
|
5,183
|
|
|
|
(92,390
|
)
|
|
|
153,280
|
|
Provision for income taxes
|
|
|
378
|
|
|
|
(56,812
|
)
|
|
|
276
|
|
|
|
|
|
|
|
(56,158
|
)
|
Minority interest in income of consolidated subsidiaries, net
|
|
|
|
|
|
|
(708
|
)
|
|
|
(932
|
)
|
|
|
|
|
|
|
(1,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
95,482
|
|
|
$
|
87,863
|
|
|
$
|
4,527
|
|
|
$
|
(92,390
|
)
|
|
$
|
95,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
|
|
|
$
|
1,134,435
|
|
|
$
|
277,441
|
|
|
$
|
(171,442
|
)
|
|
$
|
1,240,434
|
|
Cost of revenue
|
|
|
|
|
|
|
221,257
|
|
|
|
46,141
|
|
|
|
(2,454
|
)
|
|
|
264,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
913,178
|
|
|
|
231,300
|
|
|
|
(168,988
|
)
|
|
|
975,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
471,795
|
|
|
|
175,491
|
|
|
|
(169,113
|
)
|
|
|
478,173
|
|
General and administrative
|
|
|
|
|
|
|
116,665
|
|
|
|
35,045
|
|
|
|
186
|
|
|
|
151,896
|
|
Technology and content
|
|
|
|
|
|
|
65,083
|
|
|
|
18,741
|
|
|
|
(61
|
)
|
|
|
83,763
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
36,955
|
|
|
|
3,744
|
|
|
|
|
|
|
|
40,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
222,680
|
|
|
|
(1,721
|
)
|
|
|
|
|
|
|
220,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in pre-tax earnings (loss) of consolidated subsidiaries
|
|
|
156,128
|
|
|
|
(990
|
)
|
|
|
|
|
|
|
(155,138
|
)
|
|
|
|
|
Other, net
|
|
|
(25,977
|
)
|
|
|
22,962
|
|
|
|
190
|
|
|
|
9
|
|
|
|
(2,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
130,151
|
|
|
|
21,972
|
|
|
|
190
|
|
|
|
(155,129
|
)
|
|
|
(2,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
130,151
|
|
|
|
244,652
|
|
|
|
(1,531
|
)
|
|
|
(155,129
|
)
|
|
|
218,143
|
|
Provision for income taxes
|
|
|
760
|
|
|
|
(87,166
|
)
|
|
|
(1,282
|
)
|
|
|
|
|
|
|
(87,688
|
)
|
Minority interest in loss of consolidated subsidiaries, net
|
|
|
|
|
|
|
|
|
|
|
457
|
|
|
|
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
130,911
|
|
|
$
|
157,486
|
|
|
$
|
(2,356
|
)
|
|
$
|
(155,129
|
)
|
|
$
|
130,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenue
|
|
$
|
|
|
|
$
|
1,013,543
|
|
|
$
|
208,840
|
|
|
$
|
(130,027
|
)
|
|
$
|
1,092,356
|
|
Cost of revenue
|
|
|
|
|
|
|
211,839
|
|
|
|
38,114
|
|
|
|
(2,190
|
)
|
|
|
247,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
801,704
|
|
|
|
170,726
|
|
|
|
(127,837
|
)
|
|
|
844,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
402,610
|
|
|
|
124,973
|
|
|
|
(127,891
|
)
|
|
|
399,692
|
|
General and administrative
|
|
|
|
|
|
|
117,853
|
|
|
|
26,507
|
|
|
|
54
|
|
|
|
144,414
|
|
Technology and content
|
|
|
|
|
|
|
53,706
|
|
|
|
15,126
|
|
|
|
|
|
|
|
68,832
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
56,513
|
|
|
|
3,778
|
|
|
|
|
|
|
|
60,291
|
|
Amortization of non-cash distribution and marketing
|
|
|
|
|
|
|
8,867
|
|
|
|
|
|
|
|
|
|
|
|
8,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
162,155
|
|
|
|
342
|
|
|
|
|
|
|
|
162,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of consolidated subsidiaries
|
|
|
108,119
|
|
|
|
2,176
|
|
|
|
|
|
|
|
(110,295
|
)
|
|
|
|
|
Other, net
|
|
|
9,839
|
|
|
|
12,248
|
|
|
|
298
|
|
|
|
|
|
|
|
22,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
117,958
|
|
|
|
14,424
|
|
|
|
298
|
|
|
|
(110,295
|
)
|
|
|
22,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
117,958
|
|
|
|
176,579
|
|
|
|
640
|
|
|
|
(110,295
|
)
|
|
|
184,882
|
|
Provision for income taxes
|
|
|
859
|
|
|
|
(67,434
|
)
|
|
|
759
|
|
|
|
|
|
|
|
(65,816
|
)
|
Minority interest in (income) loss of consolidated subsidiaries, net
|
|
|
|
|
|
|
(676
|
)
|
|
|
427
|
|
|
|
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
118,817
|
|
|
$
|
108,469
|
|
|
$
|
1,826
|
|
|
$
|
(110,295
|
)
|
|
$
|
118,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
975
|
|
|
$
|
1,483,194
|
|
|
$
|
326,428
|
|
|
$
|
(284,213
|
)
|
|
$
|
1,526,384
|
|
Investment in subsidiaries
|
|
|
6,020,547
|
|
|
|
335,526
|
|
|
|
|
|
|
|
(6,356,073
|
)
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
958,887
|
|
|
|
47,259
|
|
|
|
|
|
|
|
1,006,146
|
|
Goodwill
|
|
|
|
|
|
|
5,614,890
|
|
|
|
292,396
|
|
|
|
|
|
|
|
5,907,286
|
|
Other assets, net
|
|
|
5,591
|
|
|
|
144,496
|
|
|
|
85,684
|
|
|
|
|
|
|
|
235,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,027,113
|
|
|
$
|
8,536,993
|
|
|
$
|
751,767
|
|
|
$
|
(6,640,286
|
)
|
|
$
|
8,675,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
91,546
|
|
|
$
|
2,067,089
|
|
|
$
|
342,317
|
|
|
$
|
(284,213
|
)
|
|
$
|
2,216,739
|
|
Long-term debt
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Other liabilities and minority interest
|
|
|
|
|
|
|
445,243
|
|
|
|
78,038
|
|
|
|
|
|
|
|
523,281
|
|
Stockholders equity
|
|
|
5,435,567
|
|
|
|
6,024,661
|
|
|
|
331,412
|
|
|
|
(6,356,073
|
)
|
|
|
5,435,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
6,027,113
|
|
|
$
|
8,536,993
|
|
|
$
|
751,767
|
|
|
$
|
(6,640,286
|
)
|
|
$
|
8,675,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
461,397
|
|
|
$
|
916,216
|
|
|
$
|
267,113
|
|
|
$
|
(462,041
|
)
|
|
$
|
1,182,685
|
|
Investment in subsidiaries
|
|
|
5,951,961
|
|
|
|
295,989
|
|
|
|
|
|
|
|
(6,247,950
|
)
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
989,668
|
|
|
|
39,106
|
|
|
|
|
|
|
|
1,028,774
|
|
Goodwill
|
|
|
|
|
|
|
5,593,031
|
|
|
|
268,261
|
|
|
|
|
|
|
|
5,861,292
|
|
Other assets, net
|
|
|
6,863
|
|
|
|
137,073
|
|
|
|
58,412
|
|
|
|
(5,915
|
)
|
|
|
196,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,420,221
|
|
|
$
|
7,931,977
|
|
|
$
|
632,892
|
|
|
$
|
(6,715,906
|
)
|
|
$
|
8,269,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
|
|
|
$
|
1,598,859
|
|
|
$
|
263,306
|
|
|
$
|
(462,040
|
)
|
|
$
|
1,400,125
|
|
Long-term debt
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Other liabilities and minority interest
|
|
|
15,931
|
|
|
|
378,399
|
|
|
|
76,354
|
|
|
|
(5,915
|
)
|
|
|
464,769
|
|
Stockholders equity
|
|
|
5,904,290
|
|
|
|
5,954,719
|
|
|
|
293,232
|
|
|
|
(6,247,951
|
)
|
|
|
5,904,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
6,420,221
|
|
|
$
|
7,931,977
|
|
|
$
|
632,892
|
|
|
$
|
(6,715,906
|
)
|
|
$
|
8,269,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Notes to Consolidated Financial Statements (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(1,399
|
)
|
|
$
|
854,354
|
|
|
$
|
69,658
|
|
|
$
|
922,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
1,399
|
|
|
|
(70,139
|
)
|
|
|
(59,450
|
)
|
|
|
(128,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
1,399
|
|
|
|
(70,139
|
)
|
|
|
(59,450
|
)
|
|
|
(128,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock activity
|
|
|
(668,018
|
)
|
|
|
|
|
|
|
|
|
|
|
(668,018
|
)
|
Transfers (to) from related parties
|
|
|
664,662
|
|
|
|
(664,662
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
3,356
|
|
|
|
7,260
|
|
|
|
14,656
|
|
|
|
25,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
|
(657,402
|
)
|
|
|
14,656
|
|
|
|
(642,746
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
5,781
|
|
|
|
672
|
|
|
|
6,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
132,594
|
|
|
|
25,536
|
|
|
|
158,130
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
658,540
|
|
|
|
194,734
|
|
|
|
853,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
|
$
|
791,134
|
|
|
$
|
220,270
|
|
|
$
|
1,011,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Consolidated
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
2,791
|
|
|
$
|
685,955
|
|
|
$
|
20,167
|
|
|
$
|
708,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(2,791
|
)
|
|
|
(31,852
|
)
|
|
|
(5,909
|
)
|
|
|
(40,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,791
|
)
|
|
|
(31,852
|
)
|
|
|
(5,909
|
)
|
|
|
(40,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings, net
|
|
|
(230,000
|
)
|
|
|
|
|
|
|
(668
|
)
|
|
|
(230,668
|
)
|
Transfers (to) from related parties
|
|
|
333,284
|
|
|
|
(333,284
|
)
|
|
|
|
|
|
|
|
|
Treasury stock activity
|
|
|
(127,195
|
)
|
|
|
|
|
|
|
|
|
|
|
(127,195
|
)
|
Other, net
|
|
|
23,911
|
|
|
|
(13,239
|
)
|
|
|
9,568
|
|
|
|
20,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) financing activities
|
|
|
|
|
|
|
(346,523
|
)
|
|
|
8,900
|
|
|
|
(337,623
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
16,643
|
|
|
|
(1,456
|
)
|
|
|
15,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
324,223
|
|
|
|
21,702
|
|
|
|
345,925
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
151,523
|
|
|
|
145,893
|
|
|
|
297,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
|
$
|
475,746
|
|
|
$
|
167,595
|
|
|
$
|
643,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Part I. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
reflect the views of our management regarding current expectations and projections about future
events and are based on currently available information. Actual results could differ materially
from those contained in these forward-looking statements for a variety of reasons, including, but
not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31,
2006, Part I, Item 1A, Risk Factors, as well as those discussed elsewhere in this report. Other
unknown or unpredictable factors also could have a material adverse effect on our business,
financial condition and results of operations. Accordingly, readers should not place undue reliance
on these forward-looking statements. The use of words such as anticipates, estimates,
expects, intends, plans and believes, among others, generally identify forward-looking
statements; however, these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. These forward-looking statements are
inherently subject to uncertainties, risks and changes in circumstances that are difficult to
predict. We are not under any obligation and do not intend to publicly update or review any of
these forward-looking statements, whether as a result of new information, future events or
otherwise, even if experience or future events make it clear that any expected results expressed or
implied by those forward-looking statements will not be realized. Please carefully review and
consider the various disclosures made in this report and in our other reports filed with the
Securities and Exchange Commission (SEC) that attempt to advise interested parties of the risks
and factors that may affect our business, prospects and results of operations.
The information included in this managements discussion and analysis of financial condition
and results of operations should be read in conjunction with our consolidated financial statements
and the notes included in this Quarterly Report, and the audited consolidated financial statements
and notes and Managements Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for the year ended December 31, 2006.
Overview
Expedia, Inc. is an online travel company, empowering business and leisure travelers with
the tools and information they need to efficiently research, plan, book and experience travel. We
have created a global travel marketplace used by a broad range of leisure and corporate travelers
and offline retail travel agents as well as travel service providers. We make available, on a
stand-alone and package basis, travel products and services provided by numerous airlines, lodging
properties, car rental companies, destination service providers, cruise lines and other travel
product and service companies.
Our portfolio of brands includes Expedia.com
®
, Hotels.com
®
,
Hotwire.com
tm
, our private label programs (Worldwide Travel Exchange and
Interactive Affiliate Network), Classic Vacations, Expedia
®
Corporate Travel (ECT),
eLong
tm
and TripAdvisor
®
. In addition, many of these brands have
related international points of sale. For additional information about our portfolio of brands, see
Portfolio of Brands in Part I, Item 1, Business, in our Annual Report on Form 10-K for the year
ended December 31, 2006.
Industry Trends
The travel industry, including offline and online travel agencies, as well as suppliers
of travel products and services, has been characterized by rapid and significant change.
The U.S. airline sector in particular has experienced significant turmoil in recent years,
with oil prices hitting all-time highs, the shift of capacity to low-cost carriers (LCCs)
offering no frills flights at discounted prices and the entry and subsequent emergence of several
of the largest traditional carriers from the protection of Chapter 11 bankruptcy proceedings.
19
The traditional carriers need to rationalize high fixed cost structures to better compete in
this environment has caused them to consider consolidation opportunities to better share fixed
costs and reduce redundant flight routes. These attempts have generally been unsuccessful either
due to antitrust concerns or reluctance among target companies to consummate mergers. Carriers have
also aggressively pursued cost reductions in every aspect of their operations, including
distribution costs. Airlines have successfully pursued distribution cost reductions in a number of
ways, including negotiating lower (or in some cases eliminating) travel agent commissions and
overrides, increasing direct distribution through their proprietary websites, and reducing payments
to global distribution system (GDS) intermediaries as contracts with the GDSs expired in
mid to late 2006. These GDS reductions, in turn, impacted travel agents as large agencies,
including Expedia, have historically received a meaningful portion of their air remuneration from
GDS providers.
Through the end of 2006, the U.S. airline industry enjoyed increasing load factors and rapidly
escalating ticket prices. At the same time, the carriers which participate in the Expedia
marketplace have been reducing their share of total air seat per mile capacity; while the LCCs,
which have increased their relative capacity, have not generally participated in the Expedia
marketplace. These trends have impacted our ability to obtain supply in our agency and merchant air
businesses, reduced discounts for merchant air tickets and limited supply of merchant air tickets
for use in our package travel offerings. As a result of these industry dynamics and reduced
economics relating to recently negotiated GDS and airline agreements, our revenue per air ticket
has declined significantly since the fourth quarter of 2004, and we anticipate it will continue to
decline further in 2007. However, as of June 30, 2007, we have successfully completed agreements
with nine of the top ten domestic carriers, which we believe will result in more stabilized
economics into 2008.
Additionally, the U.S. airline industry has recently seen load factors steadying and airfare
increases have moderated, which is generally positive for our business. In addition, we have been
successful in increasing our selection of content from LCCs, including AirTran Airways, Frontier
Airlines, and JetBlue Airways.
The hotel sector has recently been characterized by robust demand and constrained supply,
resulting in increasing occupancy rates and average daily rates (ADRs). More recently, hotels
have begun to see a leveling in occupancies with ADRs continuing to grow. Industry experts expect
demand growth to continue to outstrip supply through at least 2007. While increasing ADRs generally
have a positive effect on our merchant hotel operations as our remuneration increases
proportionally with the room price, higher ADRs can impact underlying demand, and the higher
occupancies which accompany robust ADRs can restrict our ability to obtain merchant hotel room
allocation, particularly in high occupancy destinations popular with our travel base, including our
three largest markets in Las Vegas, New York and Orlando. Higher occupancy levels also has
historically tended to drive lower margins as hotel room suppliers have less need for third-party
intermediaries to generate demand.
Increased usage and familiarity with the internet has driven rapid growth in online
penetration of travel expenditures. According to PhoCusWright, an independent travel, tourism and
hospitality research firm, in 2006 29% of worldwide leisure, unmanaged and corporate travel
expenditures occurred online, with 49% in the United States, compared with 22% of European travel
and 12% in the Asia Pacific region. These penetration rates have increased considerably over the
past few years, and are expected to continue growing. This significant growth has attracted many
competitors to online travel. This competition has intensified in recent years, and the industry is
expected to remain highly competitive for the foreseeable future.
In addition to the growth of online travel agencies, airlines and lodging companies have
aggressively pursued direct online distribution of their products and services over the last
several years, with supplier growth outpacing online growth since 2002, and now accounting for
nearly two-thirds of all online travel expenditures in the United States according to PhoCusWright.
Going forward, airline supplier site growth is expected to move more in line with
20
overall online air bookings growth, while hotel supplier sites are expected to continue
growing faster than online hotel bookings growth.
Differentiation among the various travel websites has narrowed in the past several years, and
the travel landscape has grown extremely competitive, with the need for competitors to generally
differentiate their offerings on features other than price.
Business Strategy
We play a fundamental role in facilitating travel, whether for leisure or business. We are
committed to providing our travelers with the best set of resources to serve their travel needs by
taking advantage of our critical assets our brand portfolio, our technology and commitment to
continuous innovation, our global reach and our breadth of product offering. In addition, we take
advantage of our growing base of knowledge about our destinations, suppliers and travelers based on
our unique position in the travel value chain.
A discussion of the critical assets that we leverage in achieving our business strategy
follows:
Portfolio of Travel Brands.
We seek to appeal to the broadest possible range of travelers and
suppliers through our collection of industry-leading brands. We target several different
demographics, from the value-conscious traveler through our Hotwire brand to luxury travelers
seeking a high-touch, customized vacation package through our Classic Vacations brand. We believe
our flagship Expedia brand appeals to the broadest range of travelers, with our extensive product
offering ranging from single item bookings of discounted product to complex bundling of higher-end
travel packages. Our Hotels.com site and its international versions target travelers with premium
content about lodging properties, and generally appeal to travelers with shorter booking windows
who prefer to drive to their destinations.
Technology and Continuous Innovation.
Expedia has an established tradition of innovation,
from Expedia.coms inception as a division of Microsoft, to our introduction of more recent
innovations such as our ThankYou Rewards Network offered in conjunction with Citigroup, Traveler
hotel reviews, Expedia
®
Fare Alerts and Flight Fare Calendar, Travel
Ticker
tm
by Hotwire
®
, TripAdvisors traveler network and ECTs
business intelligence toolset.
We intend to continue to aggressively innovate on behalf of our travelers and suppliers,
including our current efforts to build a scaleable, service-oriented technology platform for our
travelers, which will extend across our portfolio of brands. We expect this to result in improved
flexibility and allow faster innovation. This transition should allow us to improve our site
merchandising, browse and search functionality and add significant personalization features. This
transition is occurring in a phased approach, with a portion of our worldwide points of sale
migrating to the new platform during 2007.
For our suppliers, we have developed proprietary technology that streamlines the interaction
between some of our websites and hotel central reservation systems, making it easier for hotels to
manage reservations made through our brands. We began offering more streamlined application
programming interfaces for our lodging partners in 2007 to enable faster and simpler integration of
real-time hotel content.
Global Reach.
In 2006, international gross bookings accounted for approximately 26% of
worldwide gross bookings and 28% of revenue. We currently operate over 70 branded points of sale in
more than 50 countries across the globe, including Expedia-branded sites in the United States,
Australia, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden
and the United Kingdom. Our Hotels.com and TripAdvisor brands also maintain both U.S. points of
sale and additional points of sale outside the United States. We also offer Chinese travelers a
wide array of products and services through our majority ownership in eLong.
We intend to continue investing in and growing our existing international points of sale. We
anticipate launching points of sale in additional countries where we find large travel markets and
rapid growth of online commerce.
21
ECT currently conducts operations in the United States, Belgium, Canada, France, Germany,
Italy and the United Kingdom. We believe the corporate travel sector represents a large opportunity
for Expedia, and we believe we offer a compelling technology solution to businesses seeking to
control travel costs and improve their employees travel experiences. We intend to continue
investing in and expanding the geographic footprint of our ECT business.
In expanding our global reach, we are leveraging our significant investment in technology,
operations, brand building, supplier integration and relationships and other areas since the launch
of Expedia.com in 1996. We intend to continue leveraging this investment when launching points of
sale in new countries, introducing website features, adding supplier products and services, and
adding value-added content for travelers.
Breadth of Product Offering.
We believe we offer a comprehensive array of innovative travel
products and services to travelers. We plan to continue improving and growing these offerings, as
well as expand them to our worldwide points of sale over time.
The majority of our revenue comes from transactions involving the booking of hotel
reservations and the sale of airline tickets, either as stand-alone products or as part of package
transactions. We are working to grow our package business as it results in higher revenue per
transaction, and we also seek to continue diversifying our revenue mix beyond core air and hotel
products to car rental, destination services, cruise and other product offerings. We are also
working to increase the mix of revenue from advertising through expansion of our TripAdvisor model,
as well as media enhancements across many of our other worldwide points of sale.
Seasonality
We generally experience seasonal fluctuations in the demand for our travel products and
services. For example, traditional leisure travel bookings are generally the highest in the first
three quarters of the year as travelers plan and book their spring, summer and holiday travel. The
number of bookings typically decreases in the fourth quarter. Because revenue in the merchant
business is generally recognized when the travel takes place rather than when it is booked, revenue
typically lags bookings by several weeks or longer. As a result, revenue is typically the lowest in
the first quarter and highest in the third quarter. The continued growth of our international
operations or a change in our product mix may influence the typical trend of our seasonality in the
future.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that we believe are important in the
preparation of our consolidated financial statements because they require that we use judgment and
estimates in applying those policies. We prepare our consolidated financial statements and
accompanying notes in accordance with generally accepted accounting principles in the United States
(GAAP). Preparation of the consolidated financial statements and accompanying notes requires that
we make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the consolidated financial
statements as well as revenue and expenses during the periods reported. We base our estimates on
historical experience, where applicable, and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates under different assumptions or
conditions.
There are certain critical estimates that we believe require significant judgment in the
preparation of our consolidated financial statements. We consider an accounting estimate to be
critical if:
|
|
|
It requires us to make assumptions because information was not available at the time
or it included matters that were highly uncertain at the time we were making the
estimate; and
|
|
|
|
|
Changes in the estimate or different estimates that we could have selected may
have had a material impact on our financial condition or results of operations.
|
22
For additional information about our critical accounting policies and estimates, see the
disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2006.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income
Taxes
, we record income taxes under the liability method. Deferred tax assets and liabilities
reflect our estimation of the future tax consequences of temporary differences between the carrying
amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes
based on the differences in accounting methods and timing between financial statement and income
tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary
difference based on the enacted tax rates in effect for the years in which we expect to realize the
underlying items of income and expense. We consider many factors when assessing the likelihood of
future realization of our deferred tax assets, including our recent earnings experience by
jurisdiction, expectations of future taxable income, and the carryforward periods available to us
for tax reporting purposes, as well as other relevant factors. We may establish a valuation
allowance to reduce deferred tax assets to the amount we believe is more likely than not to be
realized. Due to inherent complexities arising from the nature of our businesses, future changes in
income tax law, tax sharing agreements or variances between our actual and anticipated operating
results, we make certain judgments and estimates. Therefore, actual income taxes could materially
vary from these estimates.
We record liabilities to address uncertain tax positions we have taken in previously filed tax
returns or that we expect to take in a future tax return. The determination for required
liabilities is based upon an analysis of each individual tax position, taking into consideration
whether it is more likely than not that our tax positions, based on technical merits, will be
sustained upon examination. For those positions for which we conclude it is more likely than not
it will be sustained, we recognize the largest amount of tax benefit that is greater than 50
percent likely of being realized upon ultimate settlement with the taxing authority. The
difference between the amount recognized and the total tax position is recorded as a liability.
The ultimate resolution of these tax positions may be greater or less than the liabilities
recorded.
New Accounting Pronouncements
For a discussion of new accounting pronouncements, see Note 2 Summary of Significant
Accounting Policies in the notes to the consolidated financial statements.
Segments
We have two reportable segments: North America and Europe. We determined our segments
based on how our chief operating decision makers manage our business, make operating decisions and
evaluate operating performance.
Our North America segment provides a full range of travel services to customers in the United
States, Canada and Mexico. This segment operates through a variety of brands including Classic
Vacations, Expedia.com, Hotels.com, Hotwire.com and TripAdvisor.
Our Europe segment provides travel services primarily through localized Expedia websites in
Denmark, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden and the United Kingdom, as
well as localized versions of Hotels.com in various European countries.
Corporate and Other includes ECT, Expedia Asia Pacific and unallocated corporate functions and
expenses. ECT provides travel products and services to corporate customers in North America and
Europe. Expedia Asia Pacific provides online travel information and reservation services primarily
through eLong in the Peoples Republic of China, localized Expedia websites in Australia and Japan,
as well as localized versions of Hotels.com in various Asian countries.
23
Operating Metrics
Our operating results are affected by certain metrics that represent the selling
activities generated by our travel products and services. As travelers have increased their use of
the internet to book their travel arrangements, we have seen our gross bookings increase,
reflecting the growth in the online travel industry and our business acquisitions. Gross bookings
represent the total retail value of transactions booked for both agency and merchant transactions,
recorded at the time of booking reflecting the total price due for travel by travelers, including
taxes, fees and other charges, and are generally reduced for cancellations and refunds.
Gross Bookings and Revenue Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
% Change
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Gross Bookings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,722,859
|
|
|
$
|
3,445,166
|
|
|
|
8%
|
|
|
$
|
7,281,797
|
|
|
$
|
6,966,804
|
|
|
|
5%
|
|
Europe
|
|
|
1,035,243
|
|
|
|
751,793
|
|
|
|
38%
|
|
|
|
2,066,889
|
|
|
|
1,531,737
|
|
|
|
35%
|
|
Corporate and Other
|
|
|
466,052
|
|
|
|
367,805
|
|
|
|
27%
|
|
|
|
891,450
|
|
|
|
714,430
|
|
|
|
25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross bookings
|
|
$
|
5,224,154
|
|
|
$
|
4,564,764
|
|
|
|
14%
|
|
|
$
|
10,240,136
|
|
|
$
|
9,212,971
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
13.6
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
12.5
|
%
|
|
|
12.0
|
%
|
|
|
|
|
Europe
|
|
|
14.0
|
%
|
|
|
14.9
|
%
|
|
|
|
|
|
|
12.4
|
%
|
|
|
12.9
|
%
|
|
|
|
|
Corporate and Other
|
|
|
8.4
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
8.2
|
%
|
|
|
8.0
|
%
|
|
|
|
|
Total revenue margin
|
|
|
13.2
|
%
|
|
|
13.1
|
%
|
|
|
|
|
|
|
12.1
|
%
|
|
|
11.9
|
%
|
|
|
|
|
Gross bookings increased $659.4 million and $1.0 billion, or 14% and 11%, for the three and
six months ended June 30, 2007 compared to the same periods in 2006. For the three and six months
ended June 30, 2007, North America gross bookings increased 8% and 5% compared to the same periods
in 2006. For the three and six months ended June 30, 2007, Europe gross bookings increased 38% and
35% compared to the same periods in 2006.
Revenue margin, which is defined as revenue as a percentage of gross bookings, increased 10
basis points and 26 basis points for the three and six months ended June 30, 2007 compared to the
same periods in 2006. For the three and six months ended June 30, 2007, revenue margin increased 34
basis points and 50 basis points in our North America segment compared to the same periods in 2006.
For the three and six months ended June 30, 2007, revenue margin decreased 85 basis points and 52
basis points in our Europe segment compared to the same periods in 2006.
The increase in worldwide and North America revenue margin for the three months ended June 30,
2007, as compared to the same period in 2006, was primarily due to an increased mix of advertising
and media and car rental revenue, partially offset by the decline in revenue per air ticket and
lower merchant hotel raw margin (defined as hotel net revenue as a percentage of hotel gross
revenue). The increase in worldwide and North America revenue margin for the six months ended June
30, 2007, as compared to the same period in 2006, was primarily due to an increased mix of
advertising and media and car rental revenue as well as a higher merchant hotel raw margin,
partially offset by the decline in revenue per air ticket. Europe revenue margin decreased in part due to a 4% and 9% increase in airfares, as our
remuneration generally does not vary with the price of air tickets. In addition, for the three
months ended June 30, 2007 compared to the same period in the prior year, Europe revenue margin
also decreased due to decreased revenue from air booking fees and more competitive hotel pricing.
24
Results of Operations
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
North America
|
|
$
|
505,379
|
|
|
$
|
455,925
|
|
|
|
11%
|
|
|
$
|
911,780
|
|
|
$
|
837,850
|
|
|
|
9%
|
|
Europe
|
|
|
145,437
|
|
|
|
112,036
|
|
|
|
30%
|
|
|
|
255,427
|
|
|
|
197,304
|
|
|
|
29%
|
|
Corporate and Other
|
|
|
39,107
|
|
|
|
30,497
|
|
|
|
28%
|
|
|
|
73,227
|
|
|
|
57,202
|
|
|
|
28%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
689,923
|
|
|
$
|
598,458
|
|
|
|
15%
|
|
|
$
|
1,240,434
|
|
|
$
|
1,092,356
|
|
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue increased for the three and six months ended June 30, 2007, compared to the same
periods in 2006, primarily due to increases in worldwide merchant hotel revenue and
advertising and media revenue, partially offset by a decline in our North America air revenue.
Worldwide merchant hotel revenue increased 14% and 15% for the three and six months ended June
30, 2007, compared to the same periods in 2006. The increases were primarily due to a 4% and 8%
increase in revenue per room night as well as a 10% and 7% increase in room nights stayed,
including rooms delivered as a component of vacation packages. For the three months ended June 30,
2007, revenue per room night increased due to a 5% increase in worldwide ADRs, partially offset by
a modest decrease in hotel raw margins. For the six months ended June 30, 2007, revenue per room
night increased due to a 7% increase in worldwide ADRs and a modest
increase in hotel raw margins.
Worldwide air revenue decreased 7% and 12% for the three and six months ended June 30, 2007,
compared to the same periods in 2006, due to a 19% decrease in revenue per air ticket for both
periods partially offset by an increase of 14% and 9% in air tickets sold for those periods. The
decrease in revenue per air ticket primarily reflects decreased compensation from air carriers and
GDS providers. Packages revenue grew 1% and decreased 1% for the three and six months ended June
30, 2007 compared with the prior year periods.
The remaining worldwide revenue other than merchant hotel and air discussed above, which
includes advertising and media, agency hotel, car rental, destination services, and cruise,
increased by 40% and 35% for the three and six
months ended June 30, 2007, compared to the same periods in 2006, primarily due to an increase
in advertising and media revenue and car rental revenue.
Cost of Revenue and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Cost of revenue
|
|
$
|
143,646
|
|
|
$
|
128,449
|
|
|
|
12
|
%
|
|
$
|
264,944
|
|
|
$
|
247,763
|
|
|
|
7
|
%
|
% of revenue
|
|
|
20.8
|
%
|
|
|
21.5
|
%
|
|
|
|
|
|
|
21.4
|
%
|
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
546,277
|
|
|
$
|
470,009
|
|
|
|
16
|
%
|
|
$
|
975,490
|
|
|
$
|
844,593
|
|
|
|
15
|
%
|
% of revenue
|
|
|
79.2
|
%
|
|
|
78.5
|
%
|
|
|
|
|
|
|
78.6
|
%
|
|
|
77.3
|
%
|
|
|
|
|
Cost of revenue increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, primarily due to higher costs associated with the increase in transaction
volumes.
Gross profit increased for the three and six months ended June 30, 2007, compared to the same
periods in 2006, primarily due to increased revenue and an increase in gross margin. Gross margin
increased 64 basis points and 132 basis points for these periods primarily due to the same factors
contributing to our increased revenue margin, as well as cost savings from our productivity
initiatives.
25
Selling and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Selling and marketing
|
|
$
|
255,905
|
|
|
$
|
198,666
|
|
|
|
29
|
%
|
|
$
|
478,173
|
|
|
$
|
399,692
|
|
|
|
20
|
%
|
% of revenue
|
|
|
37.1
|
%
|
|
|
33.2
|
%
|
|
|
|
|
|
|
38.5
|
%
|
|
|
36.6
|
%
|
|
|
|
|
Selling and marketing expenses increased, compared to the same periods in 2006, primarily due
to increased marketing spend in Europe and increased online marketing efforts across our global
points of sale, as well as higher indirect costs.
We expect absolute amounts spent on selling and marketing to increase in 2007, and we expect
selling and marketing to be higher as a percentage of revenue in 2007 as we support our established
brands, grow our earlier stage international markets, invest in our global advertising and media
business and expand our corporate travel sales and market management teams.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
General and administrative
|
|
$
|
75,733
|
|
|
$
|
71,053
|
|
|
|
7
|
%
|
|
$
|
151,896
|
|
|
$
|
144,414
|
|
|
|
5
|
%
|
% of revenue
|
|
|
11.0
|
%
|
|
|
11.9
|
%
|
|
|
|
|
|
|
12.2
|
%
|
|
|
13.2
|
%
|
|
|
|
|
General and administrative expense increased, compared to the same periods in 2006, primarily
due to higher personnel costs related to expansion of our corporate
information technology functions and our European businesses. We expect general and administrative expense to increase in absolute dollars but
decrease as a percentage of revenue for the full year of 2007 versus 2006.
Technology and Content
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Technology and content
|
|
$
|
41,511
|
|
|
$
|
33,288
|
|
|
|
25
|
%
|
|
$
|
83,763
|
|
|
$
|
68,832
|
|
|
|
22
|
%
|
% of revenue
|
|
|
6.0
|
%
|
|
|
5.6
|
%
|
|
|
|
|
|
|
6.8
|
%
|
|
|
6.3
|
%
|
|
|
|
|
Technology and content expense increased in absolute costs and as a percentage of revenue
primarily due to increased amortization of capitalized software development costs, a significant
amount of which was placed into service beginning in the fourth quarter of 2006 and the first
quarter of 2007 and growth in personnel-related expenses in our software development and
engineering teams as we increase our level of website innovation.
Given our historical and ongoing investments in our enterprise data warehouse, new platform,
geographic expansion, data centers, redundancy, call center technology, site merchandising, content
management, site monitoring, networking, corporate travel, supplier integration and other
initiatives, we expect
technology and content expense to increase in absolute dollars and as a percentage of revenue for
both 2007 and 2008.
26
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Amortization of intangible assets
|
|
$
|
19,503
|
|
|
$
|
30,120
|
|
|
|
(35
|
%)
|
|
$
|
40,699
|
|
|
$
|
60,291
|
|
|
|
(32
|
%)
|
% of revenue
|
|
|
2.8
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
3.3
|
%
|
|
|
5.5
|
%
|
|
|
|
|
Amortization of intangible assets decreased for the three and six months ended June 30, 2007,
compared to the same periods in 2006, due primarily to the completion of amortization related to
certain technology and supplier intangible assets over the past year, partially offset by
amortization related to new business acquisitions.
Amortization of Non-Cash Distribution and Marketing
In 2006, we substantially utilized all media time we received from IAC in conjunction
with the Spin-Off, with an original value of $17.1 million.
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Operating income
|
|
$
|
153,625
|
|
|
$
|
136,255
|
|
|
|
13
|
%
|
|
$
|
220,959
|
|
|
$
|
162,497
|
|
|
|
36
|
%
|
% of revenue
|
|
|
22.3
|
%
|
|
|
22.8
|
%
|
|
|
|
|
|
|
17.8
|
%
|
|
|
14.9
|
%
|
|
|
|
|
Operating income increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, due to an increase in gross profit and a general decrease in
operating expenses as a percentage of revenue, including stock-based compensation, amortization of
intangibles, and amortization of non-cash distribution and marketing, with the exception of sales
and marketing expense and technology and content expense which grew as a percentage of revenue.
Operating Income Before Amortization (OIBA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
OIBA
|
|
$
|
187,100
|
|
|
$
|
184,223
|
|
|
|
2
|
%
|
|
$
|
291,490
|
|
|
$
|
272,763
|
|
|
|
7
|
%
|
% of revenue
|
|
|
27.1
|
%
|
|
|
30.8
|
%
|
|
|
|
|
|
|
23.5
|
%
|
|
|
25.0
|
%
|
|
|
|
|
The increase in OIBA for the three and six months ended June 30, 2007, compared to the same
periods in 2006, was primarily due to an increase in gross profit, partially offset by
growth in sales and marketing expenses and technology and content expenses as a percentage of
revenue.
Definition of OIBA
We provide OIBA as a supplemental measure to accounting principles generally accepted in
the United States (GAAP). We define OIBA as operating income plus: (1) amortization of non-cash
distribution and marketing expense, (2) stock-based compensation expense, (3) amortization of
intangible assets and goodwill and intangible asset impairment, if applicable and (4) certain
one-time items, if applicable.
OIBA is the primary operating metric used by which management evaluates the performance of our
business, on which internal budgets are based, and by which management is compensated. Management
believes that investors should have access to the same set of tools that management uses to analyze
our results. This non-GAAP measure should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a
27
substitute for, or superior to, GAAP. We
endeavor to compensate for the limitation of the non-GAAP measure presented by also providing the
comparable GAAP measures, GAAP financial statements, and descriptions of the reconciling items and
adjustments, to derive the non-GAAP measure. We present a reconciliation of this non-GAAP financial
measure to GAAP below.
OIBA represents the combined operating results of Expedia, Inc.s businesses, taking into
account depreciation, which we believe is an ongoing cost of doing business, but excluding the
effects of other non-cash expenses that may not be indicative of our core business operations. We
believe this measure is useful to investors for the following reasons:
|
|
|
It corresponds more closely to the cash operating income generated from our core
operations by excluding significant non-cash operating expenses;
|
|
|
|
|
It aids in forecasting and analyzing future operating income as stock-based compensation,
non-cash distribution and marketing expenses and intangible assets amortization, assuming no
subsequent acquisitions, are likely to decline going forward; and
|
|
|
|
|
It provides greater insight into management decision making at Expedia, as OIBA is our
primary internal metric for evaluating the performance of our business.
|
OIBA has certain limitations in that it does not take into account the impact of certain
expenses to our consolidated statements of income, including stock-based compensation, non-cash
payments to partners, acquisition-related accounting and certain one-time items, if applicable. Due
to the high variability and difficulty in predicting certain items that affect net income, such as
tax rates, stock price and interest rates, we are unable to provide a reconciliation to net income
on a forward-looking basis without unreasonable efforts.
Reconciliation of OIBA to Operating Income and Net Income
The following table presents a reconciliation of OIBA to operating income and net income
for the three and six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
OIBA
|
|
$
|
187,100
|
|
|
$
|
184,223
|
|
|
$
|
291,490
|
|
|
$
|
272,763
|
|
Amortization of intangible assets
|
|
|
(19,503
|
)
|
|
|
(30,120
|
)
|
|
|
(40,699
|
)
|
|
|
(60,291
|
)
|
Stock-based compensation
|
|
|
(13,972
|
)
|
|
|
(17,221
|
)
|
|
|
(29,832
|
)
|
|
|
(41,108
|
)
|
Amortization of non-cash distribution and marketing
|
|
|
|
|
|
|
(627
|
)
|
|
|
|
|
|
|
(8,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
153,625
|
|
|
|
136,255
|
|
|
|
220,959
|
|
|
|
162,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
650
|
|
|
|
6,559
|
|
|
|
(3,257
|
)
|
|
|
8,262
|
|
Other, net
|
|
|
5,936
|
|
|
|
10,466
|
|
|
|
441
|
|
|
|
14,123
|
|
Provision for income taxes
|
|
|
(64,076
|
)
|
|
|
(56,158
|
)
|
|
|
(87,688
|
)
|
|
|
(65,816
|
)
|
Minority interest in (income) loss of consolidated subsidiaries, net
|
|
|
1
|
|
|
|
(1,640
|
)
|
|
|
457
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
96,136
|
|
|
$
|
95,482
|
|
|
$
|
130,912
|
|
|
$
|
118,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Interest income
|
|
$
|
10,552
|
|
|
$
|
7,034
|
|
|
|
50
|
%
|
|
$
|
17,821
|
|
|
$
|
10,635
|
|
|
|
68
|
%
|
Interest expense
|
|
|
(9,902
|
)
|
|
|
(475
|
)
|
|
|
1,985
|
%
|
|
|
(21,078
|
)
|
|
|
(2,373
|
)
|
|
|
788
|
%
|
Interest income increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, primarily due to higher cash and cash equivalent balances.
28
Interest expense increased for the three and six months ended June 30, 2007, compared to the
same periods in 2006, due to interest expense related to the $500.0 million senior unsecured notes
(the Notes) that we issued in August 2006. Interest expense will increase for fiscal 2007 versus
2006, as the Notes will have been outstanding for a full year. In addition, interest expense may
increase in the second half of 2007 due to the potential draw on our revolving credit facility to
fund the outstanding tender offer.
Other, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Other, net
|
|
$
|
5,936
|
|
|
$
|
10,466
|
|
|
|
(43
|
%)
|
|
$
|
441
|
|
|
$
|
14,123
|
|
|
|
(97
|
%)
|
For the three months ended June 30, 2007, other, net primarily includes a gain of $12.1
million related to federal excise tax refunds, partially offset by net losses of $3.2 million from
fair value changes in and the settlement of derivative instruments related to the Ask Jeeves Notes
and certain stock warrants as well as $2.3 million of losses from unconsolidated equity affiliates.
For the six months ended June 30, 2007, other, net primarily includes a gain of $12.1 million
relating to federal excise tax refunds, partially offset by net losses of $4.5 million from fair
value changes in and the settlement of derivative instruments related to the Ask Jeeves Notes and
certain stock warrants, net losses of $3.2 million from the fluctuation of exchange rates on
foreign denominated assets and liabilities of U.S. dollar functional currency subsidiaries, as well
as $3.6 million of losses from unconsolidated equity affiliates.
For the three and six months ended June 30, 2006, other, net primarily includes net gains of
$7.9 million and $12.2 million from fair value changes in and the settlement of derivative
instruments related to the Ask Jeeves Notes and certain stock warrants as well as net gains of $1.9
million and $1.5 million from the fluctuation of exchange rates on foreign denominated assets and
liabilities of U.S. dollar functional currency subsidiaries.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Provision for income taxes
|
|
$
|
(64,076
|
)
|
|
$
|
(56,158
|
)
|
|
|
14
|
%
|
|
$
|
(87,688
|
)
|
|
$
|
(65,816
|
)
|
|
|
33
|
%
|
Effective tax rate
|
|
|
40.0
|
%
|
|
|
36.6
|
%
|
|
|
|
|
|
|
40.2
|
%
|
|
|
35.6
|
%
|
|
|
|
|
We determine our provision for income taxes for interim periods using an estimate of our
annual effective rate. We record any changes to the estimated annual rate in the interim period in
which the change occurs, including discrete tax items.
Our effective tax rate was 40.0% and 40.2% for the three and six months ended June 30, 2007,
which is higher than the 35% statutory rate primarily due to state income taxes, non-deductible
losses related to our derivative liabilities, interest accruals related to uncertain tax positions
and a taxable dividend from an equity investment.
Our effective tax rate was 36.6% and 35.6% for the three and six months ended June 30, 2006,
which is higher than the 35% statutory rate primarily due to state income taxes and the valuation
allowance on foreign losses, partially offset by the disallowance for tax purposes of the
mark-to-market net gain related to our derivative instruments.
Financial Position, Liquidity and Capital Resources
Our principal sources of liquidity are cash flows generated from operations, our cash and
cash equivalents balances, which were $1,011.4 million and $853.3 million as of June 30, 2007 and
December 31, 2006, and our
29
$1.0 billion revolving credit facility, of which $947.5 million was
available to us as of June 30, 2007 representing the total of the facility less $52.5 million of
outstanding stand-by letters of credit.
On June 19, 2007, we announced our intention to repurchase up to 116,666,665 shares of our
common stock in a tender offer at a price per share not less than $27.50 and not greater than
$30.00. On July 25, 2007, we filed an amended offer to purchase that reduced the maximum number of
shares the Company is offering to purchase to 25,000,000 shares, due to lack of available financing
on terms satisfactory to the Company, as a result of current conditions in the credit market. We
expect to fund the purchase of shares under the amended tender offer through available borrowing
capacity under our existing revolving credit facility and cash on-hand. The 25,000,000 shares
subject to the amended tender offer represent approximately 9% of the number of shares of common
stock outstanding and approximately 8% of the total number of shares of common stock and Class B
common stock outstanding as of the announcement date. The tender offer will expire, unless
extended, on August 8, 2007. A modified Dutch auction will allow stockholders to indicate how
many shares and at what price within our specified range they wish to tender. Based on the number
of shares tendered and the prices specified by the tendering stockholders, we will determine the
lowest price per share within the range at which the Company can purchase up to 25,000,000 shares
of its common stock or such lesser number of shares as are properly tendered. We will not purchase
shares below a price stipulated by a stockholder, and in some cases, may actually purchase shares
at prices above a stockholders indication under the terms of the modified Dutch auction. Our
directors and executive officers and Liberty Media Corporation have advised the Company that they
do not intend to tender any shares in the tender offer.
Under the merchant model, we receive cash from travelers at the time of booking and we record
these amounts on our consolidated balance sheets as deferred merchant bookings. We pay our
suppliers related to these bookings generally within two weeks after completing the transaction for
air travel and, for all other merchant bookings, which is primarily our merchant hotel business,
after the travelers use and subsequent billing from the supplier. Therefore, there is generally a
greater time from the receipt of cash from the traveler to the payment to the supplier, and this
operating cycle represents a working capital source of cash to us. As long as the merchant hotel
business continues to grow and our business model does not significantly change, we expect that
changes in working capital will positively impact operating cash flows. If this business declines
relative to our other businesses, or if there are changes to the model which compress the time
between receipts of cash from travelers to payments to suppliers, our working capital benefits
could be reduced, as was the case to a certain degree in fiscal 2006 as we increased the efficiency
of our supplier payment process.
Seasonal fluctuations in our merchant hotel bookings affect the timing of our annual cash
flows. During the first half of the year, hotel bookings have traditionally exceeded stays,
resulting in much higher cash flow related to working capital. During the second half of the year,
this pattern reverses. While we expect the impact of seasonal fluctuations to continue, merchant
hotel growth rates or model changes as discussed above may affect working capital, which might
counteract or intensify the anticipated seasonal fluctuations.
As of June 30, 2007, we had a deficit in our working capital of $690.4 million compared to a
deficit of $217.4 million as of December 31, 2006. The increase in deficit is primarily a result of
the completion of a tender offer during the three months ended March 31, 2007, partially offset by
the generation of working capital from operations.
We anticipate continued investment in the development and expansion of our operations. These
investments include but are not limited to improvements to infrastructure, which include our
enterprise data warehouse investment, servers, networking equipment and software, release
improvements to our software code and continuing efforts to build a scaleable, service-oriented
technology platform that will extend across our portfolio of brands. Portions of our worldwide
points of sale are migrating, in a phased approach, to the new platform during 2007. Capital
expenditures are expected to increase up to 10% in fiscal 2007. Our future capital requirements may
include capital needs for acquisitions or expenditures in support of our business strategy. In the
event we have acquisitions,
30
this may reduce our cash balance and increase our debt. Legal risks and
challenges to our business strategy may also negatively affect our cash balance.
Our cash flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
(in thousands)
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
922,613
|
|
|
$
|
708,913
|
|
|
$
|
213,700
|
|
Investing activities
|
|
|
(128,190
|
)
|
|
|
(40,552
|
)
|
|
|
(87,638
|
)
|
Financing activities
|
|
|
(642,746
|
)
|
|
|
(337,623
|
)
|
|
|
(305,123
|
)
|
Effect of foreign exchange rate
changes on cash and cash equivalents
|
|
|
6,453
|
|
|
|
15,187
|
|
|
|
(8,734
|
)
|
For the six months ended June 30, 2007, net cash provided by operating activities increased by
$213.7 million primarily due to an increase in changes in operating assets and liabilities, an
increase in cash flows from operating income as well as a decrease in tax payments, partially
offset by an increase in interest payments in the current period. We made tax payments of $5.9
million, a decrease of $27.2 million over the prior year period, increasing cash provided by
operations due primarily to timing differences in tax payments.
Cash used in investing activities increased by $87.6 million for the six months ended June 30,
2007 primarily due to a $54.7 million increase in cash paid for acquisitions and a $28.0 million
increase in long-term investments and deposits mainly related to our 50% investment in a travel
company.
Cash used in financing activities for the six months ended June 30, 2007 primarily included
cash paid to acquire shares in first quarter of 2007 tender offer pursuant to which we acquired 30
million tendered shares of our common stock at a purchase price of $22.00 per share, for a total
cost of $660 million plus fees and expenses relating to the tender offer. Cash used in financing
activities for the six months ended June 30, 2006 primarily included the $230.0 million repayment
of our revolving credit facility as well as $127.2 million of treasury stock activity primarily
related to share repurchases.
Prior to the end of 2007, we expect that, upon exercise of certain options to purchase shares
of our common stock, the Company may make certain payments on behalf
of the exercising optionee in lieu of issuing shares of the Company
that would otherwise have been issued with a value equal to the tax obligations of
the optionee associated with such exercise. Based upon our stock price of $29.29 as of June 29,
2007, such payments would be approximately $100 million.
We reclassified certain foreign exchange effects on our cash balances from operating
activities to effect of foreign exchange rate changes for the periods presented. The effect of
foreign exchange on our cash balances denominated in foreign currency for the six months ended June
30, 2007 showed a net decrease of $8.7 million from the same period in 2006.
In addition to the ongoing tender offer, we currently have authorization from our Board of
Directors to repurchase up to 20 million outstanding shares of our common stock. There is no fixed
termination date for the authorization.
In our opinion, available cash, funds from operations and available borrowings will provide
sufficient capital resources to meet our foreseeable liquidity needs.
Contractual Obligations and Commercial Commitments
For a discussion of potential future commitments related to new acquisitions, see Note 8
Acquisitions and Other Investments in the notes to the consolidated financial statements. In
addition, see Note 9 Commitments and Contingencies for updated future minimum lease commitments.
There have been no other material changes outside the normal course of business to our contractual
obligations and commercial commitments since December 31,
31
2006. Other than our contractual
obligations and commercial commitments, including derivatives, we did not have any off-balance
sheet arrangements as of June 30, 2007 or December 31, 2006.
32
Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Management
There have been no material changes in our market risk during the six months ended June
30, 2007. For additional information, see Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, in Part II of our Annual Report on Form 10-K for the year ended December 31, 2006.
33
Part I. Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the
Exchange Act), our management, including our Chairman and Senior Executive, Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined by Rule 13a-15(e) and 15(d)-15(e) under the Exchange
Act). Based upon that evaluation, our Chairman and Senior Executive, Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
Changes in internal control over financial reporting.
There were no changes to our internal control over financial reporting that occurred
during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
34
Part II. Item 1. Legal Proceedings
In the ordinary course of business, Expedia and its subsidiaries are parties to legal
proceedings and claims involving property, personal injury, contract, alleged infringement of third
party intellectual property rights and other claims. A discussion of certain legal proceedings can
be found in the section titled Legal Proceedings, of our Annual Report on Form 10-K for the year
ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
The following are developments regarding such legal proceedings:
Litigation Relating to Hotel Occupancy Tax
Canales v. Hotels.com
. On April 11, 2007, the parties submitted a Joint Status Report to
the court asking that the court reset the next status conference until October 2007.
City of Los Angeles Litigation
. On June 11, 2007, a hearing took place on defendants
demurrers and motion to strike class allegations. The court has not ruled on those motions.
City of Chicago Litigation
. On July 12, 2007, the court issued an order resetting the ruling
date on defendants motion to dismiss to September 27, 2007.
City of Rome, Georgia Litigation
. On May 10, 2007, the court denied, without prejudice,
defendants motion for summary judgment based on plaintiffs failure to exhaust administrative
remedies, but stayed the litigation, concluding that the plaintiffs must exhaust their
administrative remedies before continuing to litigate their tax claims.
Pitt County, North Carolina Litigation
. A hearing on defendants motion for reconsideration
or certification of an interlocutory appeal took place on July 31, 2007. The court has not yet
ruled on the motion.
Orange County, Florida Litigation
. On July 17, 2007, the court entered an order granting
defendants motion to dismiss the Countys Amended Complaint.
City of Atlanta, Georgia Litigation
. On June 22, 2007, the plaintiffs in the Rome, Georgia
litigation filed a motion seeking to unseal the appellate record in the City of Atlanta appeal. On
July 17, 2007, the Court of Appeals denied the City of Romes motion to unseal the record.
City of Charleston, South Carolina Litigation
. On May 14, 2007, the plaintiff filed its first
amended complaint. On June 4, 2007, the Defendants filed a motion to dismiss.
City of San Antonio, Texas Litigation
. On May 16 and 17, 2007, the court held a hearing on
plaintiffs motion for class certification. The court has not ruled on that motion.
City of Gallup, New Mexico Litigation
. On July 6, 2007, the City of Gallup refilled its
lawsuit. The deadline to respond to the lawsuit has not yet been established.
Town of Mt. Pleasant, South Carolina Litigation
. On May 14, 2007, the town filed its first
amended complaint. On June 4, 2007, the defendants filed a motion to dismiss.
Cities of Columbus and Dayton, Ohio Litigation
. On July 10, 2007, the court entered an
ordering transferring the case to the Northern District of Ohio, Western Division. On July
23, 2007, the court ruled that the defendants are not subject to Ohios transient guest tax
ordinance, adopting the courts July 26, 2006 order in the Findlay, Ohio lawsuit. The court also
granted Columbus/Daytons request to withdraw the class action allegations from their lawsuit.
Cumberland County, North Carolina Litigation
. A hearing on defendants motion to dismiss took
place on July 18, 2007. The court has not yet rendered a decision on that motion.
Branson, Missouri Litigation
. On April 23, 2007, the defendants filed a motion to dismiss the
lawsuit.
35
Part II. Item 1. Legal Proceedings
Wake County, North Carolina Litigation
. A hearing on defendants motion to dismiss took place
on July 18, 2007. The court has not yet rendered a decision on that motion.
Buncombe County, North Carolina Litigation
. A hearing on defendants motions to dismiss took
place on July 18, 2007. The court has not yet rendered a decision on that motion.
Dare County, North Carolina Litigation
. A hearing on defendants motion to dismiss took place
on July 18, 2007. The court has not yet rendered a decision on that motion.
Myrtle Beach, South Carolina Litigation
. On April, 30, 2007, the defendants filed a motion to
dismiss. That motion is pending.
Horry County, South Carolina Litigation
. On April 23, 2007, the defendants filed a motion to
dismiss. That motion is pending.
City of Fayetteville, Arkansas Litigation
. On June 6, 2007, the court entered an order
granting defendants request to extend the deadline to file an answer or other responsive pleading.
Defendants deadline to file their answers or other responsive pleadings is ten days after
plaintiffs file their Amended Class Action Complaint, which has not been filed.
City of Houston, Texas Litigation
. On July 5, 2007, the court denied defendants special
exception requesting the city to replead its complaint, but granted defendants special exception
that the plaintiff plead the maximum amount of damages claimed.
The following cases relating to hotel occupancy taxes have been filed in addition to the legal
proceedings discussed in the Legal Proceedings, of our Annual Report on Form 10-K for the year
ended December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007:
Jefferson City, Missouri Litigation.
On June 27, 2007, Jefferson City, Missouri filed a
putative class action in state court against a number of internet travel companies, including
Hotels.com, Hotwire and Expedia.
Jefferson City v. Hotels.com, L.P., et al.
, 07AC-CC0055 (Circuit
Court of Cole County). The complaint alleges that the defendants have failed to pay to the city
hotel accommodations taxes as required by municipal ordinance. The complaint purports to assert
claims for violation of that ordinance, violation of Missouris Merchandising Practices Act,
conversion, unjust enrichment, breach of fiduciary duties, constructive trust, and declaratory
judgment. The complaint seeks injunctive relief and damages in an unspecified amount. The
deadline to respond to the lawsuit has not yet been established.
City of Oakland, California Litigation.
On June 29, 2007, the City of Oakland filed an
individual lawsuit in federal court against a number of internet travel companies, including
Hotels.com, Hotwire and Expedia.
City of Oakland v. Hotels.com, L.P., et al.
, C-07-3432 (United
States District Court, Northern District of California). The complaint alleges that the defendants
have failed to pay to the city hotel accommodations taxes as required by municipal ordinance. The
complaint purports to assert claims for violation of that ordinance. The complaint seeks
injunctive relief and damages in an unspecified amount, including punitive damages and restitution.
The deadline to respond to the lawsuit has not yet been established.
The Company believes that the claims discussed above lack merit and will continue to defend
vigorously against them.
36
Part II. Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form
10-K for the year ended December 31, 2006, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
37
Part II. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase
There was no repurchase activity during the three months ended June 30, 2007.
On July 25, 2007, we filed an amended tender offer pursuant to which we offered to repurchase
up to 25,000,000 shares of our common stock in an amended tender offer at a price per share not
less than $27.50 and not greater than $30.00. The shares subject to the tender offer represent
approximately 9% of the number of shares of common stock outstanding and approximately 8% of the
total number of shares of common stock and Class B common stock outstanding as of the announcement
date. The tender offer will expire, unless extended, on August 8, 2007. Based on the number of
shares tendered and the prices specified by the tendering stockholders, we will determine the
lowest price per share within the range at which the Company can purchase up to 25,000,000 shares
of its common stock.
In addition to the ongoing tender offer, we currently have authorization from our Board of
Directors to repurchase up to 20 million outstanding shares of our common stock. There is no fixed
termination date for the authorization.
38
Part II. Item 4. Submission of Matters to a Vote of Security Holders
On June 6, 2007, the Companys annual meeting of stockholders (the Annual Meeting) was held.
Stockholders present in person or by proxy, representing 246,379,652 shares of Expedia common stock
(entitled to one vote per share), 25,599,998 shares of Expedia Class B common stock (entitled to
ten votes per share) and 469 shares of Expedia Series A preferred stock (entitled to two votes per
share), voted on the following matters:
Proposal 1
.
Election of Directors
The stockholders elected ten directors of the Company, three
of whom were elected by holders of common stock only, and seven of whom were elected by holders of
common stock, Class B common stock and Series A preferred stock, voting together as a single class,
each to hold office until the next annual meeting of stockholders or until their successors have
been duly elected and qualified. In each case, the affirmative vote of a plurality of the total
number of votes cast was required to elect each director. Stockholders eligible to vote voted as
follows:
Holders of Expedia Common Stock, voting as a separate class:
|
|
|
|
|
|
|
|
|
|
|
Number of Votes
|
|
Number of Votes
|
|
|
in Favor
|
|
Withheld
|
A. George Skip Battle
|
|
|
235,229,424
|
|
|
|
11,150,228
|
|
David Goldhill
|
|
|
235,438,824
|
|
|
|
10,940,828
|
|
Peter M. Kern
|
|
|
235,433,248
|
|
|
|
10,946,404
|
|
Holders of Expedia Common Stock, Expedia Class B Common Stock and Expedia Series A Preferred
Stock, voting together as a single class:
|
|
|
|
|
|
|
|
|
|
|
Number of Votes
|
|
Number of Votes
|
|
|
in Favor
|
|
Withheld
|
Barry Diller
|
|
|
457,542,381
|
|
|
|
44,838,189
|
|
Dara Khosrowshahi
|
|
|
459,590,960
|
|
|
|
42,789,610
|
|
Victor A. Kaufman
|
|
|
456,721,750
|
|
|
|
45,658,820
|
|
Simon J. Breakwell
|
|
|
466,707,978
|
|
|
|
35,672,592
|
|
Jonathan L. Dolgen
|
|
|
491,433,812
|
|
|
|
10,496,758
|
|
William R. Fitzgerald
|
|
|
451,053,462
|
|
|
|
51,327,108
|
|
John C. Malone
|
|
|
446,563,778
|
|
|
|
55,816,792
|
|
Proposal 2. Approval of the Expedia, Inc. 2005 Stock and Annual Incentive Plan
The holders of
Expedia Common Stock, Expedia Class B Common Stock and Expedia Series A Preferred Stock, voting as
a single class, also approved the Expedia, Inc. 2005 Stock and Annual Incentive Plan. The
affirmative vote of a majority of the total voting power of those shares of Expedia Common Stock,
Class B Common Stock and Series A Preferred Stock present in person or represented by proxy at the
Annual Meeting, voting together as a single class, was required to approve Proposal 2. Those
stockholders eligible to vote voted as follows:
|
|
|
|
|
|
|
Number of Votes in Favor
|
|
Number of Votes Against
|
|
Number of Votes Abstaining
|
|
Number of Broker No Votes
|
439,866,760
|
|
48,155,629
|
|
415,187
|
|
13,942,994
|
Proposal 3. Ratification of Appointment of Independent Registered Public Accounting Firm
The
holders of Expedia Common Stock, Expedia Class B Common Stock and Expedia Series A Preferred Stock,
voting as a single class, also ratified the appointment of Ernst & Young LLP as the Companys
independent registered public accounting firm for the year ending December 31, 2007. The
affirmative vote of a majority of the total voting power
of those shares of Expedia Common Stock, Class B Common Stock and Series A Preferred Stock
present in person
39
Part II. Item 4. Submission of Matters to a Vote of Security Holders
or represented by proxy at the Annual Meeting, voting together as a single class,
was required to approve Proposal 3. Those stockholders eligible to vote voted as follows:
|
|
|
|
|
Number of Votes in Favor
|
|
Number of Votes Against
|
|
Number of Votes Abstaining
|
502,209,828
|
|
65,416
|
|
105,326
|
40
Part
II. Item 6. Exhibits
The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
10.1
|
|
Office Building Lease by and between Tower 333 LLC, a
Delaware limited liability company, and Expedia, Inc., a
Washington corporation, dated June 25, 2007
|
|
|
|
10.2
|
|
First Amendment to Governance Agreement, dated as of June
19, 2007, among Expedia, Inc., Liberty Media Corporation
and Barry Diller
(1)
|
|
|
|
31.1
|
|
Certification of the Chairman and Senior Executive
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934 as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act
|
|
|
|
31.2
|
|
Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted pursuant to Section 302
of the Sarbanes-Oxley Act
|
|
|
|
31.3
|
|
Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934 as adopted pursuant to Section 302
of the Sarbanes-Oxley Act
|
|
|
|
32.1
|
|
Certification of the Chairman and Senior Executive
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
|
|
|
|
32.2
|
|
Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act
|
|
|
|
32.3
|
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act
|
|
|
|
(1)
|
|
Incorporated by reference to Expedia, Inc.s Current Report on Form 8-K,
filed on June 19, 2007 (File Number 000-51447).
|
41
Signature
Pursuant to the requirements of the Section 13 or 15(d) Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
|
|
|
|
|
August 2, 2007
|
Expedia, Inc.
|
|
|
By:
|
/s/ MICHAEL B. ADLER
|
|
|
|
Michael B. Adler
|
|
|
|
Chief Financial Officer
|
|
|
42
Exhibit
10.1
Basic Lease Information Sheet
|
|
|
1. Date of Lease
|
|
June 25, 2007
|
|
|
|
2. Tenant:
|
|
EXPEDIA, INC.
, a Washington corporation
|
|
|
|
3. Tenants Address:
|
|
General Counsel
Expedia, Inc.
3150 139th Ave SE
Bellevue, WA 98005
|
|
|
|
|
|
With a copy to
|
|
|
|
|
|
VP Real Estate
Expedia, Inc.
3150 139th Ave SE
Bellevue, WA 98005
|
|
|
|
4. Landlord:
|
|
TOWER 333 LLC, a Delaware limited liability company
|
|
|
|
5. Landlords Address:
|
|
Tower 333 LLC
2800 Post Oak Boulevard, 50
th
Floor
Houston, TX 77056
|
|
|
|
6. Initial Premises;
Net Rentable Area:
|
|
Three Hundred Forty-seven Thousand Six Hundred Sixty-one (347,661) square feet
of Net Rentable Area, which includes all of the office space located on Floors
3 through 18 (inclusive) of the Building.
|
|
|
|
7. Building Net
Rentable Area:
|
|
Four Hundred Thirteen Thousand Seven Hundred Eighty (413,780) square feet
|
|
|
|
8. Tenants
Proportionate Share:
|
|
Estimated to be eighty-eight and 44/100 percent (88.44%) as calculated under
Section 4.3
below
|
|
|
|
9. Target Commencement
Date:
|
|
November 1, 2008
|
|
|
|
10. Target Delivery
Date
|
|
May 1, 2008
|
|
|
|
11. Term:
|
|
Initial Term: Ten (10) years
Extension Term(s): Two (2) options for five (5) years each
|
|
|
|
|
|
12. Base Rent:
|
|
Time Period
|
|
Annual Base Rent Rate per Square Foot of Net Rentable Area
(exclusive of Operating Costs)
|
|
|
Lease Year 1
|
|
Twenty-five Dollars and Eighty-five Cents ($25.85)
|
|
|
Lease Year 2
|
|
Twenty-six Dollars and Eighty-five Cents ($26.85)
|
|
|
Lease Year 3
|
|
Twenty-seven Dollars and Eighty-five Cents ($27.85)
|
|
|
Lease Year 4
|
|
Twenty-eight Dollars and Eighty-five Cents ($28.85)
|
|
|
Lease Year 5
|
|
Twenty-nine Dollars and Eighty-five Cents ($29.85)
|
|
|
Lease Year 6
|
|
Thirty Dollars and Eighty-five Cents ($30.85)
|
|
|
LeaseYear 7
|
|
Thirty-one Dollars and Eighty-five Cents ($31.85)
|
|
|
Lease Year 8
|
|
Thirty-two Dollars and Eighty-five Cents ($32.85)
|
A
|
|
|
|
|
|
|
Lease Year 9
|
|
Thirty-three Dollars and Eighty-five Cents ($33.85)
|
|
|
Lease Year 10
|
|
Thirty-four Dollars and Eighty-five Cents ($34.85)
|
|
|
Lease Year 11
|
|
Thirty-five Dollars and Eighty-five Cents ($35.85)
|
13. Parking:
|
|
Three (3) parking passes per one thousand (1,000) square feet of Net Rentable
Area in the Premises, subject
Section 14.22
.
|
|
|
|
|
|
14. Cash Allowance:
|
|
Fifty and 00/100 Dollars ($50.00) per square foot of Net Rentable Area in the
Premises, to be allocated as provided in
Exhibit C.
|
|
|
|
|
|
15. Broker(s):
|
|
Landlords Broker: Broderick Group
Tenants Broker: Cushman & Wakefield
|
|
|
|
|
|
/
Tenants Initials/Date
|
|
|
|
/
Landlords Initials/Date
|
B
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page
|
|
Basic Lease Information Sheet
|
|
|
A
|
|
|
|
|
|
|
ARTICLE 1 Premises
|
|
|
1
|
|
|
|
|
|
|
1.1 Lease
|
|
|
1
|
|
1.2 Landlords Reserved Rights
|
|
|
3
|
|
1.3 Common Areas
|
|
|
3
|
|
1.4 Calculation of Net Rentable Area; Useable Area
|
|
|
4
|
|
1.5 Confirmation of Area
|
|
|
4
|
|
|
|
|
|
|
ARTICLE 2 Term, Use of Premises and Base Rent
|
|
|
5
|
|
|
|
|
|
|
2.1 Term
|
|
|
5
|
|
2.2 Delay in Delivery
|
|
|
6
|
|
2.3 Confirmation
|
|
|
6
|
|
2.4 Use
|
|
|
6
|
|
2.5 Payments by Tenant
|
|
|
7
|
|
2.6 Payment of Base Rent
|
|
|
7
|
|
2.7 Partial Months
|
|
|
9
|
|
|
|
|
|
|
ARTICLE 3 Security Deposit
|
|
|
10
|
|
|
|
|
|
|
ARTICLE 4 Payment of Operating Costs
|
|
|
10
|
|
|
|
|
|
|
4.1 Net Lease
|
|
|
10
|
|
4.2 Estimated Payments
|
|
|
10
|
|
4.3 Tenants Proportionate Share
|
|
|
10
|
|
4.4 Operating Costs
|
|
|
10
|
|
4.5 Adjustment for Occupancy
|
|
|
15
|
|
4.6 Computation of Operating Costs Adjustment
|
|
|
15
|
|
4.7 Adjustment for Variation Between Estimated and Actual
|
|
|
15
|
|
4.8 Cap on Controllable Operating Costs
|
|
|
16
|
|
4.9 Audit Right
|
|
|
16
|
|
4.10 Review, Approval of Budget
|
|
|
17
|
|
|
|
|
|
|
ARTICLE 5 Landlords Covenants
|
|
|
17
|
|
|
|
|
|
|
5.1 Basic Services
|
|
|
17
|
|
5.2 Hours of Operation
|
|
|
19
|
|
5.3 Interruption
|
|
|
19
|
|
5.4 Extra Services
|
|
|
20
|
|
5.5 Window Coverings
|
|
|
21
|
|
5.6 Graphics and Signage
|
|
|
21
|
|
5.7 Tenant Extra Improvements
|
|
|
21
|
|
5.8 Peaceful Enjoyment
|
|
|
21
|
|
5.9 Corporate Authority
|
|
|
21
|
|
5.10 Building Naming and Signage Rights
|
|
|
22
|
|
|
|
|
|
|
ARTICLE 6 Tenants Covenants
|
|
|
23
|
|
|
|
|
|
|
6.1 Compliance With
Exhibit C
|
|
|
23
|
|
6.2 Construction of Tenant Improvements
|
|
|
23
|
|
6.3 Telecommunications
|
|
|
23
|
|
i
|
|
|
|
|
6.4 Taxes on Personal Property and Tenant Extra Improvements
|
|
|
24
|
|
6.5 Repairs by Tenant
|
|
|
24
|
|
6.6 Waste
|
|
|
25
|
|
6.7 Alterations, Additions, Improvements
|
|
|
25
|
|
6.8 Liens
|
|
|
26
|
|
6.9 Compliance With Laws and Insurance Standards
|
|
|
26
|
|
6.10 Entry for Repairs, Inspection, Posting Notices, Etc.
|
|
|
27
|
|
6.11 No Nuisance
|
|
|
28
|
|
6.12 Rules and Regulations
|
|
|
28
|
|
6.13 Surrender of Premises on Termination
|
|
|
28
|
|
6.14 Corporate Authority
|
|
|
29
|
|
6.15 Utilities
|
|
|
29
|
|
|
|
|
|
|
ARTICLE 7 Hazardous Materials
|
|
|
29
|
|
|
|
|
|
|
7.1 Prohibition and Indemnity With Respect to Hazardous Materials
|
|
|
29
|
|
7.2 Definitions
|
|
|
30
|
|
|
|
|
|
|
ARTICLE 8 Assignment or Sublease
|
|
|
31
|
|
|
|
|
|
|
8.1 Consent Required
|
|
|
31
|
|
8.2 Transfers to Qualified Transferees
|
|
|
32
|
|
8.3 Landlords Options
|
|
|
32
|
|
8.4 Minimum Rental and Terms; Division of Excess Rent
|
|
|
33
|
|
8.5 Tenant Not Released
|
|
|
33
|
|
8.6 Written Agreement
|
|
|
33
|
|
8.7 No Transfer Period
|
|
|
33
|
|
8.8 Conditions
|
|
|
33
|
|
8.9 Expenses
|
|
|
33
|
|
8.10 Restriction on Landlord
|
|
|
33
|
|
8.11 No Leasehold Financing
|
|
|
34
|
|
|
|
|
|
|
ARTICLE 9 Condition and Operation of the Building
|
|
|
34
|
|
|
|
|
|
|
9.1 No Warranty
|
|
|
34
|
|
9.2 Building Alterations
|
|
|
34
|
|
|
|
|
|
|
ARTICLE 10 Lender Rights
|
|
|
35
|
|
|
|
|
|
|
10.1 Subordination
|
|
|
35
|
|
10.2 Attornment
|
|
|
35
|
|
10.3 REAs
|
|
|
35
|
|
10.4 Estoppel Certificate
|
|
|
35
|
|
|
|
|
|
|
ARTICLE 11 Insurance
|
|
|
36
|
|
|
|
|
|
|
11.1 Landlords Property Insurance
|
|
|
36
|
|
11.2 Liability Insurance
|
|
|
36
|
|
11.3 Tenants Insurance
|
|
|
37
|
|
11.4 Indemnity and Exoneration
|
|
|
38
|
|
11.5 Indemnity for Liens
|
|
|
38
|
|
11.6 Waiver of Subrogation Rights
|
|
|
39
|
|
|
|
|
|
|
ARTICLE 12 Casualty and Eminent Domain
|
|
|
39
|
|
|
|
|
|
|
12.1 Damage and Destruction
|
|
|
39
|
|
12.2 Condemnation
|
|
|
41
|
|
ii
|
|
|
|
|
ARTICLE 13 Default
|
|
|
42
|
|
|
|
|
|
|
13.1 Events of Default
|
|
|
42
|
|
13.2 Remedies Upon Default
|
|
|
43
|
|
13.3 Damages Upon Termination
|
|
|
44
|
|
13.4 Computation of Rent for Purposes of Default
|
|
|
44
|
|
13.5 Late Charge
|
|
|
45
|
|
13.6 Remedies Cumulative
|
|
|
45
|
|
13.7 Tenants Remedies
|
|
|
45
|
|
|
|
|
|
|
ARTICLE 14 Miscellaneous
|
|
|
47
|
|
|
|
|
|
|
14.1 No Waiver
|
|
|
47
|
|
14.2 Holding Over
|
|
|
47
|
|
14.3 Attorneys Fees
|
|
|
48
|
|
14.4 Amendments
|
|
|
48
|
|
14.5 Transfers by Landlord
|
|
|
48
|
|
14.6 Severability
|
|
|
48
|
|
14.7 Notices
|
|
|
48
|
|
14.8 No Option
|
|
|
48
|
|
14.9 Integration and Interpretation
|
|
|
49
|
|
14.10 Quitclaim
|
|
|
49
|
|
14.11 No Easement for Light, Air and View
|
|
|
49
|
|
14.12 No Merger
|
|
|
49
|
|
14.13 Memorandum of Lease
|
|
|
49
|
|
14.14 Survival
|
|
|
49
|
|
14.15 Financial Statements
|
|
|
50
|
|
14.16 No Joint Venture
|
|
|
50
|
|
14.17 Successors and Assigns
|
|
|
50
|
|
14.18 Applicable Law
|
|
|
50
|
|
14.19 Time of the Essence; Force Majeure
|
|
|
50
|
|
14.20 Confidentiality
|
|
|
50
|
|
14.21 Interpretation
|
|
|
51
|
|
14.22 Parking
|
|
|
51
|
|
14.23 Rent Assumption
|
|
|
54
|
|
14.24 Brokers
|
|
|
54
|
|
14.25 Roof Top Equipment
|
|
|
54
|
|
14.26 USA Patriot Act Disclosures
|
|
|
55
|
|
14.27 Generator
|
|
|
56
|
|
14.28 Changes to Base Building
|
|
|
57
|
|
14.29 Dedicated Move In
|
|
|
58
|
|
iii
|
|
|
Attachments:
|
|
|
Exhibit A
|
|
Floor Plans for the Premises, Depiction of Outdoor Amenity Area and Generator Location
|
Exhibit B
|
|
Legal Description of the Real Property
|
Exhibit C
|
|
Initial Tenant Improvements
|
Schedule C-1
|
|
Base Building Improvements
|
Schedule C-2
|
|
Definition of Building Standard Improvements
|
Schedule C-3
|
|
Typical Floor Plan for Building Standard Improvements
|
Exhibit D
|
|
Rules and Regulations
|
Exhibit E
|
|
Lease Commencement Certificate
|
Exhibit F
|
|
Form of Estoppel Certificate
|
Exhibit G
|
|
Form of SNDA
|
Exhibit H
|
|
Environmental Reports
|
Exhibit I
|
|
Memorandum of Lease
|
Exhibit J
|
|
Existing Leases and Assumed Obligations
|
iv
SCHEDULE OF DEFINED TERMS
|
|
|
|
|
|
|
|
|
Section No.
|
|
Page No.
|
|
Actual Cost
|
|
Section 5.4
|
|
|
20
|
|
Adjustment Date
|
|
Section 2.6(b)
|
|
|
7
|
|
Alterations
|
|
Section 6.7
|
|
|
25
|
|
amortization
|
|
Section 4.4(k)
|
|
|
13
|
|
Availability Notice
|
|
Section 1.1(b)
|
|
|
2
|
|
Base Building
|
|
Exhibit C, Paragraph 1(a)
|
|
|
1
|
|
Base Building Improvements
|
|
Exhibit C, Paragraph 2
|
|
|
1
|
|
Base Building Plans
|
|
Exhibit C, Paragraph 1(b)
|
|
|
1
|
|
Basic Services
|
|
Section 5.1
|
|
|
17
|
|
Blocked Persons
|
|
Section 14.26
|
|
|
56
|
|
BOMA Standard
|
|
Section 1.4
|
|
|
4
|
|
Building Components
|
|
Section 1.2
|
|
|
3
|
|
Building Name
|
|
Section 5.9
|
|
|
22
|
|
Building
|
|
Section 1.1(a)
|
|
|
1
|
|
Building Standard Improvements
|
|
Schedule C-2
|
|
|
1
|
|
Business Days
|
|
Section 5.2
|
|
|
19
|
|
CAD
|
|
Exhibit C, Paragraph 1(d)
|
|
|
1
|
|
Cash Allowance
|
|
Exhibit C, Paragraph 15(a)
|
|
|
7
|
|
Claims
|
|
Section 7.1(b)
|
|
|
30
|
|
Common Areas
|
|
Section 1.3
|
|
|
4
|
|
Comparable Buildings
|
|
Section 2.6(c)
|
|
|
8
|
|
Competitor
|
|
Section 8.10
|
|
|
33
|
|
Conceptual Plans
|
|
Exhibit C, Paragraph 5
|
|
|
3
|
|
Control
|
|
Section 8.2
|
|
|
32
|
|
Controllable Operating Costs
|
|
Section 4.8
|
|
|
16
|
|
Cosmetic Alteration
|
|
Section 6.7
|
|
|
25
|
|
Cost Statement
|
|
Section 4.6
|
|
|
15
|
|
Covered Parties
|
|
Section 14.26
|
|
|
56
|
|
CPI Index
|
|
Section 13.4(b)
|
|
|
45
|
|
Delivery Date
|
|
Section 2.1(a)
|
|
|
5
|
|
Design Manual
|
|
Section 6.1
|
|
|
23
|
|
Devices
|
|
Section 14.25
|
|
|
55
|
|
Environmental Reports
|
|
Section 7.1(a)
|
|
|
29
|
|
Estimated Operating Costs
|
|
Section 4.2
|
|
|
10
|
|
Event of Default
|
|
Section 13.1
|
|
|
42
|
|
Excess Rent
|
|
Section 8.4
|
|
|
33
|
|
Executive Order
|
|
Section 14.26
|
|
|
56
|
|
Existing Leases
|
|
Section 14.23
|
|
|
54
|
|
Expiration Date
|
|
Section 2.1(a)
|
|
|
5
|
|
Extension Notice
|
|
Section 2.1(b)
|
|
|
6
|
|
Extension Option
|
|
Section 2.1(b)
|
|
|
6
|
|
Extension Terms
|
|
Section 2.1(b)
|
|
|
6
|
|
Extra Services
|
|
Section 5.4
|
|
|
20
|
|
Fair Market Rent
|
|
Section 2.6(c)
|
|
|
7
|
|
Final Finding
|
|
Section 4.9(g)
|
|
|
17
|
|
Final Removal Notice
|
|
Section 6.13
|
|
|
28
|
|
Final Submission
|
|
Section 2.6(c)(i)
|
|
|
8
|
|
v
|
|
|
|
|
|
|
|
|
Section No.
|
|
Page No.
|
|
Force Majeure
|
|
Section 14.19
|
|
|
50
|
|
Garage
|
|
Section 14.22(d)
|
|
|
53
|
|
Generator
|
|
Section 14.27(a)
|
|
|
56
|
|
HVAC
|
|
Section 5.1(b)
|
|
|
18
|
|
Initial Assessments
|
|
Section 4.4(j)
|
|
|
12
|
|
Initial Premises
|
|
Section 1.1(a)
|
|
|
1
|
|
Initial Tenant
|
|
Section 1.1(b)
|
|
|
1
|
|
Initial Term
|
|
Section 2.1(a)
|
|
|
5
|
|
Interest Rate
|
|
Section 13.5
|
|
|
45
|
|
Land
|
|
Section 7.1(a)
|
|
|
29
|
|
Landlord Covered Parties
|
|
Section 14.26
|
|
|
56
|
|
Landlord
|
|
Introduction
|
|
|
1
|
|
Landlord Parties
|
|
Section 6.5
|
|
|
25
|
|
Laws
|
|
Section 6.9(a)
|
|
|
26
|
|
Lease
|
|
Introduction
|
|
|
1
|
|
Lease Year
|
|
Section 2.1(a)
|
|
|
5
|
|
List
|
|
Section 14.26
|
|
|
56
|
|
Major Vertical Penetrations
|
|
Section 1.2
|
|
|
3
|
|
Market Area
|
|
Section 2.6(c)
|
|
|
8
|
|
Minimum Leasing Requirement
|
|
Section 5.9
|
|
|
22
|
|
Negotiation Period
|
|
Section 2.6(c)(i)
|
|
|
8
|
|
Net Rentable Area
|
|
Section 1.4
|
|
|
4
|
|
Normal Office Hours
|
|
Section 5.2
|
|
|
19
|
|
OFAC
|
|
Section 14.26
|
|
|
56
|
|
Offer Space
|
|
Section 1.1(d)
|
|
|
1
|
|
Operating Costs Adjustments
|
|
Section 4.6
|
|
|
15
|
|
Operating Costs
|
|
Section 4.4
|
|
|
10
|
|
Outdoor Amenity Area
|
|
Section 2.4
|
|
|
7
|
|
Parking Pass
|
|
Section 14.22(a)
|
|
|
51
|
|
Parking Rent
|
|
Section 14.22(a)
|
|
|
51
|
|
Permitted Use
|
|
Section 2.4
|
|
|
6
|
|
Premises
|
|
Section 1.1(a)
|
|
|
1
|
|
Prime Rate
|
|
Section 4.4(k)
|
|
|
13
|
|
Provider
|
|
Section 6.3
|
|
|
23
|
|
Qualified Auditor
|
|
Section 4.9(d)
|
|
|
16
|
|
Qualified Transferee
|
|
Section 8.2
|
|
|
32
|
|
Real Property
|
|
Section 1.1(a)
|
|
|
1
|
|
Real Property Taxes
|
|
Section 4.4(j)
|
|
|
12
|
|
REAs
|
|
Section 10.3
|
|
|
35
|
|
Relet Term
|
|
Section 13.2(b)
|
|
|
43
|
|
Reletting Expenses
|
|
Section 13.2(b)
|
|
|
44
|
|
Removable Improvements
|
|
Section 6.13
|
|
|
28
|
|
Rent
|
|
Section 2.5
|
|
|
7
|
|
Repair Notice
|
|
Section 12.1
|
|
|
39
|
|
ROFO
|
|
Section 1.1(b)
|
|
|
1
|
|
Rules and Regulations
|
|
Section 6.12
|
|
|
28
|
|
Secured Areas
|
|
Section 6.10
|
|
|
27
|
|
Senior Instruments
|
|
Section 10.1
|
|
|
35
|
|
Senior Parties
|
|
Section 10.1
|
|
|
35
|
|
SNDA
|
|
Section 10.1
|
|
|
35
|
|
Successor
|
|
Section 10.2
|
|
|
35
|
|
vi
|
|
|
|
|
|
|
|
|
Section No.
|
|
Page No.
|
|
Supplemental Parking
|
|
Section 14.22(c)
|
|
|
52
|
|
Tenant Extra Improvements
|
|
Exhibit C, Paragraph 3
|
|
|
2
|
|
Tenant Improvements
|
|
Exhibit C, Paragraph 3
|
|
|
2
|
|
Tenant
|
|
Introduction
|
|
|
1
|
|
Tenant Parties
|
|
Section 6.5
|
|
|
24
|
|
Tenants Personal Property
|
|
Section 6.4
|
|
|
24
|
|
Tenants Proportionate Share
|
|
Section 4.3
|
|
|
10
|
|
Tenants Security
|
|
Section 5.1(g)
|
|
|
19
|
|
Term Commencement Date
|
|
Section 2.1(a)
|
|
|
5
|
|
Termination Notice
|
|
Section 12.1(f)
|
|
|
40
|
|
TI Architect
|
|
Exhibit C, Paragraph 1(i)
|
|
|
1
|
|
TI Construction Contract
|
|
Exhibit C, Paragraph 10
|
|
|
5
|
|
TI Contractor
|
|
Exhibit C, Paragraph 1(j)
|
|
|
1
|
|
Transfer
|
|
Section 8.1
|
|
|
31
|
|
Transferee
|
|
Section 8.1
|
|
|
31
|
|
UPS
|
|
Section 14.27(a)
|
|
|
56
|
|
Useable Area
|
|
Section 1.4
|
|
|
4
|
|
Variable Operating Costs
|
|
Section 4.5
|
|
|
15
|
|
Working Drawings
|
|
Exhibit C, Paragraph 6
|
|
|
3
|
|
vii
OFFICE BUILDING LEASE
This Office Building Lease (the
Lease
) is made and entered into as of the date specified in
Item 1
of the Basic Lease Information Sheet attached hereto and incorporated herein by this
reference, by and between
TOWER 333 LLC
, a Delaware limited liability company (
Landlord
) and
EXPEDIA, INC.
, a Washington corporation (
Tenant
). Tenant authorizes Landlord to insert the date
of Landlords execution hereof on the Basic Lease Information Sheet as the date of this Lease.
Now, therefore, in consideration of the mutual covenants and agreements contained in this
Lease, the parties agree as follows:
ARTICLE 1
Premises
1.1 Lease.
(a) Initial Premises.
Subject to the terms, covenants and conditions set forth herein,
Landlord leases to Tenant and Tenant leases from Landlord those certain premises identified in the
Basic Lease Information Sheet as
Item 6
, which are schematically depicted on the floor
plans and/or stacking diagrams attached hereto as
Exhibit A
(the
Initial Premises
). The
Premises,
which will include the Initial Premises and any additional space leased by Tenant
hereunder, are a part of the building and other improvements, including common areas (collectively,
the
Building
), to be constructed on the real property situated in the City of Bellevue, County of
King, State of Washington, legally described on
Exhibit B
(the
Real Property
). The
precise location of and floor plans for the Initial Premises shall be modified to reflect any
revisions to the Building design after the date hereof; provided that any material modifications of
the Building design which would (i) materially affect Tenants access to or use of the Premises or
the size or configuration of the Premises, (ii) reduce the number of parking spaces in the Garage
by more than ten (10) spaces, or (iii) alter the character of the Common Areas, will be subject to
the prior written approval of Tenant unless the same are required by applicable Law, permits or
inspections from or by any governmental authorities or changes in materials due to unavailability
or precipitous price increases (as long as materials of equivalent quality are substituted), and
Tenants approval shall not be unreasonably withheld, delayed or conditioned. The calculation of
Net Rentable Area and Useable Area for the Building and the Premises shall be determined in
accordance with
Section 1.4
below and if a final measurement is different from that set
forth herein, the parties shall enter into an amendment to this Lease to confirm the correct square
footage and Tenants Proportionate Share.
(b) Right of First Offer.
Subject to the terms and conditions of this
Section 1.1(b)
,
Tenant shall have an ongoing right of first offer
(ROFO)
to include within the Premises any
office space which becomes available in the Building (the
Offer Space
). Vacant space shall not
be considered Offer Space until the Landlord has entered into a lease with a third party (the
Initial Tenant
) and the Initial Tenant has surrendered the space. Tenants ROFO shall be
subordinate to the rights (including any expansion or first offer rights with respect to the floors
on which such tenant is located and any renewal or extension rights) granted to the Initial Tenant
and any other tenant to whom the Offer Space is leased if Landlord offers the space to Tenant under
this
Section 1.1(b)
and Tenant does not lease such space; provided that with respect to the
nineteenth (19th) floor only, Landlord shall not grant any tenant expansion rights that extend
beyond the initial term of such tenants lease. Landlord shall not be required to offer any Offer
Space to Tenant at any time if a material Event of Default (as defined in
Section 13.1
below) is outstanding under this Lease or if more than one (1) material Event of Default has
occurred under this Lease during the immediately preceding two (2) years or if Tenant is not
occupying and paying Rent on at least half of the Initial Premises. Tenants ROFO shall not be
exercisable after the date two (2) years prior to the Expiration Date of this Lease unless Tenant
timely exercises an Extension Option pursuant to
Section 2.1(b)
below (if such Extension
Option is then available to Tenant) concurrently with its exercise of the ROFO and if Tenant fails
to exercise an Extension Option the first time Offer Space is offered to Tenant during such two (2)
year period, the
J-1
ROFO shall automatically terminate and shall be of no further force nor effect. In addition,
if at any time after the earlier of (x) the date on which Tenant occupies the Initial Premises or
(y) one (1) year after the Term Commencement Date, Tenant leases and occupies less than one hundred
seventy-three thousand (173,000) square feet of Net Rentable Area, the ROFO shall automatically
terminate and shall be of no further force nor effect.
For the purposes of this
Section 1.1
, and any other provision of this Lease
(including, without limitation,
Sections 2.1(b)
,
5.9
, and
8.10
) which
includes a requirement that at the time in question Tenant be occupying and paying Rent on, or
leasing and occupying, or leasing, occupying, and paying Rent on, a specified portion of the
Initial Premises or a specified number of rentable square feet, Tenant shall be deemed to be
occupying any portion of the Premises that Tenant is then prevented from occupying by the operation
of Force Majeure, and Tenant shall be deemed to be paying Rent on any space as to which abatement
of Rent pursuant to the provision of this Lease is then applicable.
Landlord shall provide Tenant written notice of the date when any Offer Space is expected to
be available based upon (A) the expiration date of the third party lease affecting such Offer Space
(but in no event prior to the date that is eighteen (18) months prior to the scheduled date of
expiration of such third party lease) and (B) in the event of an early termination of the lease of
an occupant of any portion of the Offer Space, the date of any early termination of any such lease
that accelerates the date when an Offer Space will be available (
Availability Notice
). Any
Availability Notice will specify the approximate location and configuration of the Offer Space and
the date upon which Landlord estimates such space will become available for occupancy or the
construction of improvements. Landlord will include in the Availability Notice Landlords
nonbinding good faith estimate of the Fair Market Rent that would be applicable to the Offer Space
provided that such estimate will not be used in determining the Base Rent for the Offer Space. If
Tenant desires to exercise the ROFO with respect to such space, Tenant must deliver irrevocable
written notice of exercise to Landlord no later than fifteen (15) days after Landlords
Availability Notice is given to Tenant. During such fifteen (15) day period, Tenant shall be
entitled to tour the Offer Space described in the Availability Notice. So long as this ROFO
remains in effect, Landlord will not enter into any lease for any portion of the Offer Space with a
third party (other than a lease with an Initial Tenant) unless and until Landlord has delivered to
Tenant an Availability Notice with respect to such space and Tenant has failed to exercise the ROFO
with respect to such space. If Tenant exercises the ROFO, Landlord and Tenant shall enter into an
amendment to this Lease reflecting the inclusion of the Offer Space as part of the Premises.
Tenant shall lease each increment of Offer Space commencing as soon as the Offer Space actually
becomes available for occupancy, upon the terms and conditions of this Lease except that (a) the
Base Rent for the Offer Space shall be the Fair Market Rent (as defined in and determined in
accordance with
Section 2.6
below), but in no event will the Base Rent for such space be
less than the Base Rent rate then applicable for the Initial Premises, (b) the Offer Space shall be
leased in its then-current as-is condition and Landlord shall not be required to make or contribute
any funds toward any improvements in such space (except that Landlord shall pay Tenant an allowance
equal to One Dollar ($1.00) per square foot of Net Rentable Area leased by Tenant under this ROFO
for each year of the then-remaining Term plus a pro-rata share of One Dollar ($1.00) per square
foot for any partial year) nor to pay any commission or fee to any broker representing Tenant in
connection therewith. For the purposes of application of
Section 2.6(c)
below, Landlord
will notify Tenant of Landlords good faith determination of Fair Market Rent for the Offer Space
within ten (10) Business Days following Tenants exercise of the ROFO. Thereafter, the provisions
of
Section 2.6(c)
will apply to the determination of Fair Market Rent for the Offer Space,
with references in said
Section 2.6(c)
to the Adjustment Date being deemed references to
the date upon which Tenants obligation to pay rent for the Offer Space commences. If Tenant does
not exercise the ROFO with respect to such space within the time period required then (subject to
the terms of the third sentence of this
Section 1.1(b)
and
Section 8.10
below)
Landlord shall be free to lease the Offer Space to a third party on any terms and conditions
Landlord may desire. In the event this Lease is terminated for any reason, the rights granted to
Tenant in this paragraph shall also terminate at the same time. In the event Tenant exercises the
ROFO and
J-2
thereafter an Event of Default on the part of Tenant occurs prior to Tenants occupancy of the
Offer Space, Landlord may elect, by written notice to Tenant, to terminate Tenants prior exercise
of the ROFO, in which event Tenant shall have no rights with respect to such Offer Space.
The ROFO is personal to Tenant and any Qualified Transferee who takes an assignment of all of
Tenants rights under this Lease. The ROFO shall be a continuing right, and Offer Space shall be
offered to Tenant as provided herein from time to time as any portion of the Offer Space becomes
available.
1.2 Landlords Reserved Rights.
In addition to all other rights reserved by Landlord under
this Lease, Landlord reserves from the leasehold estate hereunder, and the Premises shall not
include: (a) the exterior surfaces of the walls and windows bounding the Premises, and (b) all
space located within the Premises for Major Vertical Penetrations (as defined below), conduits
(subject to Tenants conduit rights set forth herein), electric and all other utilities, heating
ventilation and air-conditioning and fire protection and life safety systems, sinks or other
Building facilities that do not constitute Tenant Improvements (collectively,
Building
Components
). Landlord shall have the use of the Building Components and (provided Landlord gives
Tenant at least twenty-four (24) hours advance notice, which may be e-mail notice, except in the
case of emergency when no notice shall be required) access through the Premises for operation,
maintenance, repair or replacement thereof, subject to the provisions of this
Section 1.2
.
Landlord shall have the right from time to time, to install, remove or relocate any of the Building
Components within the Premises to locations that do not permanently and materially reduce the
square footage of the Premises. As used herein, the term
Major Vertical Penetrations
shall mean
the area or areas within Building stairs, elevator shafts, flues, pipe shafts, vertical ducts and
the like that service more than one floor of the Building and their enclosing walls. The area of
Major Vertical Penetrations shall be bounded and defined to include the perimeter walls thereof (or
the extended plane of such walls over areas that are not enclosed). Notwithstanding the foregoing,
Major Vertical Penetrations shall exclude, however, the structure to support the Building,
including the structural concrete core walls and areas for the specific use of Tenant or installed
at the request of Tenant, such as special stairs or elevators. Landlord shall use commercially
reasonable efforts to ensure that the performance of any such work of repairs or alterations shall
not materially interfere with Tenants use of or access to the Premises (or any material portion
thereof) for Tenants business purposes (such efforts may include performing such work outside
Normal Office Hours if performance of such work would be disruptive and shall include cleaning any
work area prior to the commencement of the next Business Day).
1.3 Common Areas.
Tenant shall have the nonexclusive right (in common with other tenants or
occupants of the Building, Landlord and all others to whom Landlord has granted or may hereafter
grant such rights) to use the Common Areas (defined below), subject to the Rules and Regulations
(as defined in
Section 6.12
below). Landlord may at any time close temporarily any Common
Areas to make repairs or changes therein or to effect construction, repairs, or changes within the
Building, or to prevent the acquisition of public rights in such areas, or to discourage parking by
parties other than tenants, and may do such other acts in and to the Common Areas as in its
reasonable judgment may be desirable as long as such changes (i) do not change the nature of the
Building to something other than a first class office building project, (ii) do not materially,
adversely effect Tenants use of the Premises for the Permitted Use, or materially, adversely
affect Tenants ingress to or egress from the Building, the Premises or the Garage, or (iii) do not
reduce the number of parking spaces in the Garage by more than ten (10) spaces. The manner in
which the Common Areas are maintained and operated shall be at the reasonable discretion of
Landlord, provided that Landlord shall at all times maintain and operate the Common Areas in a
first class manner consistent with Comparable Buildings, as such term is defined in
Section
2.6(c)
below. Landlord may from time to time permit portions of the Common Areas to be used
exclusively by specified tenants such as, by way of example only, a tenant reception/party in the
Building lobby. Landlord may also, from time to time, place or permit customer service and
information booths, kiosks, stalls, push carts and other merchandising facilities (consistent with
those in Comparable Buildings) but Landlord may not permit such facilities to be used by any
Competitor (as defined in
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Section 8.10
below) in the Common Areas.
Common Areas
shall mean any of the
following or similar items: (a) to the extent included in the Building the total square footage of
areas of the Building devoted to nonexclusive uses such as ground floor lobbies, seating areas and
elevator foyers; fire vestibules; mechanical areas; restrooms and corridors on all floors; elevator
foyers and lobbies on multi-tenant floors; electrical and janitorial closets; telephone and
equipment rooms; and other similar facilities maintained for the benefit of Building tenants and
invitees, but shall not mean Major Vertical Penetrations; and (b) all parking garage vestibules;
restrooms; loading docks; locker rooms, exercise and conference facilities available for use by
Building tenants (if any); walkways, roadways and sidewalks; trash areas; mechanical areas;
landscaped areas including courtyards, plazas and patios; and other similar facilities maintained
for the benefit of Building tenants and invitees. Except when and where Tenants right of access
is specifically prevented as a result of (i) an emergency, (ii) a legal requirement, or (iii) a
specific provision set forth in this Lease, Tenant shall have the right of ingress and egress to
the Premises, the Building, and the Garage twenty-four (24) hours per day, seven (7) days per week,
provided access may be subject to reasonable security restrictions.
1.4 Calculation of Net Rentable Area; Useable Area.
Tenant acknowledges that the term
Net
Rentable Area
as used in this Lease shall mean the area or areas of space within the Building
determined substantially in accordance with the ANSI/BOMA 1996 Standards Method for
Measuring Floor Area in Office Buildings as customarily used by Landlord to measure space within
the Building (the
BOMA Standard
) and shall include all space within any demising walls (measured
from the mid-point of the demising walls for a multi-tenant floor and, in the case of exterior
walls, measured to the inside surface of the outer pane of glass and extensions of the plane
thereof in non-glass areas), plus Tenants pro rata share of Common Areas. Landlord shall
determine Tenants pro rata share of Common Areas using any commercially reasonable allocation
formula selected by Landlord excluding any space in the Building designated or leased for retail
uses. No deductions from the rentable area shall be made for structure to the Building (such as
columns or the structural concrete core) or projections necessary to the Building except for Major
Vertical Penetrations. Tenant acknowledges that the term
Useable Area
means the Net
Rentable Area less the Common Areas included in the calculation thereof.
1.5 Confirmation of Area.
Tenant, at Tenants sole cost, may hire the TI Architect (as
defined in
Exhibit C
) to physically measure the as-built Initial Premises and the Building
using the BOMA Standard provided that such remeasurement must be completed within sixty (60) days
after the Delivery Date. If Tenant remeasures the Initial Premises and/or the Building, it shall
deliver to Landlord a complete copy of all documentation relating to such remeasurement so that
Landlord can either confirm or contest the accuracy of such remeasurement. If the result of the
remeasurement varies from the numbers set forth herein then Landlord, Tenant and the TI Architect
shall meet with Landlords architect to resolve the discrepancy. If and only if the remeasurement
shows a discrepancy of one percent (1%) (greater than or less than) the numbers set forth in the
Basic Lease Information Sheet, the size of the Initial Premises shall be adjusted accordingly. If
the variance is less than one percent (1%) the numbers shall not be adjusted. In the event that
the remeasurement does not show a discrepancy of one percent (1%) (greater than or less than) the
numbers set forth in the Basic Lease Information Sheet, Tenant shall pay all costs associated with
the remeasurement, including Landlords costs to contest or confirm the remeasurement. In the event
that the remeasurement shows a discrepancy of more than one percent (1%) (greater than or less
than) the numbers set forth in the Basic Lease Information Sheet, Landlord shall pay all costs
associated with the remeasurement, including the cost of the TI Architect. If the parties acting
reasonably and in good faith cannot resolve the discrepancy and agree on the actual square footage
within thirty (30) days after Landlords receipt of the remeasurement, the matter shall be resolved
through arbitration in accordance with the following paragraph. If Tenant does not elect to
remeasure in accordance with this
Section 1.5
, Tenant shall be deemed to have waived such
right and the numbers set forth in this Lease shall be conclusively deemed to be correct and shall
not thereafter be subject to remeasurement, modification or adjustment.
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All disputes between Landlord and Tenant regarding the results of any remeasurement under this
Section 1.5
shall be resolved through arbitration in accordance with this paragraph. If a
party objects to the remeasurement calculations, it shall deliver an arbitration demand to the
other party within forty (40) days after receipt of such remeasurement. Within ten (10) Business
Days following delivery of an arbitration demand, the parties shall mutually select one (1)
arbitrator who is a natural person not employed by either of the parties or any parent or
affiliated partnership, corporation or other enterprise thereof, who shall be a licensed AIA
architect with at least ten (10) years experience measuring space in Class A office buildings in
the Seattle/Bellevue vicinity. If the parties do not agree on an arbitrator, then either party, on
behalf of both, may request appointment of such a qualified person by the AAA in a written notice
with a copy given to the other party. The arbitrator so selected shall decide the dispute, if it
has not previously been resolved, by following the procedure set forth herein. The arbitrator
shall state in writing his or her determination of the Net Rentable Area of the Initial Premises
and the Building applying the BOMA Standard supported by the reasons therefor, and shall deliver a
copy to each party. The arbitrator shall have no power to modify the provisions of this Lease or
to revise the BOMA Standard or to apply any methodology for measuring space other than the BOMA
Standard. The arbitrator shall complete its determination within ten (10) Business Days after
appointment. The decision of the arbitrator shall be final and binding upon the parties. Each
party shall pay the fees and costs of its own counsel. Tenant shall pay the costs of the
arbitrator unless there is a discrepancy of one percent (1%) or more, in which case the
non-prevailing party shall pay the costs of the arbitrator. If any arbitrator fails, refuses or is
unable to act, his or her successor shall be appointed in the manner provided above.
ARTICLE 2
Term, Use of Premises and Base Rent
2.1 Term.
(a) Initial Term; Lease Year.
Except as otherwise provided herein, the term
Term
Commencement Date
shall mean the earlier of (a) the date that is one hundred eighty (180) days
after the date on which Landlord delivers possession of the Premises to Tenant in the condition
required hereunder (the
Delivery Date
), or (b) the date on which Tenant commences business
operations in the Premises (as opposed to the construction of improvements or the installation of
furniture or equipment) but in no event shall the Delivery Date be earlier than May 1, 2008,
without Tenants consent. Notwithstanding the foregoing, Landlord shall permit Tenant access to
the Initial Premises for purposes of verifying existing conditions as required under
Exhibit
C
and for purposes of installing the Tenant Improvements for up to an additional sixty (60)
days without triggering the Delivery Date but only if the Base Building Improvements have been
completed and such access will not materially interfere with any remaining work to be completed by
Landlord.
Initial Term
of this Lease shall mean the number of years set forth in the Basic Lease
Information Sheet as
Item 11
, commencing on the Term Commencement Date through and
including the Expiration Date.
Expiration Date
shall mean the last day of the calendar month in
which the Term expires or such earlier date upon which this Lease is terminated pursuant to the
terms hereof.
Lease Year
shall mean each twelve (12) month period commencing on April 1 of each
calendar year following the Term Commencement Date and each anniversary thereof, during the Term
except that the first Lease Year shall commence on the Term Commencement Date and shall end on
March 31, 2009. Landlord shall use good faith efforts to keep Tenant informed as to the
anticipated delivery schedule. On or before December 31, 2007, Landlord will provide to Tenant a
status report on the progress of construction and the anticipated Delivery Date. Thereafter, if
the anticipated Delivery Date changes, Landlord will provide updates to Tenant at least once per
calendar month by delivering to Tenant the most recently updated construction schedule from the
Landlords general contractor. If the anticipated Delivery Date changes, then beginning three (3)
months prior to the anticipated Delivery Date, Landlord will provide Tenant with weekly updates on
the current status of the Delivery Date.
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(b) Extension Terms.
Provided that no material Event of Default is outstanding under this
Lease at the time of exercise or at any time thereafter prior to the then-scheduled Expiration Date
and no more than (1) material Event of Default has occurred during the two (2) years of the Term of
this Lease immediately preceding the date on which Tenants Extension Notice is due, Tenant shall
have two (2) consecutive options (each an
Extension Option
) to extend the Term of this Lease with
respect to a minimum of fifty percent (50%) of the Initial Premises consisting of contiguous full
floors (which must include floor 11), for the number of years set forth in the Basic Lease
Information Sheet as
Extension Terms
in
Item 11
, commencing on the day after the
expiration of the Initial Term or the first Extension Term (as applicable), subject to all of the
terms and conditions of this Lease, except that Base Rent shall be adjusted as provided in
Section 2.6(b)
below. The Extension Options shall immediately terminate and be of no
further force and effect if at any time after the earlier of (x) the date on which Tenant occupies
the Initial Premises or (y) one (1) year after the Term Commencement Date, Tenant ceases to lease
and occupy at least two hundred thousand (200,000) square feet of Net Rentable Area in the Building
located on contiguous floors and including no more than one partial floor. If Tenant is in default
at the time it exercises an Extension Option or at any time prior to the first day of such
Extension Term, then Landlord shall, in its sole discretion, have the right to cancel the Extension
Option on or before the date of commencement of the applicable Extension Term, if the default is
not cured within the applicable cure period permitted hereunder, if any. If Tenant wishes to
exercise an Extension Option, Tenant shall deliver an irrevocable written notice to Landlord at
least twelve (12) months prior to the expiration of the Initial Term or the first Extension Term,
as applicable (the
Extension Notice
). Any Extension Notice shall specify the portion of the
Premises for which Tenants exercise of the Extension Option will be applicable subject to the
minimum set forth above. If Tenant does not timely deliver an Extension Notice, then the Extension
Options shall immediately terminate and be of no further force or effect and this Lease shall
terminate on the scheduled Expiration Date. If Tenant does not exercise the first Extension Option
then the second Extension Option shall immediately terminate and be of no further force or effect.
The Extension Options shall be personal to Tenant, and may not be exercised by any Transferee
(other than a Qualified Transferee who takes an assignment of all of Tenants rights and
obligations under this Lease) without Landlords prior written consent. No further renewal or
extension options shall be permitted and such rights shall not be deemed to have been created by
Tenants exercise of the Extension Options herein. As used herein the
Term
shall mean the
Initial Term and each Extension Term if validly exercised.
2.2 Delay in Delivery.
Tenant acknowledges that the actual Delivery Date may be delayed
beyond the target Delivery Date set forth above and that Landlord shall not be liable for any such
delay. If the actual Delivery Date has not occurred by September 30, 2008 (as such date may be
extended due to delays caused by Tenant or its contractors and Force Majeure) then Tenant may elect
to cancel this Lease by written notice to Landlord provided that such termination shall not be
effective if the Delivery Date occurs within thirty (30) days after the date of delivery of such
notice.
2.3 Confirmation.
When the actual Term Commencement Date is determined, Tenant shall, within
ten (10) Business Days after receipt thereof, execute (or make good faith comments to) and return
to Landlord a Rent/Lease Commencement Certificate in the form of
Exhibit E
attached hereto,
or any similar form requested by Landlord, confirming the information thereon.
2.4 Use.
Subject to the restrictions set forth in
Section 7.1
, Tenant shall use the
Premises solely for executive, professional, corporate and administrative offices (the
Permitted
Use
) and may, at Tenants cost, include 24-hour operations, and for no other use or purpose.
Notwithstanding the foregoing, for the purpose of limiting the type of use permitted by Tenant, or
any party claiming through Tenant, but without limiting Landlords right to lease any portion of
the Building to a tenant of Landlords choice, the Permitted Use shall not include: (a) offices of
any agency or bureau of the United States or any state or political subdivision thereof; (b)
offices or agencies of any foreign government or political subdivision thereof; (c) offices of any
health care professionals or service organization, except
J-6
for administrative offices where no diagnostic, treatment or laboratory services are
performed; (d) schools or other training facilities that are not ancillary to Tenants business
operations; (e) retail or restaurant uses (provided that this exclusion shall not preclude Tenant
from installing and operating a lunchroom for Tenants employees and guests provided that the
lunchroom does not include major cooking equipment such as grills, ovens [other than microwave
ovens] and fryers); (f) broadcast studios or other broadcast production facilities, such as radio
and/or television stations; (g) offices at which deposits or bills are regularly paid in person by
customers; or (h) personnel agencies, except offices of executive search firms. With respect to
the exterior
Outdoor Amenity Area
to be located along Northeast 4th Street approximately where
indicated on
Exhibit A
, Landlord shall develop the area in cooperation with Tenant in order
to create a mutually acceptable amenity package which could include construction of an outdoor
sport court, outdoor barbeque/fireplace, patio area with wi/fi access and landscaping, provided
such improvements do not diminish the value of the Building, subject to Landlords review and
written approval. When developed, the Outdoor Amenity Area shall be made available to Tenant (at
no additional cost to Tenant) and other tenants in the Building on a reservation basis coordinated
by Landlord; however, Tenant shall have the first right to reserve the Outdoor Amenity Area at
certain times designated and agreed to by Landlord and Tenant. Provided Landlord and Tenant reach
agreement on the development of such area, Tenant shall be responsible for any incremental costs
incurred in connection with the design, construction or installation of the Outdoor Amenity Area in
excess of Landlords Base Building costs for the design, construction or installation of the
Outdoor Amenity Area depicted on Landlords marketing materials provided to Tenant, and may apply a
portion of the Cash Allowance to such costs. Tenant acknowledges that the costs of maintenance and
repair of the Outdoor Amenity Area will be included in Operating Costs.
2.5 Payments by Tenant.
As used herein, the term
Rent
shall include Base Rent, Operating
Costs (as defined in
Article 4
below) and all other sums payable by Tenant to Landlord.
Tenant shall pay Rent at the times and in the manner herein provided. All obligations of Tenant
hereunder to make payments to Landlord shall constitute Rent and failure to pay the same when due
shall give rise to the rights and remedies provided herein.
2.6 Payment of Base Rent.
(a) General
. Tenants obligation to pay Rent and its other obligations under this Lease shall
commence upon the Term Commencement Date (except as expressly otherwise provided herein with
respect to obligations arising earlier). The annual increases in Base Rent shall occur on April 1
of each calendar year after the Term Commencement Date. Tenant shall pay the Base Rent in the
amounts set forth in the Basic Lease Information Sheet as
Item 12
(as the same may be
adjusted from time to time hereunder) in advance on or before the first day of each calendar month
during the Term and any extensions or renewals thereof;
provided
,
however
, that
Base Rent for the first calendar month in which Base Rent for the Premises is payable shall be paid
on or before the Term Commencement Date. All payments of Rent due under this Lease shall be
payable in advance, without demand (except as specifically provided herein) and without reduction,
abatement (except as specifically provided herein), counterclaim or setoff (except as specifically
provided herein), at the address specified in the Basic Lease Information Sheet as
Item 5
,
or at such other address as may be designated by Landlord.
(b) Adjustment
of Base Rent.
If Tenant exercises an Extension Option under
Section 2.1(b)
, the Base Rent for the Extension Term shall be the greater of: (i) ninety-five percent
(95%) of the Fair Market Rent (as defined in
Section 2.6(c)
below) based on a five (5) year
term to begin on the first day of the Extension Term (an
Adjustment Date
); or (ii) Twenty-eight
and 43/100 Dollars ($28.43) per square foot of Net Rentable Area per year for the length of the
Extension Terms
.
(c) Definition of Fair Market Rent.
Fair Market Rent
as of any Adjustment Date shall mean
the rate being charged during the preceding six (6) month period by direct landlords (including
Landlord), in nonsublease, nonassignment, nonequity, nonexpansion, and nonrenewing lease
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transactions, for comparable space with comparable quality construction in the Building and
comparable projects in the Market Area (
Comparable Buildings
), taking into consideration such
things as: size (excluding any deals that are not multi floor transactions), location in the
Building or Comparable Buildings, conditions in Comparable Buildings location, quantity and quality
of tenant improvements or allowances existing or to be provided, extent of service provided or to
be provided, age, floor levels, common area factors, finish allowances, conditions or concessions
including rental abatements, parking charges or concessions, lease assumptions, moving allowances,
space planning allowances, refurbishment allowances, the time the particular rate under
consideration became or is to become effective, and any other concession or inducement, expense
stop, other rental adjustments, credit standing of tenant, lease term and any other terms that
would be relevant in making a market rate determination but excluding brokerage commissions. Fair
Market Rent may include periodic or annual increases if such increases are consistent with
then-existing market conditions.
Market Area
means Class A quality office projects and buildings
with comparable finishes and amenities located in the downtown Bellevue central business district.
(i) Landlords Determination
. The following procedure set forth in this
Section
2.6(b)(i)
will apply to establish the Fair Market Rent if (x) Tenant timely delivered an
Extension Notice or (y) Tenant and Landlord are determining the applicable rent payable for any
Offer Space leased by Tenant under
Section 1.1(b)
above. With respect to any Extension
Notice, not later than ninety (90) days prior to the Adjustment Date, Landlord will notify Tenant
of Landlords good faith determination of Fair Market Rent as of such Adjustment Date. Failure on
the part of Landlord to give such notice in a timely manner shall not vitiate the right to require
adjustment of Base Rent or delay the effective date of the adjustment in Base Rent. If Landlord
does not provide its good faith determination in a timely manner then Tenant may request in writing
that Landlord provide its determination and Landlord shall provide the good faith determination of
Fair Market Rent within thirty (30) days after receipt of such request. If Tenant disputes the
amount claimed by Landlord as Fair Market Rent, the parties shall attempt to agree on Fair Market
Rent within thirty (30) days after receipt of Landlords good faith determination of the Fair
Market Rent (the
Negotiation Period
). If such dispute is not resolved by mutual agreement within
the Negotiation Period, then either party may submit the issue to arbitration, as described below,
based on each partys final proposal as to Fair Market Rent submitted in writing to the other party
prior to the end of the Negotiation Period (each a
Final Submission
). Should the arbitration not
be concluded prior to the Adjustment Date, Tenant shall pay Rent to Landlord after the Adjustment
Date at the rates applicable during the period immediately preceding the Adjustment Date. Any
adjustment required to correct the amount previously paid shall be made by payment by or to Tenant
within thirty (30) days after final determination of Fair Market Rent.
(ii) Arbitration of Fair Market Rent
. The award rendered in any such arbitration may be
entered in any court having jurisdiction and shall be final and binding between the parties. The
arbitration shall be conducted and determined in the City of Bellevue, Washington, in accord with
the then-prevailing commercial arbitration rules of the American Arbitration Association or its
successor for arbitration of commercial disputes except that the procedures mandated by said rules
shall be modified as follows:
(A)
If the parties are unable to reach an agreement on Fair Market Rent during the Negotiation
Period, the party demanding arbitration shall, in its demand, specify the name and address of the
person to act as the arbitrator on its behalf. Each arbitrator hereunder shall be qualified as a
real estate appraiser with at least the immediately preceding five (5) years experience appraising
first-class commercial office space in the Market Area who would qualify as an expert witness over
objection to give testimony addressed to the issue in a court of competent jurisdiction and who is
unrelated to and does not otherwise perform any services for either party. Within ten (10)
Business Days after receipt of a demand for arbitration, the recipient shall give notice to the
other party specifying the name and address of the person to act as the arbitrator on its behalf.
If the recipient fails to timely notify the other party of
J-8
the appointment of its arbitrator, then the arbitrator appointed by the other party shall be
the arbitrator to determine the issue. When the arbitrator(s) have been selected, the parties
shall deliver to the arbitrator(s) a copy of each partys Submission.
(B)
If two (2) arbitrators are chosen pursuant to the preceding Section, the arbitrators so
chosen shall meet within ten (10) Business Days after the second arbitrator is appointed and
attempt to reach agreement as to which of the two (2) Final Submissions most closely reflects Fair
Market Rent. If, within ten (10) Business Days after such first meeting, the two (2) arbitrators
have not agreed upon a determination of Fair Market Rent, they shall, within an additional five (5)
Business Days, appoint a third arbitrator who shall be similarly qualified. If they are unable to
agree upon such appointment within such five (5) Business Day period, the third arbitrator shall be
selected by the parties themselves if they can agree thereon, within a further period of ten (10)
Business Days. If the parties do not so agree, then either party, on behalf of both, may request
appointment of such a qualified person by a court of the State of Washington sitting in King County
pursuant to RCW 7.04.050. Request for appointment shall be made in writing with a copy given to
the other party. Each party agrees that said court shall have the power to make the appointment;
provided
,
however
, if the court does not make a determination within ten (10)
Business Days of request by either party for the appointment of a third arbitrator, appointment of
such third arbitrator shall be made in accordance with the selection procedure of the commercial
arbitration rules of the American Arbitration Association or its successor for arbitration of
commercial disputes. The three (3) arbitrators shall decide the dispute, if it has not previously
been resolved, by following the procedure set forth below.
(C)
The arbitrator selected by each of the parties shall state in writing his determination of
which Final Submission most closely reflects the Fair Market Rent, supported by the reasons
therefor, and shall deliver a copy to each party. The arbitrators shall arrange for a simultaneous
exchange of such determinations to the other arbitrator and to the third (3rd) arbitrator. The
role of the third arbitrator shall be to select which of the two (2) Final Submissions most closely
approximates his determination of Fair Market Rent. The third arbitrator shall have no right to
propose a middle ground or any modification of either of the Final Submissions. The Final
Submission he chooses as most closely approximating his determination of Fair Market Rent shall
constitute the decision of the arbitrators and shall be final and binding upon the parties.
(D)
If any arbitrator fails, refuses or is unable to act, his successor shall be appointed by
him, but in the case of the third arbitrator, his successor shall be appointed in the same manner
as provided for appointment of the third arbitrator. The arbitrators shall attempt to decide the
issue within ten (10) Business Days after the appointment of the third arbitrator. Any decision in
which the arbitrator appointed by Landlord and the arbitrator appointed by Tenant concur shall be
binding and conclusive upon the parties. Each party shall pay the fees and costs of its own
counsel and other consultants. The losing party shall pay the fees and costs of the arbitrators
and of the expert witnesses (if any) of the prevailing party as well as those of its expert
witnesses. For purposes hereof, the losing party shall be that party whose Final Submission was
not selected by the third arbitrator.
(E)
The arbitrators shall have the right to consult experts and competent authorities with
factual information or evidence pertaining to a determination of Fair Market Rent, but any such
consultation shall be made in the presence of both parties with full right on their part to
cross-examine. The arbitrators will be required to refer to the definition of Fair Market Rent set
forth herein in making their determination and will not be permitted to refer to any other
valuation methodology or declaration. The arbitrators shall render their decision and award in
writing and shall deliver copies to each party. The arbitrators shall have no power to modify the
provisions of this Lease.
2.7 Partial Months.
If the Term Commencement Date occurs on other than the first day of a
calendar month, then Base Rent and Operating Costs for such partial calendar month shall be
prorated based on the actual number of days in the month and the prorated installment shall be paid
on the Term
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Commencement Date together with any other amounts payable on that day. If the Expiration Date
occurs on other than the last day of a calendar month, then Base Rent and Operating Costs for such
partial calendar month shall be prorated based on the actual number of days in the month and the
prorated installment shall be paid on the first day of the calendar month in which the Expiration
Date occurs.
ARTICLE 3
Security Deposit
[Intentionally Omitted]
ARTICLE 4
Payment of Operating Costs
4.1 Net Lease.
This is a net lease. Except as otherwise provided herein, Base Rent shall be
paid to Landlord absolutely net of all costs and expenses. The provisions of this
Article
4
for payment of Operating Costs by means of periodic payment of Tenants Proportionate Share
(as defined in
Section 4.3
) of Estimated Operating Costs (as defined in
Section
4.2
) and the Operating Costs Adjustment (as defined in
Section 4.6
) are intended to
pass on to Tenant and reimburse Landlord for Tenants Proportionate Share of all costs and expenses
of the nature described in
Section 4.4
.
4.2 Estimated Payments.
Tenant shall pay Tenants Proportionate Share of Estimated Operating
Costs in advance on or before the first day of each calendar month during the Term and any
extensions or renewals thereof.
Estimated Operating Costs
for any calendar month shall mean
Landlords estimate of Operating Costs for the calendar year within which such month falls, divided
into twelve (12) equal monthly installments. Landlord shall provide Tenant with a statement
setting forth the Estimated Operating Costs and Tenants Proportionate Share thereof within a
reasonable period of time not later than sixty (60) days before the Term Commencement Date and the
commencement of each calendar year thereafter. Landlords annual statement of estimated Operating
Costs for any ensuing year shall be set forth in reasonable detail and shall contain (i) a
breakdown of component costs by major cost category, and (ii) the method of calculation of any
adjustment performed by Landlord in estimating Operating Costs pursuant to the terms of
Section
4.5
below. Landlord may, in good faith, adjust such estimate from time to time by written
notice but not more often than twice in any calendar year. Until a new statement of Estimated
Operating Costs is received Tenant shall continue to make the monthly payment of Estimated
Operating Costs applicable to the prior year.
4.3 Tenants Proportionate Share.
Tenants Proportionate Share
shall be calculated by
Landlord for each calendar year of the Term and shall mean a percentage equal to the Net Rentable
Area of the Premises divided by the greater of (a) ninety-five percent (95%) of the total Net
Rentable Area in the Building leased or held for lease, or (b) the Net Rentable Area of the
Building actually leased to tenants. As of the date of this Lease, Tenants Proportionate Share is
estimated to be the percentage set forth in the Basic Lease Information Sheet as
Item 8
.
4.4 Operating Costs.
Operating Costs
shall, subject to the exclusions set forth below, mean
all expenses and costs (but not specific costs that are separately billed to and payable by
specific tenants) that Landlord shall pay or incur or become obligated to pay or incur (including,
without limitation, costs incurred by managers and agents that are reimbursed by Landlord) (without
duplication) in the management, repair, maintenance, replacement, preservation, and operation of
the Building and any supporting facilities directly serving the Building (as allocated to the
Building in accordance with standard accounting principles), calculated in accordance with standard
accounting principles and commercially reasonable property management practices, both consistently
applied on a year-over-year basis). Operating Costs shall include, but not be limited to the
following expenses:
(a)
Wages, salaries, reimbursable expenses and benefits of all on-site and off-site personnel
(including supervisory personnel who are directly involved in the management of the Building)
engaged in the operation, repair, maintenance and security of the Building (prorated, in the case
of
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employees, including supervisory personnel, performing services for one or more properties, on
the basis of the reasonably allocated number of hours spent performing services for the Building)
and the direct costs of training such employees.
(b)
Costs (including allocated rental) for the property management (but not leasing) office
and office operation (provided that if the property management office serves more than one Building
or property, such costs shall be allocated on an equitable and consistent basis, year over year,
among the properties for which such office provides management services); costs of operating
exercise facilities in the Building, if any, available for use by tenants, including the cost of
acquiring or leasing equipment therein (less revenues actually received in connection with the use
thereof); and costs of operating any conference facilities in the Building, if any, available for
use by tenants, including the cost of acquiring or leasing equipment therein (less revenues
received in connection with the use thereof).
(c)
All supplies, materials, furniture and rental equipment used in the operation and
maintenance of the Building, including, without limitation, the reasonable cost of erecting,
maintaining and dismantling art work and similar decorative displays commensurate with operation of
Comparable Buildings.
(d)
Utilities, including, without limitation, water, gas, power, sewer, waste disposal,
communication and cable television facilities, heating, cooling, lighting and ventilation of the
Building.
(e)
All maintenance, extended warranties (amortized over the period of such warranty),
janitorial and service agreements for the Building and the equipment therein, including, but not
limited to, alarm service, window cleaning, elevator maintenance, and maintenance and repair of the
Building and all Building Components.
(f)
A management fee equal to three percent (3%) of all revenue derived from the Building,
including without limitation, all Rent hereunder, all rent and other payments derived from other
tenants in the Building (excluding sums paid in reimbursement of the management fee), parking
revenue, and other revenues derived from licenses of any other part of or right in the Building.
(g)
Legal and accounting services for the Building, including, but not limited to, the costs
of annual audits by certified public accountants of Operating Costs records in order to produce
statements of estimated and actual Operated Costs (other than reimbursement of any audit costs due
Tenant under
Section 4.9
or any other tenant under similar provisions in their respective
leases or the cost of defending or completing audits of Landlords books and records by tenants
pursuant to provisions similar to
Section 4.4
);
provided
,
however
, that
Operating Costs shall not include legal fees related to (i) negotiating lease terms for prospective
tenants, (ii) negotiating termination or extension of leases with existing tenants, (iii)
proceedings against tenants for the collection of rent or other sums due Landlord from such
tenants; or (iv) the initial development and/or initial construction of the Building.
(h)
All insurance premiums and costs, including but not limited to, the premiums and cost of
fire, casualty, liability, rental abatement or interruption and earthquake insurance applicable to
the Building and Landlords personal property used in connection therewith (and all amounts paid as
a result of loss sustained that would be covered by such policies but for commercially reasonable
deductible or self-insurance provisions);
provided
,
however
, that the deductible
or self-insured retention for earthquake and terrorism coverage (or any other coverage for which
deductibles are commonly stated as a percentage of value or are otherwise higher than normal
casualty coverage limits) shall not exceed ten percent (10%) of Operating Costs in any calendar
year, and if any deductible or self-insured retention described in the preceding clause is not
fully recouped in the year in which the insured event occurs, the balance of the deductible shall
be included in Operating Costs in subsequent years provided that the maximum pass through in any
year shall not exceed ten percent (10%) of Operating Costs for that year and in no event shall the
deductible for any occurrence be passed through for more than five (5) years.
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(i)
Repairs, replacements and general maintenance of the Building (except for repairs and
replacements (x) paid for from the proceeds of insurance [and Landlord hereby agrees to use
diligent, good faith efforts to obtain in each instance the maximum possible recovery from
available insurance coverage], or (y) payable directly by Tenant, other tenants or any third
party).
(j)
All real and personal property taxes, assessments, local improvement or special benefit
district charges and other governmental charges, special and general, known and unknown, foreseen
and unforeseen, of every kind and nature whatsoever: (i) attributable to the Real Property or the
Building or levied, assessed or imposed on, the Real Property or the Building, or any portion
thereof, or interest therein; (ii) attributable to or levied upon Landlords personal property
located in, and/or used in the operation of the Building; (iii) surcharges and all local
improvement or special benefit and other assessments levied with respect to the Building, the Real
Property, and all other property of Landlord used in the operation of the Building; (iv) any taxes
levied or assessed in lieu of, in whole or in part, or in addition to such real or personal
property taxes; (including, but not limited to, leasehold taxes, business and occupation taxes and
taxes or license fees upon or measured by the leasing of the Building or the rents or other income
collected therefrom; and (v) any and all reasonable costs, expenses and attorneys fees paid or
incurred by Landlord in connection with any proceeding or action to contest in whole or in part,
formally or informally, the imposition, collection or validity of any of the foregoing taxes,
assessments, charges or fee (collectively,
Real Property Taxes
). If by law any Real Property
Taxes may be paid in installments at the option of the taxpayer, then Landlord shall include within
Real Property Taxes for any year only those installments (including interest, if any) which would
become due by exercise of such option. Real Property Taxes shall not include (x) inheritance or
estate taxes imposed upon or assessed against the Building, or any part thereof or interest
therein, or (y) federal or state income taxes computed upon the basis of the Landlords net income.
If Landlord receives a refund of Real Property Taxes, or a credit against its future Real Property
Taxes, for any calendar year, Landlord shall, at its election, either pay to Tenant, or credit
against subsequent payments of Rent due hereunder, an amount equal to Tenants Proportionate Share
of the refund, net of any reasonable expenses incurred by Landlord in achieving such refund;
provided, however, if this Lease shall have expired or is otherwise terminated, Landlord shall
refund in cash any such refund or credit due to Tenant within thirty (30) days after Landlords
receipt of such refund or its receipt of such credit against future Real Property Taxes. Real
Property Taxes shall not include (A) any excess profits taxes, franchise taxes, gift taxes, capital
stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and
other taxes to the extent applicable to Landlords general or net income (as opposed to rents or
receipts), (B) penalties incurred as a result of Landlords negligence, inability or unwillingness
to make payments of, and/or to file any tax or informational returns with respect to, any Real
Property Taxes, when due, except to the extent caused by Tenants failure to pay Rent when required
hereunder, (C) any real estate taxes directly payable by Tenant or any other tenant in the Building
under the applicable provisions in their respective leases, (D) any items included as Operating
Costs or specifically excluded from Operating Costs, (E) any gross receipts or gross income taxes
to the extent that same are substituted for any net income taxes, (F) any hotel, sales, gross
receipts or business entity fee (unless such taxes of fees replace the current system of real
property taxes in effect as of the date hereof), and (G) mitigation or impact fees or subsidies,
imposed or incurred as a condition of the initial construction, but not ongoing operation or
ownership of, the Building (
Initial Assessments
).
(k)
Amortization (together with interest at the Prime Rate plus two and one-half percent
(2-1/2%) per annum) of capital improvements made: (i) to comply with the requirements of law,
ordinance rule or regulation first enacted or enforced against the Building after the issuance of
the building permit for the Base Building, (ii) to replace items which Landlord would be obligated
to maintain under this Lease; or (iii) for the purpose of energy conservation or to improve the
operating efficiency or reduce Operating Costs of the Building if Landlord reasonably believes the
amortized cost will approximate the cost savings over the useful life of the item in question.
Upon request, Landlord will provide Tenant with the basis for Landlords belief that the amortized
cost of item in question will
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approximate the cost savings over its useful life. As used in this Section, (A)
amortization
shall mean allocation of the cost equally to each year of useful life (measured by a
commercially reasonable standard), as reasonably calculated by Landlord, of the items being
amortized, and (B)
Prime Rate
shall mean The Wall Street Journal Prime Rate as published from
time to time. Notwithstanding the foregoing, Landlord may treat as expenses (chargeable in the
year incurred), and not as capital costs, items that on a cumulative basis are less than two
percent (2%) of Estimated Operating Costs for the year in question.
(l)
All charges of any kind and nature, but excluding Initial Assessments, imposed, levied,
assessed, charged or collected by any governmental authority or other entity either directly or
indirectly: (i) for or in connection with public improvements, user, maintenance or development
fees, transit, parking, housing, employment, police, fire, open space, streets, sidewalks,
utilities, job training, child care or other governmental services or benefits; or (ii) for
environmental matters (unless arising from a violation of applicable Hazardous Materials Laws
resulting from Landlords gross negligence or willful misconduct) or as a result of the imposition
of mitigation measures, including compliance with any transportation management plan, or fees,
charges or assessments as a result of the treatment of the Building, or any portion thereof or
interest therein, as a source of pollution or storm water runoff.
Notwithstanding the foregoing, Operating Costs shall not include:
(i)
any sums collected from other Building tenants for special services provided to such
tenant, in excess of the services provided to Tenant hereunder;
(ii)
amounts received from insurance claims and costs of repair and reconstruction related
thereto to the extent of insurance proceeds received by Landlord (other than commercially
reasonable deductible amounts under applicable insurance policies) (and Landlord hereby agrees to
use diligent good faith efforts to obtain in each instance the maximum recovery from available
insurance coverage), or the extent that Landlord would have received such proceeds had Landlord
maintained the insurance coverage required under this Lease;
(iii)
ground rent (if any);
(iv)
interest or loan fees incurred in connection with any loan secured by the Building or the
Real Property;
(v)
costs of work to the Building that are necessary to comply with applicable laws,
regulations, ordinances or codes relating to the initial construction of the Base Building in
effect as of the date on which the building permit was issued;
(vi)
leasing commissions;
(vii)
except as permitted under
Section 4.4(k)
above, depreciation or amortization of
the Building or Building Components or any expenses that should be capitalized in accordance with
standard accounting practices (similar to those accounting practices used by owners of Comparable
Buildings), consistently applied;
(viii)
any penalties due to violation of law or fines imposed for late payment of any
Operating Costs by Landlord or interest thereon, unless such penalties, interest or fines were
caused directly or indirectly by Tenant;
(ix)
attorneys fees, costs, disbursements and other expenses incurred in connection with rent
disputes with tenants, or lease negotiations with prospective or existing tenants;
(x)
marketing and promotional costs relating to securing new tenants;
(xi)
Landlords general corporate overhead and general and administrative expenses, other than
a commercially reasonable allocation of costs relating to accounting, payroll, legal
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and computer services even if such services are partially or totally rendered in locations
outside the Building;
(xii)
costs of special services (which shall not cover normal variations in repairs or the
need for repairs) not rendered to tenants generally;
(xiii)
the costs of electrical power provided to the premises of other tenants or occupants of
the Building on a separately metered (i.e., direct pay) basis to the extent usage exceeds the
Buildings standard allocation;
(xiv)
repairs or rebuilding necessitated by condemnation to the extent covered by condemnation
awards or payments in lieu thereof, received by Landlord;
(xv)
tenant concessions and any other costs associated with the leasing or sale of the
Building, Property or any portion thereof;
(xvi)
Landlords costs of any service sold to any tenant or occupant of the Building for which
Landlord is reimbursed as an additional charge or rental over and above the basic rent and
escalations payable under the lease or occupancy agreement with that tenant or other occupant
(including, without limitation, after-hours HVAC costs or over-standard electrical consumption
costs paid by other tenants or occupants);
(xvii)
the cost of the initial construction of the Base Building;
(xviii)
reserves of any kind;
(xix)
expenses for repairs, replacements or improvements arising from the initial construction
of the Base Building to the extent such expenses are either (i) reimbursed to Landlord by virtue of
warranties from contractors or suppliers or (ii) result from reason of structural or latent defects
in the Base Building;
(xx)
costs relating to maintaining Landlords existence, either as a corporation, partnership,
or other entity, such as trustees fees, annual fees, partnership or organization or administration
expenses, deed recordation expenses, as well as the operation of the entity which constitutes
Landlord, as the same are distinguished from the costs of operation of the Building, as well as
partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs
of selling, syndicating, financing, mortgaging or hypothecating any of Landlords interest in the
Building or any part thereof, legal fees, awards or judgments incurred with respect to any disputes
between Landlord and its employees or disputes between Landlord and Building management or
personnel;
(xxi)
to the extent such facilities or services are not available to all tenants in the
Building, (i) the cost of installing, operating and maintaining any specialty service, observatory,
broadcasting facilities, luncheon club, museum, athletic or recreational club, or child care
facility, and (ii) the cost of installing, operating and maintaining any other service operated or
supplied by or normally operated or supplied by a third party under an agreement between a third
party and a landlord;
(xxii)
any compensation paid to clerks, attendants or other persons in commercial concessions
operated by Landlord (other than a concierge service provided to all tenants);
(xxiii)
the cost of leasing any item, the purchase price of which, if purchased, would not be
included as an Operating Cost;
(xxiv)
costs for acquisition of sculpture, paintings, other objects of art except for holiday
decorations;
(xxv)
the entertainment expenses and travel expenses of Landlord, its employees (above Group
Manager level), agents, partners and affiliates;
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(xxvi)
costs attributable to any revenue generating signs or any rooftop equipment, fixtures,
or installations which are not generally available for use to all tenants at the same cost; and
(xxvii)
increased costs resulting from Landlords violation of the provisions of any lease in
the Building.
4.5 Adjustment for Occupancy
. Notwithstanding any other provision herein to the contrary, if
during any year of the Term the Building is not fully occupied or all premises within the Building
do not receive Basic Services (as defined in
Section 5.1
below), then an adjustment shall
be made in computing variable Operating Costs for such year so that variable Operating Costs shall
be computed as though the Building had been fully occupied and provided with Basic Services during
such year;
provided
,
however
, that (i) Landlord shall not make a profit by charging items to
Operating Costs that are otherwise also charged separately to others and (ii) in no event shall
Landlord collect in total, from Tenant and all other tenants of the Building, an amount greater
than one hundred percent (100%) of Operating Costs during any year of the Term. As used herein
Variable Operating Costs
shall mean those Operating Costs that change due to changes in the
occupancy level within the Building, such as janitorial services for tenant occupied spaces.
4.6 Computation of Operating Costs Adjustment.
The term
Operating Costs Adjustment
for any
calendar year shall mean the difference, if any, between Estimated Operating Costs and actual
Operating Costs for that calendar year. Landlord shall, within a reasonable period of time after
the end of any calendar year for which Estimated Operating Costs differs from actual Operating
Costs, give written notice thereof to Tenant (a
Cost Statement
). The Cost Statement shall
include a statement of the total Operating Costs applicable to such calendar year and the
computation of the Operating Costs Adjustment, including the following major categories and
subcategories of Expenses: maintenance and repairs (cleaning; security; elevators; supplies; waste
removal; heating, ventilation and air conditioning; landscaping); utilities (electricity; gas; and
water and sewer); insurance; salaries (engineering; and administrative); general and administrative
(management fees; professional services; office supplies; and other) and Real Property Taxes, the
amounts charged to all tenants and Tenants Proportionate Share thereof, Landlords reconciliation
between Tenants estimated payments and actual amounts due, and Landlords adjustment calculations
and recalculations, if any, pursuant to
Section 4.5
. Landlords failure to give such Cost
Statement within a reasonable period of time after the end of any calendar year for which an
Operating Costs Adjustment is due shall not release either party from the obligation to make the
adjustment provided for in
Section 4.7
. Tenant shall have no liability for any amounts of
Operating Costs which may be invoiced for any given calendar year more than two (2) years after the
expiration of such calendar year, except for amounts relating to Real Property Taxes for which
appeals of valuations or assessments are pending. Landlord shall have no liability for refund or
credit of any Rent paid by Tenant for any given calendar year more than two (2) years after the
expiration of such calendar year except to the extent provided in connection with Tenants audit
right under
Section 4.9
, and except for amounts relating to Real Property Taxes for which
appeals of valuations or assessments are pending.
4.7 Adjustment for Variation Between Estimated and Actual.
If Tenants Proportionate Share of
Operating Costs for any calendar year exceeds the payments received by Landlord towards Tenants
Proportionate Share of Estimated Operating Costs for such year, Tenant shall pay to Landlord
Tenants Proportionate Share of the Operating Costs Adjustment within thirty (30) days after the
date of delivery of the Cost Statement. In no event shall Tenants payment of such Tenants
Proportionate Share of the Operating Costs Adjustment constitute an agreement, acknowledgement or
consent by Tenant that such amount is correct or is owed by Tenant, or a waiver of any of Tenants
audit or other rights hereunder. If Tenants Proportionate Share of Operating Costs for any
calendar year is less than the payments received by Landlord towards Tenants Proportionate Share
of Estimated Operating Costs for such year, then Landlord, at Landlords option, shall either (a)
pay Tenants Proportionate Share of the Operating Costs Adjustment to Tenant in cash within thirty
(30) days following the delivery of the Cost
J-15
Statement, or (b) credit said amount against future installments of Estimated Operating Costs
payable by Tenant hereunder; provided that if the Term is scheduled to expire prior to the
completion of any such credit, Landlord will pay any remaining balance to Tenant within fifteen
(15) days after expiration of this Lease. If the Term commences or terminates at any time other
than the first day of a calendar year, Tenants Proportionate Share of the Operating Costs
Adjustment shall be calculated based upon the exact number of calendar days during such calendar
year that fall within the Term, and any payment by Tenant required hereunder shall be paid even if
the Term has expired when such determination is made.
4.8 Cap on Controllable Operating Costs.
Notwithstanding anything in this
Article 4
to the contrary, the amount of Controllable Operating Costs charged to and payable by Tenant for
each year shall not increase by more than the greater of (i) four percent (4%) per year on a
cumulative, annually compounding basis over the then-expired portion of the Term, or (ii) the
cumulative increase in the CPI Index (as defined in
Section 13.4
below) over the
then-expired portion of the Term.
Controllable Operating Costs
shall mean Operating Costs other
than: utilities charges, insurance premiums and deductibles, union wages, any service contracts
which are competitively bid, government imposed charges which are Operating Costs (including Real
Property Taxes) and any other items outside of Landlords reasonable control.
4.9 Audit Right.
Tenant shall have the right to conduct an audit of Landlords books and
records relating to Operating Costs during the immediately preceding two (2) calendar years
provided that Tenant delivers to Landlord written notice of its intent to audit within ninety (90)
days after receipt by Tenant of Landlords Cost Statement for either of the two (2) years or one
hundred twenty (120) days after expiration of this Lease. Tenant must complete such audit within
one hundred and twenty (120) days after the date of Tenants notice of intent to audit. Tenants
right to audit is subject the following terms and conditions:
(a)
Tenant may not conduct an audit if an Event of Default is outstanding with respect to
payment of Base Rent or Tenants Proportionate Share of Operating Costs.
(b)
Tenant shall have the right to have an employee of Tenant or a Qualified Auditor (as
defined below) inspect Landlords accounting records at Landlords office no more than once per
calendar year (which inspection may occur over multiple days).
(c)
Neither the employee of Tenant nor the Qualified Auditor shall be employed or engaged on a
contingency basis, in whole or in part.
(d)
Prior to commencing the audit, Tenant and the auditor shall: (i) provide Landlord with
evidence that the individual performing the audit is a certified public accountant (a
Qualified
Auditor
); (ii) each sign a confidentiality letter to be provided by Landlord, consistent with the
provisions of this
Section 4.9
; and (iii) provide Landlord with evidence of the fee
arrangement between the auditor and Tenant.
(e)
The audit shall be limited solely to confirming that the Operating Costs reported in the
Landlords Cost Statement are consistent with the terms of this Lease. The auditor shall not make
any judgments as to the reasonableness of any item of expense and/or the total Operating Costs of
the Building, nor shall such reasonableness be subject to audit except where this Lease
specifically states that a particular item must be reasonable.
(f)
If Tenants auditor finds errors or overcharges in Landlords Cost Statement that Tenant
wishes to pursue, then within the time period set forth above Tenant shall advise Landlord thereof
in writing with specific reference to claimed errors and overcharges and the relevant Lease
provisions disqualifying such expenses. Landlord shall have a reasonable opportunity to meet with
Tenants auditor (and any third auditor selected hereinbelow, if applicable) to explain its
calculation of Operating Costs, it being the understanding of Landlord and Tenant that Landlord
intends to operate the Building as a first-class office building with services at or near the top
of the market. If Landlord agrees with said findings,
J-16
appropriate rebates or charges shall be made to Tenant. If Landlord does not agree, Landlord
shall engage its own auditor to review the findings of Tenants auditor and Landlords books and
records. The two (2) auditors and the parties shall then meet to resolve any difference between
the audits.
(g)
If agreement cannot be reached within two (2) weeks thereafter, then the auditors shall
together select a third auditor (who shall be a Qualified Auditor not affiliated with and who does
not perform services for either party or their affiliates) to which they shall each promptly submit
their findings in a final report, with copies submitted simultaneously to the first two (2)
auditors, Tenant and Landlord. Within two (2) weeks after receipt of such findings, the third
auditor shall determine which of the two reports best meets the terms of this Lease, which report
shall become the
Final Finding
. The third auditor shall not have the option of selecting a
compromise between the first two auditors findings, nor to make any other finding.
(h)
If the Final Finding determines that Landlord has overcharged Tenant, Landlord shall
credit Tenant toward the payment of the Base Rent next due and payable under this Lease the amount
of such overcharge. If the Final Finding determines that Tenant was undercharged, then within
twenty (20) days after the Final Finding, Tenant shall reimburse Landlord the amount of such
undercharge.
(i)
If the Final Finding results in a credit to Tenant in excess of three percent (3%) of
Tenants Proportionate Share of the Operating Costs for a calendar year subject to the audit,
Landlord shall pay its own audit costs and reimburse Tenant for its costs associated with said
audits. In all other events, each party shall pay its own audit costs, including one half (1/2) of
the cost of the third auditor.
(j)
The results of any audit of Operating Costs hereunder shall be treated by Tenant, all
auditors, and their respective employees and agents as confidential, and shall not be discussed
with nor disclosed to any third party, except for disclosures required by applicable law, court
rule or order or in connection with any litigation or arbitration involving Landlord or Tenant.
4.10 Review, Approval of Budget.
At all times during the Term during which Tenant is leasing
one hundred percent (100%) of the Net Rentable Area of the office portion of the Building, Tenant
shall have the right to review and approve Landlords proposed annual budget for Operating Costs,
which approval shall not be unreasonably withheld, delayed or conditioned;
provided
,
however
, that in no event shall Landlord be required to provide any services for which
Tenant will not approve the budgeted cost nor reduce any service if and to the extent Landlord
believes to do so would adversely affect the value of the Building. During periods when Tenant is
entitled to review and approve the proposed annual budget for Operating Costs hereunder, the
parties agree as follows: (i) Landlord shall deliver to Tenant its preliminary proposed annual
budget for Operating Costs on or before September 1 of the year preceding such budget year; (ii)
any changes proposed by Tenant must be specified in detail in a written notice to Landlord no later
than twenty (20) Business Days following Tenants receipt of the proposed budget; and (iii)
Landlord shall deliver to Tenant its final proposed annual budget for Operating Costs on or before
December 1 of the year preceding such budget year.
ARTICLE 5
Landlords Covenants
5.1 Basic Services.
Landlord shall maintain and operate the Building in a first class manner
consistent with Comparable Buildings, and provide ingress and egress control services to the
Building in a first class manner consistent with the Comparable Buildings. During Tenants
occupancy of the Premises Landlord shall provide the following (
Basic Services
):
(a)
Cold water for restroom and drinking fountain purposes and hot water (other than hot water
for special needs which will be supplied as an Extra Service) for restroom purposes, at those
points of supply provided generally for use of tenants in the Building.
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(b)
Central heat, ventilation and air conditioning (
HVAC
) in season sufficient to meet the
requirements set forth on
Schedule C-1
under Indoor Design Conditions, for office usage
during Normal Office Hours. If Tenant installs supplemental HVAC units to serve the Premises then
there shall be separate meters installed by Tenant as part of the Tenant Improvements and Tenant
shall pay for the cost of electricity consumed by such units based on such measured usage, based on
an hourly charge reflecting Landlords full cost (including a commercially reasonable allocation
for on-site engineers if and to the extent such engineers are involved) but without a mark-up for
profit. Notwithstanding the foregoing, Landlord will not charge Tenant directly for responding to
hot/cold calls for Building Standard Improvements.
(c)
Routine maintenance, repairs, structural and exterior maintenance (including exterior
glass and glazing and interior glass and glazing in Common Areas), painting and electric lighting
service for all public areas and special service areas of the Building in good condition, in
compliance with all applicable Laws and in a manner consistent with first-class office buildings.
Landlords obligation with respect to repair as part of Basic Services under this
Section
5.1
shall be limited to (i) the structural portions of the Building, (ii) the exterior walls of
the Building, including glass and glazing, (iii) the roof, (iv) mechanical (including without
limitation, Base Building HVAC and elevators), electrical, plumbing and life safety systems that
are considered Building Standard Improvements (as defined in
Schedule C-2
attached hereto)
and all replacements of same, and (v) Common Areas.
(d)
Janitorial service on a five (5) day week basis, excluding holidays.
(e)
An electrical system to convey power delivered by public utility or other providers
selected by Landlord, in amounts sufficient for normal office operations during Normal Office Hours
as provided in similar office buildings and to satisfy the requirements set forth on
Schedule
C-1
under Electrical System. If Tenants electrical consumption, as reasonably estimated by
Landlord based upon rated capacity (or based upon metered consumption), exceeds the wattage per
square foot of Net Rentable Area set forth in
Schedule C-1
, Tenant shall pay the actual
cost of any such excess consumption together with any additional cost necessary to provide such
excess capacity. If the installation and operation of Tenants electrical equipment requires
additional air conditioning capacity above that provided by the Building Standard Improvements,
then (i) Landlord will notify Tenant and the parties will thereafter meet and confer in good faith
in an effort to determine the most cost effective manner in which to mitigate the effects of such
equipment on the Buildings air conditioning system, and (ii) the cost of installing additional air
conditioning and operation which Landlord reasonably determines is required (including utilities)
shall be paid by Tenant; any charges for electrical consumption described herein will be billed to
Tenant at the actual cost of electrical consumption billed at the average cost per kilowatt-hour
without any mark-up or service charge, such that in no event will Tenant pay Landlord a higher rate
per kilowatt-hour than Landlord actually pays the appropriate utility, and shall be considered an
Extra Service, subject to the provisions of
Section 5.4
below except Landlord shall not
charge any additional fee for the electrical service. Tenant covenants that Tenants use and
consumption of electric current shall not at any time exceed the capacity of any of the electrical
facilities and installations in or otherwise serving or being used in the Premises and Tenant
shall, upon the submission by Landlord to Tenant of written notice specifying Landlords belief
that Tenants use may exceed such capacity, promptly meet and confer in good faith with Landlord in
a mutual effort to determine the most cost-effective manner in which to mitigate Tenants usage so
as not to exceed such capacity. If, within thirty (30) days following the parties initial
meeting, the parties have failed to reach agreement as to the appropriate method of mitigation, at
Landlords written request, either (A) Tenant shall promptly cease the use of any of Tenants
electrical equipment which Landlord in good faith believes will cause Tenant to exceed such
capacity or (B) Landlord shall have the right to install electrical meters measuring Tenants usage
at Tenants cost and to bill Tenant for the actual cost of any such excess electrical usage.
(f)
Installation, maintenance and replacement of Building standard lamps, bulbs and ballasts
used in the Premises.
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(g)
Security service for the Building commensurate with the levels and types of security
service provided at Comparable Buildings, including electronic card key access;
provided
,
however
,
that the security service shall be provided by unarmed personnel and shall not include alarm
systems for special surveillance of the Premises; and
provided
,
further
, that
notwithstanding anything to the contrary contained herein Landlord shall not be liable to Tenant or
any third party for any breach of security or any losses due to theft, burglary, battery or for
damage done or injury inflicted by persons in or on the Building except to the extent that Landlord
acted in a grossly negligent manner in selecting and/or retaining the security firm. Tenant
acknowledges that the actions of individual security personnel retained by the security firm shall
not be imputed to Landlord. Landlords current security/access control equipment will initially be
as described in
Schedule C-1
attached hereto. If Tenant provides Landlord with written
notice of any complaints with respect to security at the Building Landlord shall meet with Tenant
to discuss possible measures to enhance security. Landlord shall not be obligated to implement any
measures that it does not reasonably consider to be commensurate with the levels and types of
security service provided at Comparable Buildings. Any costs of implementing additional security
shall be an Operating Cost or shall be paid in full by Tenant if Landlord cannot pass through the
cost to other Building tenants under the terms of their leases. Tenant may, at its own expense,
install its own security system (
Tenants Security
) in the Premises and common stairwells of the
Building;
provided
,
however
, that Tenant shall coordinate the design, installation
and operation of Tenants Security with Landlord to assure that Tenants Security is compatible,
and does not interfere, with the Base Building security system. Tenant shall be solely responsible
for the monitoring and operation of Tenants security system.
(h)
Public elevator service to the Garage and the floors on which the Premises are situated on
a twenty-four (24) hour per day, seven (7) day a week basis provided that access may be monitored
or restricted to holders of electronic access card keys outside Normal Office Hours.
(i)
Window washing equivalent to that provided at Comparable Buildings.
(j)
A reasonable allocation of riser/conduit space to accommodate Tenants needs for its
Permitted Use.
5.2 Hours of Operation
. The term
Business Days
shall mean Monday through Friday, excluding
State and Federal holidays. The term
Normal Office Hours
shall mean Business Days from 7:00 a.m.
to 6:00 p.m., and Saturdays from 9:00 a.m. to 1:00 p.m.
5.3 Interruption
. Landlord shall not be liable for damages to either person or property, nor
shall Landlord be deemed to have evicted Tenant, nor, except as expressly set forth in this Lease,
shall there be any abatement of Rent, nor, except as set forth herein, shall Tenant be relieved
from performance of any covenant on its part to be performed hereunder by reason of (a)
interruption of, or deficiency in, the provision of Basic Services; (b) breakdown or malfunction of
lines, cables, wires, pipes, equipment or machinery utilized in supplying or permitting Basic
Services or telecommunications; or (c) curtailment or cessation of Basic Services due to causes or
circumstances beyond the reasonable control of Landlord, including but not limited to (i) strikes,
lockouts or other labor disturbance or labor dispute of any character, (ii) governmental
regulation, moratorium or other governmental action, (iii) inability, despite the exercise of
reasonable diligence, to obtain electricity, water or fuel from the providers thereof, (iv) acts of
God, and (v) war, terrorism, civil unrest, and rioting. Landlord shall use reasonable diligence to
make such repairs as may be required to lines, cables, wires, pipes, equipment or machinery within
the Building to provide restoration of Basic Services and, where the cessation or interruption of
Basic Services has occurred due to circumstances or conditions beyond Real Property boundaries or
outside the Landlords control, to cause the same to be restored, by application or request to the
provider thereof.
Notwithstanding the foregoing, if either (1) an interruption or curtailment of any Basic
Service to be provided by Landlord occurs by reason of Landlords negligence, omission or breach of
its obligations hereunder or if Landlord materially interferes with Tenants use of or access to
the Premises in exercising
J-19
Landlords rights under
Section 1.2
above, or (2) an interruption or curtailment of
any Basic Service to be provided by Landlord occurs and rental abatement insurance or service
interruption insurance proceeds are available and, in either such event: (A) the interruption or
interference causes the Premises or a portion thereof to be untenantable, (B) Tenant ceases to use
the Premises or the affected portion thereof, and (C) Tenant has given Landlord written notice of
such interruption or interference, then, on the fifth (5th) consecutive Business Day following the
date on which all of the foregoing conditions are satisfied (or such earlier date, if any, on which
Landlord is entitled to receive rental abatement or service interruption insurance proceeds), Base
Rent shall abate (in whole or in part based on the number of square feet that are affected) until
the Premises (or the affected portion thereof) are rendered usable by Tenant for Tenants Permitted
Use;
provided
,
however
, that in no event shall Tenant be entitled to an abatement
of Base Rent if the interruption was caused by: (y) any action or inaction by Tenant or its
employees, agents, contractors, or invitees, except to the extent Landlord receives rental
abatement insurance proceeds with respect thereto, or (z) causes not within Landlords direct
control, except to the extent Landlord receives rental abatement or service interruption insurance
proceeds with respect thereto.
5.4 Extra Services.
Landlord may provide to Tenant at Tenants request and in Landlords
discretion and at Tenants cost and expense (and subject to the limitations hereinafter set forth)
the additional services described below (
Extra Services
). Tenant shall pay Landlord for the
actual cost (including any applicable capital costs necessary to provide such services, reasonable
out-of-pocket expenses and the allocated cost of Landlords employees) of providing any Extra
Services, together with an administrative fee of ten percent (10%) of such cost, unless otherwise
specified below, but with no additional mark-up (
Actual Cost
) within thirty (30) days following
presentation of an invoice therefor by Landlord to Tenant. The cost chargeable to Tenant for Extra
Services shall constitute additional Rent. Notwithstanding anything to the contrary provided
herein, Landlord shall provide the Extra Services described in clauses (b) and (c) below upon
request from Tenant.
(a)
Any extra cleaning and janitorial services in excess of that required for Building
Standard Improvements. Notwithstanding the foregoing, extra cleaning and janitorial services shall
be classified as an Extra Service without a Tenant request if either (i) at the time Landlord
reviews and approves any plans that Tenant submits for approval for Tenant Improvements or
Alterations, Landlord identifies certain items that will require above-standard cleaning or
janitorial service, or (ii) the need for such extra cleaning or janitorial services results from
Tenants use of the Premises (such as but not limited to clean up after special events).
(b)
Construction, installation, or maintenance of equipment to provide additional air
conditioning and ventilating capacity required by reason of any electrical, data processing or
other equipment or facilities or services installed by or on behalf of Tenant required to support
the same, in excess of that which would be required for Building Standard Improvements.
(c)
HVAC or extra electrical equipment or service during hours other than Normal Office Hours,
provided that Landlord shall only charge Tenant for additional HVAC use at a rate not to exceed
Landlords full and complete cost (including accelerated depreciation of equipment) of after-hours
HVAC and condenser water usage (including commercially reasonable allocations for the use of
Building management and engineer), but without the administrative fee. Landlord shall provide said
heating, ventilation and air conditioning or extra service solely upon the prior request of Tenant
which may be provided by telephone or through computer-based notification. After-hours services
shall be provided on a floor-by-floor basis for an hourly charge with a minimum requirement of one
(1) hour. Landlord shall make good-faith efforts to provide after-hours HVAC service at the lowest
reasonable cost, including using only fans and outside fresh air for maintaining temperature and
spreading costs between tenants when appropriate. Notwithstanding the foregoing, Landlord may
separately meter and bill to Tenant any costs (such as after hours HVAC service) on any other areas
where above standard power shall be used. Tenant shall pay for the cost of such meters.
J-20
(d)
Repair and maintenance for which Tenant is responsible hereunder, if Tenant is in default
or requests Landlord to complete such work.
(e)
Any Basic Service in amounts reasonably determined by Landlord to exceed the amounts
required to be provided under
Section 5.1
, but only if Landlord elects to provide such
additional or excess service.
(f)
Any services in connection with Tenants construction of the Tenant Improvements except to
the extent Landlord has agreed to provide such services under
Exhibit C
excluding items
covered by the terms of
Paragraph 2
of
Exhibit C
.
(g)
Any other item described in this Lease as an Extra Service or which Landlord is not
required to provide as part of Basic Services.
5.5 Window Coverings.
Building Standard window coverings shall be provided by Landlord as
Base Building Improvements as specified in
Schedule C-1
. Tenant shall not remove, replace
or install any window coverings, blinds or drapes on any exterior window without Landlords prior
written approval. Tenant acknowledges that breach of this covenant shall directly and adversely
affect the exterior appearance of the Building and the operation of the heating, ventilation and
air conditioning systems.
5.6 Graphics and Signage.
In addition to Tenants signage rights under
Section 5.9
below, Landlord shall provide the initial identification of Tenants name on the directory board
and/or electronic directory, if any, in the main lobby of the Building and at the entrance to each
suite within the Premises that is located on a floor partially leased by Tenant. Subject to
Landlords prior written approval of the signage and method of installation, which shall not be
unreasonably withheld, Tenant shall be permitted at Tenants sole cost and expense to install
signage in the elevator lobby on each whole floor that Tenant leases. All signs (including those
in the elevator lobbies on floors within the Premises), notices and graphics of every kind or
character, visible in or from public corridors, the Common Areas or the exterior of the Premises
shall comply with the Design Manual and any deviation shall be subject to Landlords prior written
approval.
5.7 Tenant Extra Improvements.
In instances in which this Lease refers to Building Standard
Improvements or Tenant Extra Improvements (as such terms are defined in
Exhibit C
) as the
standard for the provision of services, maintenance, repair or replacement by either party, such
reference shall refer to the difference in required services, maintenance, repair or replacement
between the Tenant Extra Improvements as constructed in the Premises and Building Standard
Improvements, had Building Standard Improvements been constructed in the Premises. Landlord shall
not seek the benefits of depreciation deductions or income tax credit allowances for federal income
tax reporting purposes with respect to any Tenant Extra Improvements for which Tenant has fully
reimbursed Landlord.
5.8 Peaceful Enjoyment.
Tenant shall peacefully have, hold and enjoy the Premises, subject to
the other terms hereof, provided that no Event of Default then exists hereunder. This covenant and
the other covenants of Landlord contained in this Lease shall be binding upon Landlord and its
successors only with respect to breaches occurring during its and their respective ownerships of
Landlords interest hereunder.
5.9 Corporate Authority.
If Landlord is a corporation or limited liability company or
partnership or if Landlord is a partnership on whose behalf a partner which is a corporation or
limited liability company executes this Lease, then in any such case, each individual executing
this Lease on behalf of such corporation, limited liability company, or partnership represents and
warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said
corporation, limited liability company and/or partnership, as the case may be.
J-21
5.10 Building Naming and Signage Rights.
So long as Tenant satisfies the Minimum Leasing
Requirement (as defined below) and no Event of Default is outstanding under this Lease, Tenant
shall have (a) the right to require the Building to be named Expedia Tower (or such other similar
project name incorporating Expedia as Landlord and Tenant may mutually select (the
Building
Name
), such as Expedia Plaza or Expedia Center), and (b) the rights to signage described in this
Section 5.9
. As used herein, the term
Minimum Leasing Requirement
shall mean that Tenant
is leasing, occupying and paying rent on at least fifty percent (50%) of the total Net Rentable
Area in each elevator bank in the Building (the low rise elevator bank consists of floors 3 through
11 and the high rise elevator bank consists of floors 12 through 20) and no more than fifty percent
(50%) of the Premises has been subleased. Tenant shall have the right, at Tenants sole cost and
expense, to have Landlord include Tenants name on the exterior monument sign at the main entrance
to the Building and Tenants sign shall not be smaller or lower on the sign than any other tenant
leasing fewer square feet in the Building. In addition, if such sign is permitted by and complies
with all applicable Laws, Tenant shall have the right, at Tenants sole cost and expense, to place
exclusive and prominent signage identifying Tenant on top of the Building. Except as expressly
provided herein, Tenant is not granted exclusive sign rights and Landlord shall retain the right to
include the names of other tenants: (i) on the Building directory board, (ii) on the exterior
monument sign, (iii) on any eyebrow or blade or canopy signage allowed by the City of
Bellevue and lobby signage for the Buildings retail tenants in the Building (including banking or
brokerage tenants) and any tenants located on the lobby levels of the Building, and (iv) temporary
signage not permanently affixed to the Building,
provided
,
however
, that Landlord
will not permit any signage, other than Tenants signage, to be placed directly above the main
Building entrance (but not including entrances directly into the retail tenant areas or into the
lower lobby level retail area) without the prior written approval of Tenant. Except as provided
above, Landlord will not install or permit any tenant in the Building to install signage in the
Common Areas on the lobby levels of the Building or in the elevators identifying any Building
tenant. So long as Tenant satisfies the Minimum Leasing Requirement, Landlord shall not install or
permit installation of any advertisements on the windows of the Building without Tenants consent.
Tenant shall be responsible for all costs to design, permit, construct, install, maintain and
remove Tenants signage although a portion of the Cash Allowance may be applied to such costs if
any portion thereof is available after completion of the Tenant Improvements. Tenant must submit
plans for any signage permitted under this Section to Landlord for review and approval (such
approval not to be unreasonably withheld, conditioned or delayed provided that the design of all
signage is consistent with the architectural and institutional quality of the Building) before
Tenant shall be permitted to install such signage. The rights granted herein are personal to the
Tenant named herein and any Qualified Transferee who takes an assignment of all of Tenants rights
under this Lease.
By the end of the Lease Term or on thirty (30) days notice if Tenant fails to satisfy the
conditions under the first sentence of this
Section 5.9
, Tenant at Tenants sole cost and
expense shall: (A) remove any signage installed by Tenant, (B) restore the Building substantially
to its condition prior to installation of such signage, and (C) in the case where Tenant either
requests that Expedia be removed from the Buildings name or Landlord terminates Tenants naming
right by reason of Tenants failure to satisfy the requirements under the first sentence of this
Section 5.9
, then Tenant shall reimburse Landlord for all reasonable out-of-pocket expenses
and costs incurred by Landlord in connection with a change in the Building name. Except as
provided in
Section 5.6
, all signage for Tenant shall be provided at Tenants sole cost and
expense and shall be subject to all City of Bellevue and other applicable governmental
requirements.
Any change in the Building Name or the signage described above requested by Tenant shall be at
Tenants expense and shall be subject to Landlords prior written approval, which approval may be
withheld in Landlords reasonable discretion;
provided
,
however
, Landlord shall not
unreasonably withhold its approval unless, in Landlords judgment, the proposed new name would:
(1) adversely affect Landlords ability to lease the vacant space in the Building to third parties;
(2) be inconsistent with a first class downtown Bellevue office tower; (3) be offensive; or (4)
violate the provisions of any other tenant
J-22
lease in the Building. If the Building Name is changed during the Term of this Lease,
Landlord shall not be required to change any materials identifying the Building (such as uniforms
or stationery) unless Tenant agrees to pay the cost of such changes. If the parties cannot agree
on a Building Name, or if Tenant does not exercise its naming rights hereunder, the Building shall
be called Tower 333. Landlord and Tenant will work together cooperatively to develop a logo
incorporating the Building Name at Tenants sole cost and expense.
ARTICLE 6
Tenants Covenants
6.1 Compliance With
Exhibit C
.
Tenant shall comply with the terms, conditions and
deadlines set forth in
Exhibit C
and the Tenant Design Manual, which is incorporated herein
by this reference (
Design Manual
) with respect to the construction of the Tenant Improvements in
the Premises. Notwithstanding anything to the contrary herein, in the event of any conflict
between the express terms of this Lease and the Design Manual, the terms of this Lease shall
control.
6.2 Construction of Tenant Improvements.
Tenant shall be solely responsible for the design,
permitting and construction of all Tenant Improvements pursuant to
Exhibit C
and the Design
Manual. All Building Standard Improvements (as defined in
Exhibit C
), shall be and become
the property of Landlord upon installation and all Tenant Extra Improvements shall become
Landlords property upon expiration or early termination of this Lease and shall be surrendered to
Landlord upon termination of this Lease by lapse of time or otherwise, except as otherwise stated
herein;
provided
,
however
, that this Section shall not apply to, and Tenant may
remove at any time and from time to time during the Term and at its expiration or earlier
termination, all equipment (other than supplemental HVAC equipment), machinery, furniture,
furnishings and other personal property now or hereafter installed or placed in or on the Premises
by and at the expense of Tenant that can be removed without material damage to the Premises or the
Building (including without limitation all equipment, machinery, furniture, furnishings and
demountable partitions which are bolted or similarly minimally attached to the wall or floor, but
only if Tenant repairs such wall or floor to good condition as if the same had not been bolted or
similarly attached). Although Tenant Improvements become the property of Landlord as provided
above, they are intended to be for the convenience of Tenant and are not intended to be a
substitute for Rent or any part thereof.
6.3 Telecommunications.
Tenant shall install and maintain all required intrabuilding network
cable and other communications wires and cables necessary to serve the Premises from the point of
presence in the Building and, subject to Landlords approval of the actual plans, may run wires,
cable and conduit from the point of presence in the Building to the Premises provided that Tenant
may not use more than its Proportionate Share of the sleeves available to tenants of the Building
for such wires, cables and conduit and shall vacate a proportionate share of the sleeves if the
size of the Premises is reduced to less than eighty percent (80%) of the office space in the
Building and each time it is reduced in size thereafter. Tenant shall be solely responsible for
the installation, repair, maintenance, replacement and removal of its telecommunications wires,
cable and conduit and all such work shall be subject to Landlords applicable rules and
regulations. Tenant shall obtain telecommunications services within the Building from vendors
approved by Landlord in its reasonable discretion (a
Provider
). If Tenant desires to obtain
telecommunications services from a Provider not selected by Landlord then Tenant shall submit to
Landlord a list of such proposed vendor(s) together with such other information regarding the
vendors as Landlord may request, including financial information, references from at least two (2)
owners of comparable projects in which the vendor has experience and a description of the vendors
business activities in downtown Bellevue. Landlord shall notify Tenant within fifteen (15)
Business Days of receipt of the list (and any additional information reasonably requested by
Landlord) if Landlord approves any of Tenants proposed vendors. Failure to notify Tenant shall be
deemed disapproval. If Landlord approves a Provider selected by Tenant, the Provider must agree in
writing to abide by all of Landlords policies and procedures for telecommunications vendors and to
pay for the use of any space outside the
J-23
Premises in which the Providers equipment is installed at the rate established by Landlord
from time to time, such rate to be at or below the rate then being offered to other new service
providers in the Building;
provided
,
however
, that the Provider shall not be
required to pay for temporary space used only during the period of installation. The Provider
shall also reimburse Landlord for any costs incurred by Landlord to build out such space. If
Tenant desires to utilize the services of a Provider not selected by Landlord, such Provider must
obtain the written consent of Landlord to the plans and specifications for its lines or equipment
within the Building prior to installation in the Building and must install such lines and equipment
in locations designated by Landlord. Tenant or the Provider shall obtain any necessary
governmental permits relating to the installation, use or operation of Providers lines and
equipment. Landlord shall provide Tenant and its Provider and contractors with reasonable access
to portions of the Building outside the Premises to the extent necessary to install, maintain or
replace any telecommunications equipment serving the Premises. Landlords consent to a Provider
shall not be deemed to constitute a representation or warranty as to the suitability, capability or
financial strength of any Provider. To the extent the service by a Provider is interrupted,
curtailed or discontinued for any reason whatsoever, Landlord shall have no obligation or liability
in connection therewith, except to the extent caused by Landlords gross negligence or intentional
misconduct. The provisions of this Section are solely for the benefit of Tenant and Landlord, are
not for the benefit of any third party, and no telephone or telecommunications provider shall be
deemed a third party beneficiary hereof. Tenant acknowledges and agrees that Landlord has not
represented or warranted that Tenant will have unlimited access to riser space or other space
outside the Premises for the purpose of the installing telecommunications equipment and Landlord
shall have no obligation to construct or designate additional riser space or equipment space to
accommodate the Tenants or its Providers telecommunications equipment. Tenant acknowledges that
riser space is a finite commodity and that Landlord may in its discretion limit Tenants total use
of such space under this or any other provision of this Lease to accommodate and take into account
use of the Building systems and the needs of Landlord and other Building tenants;
provided
,
however
, in no event shall such space available to Tenant be less than Tenants
Proportionate Share of the total riser space except that at least one sleeve in each riser shall be
available for other tenants.
6.4 Taxes on Personal Property and Tenant Extra Improvements
. In addition to, and wholly
apart from its obligation to pay Tenants Proportionate Share of Operating Costs, Tenant shall be
responsible for, and shall pay prior to delinquency, all taxes or governmental service fees,
possessory interest taxes, fees or charges in lieu of any such taxes, capital levies, or other
charges imposed upon, levied with respect to or assessed against Tenants furniture, equipment,
machinery, trade-fixtures, personal property, goods or supplies (
Tenants Personal Property
), on
the value of its Tenant Extra Improvements, on its interest pursuant to this Lease or on any use
made of the Premises or the Common Areas by Tenant in accordance with this Lease. To the extent
that any such taxes are not separately assessed or billed to Tenant, Tenant shall pay the amount
thereof as invoiced to Tenant by Landlord.
6.5 Repairs by Tenant.
Tenant shall maintain and repair the Premises and keep the same in good
condition. Tenants obligation shall include, without limitation, the obligation to maintain and
repair all walls, floors, ceilings and fixtures and, subject to
Section 11.6
below, to
repair all damage caused by Tenant or Tenants employees, agents, contractors, officers, directors,
partners, members, licensees, subtenants, assignees, invitees and guests (
Tenant Parties
) to the
Premises or the Building, whatever the scope of the work of maintenance or repair required. Tenant
shall repair all damage caused by removal of Tenants movable equipment or furniture or the removal
of any Tenant Extra Improvements or Alterations (as defined in
Section 6.7
) permitted or
required by Landlord, all as provided in
Section 6.13
. Any repair or maintenance that
Tenant is required to perform under this Lease shall be performed at Tenants expense by
contractors selected by Tenant and approved by Landlord following the same procedure and notice
requirements applicable to Landlords approval of Alterations under
Section 6.7
below. If
Tenant fails or refuses to commence and complete the performance of such work within a commercially
reasonable period following notice from Landlord of the need for such work,
J-24
then Landlord may perform such work for the account of Tenant and the actual cost of such work
will be reimbursed by Tenant (to the extent such work is not performed by individuals whose
salaries are included in Operating Costs) as an Extra Service. Any work of repair and maintenance
performed by or for the account of Tenant by persons other than Landlord shall be performed at
Tenants risk using contractors approved by Landlord prior to commencement of the work and in
accordance with procedures Landlord shall from time to time establish. All such work shall be
performed in compliance with all applicable Laws and the Rules and Regulations and Tenant shall
provide to Landlord copies of all permits and records of inspection issued or obtained by Tenant in
connection therewith to establish such compliance. Tenant shall not be required to perform any
maintenance or repair required solely by reason of the negligence or wrongful acts of Landlord or
its employees, agents, contractors, officers, directors, partners, licensees, invitees and guests,
Landlords affiliates or Landlords members (
Landlord Parties
). Promptly after learning thereof,
Tenant shall notify Landlord of any needed repairs in the Premises or to the Building Components
located in the Premises.
6.6 Waste.
Tenant shall not commit or allow Tenant Parties to commit any waste or damage in
any portion of the Premises or the Building.
6.7 Alterations, Additions, Improvements.
Tenant shall not make or allow to be made any
alterations, additions or improvements in or to the Premises (collectively,
Alterations
) without
obtaining the prior written consent of Landlord. Landlords consent shall not be unreasonably
withheld with respect to proposed Alterations unless the Alterations: (a) adversely affect the
structural portions of the Building; (b) adversely affect any mechanical, electrical, HVAC or life
safety systems; (c) do not comply with all applicable Laws or the Rules and Regulations; (d) affect
the exterior appearance of the Building; (e) unreasonably interfere with the normal and customary
business operations of any other tenant; or (f) adversely affect the value or institutional nature
and quality of the Building. If any Alterations, whether alone or taken together with other
improvements, require the construction of any other improvements or alterations within the Building
Landlord may condition its consent on Tenants agreement to pay for such improvements or
alterations. Landlords consent shall not be required for any Alteration that satisfies
clauses (a)
through
(f)
above and is of a cosmetic nature such as painting,
wallpapering, hanging pictures and installing carpeting, and costs less than $175,000 for any one
project or related series of projects (a
Cosmetic Alteration
). Tenant shall provide Landlord
with notice in advance of making any Alterations, describing the work to be performed. In
determining whether to consent to the proposed Alterations for which consent is required, Landlord
shall have the right to review and approve plans and specifications for the proposed Alterations,
construction means and methods, the identity of any contractor or subcontractor to be employed on
the work for Alterations, and the time for performance of such work. Tenant shall supply to
Landlord any documents and information reasonably requested by Landlord in connection with any
Alterations to the Premises. Landlord may hire outside consultants to review such documents and
information if Landlord reasonably believes such consultants review to be necessary and Tenant
shall reimburse Landlord for the Actual Cost thereof as an Extra Service under
Section 5.4
.
Landlord agrees to respond to any request by Tenant for approval of Alterations within ten (10)
Business Days after delivery of Tenants written request, subject to extension for such additional
reasonable time needed for review by Landlords consultants, if applicable, provided that Landlord
notifies Tenant within such initial ten (10) Business Day period of the necessity for such
extension. If Landlord disapproves of any proposed Alterations, Tenant may revise Tenants plans
and resubmit such plans to Landlord; in such event, the scope of Landlords review of such plans
shall be limited to Tenants changes. Landlords review and approval of such revised plans shall
be governed by the provisions set forth above in this
Section 6.7
). The procedure set out
above for approval of Tenants plans will also apply to any change, addition or amendment to
Tenants plans. All Alterations permitted hereunder shall be made and performed by Tenant without
cost or expense to Landlord. At Tenants request, Landlord may supervise and administer the
installation of Alterations as an Extra Service, but unless so requested by Tenant, Landlord will
not have any obligation to supervise such work or any right to charge any construction
administration or supervision fee in connection with Tenants performance of
J-25
Alterations. Upon completion of any Alterations which required the issuance of a building
permit or otherwise are of a scope or nature for which as built plans are typically prepared,
Tenant shall provide Landlord, at Tenants expense, with a complete hard copy set of as built
plans and specifications reflecting the actual conditions of the Alterations as constructed in the
Premises, together with a copy of such plans in the AutoCAD format or such other format as may then
be in common use for computer assisted design purposes. The obligations of the parties with
respect to removal of Alterations shall be controlled by
Section 6.13
.
6.8 Liens.
Tenant shall keep the Premises and the Building free from any liens arising out of
any (a) work performed or material furnished to or for the Premises, and (b) obligations incurred
by or for Tenant or any person claiming through or under Tenant. Tenant shall, within ten (10)
Business Days following notice to Tenant of the imposition of any such lien, cause such lien to be
released of record by payment or posting of a bond fully satisfactory to Landlord in form and
substance (in Landlords reasonable discretion) and in compliance with RCW 60.04, and in any event
Tenant shall obtain the release of any such lien prior to foreclosure thereof. Landlord shall have
the right at all times to post and keep posted on the Premises any notices permitted or required by
law, or that Landlord shall reasonably deem proper for the protection of Landlord, the Premises,
the Building and any other party having an interest therein, from mechanics, materialmens and
other liens. If Tenant fails to timely comply with this
Section 6.8
, Landlord may cause
such liens to be released by any means it deems proper, including, without limitation, payment of
any such lien, at Tenants sole cost and expense. All costs and expenses incurred by Landlord in
causing such liens to be released shall be repaid by Tenant to Landlord immediately following
demand therefore accompanied by reasonably detailed backup documentation, together with an
administrative fee equal to the greater of (y) ten percent (10%) of such costs and expenses, or (z)
Two Hundred Fifty Dollars ($250.00). In addition to all other requirements contained in this
Lease, Tenant shall give Landlord at least five (5) Business Days prior written notice before
commencement of any construction on the Premises.
6.9 Compliance With Laws and Insurance Standards.
(a)
Subject to Landlords obligations with respect to the delivery of the Base Building and as
set forth in
Section 6.9(c)
below, Tenant shall comply with all federal, state and local
laws, ordinances, codes, orders, rules, regulations and policies (collectively,
Laws
), now or
hereafter in force, as amended from time to time, in any way related to the use, condition or
occupancy of the Premises regardless of when such Laws become effective, including, without
limitation, all applicable Hazardous Materials Laws (as defined in
Section 7.2(a)
), the
Americans with Disabilities Act of 1990, as amended and any laws prohibiting discrimination
against, or segregation of, any person or group of persons on account of race, color creed,
religion, sex, marital status, national origin or ancestry to the extent that such Law relates to
Tenants particular manner of use of the Premises. Additionally, Tenant shall not be obligated to
comply with any present or future Law (or modification thereto) requiring any modifications of or
repairs to the Base Building unless the application of such Law arises from: (i) Tenants
particular manner of use of the Premises, (ii) any cause or condition created by or on behalf of
Tenant or any Tenant Party (including any Alterations), (iii) the breach of any of Tenants
obligations under this Lease, or (iv) any Hazardous Materials having been brought into the Building
by any Tenant Party. Tenant shall also comply with the terms of any transportation management
program or similar programs affecting the Building and required by any governmental authority.
Tenant shall immediately deliver to Landlord a copy of any notices received by Tenant from any
governmental agency in connection with the Premises. It is the intention of Tenant and Landlord
that the obligations of Tenant under this
Section 6.9
shall apply irrespective of the scope
of work required to achieve such compliance. Tenant shall not use or occupy the Premises in any
manner that creates, requires or causes imposition of any requirement by any governmental authority
for structural or other upgrading of or improvement to the Building. Tenant, at its expense, after
notice to Landlord, may contest by appropriate proceedings prosecuted diligently and in good faith,
the validity or applicability to the Premises of any Law with
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which Tenant is responsible for compliance hereunder, provided that (a) the condition which is
the subject of such contest does not pose a danger to persons or property, (b) neither the Building
or any part thereof is subject to being condemned or vacated by reason of non-compliance or
otherwise by reason of such contest, (c) the Certificate of Occupancy for the Premises or the
Building is neither subject to being suspended nor threatened to be suspended by reason of
non-compliance or otherwise by reason of such contest, (d) such non-compliance or contest does not
constitute or result in any violation Senior Instrument (or if any Senior Party permits such
non-compliance or contest only if Landlord takes some specified action or furnishes security, such
action is taken and/or such security is furnished at the expense of Tenant), neither Landlord or a
Landlord Party is subject to criminal penalty or to prosecution for a crime by reason of Tenants
non-compliance or otherwise by reason of such contest. Tenant shall keep Landlord advised as to
the status of any such proceedings and Tenant shall indemnify Landlord against liability in
connection with such contest or non-compliance.
(b)
Tenant shall not occupy or use, or permit any portion of the Premises to be occupied or
used, for any business or purpose that is unlawful, disreputable or constitutes a fire hazard.
Tenant shall not permit anything to be done that would increase the rate of fire or other insurance
coverage on the Building and/or its contents. If Tenant does or permits anything to be done that
increases the cost of any insurance policy carried by Landlord, then Tenant, at Landlords option,
shall not be in default under this Lease, but shall reimburse Landlord, upon demand, for any such
additional premiums as an Extra Service.
(c)
Landlord shall comply with all Laws (inclusive of the Americans with Disabilities Act)
relating to the Project, Base Building, elevator lobbies and restrooms, provided that compliance
with such Laws is not the responsibility of Tenant under this Lease or of other tenants under the
provisions of their respective leases. Landlord shall be permitted to include in Operating Costs
any costs or expenses incurred by Landlord under this
Section 6.9(c)
to the extent
permitted under
Article 4
of this Lease. Landlord shall have the right to contest any
alleged violation of any Law in good faith, including, without limitation, the right to apply for
and obtain a waiver or deferment of compliance, the right to assert any and all defenses allowed by
Law and the right to appeal any decisions, judgments or rulings to the fullest extent permitted by
Law. Landlord, after the exhaustion of any and all rights to appeal or contest, will make all
repairs, additions, alterations or improvements necessary to comply with the terms of any final
order or judgment.
6.10 Entry for Repairs, Inspection, Posting Notices, Etc.
After reasonable (i.e., at least
one (1) Business Day advance) notice delivered to the Premises (which may be e-mail notice), except
in emergencies where no such notice shall be required, Landlord or Landlord Parties shall have the
right to enter the Premises to inspect the same, to clean, to perform such work as may be permitted
or required hereunder, to make repairs to or necessary alterations of the Building or other tenant
spaces therein, to deal with emergencies, to post such notices as may be permitted or required by
law to prevent the perfection of liens against Landlords interest in the Building or to exhibit
the Premises to prospective purchasers, encumbrancers or others or, during the final twelve (12)
months of the Term to prospective tenants;
provided
,
however
, that Landlord shall make reasonable
efforts not to unreasonably interfere with Tenants business operations. Except as expressly
provided in this Lease, in no event shall Tenant be entitled to any abatement of Rent by reason of
the exercise of any such right of entry. Any such entry or work described above shall be performed
in a manner so as to minimize disruption to Tenants use of and access to the Premises (which
obligation shall except in an emergency include the necessity of performing such work after normal
business hours if the performance of such work would otherwise be materially disruptive to Tenants
business operations). Tenant may condition any entry by Landlord (except in the case of emergency)
upon Landlords being accompanied by a representative of Tenant during any such entry; in
connection therewith, Tenant agrees to use reasonable efforts to cooperate with Landlord in
scheduling any such entry and making a representative of Tenant available at times reasonably
requested by Landlord. Notwithstanding anything to the contrary in this
Section 6.10
,
Tenant may designate certain
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limited areas of the Premises as
Secured Areas
should Tenant require such areas for the
purpose of securing certain valuable property or confidential information. In connection with the
foregoing, Landlord shall not enter such Secured Areas except in the event of an emergency or when
accompanied by Tenants representative. Landlord need not clean any area designated by Tenant as a
Secured Area and shall only maintain or repair such Secured Areas to the extent such repair or
maintenance is: (i) required in order to maintain and repair the Building structural elements or
systems; (ii) as required by applicable Law, or (iii) in response to specific requests by Tenant
and in accordance with a schedule reasonably designated by Tenant, subject to Landlords reasonable
approval. Tenant shall notify Landlord in writing each time a Secured Area is designated, changed
or eliminated hereunder, including a floor plan showing the location thereof.
6.11 No Nuisance.
Tenant shall not create any nuisance, or interfere with, annoy, endanger or
disturb any other tenant or Landlord in its operation of the Building. Tenant shall not place any
loads upon the floor, walls or ceiling of the Premises that endanger the structure nor place any
harmful liquids or Hazardous Material (as defined in
Section 7.2
) in the drainage system of
the Building. Tenant shall not permit any vibration, noise or odor to escape from the Premises and
shall not do or permit anything to be done within the Premises which would adversely affect the
quality of the air in the Building.
6.12 Rules and Regulations.
Tenant shall comply with the rules and regulations for the
Building attached as
Exhibit D
and such amendments or supplements thereto as Landlord may
reasonably adopt from time to time with prior notice to Tenant (the
Rules and Regulations
).
Landlord shall not be liable to Tenant for or in connection with the failure of any other tenant of
the Building to comply with any rules and regulations applicable to such other tenant under its
lease. If there is a conflict between this Lease and any rules and regulations enacted after the
date of this Lease, the terms of this Lease shall control. The rules and regulations shall be
generally applicable, and generally applied in the same manner, to all tenants of the Building who
are similarly situated.
6.13 Surrender of Premises on Termination.
On expiration of the Term, Tenant shall quit and
surrender the Premises to Landlord, broom clean, in good order, condition and repair as required by
this Lease, with all of Tenants movable equipment, furniture, trade fixtures and other personal
property removed therefrom. In addition, Tenant shall remove all telecommunications and computer
networking wiring and cabling serving the Premises from the Building, unless Landlord requires such
materials to be surrendered to Landlord. All Alterations and Tenant Improvements shall be
surrendered with the Premises in good condition and repair, reasonable wear and tear (but only to
an extent consistent with the Premises remaining in good condition and repair) and casualty damage
not required to be repaired by Tenant excepted, unless (a) Tenant has obtained Landlords agreement
in writing that it can remove an Alteration or item of Tenant Improvements, or (b) Landlord has
notified Tenant that Tenant must remove an Alteration or item of Tenant Extra Improvements. If
Landlords approval is sought for an Alteration or Tenant Extra Improvement, Landlord shall notify
Tenant at the time it approves the Alteration or Tenant Extra Improvement which elements thereof
may be subject to removal under this Section (the
Removable Improvements
). Removable
Improvements shall not include any Building Standard Improvements or the conference rooms,
reception area, lunchroom and office improvements on the transfer floor between the low- and
high-rise elevator banks provided such improvements are consistent with the standards set forth in
the Design Manual and are of the same or comparable quality as in the Design Manual. Removable
Improvements shall include any non-standard items such as internal stairs, raised floors,
cafeterias, and above-standard business server and technology rooms. Tenants request for consent
shall conspicuously state that it is requesting Landlords determination as to whether any elements
thereof will be considered Removable Improvements. Landlord shall give written notice (the
Final
Removal Notice
) to Tenant at least ten (10) months prior to the Expiration Date as to which, if
any, Removable Improvements or other Alterations for which Landlords consent was not requested
Landlord will require Tenant to remove on termination of the Lease. If Landlord does not give
notice under the preceding sentence then Tenant shall not be required to remove any Removable
Improvements.
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Subject to the provisions of
Section 11.6
below, Tenant shall repair at its sole cost
and expense, all damage caused to the Premises or the Building by installation or removal of
Tenants movable equipment or furniture and such Tenant Improvements and Alterations as Tenant
shall be allowed or required to remove from the Premises by the provisions of this Lease.
If Tenant elects to install Removable Improvements, then at the earlier of (a) the date that
is thirty (30) days following a date on which Tenants credit rating falls below investment grade
(BBB or better as rated by Standard & Poors or any other credit rating agency of comparable
reputation), or (b) the date that is twelve (12) months prior to the Expiration Date, Tenant shall
deliver to Landlord an irrevocable, fully assignable, automatically renewing letter of credit in
form and substance acceptable to Landlord, callable upon demand by Landlord without prior notice to
Tenant, issued by a bank acceptable to Landlord in its reasonable discretion, for an amount equal
to the Landlords reasonable estimation of the cost (as of the end of the Initial Term) to repair
and restore the Removable Improvements. If Landlord later determines that the estimate is too high
(for example because Landlord ceases to require removal of some or all the Removable Improvements)
then Tenant shall be permitted to amend the letter of credit to reduce the value thereof to the
revised estimate of the cost of removal and restoration. If the Premises are not surrendered as of
the end of the Term in the manner and condition herein specified, Tenant shall indemnify, defend,
protect and hold Landlord and Landlord Parties harmless from and against any and all damages
resulting from or caused by Tenants delay or failure in so surrendering the Premises, including,
without limitation, any claims made by any succeeding tenant due to such delay or failure and
Landlord may draw on the letter of credit for any costs or damages incurred by Landlord as a result
of Tenants failure to comply with its obligations under this Section. Tenant acknowledges that
Landlord shall be attempting to lease the Premises with any such lease to be effective upon
expiration of the Term, and failure to surrender the Premises could cause Landlord to incur
liability to such successor tenant for which Tenant shall be responsible. Any property of Tenant
not removed from the Premises shall be deemed, at Landlords option, to be abandoned by Tenant and
Landlord may store such property in Tenants name at Tenants expense, and/or dispose of the same
in any manner permitted by law.
6.14 Corporate Authority.
If Tenant is a corporation or limited liability company or
partnership or if Tenant is a partnership on whose behalf a partner which is a corporation or
limited liability company executes this Lease, then in any such case, each individual executing
this Lease on behalf of such corporation, limited liability company, or partnership represents and
warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said
corporation, limited liability company and/or partnership, as the case may be.
6.15 Utilities.
Tenant shall not obtain any electrical or other utility services from vendors
other than those selected by Landlord or approved by Landlord in writing.
ARTICLE 7
Hazardous Materials
7.1 Prohibition and Indemnity With Respect to Hazardous Materials.
(a)
Landlord has provided Tenant with copies of all environmental reports, assessments and
studies pertaining to the land upon which the Building is located (
Land
) in Landlords possession
which are identified on
Exhibit J
attached hereto (the
Environmental Reports
) Landlord
hereby agrees to indemnify, defend, protect and hold harmless Tenant from and against any and all
loss, cost, damage, or liability, including, without limitation, any claims, fines, penalties,
charges, administrative and judicial proceedings and orders, judgments, remedial action
requirements and enforcement actions of any kind, and all costs and expenses incurred in connection
therewith), arising out of on account of any violation of any Hazardous Materials Laws by Landlord
or any Landlord Party. The foregoing indemnity shall not apply to any cost and expenses associated
with any Hazardous Materials placed in, on, about or under the Land and/or Building by Tenant or
any Tenant Party.
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(b)
Except as stated below, Tenant shall not cause or permit any Hazardous Material to be
brought upon, kept or used in or about the Premises by Tenant or Tenant Parties without the prior
written consent of Landlord. Tenant may, at Tenants risk, bring, store and use reasonable
quantities of Permitted Hazardous Materials in the Premises for their intended use. If Tenant
violates this provision, or if contamination of the Premises or the Real Property by Hazardous
Material occurs for which Tenant or any Tenant Party is responsible, or if Tenants activities or
those of Tenant Parties result in or cause a Hazardous Materials Claim, then Tenant shall
indemnify, defend, protect and hold Landlord and Landlord Parties harmless from and against any and
all claims, judgments, damages, penalties, fines, costs, expenses, liabilities or losses
(including, without limitation, diminution in value of the Premises or the Building or the Real
Property, damages for the loss or restriction on use of rentable or usable space or of any amenity
of the Premises or the Building, damages arising from any adverse impact on marketing of space, and
sums paid in settlement of claims, attorneys fees, consultants fees and experts fees)
(collectively,
Claims
) which arise during or after the Term as a result of any violation of any
Environmental Law by Tenant or any Tenant Party. This indemnification of Landlord by Tenant
includes, without limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial, removal or restoration work required by any federal, state or
local government agency or political subdivision because of any Hazardous Material present in the
soil or ground water on or under the Premises arising out of or by reason of the activities or
business of Tenant, Tenant Parties or any party claiming by or through Tenant and its employees,
agents, contractors, officers, directors, partners, licensees, invitees (other than Landlord or
Landlords contractors) and guests The foregoing indemnity shall survive the expiration or earlier
termination of this Lease.
7.2 Definitions
. The following terms shall have the meanings given below for purposes of this
Lease.
(a)
Hazardous Material
shall mean any (a) oil, flammable substances, explosives, radioactive
materials, hazardous wastes or substances, toxic wastes or substances or any other wastes,
materials or pollutants which (i) pose a hazard to the Building or to persons in or about the
Building or (ii) cause the Building to be in violation of any Hazardous Materials Laws; (b)
asbestos in any form, urea formaldehyde foam insulation, transformers or other equipment that
contain dielectric fluid containing levels of polychlorinated biphenyls, or radon gas; (c)
chemical, material or substance defined as or included in the definition of hazardous substances,
extremely hazardous substances, dangerous wastes, hazardous wastes, hazardous materials,
extremely hazardous waste, restricted hazardous waste, moderate risk waste, or toxic
substances or words of similar import under any applicable local, state or federal law or under
the regulations adopted or publications promulgated pursuant thereto, including, but not limited
to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended,
42 U.S.C. § 9601,
et seq.
; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. §
1801,
et seq.
; the Federal Water Pollution Control Act, as amended, 33 U.S.C. § 1251,
et seq.
; and
the Model Toxics Control Act, as amended, RCW 70.105D; (d) chemicals, materials or substances,
exposure to which is prohibited, limited or regulated by any governmental authority or may or could
pose a hazard to the health and safety of the occupants of the Building or the owners and/or
occupants of property adjacent to or surrounding the Building, or any other person coming upon the
Building or adjacent property; and (e) other chemicals, materials or substances which may or could
pose a hazard to the environment.
(b)
Hazardous Materials Claims
shall mean any liability, enforcement, investigation,
cleanup, removal, remedial or other governmental or regulatory actions, agreements or orders
instituted pursuant to any Hazardous Materials Laws; and any claims made by any third party against
Landlord, Tenant or the Building relating to damage, contribution, cost recovery compensation,
cleanup liability, natural resource damages, loss or injury resulting from the presence, release,
threatened release or discharge of any Hazardous Materials. Tenant shall promptly cure and satisfy
all Hazardous Materials Claims arising out of or by reason of the activities or business of Tenant,
Tenant Parties or any
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party claiming by or through Tenant and its employees, agents, contractors, officers,
directors, partners, licensees, invitees and guests.
(c)
Hazardous Materials Laws
shall mean any federal, state or local laws, ordinances,
orders, rules, regulations or policies, now or hereafter in force, as amended from time to time, in
any way relating to the environment, health and safety, and Hazardous Materials (including, without
limitation, the use, handling, transportation, production, disposal, discharge or storage thereof)
or to industrial hygiene or the environmental conditions on, under or about the Building and Real
Property, including, without limitation, soil, groundwater and indoor and ambient air conditioning.
(d)
Permitted Hazardous Materials
shall mean Hazardous Materials which are (i) contained in
ordinary office supplies of a type and in quantities typically used in the ordinary course of
business within executive offices of similar size and location, or (ii) used in connection with the
Generator, but only if and to the extent that such supplies are transported, stored and used in
full compliance with all Hazardous Materials Laws and their packaging instructions and otherwise in
a safe and prudent manner. Hazardous Materials which are contained in ordinary office supplies or
which are used in connection with the Generator but which are transported, stored and used in a
manner which is not in full compliance with all Hazardous Material Laws and, with respect to office
supplies, their packaging instructions, or which is not in any respect safe and prudent shall not
be deemed to be Permitted Hazardous Materials for the purposes of this Lease.
ARTICLE 8
Assignment or Sublease.
8.1 Consent Required.
Tenant shall not assign this Lease in whole or in part, sublease all or
any part of the Premises or otherwise sell, transfer or hypothecate this Lease or grant any right
to use or occupy the Premises to another party (all of such events shall be referred to herein as a
Transfer
and any such assignee, purchaser, subtenant or other transferee shall be a
Transferee
for purposes of this Article) without Landlords prior written consent which shall not be
unreasonably withheld, delayed or conditioned for any sublease of all or any portion of the
Premises or any assignment of all of Tenants interest in this Lease, subject to the terms of this
Article. Tenant shall notify Landlord in writing at least thirty (30) days before Tenant begins to
market any portion of the Premises for a Transfer. This Lease may not be transferred by operation
of law. All of the following shall constitute Transfers subject to this
Article 8
: (x) if
Tenant is a corporation that is not publicly traded on a national exchange, then any transfer of
this Lease by merger, consolidation or liquidation, or any direct, indirect or cumulative change in
the ownership of, or power to vote the majority of Tenants outstanding voting stock, shall
constitute a Transfer; (y) if Tenant is a partnership, then a change in general partners in, or
voting or decision-making control of, the partnership shall constitute a Transfer; and (z) if
Tenant is a limited liability company, then a change in members in, or voting or decision-making
control of, the limited liability company shall constitute a Transfer. Any change in ownership of
Tenants parent of the type described in (x), (y) or (z) above shall also constitute a Transfer
subject to this
Article 8
. These provisions shall apply to any single transaction or any
series of related or unrelated transactions having the effect described.
If Tenant intends to enter into a Transfer, Tenant shall give Landlord at least ten (10)
Business Days advance written notice of such intent. Tenants notice shall set forth the effective
date of such Transfer and shall be accompanied by an exact copy of the proposed agreements between
Tenant and the proposed Transferee and complete financial information regarding the proposed
Transferee. If requested by Landlord within five (5) calendar days following delivery of Tenants
notice requesting consent, Tenant shall provide Landlord with (a) any additional information or
documents reasonably requested by Landlord relating to the proposed Transfer or the Transferee, and
(b) an opportunity to meet and interview any proposed Transferee which proposes to occupy at least
one (1) full Floor in the Premises. Landlord shall have a period of ten (10) Business Days
following receipt of such additional information as Landlord requests or the date of the interview
(or twenty (20) days from the date of Tenants original
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notice if Landlord does not request additional information or an interview) within which to
respond to Tenants request.
8.2 Transfers to Qualified Transferees.
Notwithstanding anything herein to the contrary, so
long as the transfer to a Qualified Transferee (defined below) is a good faith transaction not
being carried out in order to circumvent the other provisions of this
Article 8
, Landlords
consent shall not be required with respect to any proposed assignment or subletting by Tenant under
this
Article 8
to any of the following (a
Qualified Transferee
): (a) any corporation or
other entity that controls, is controlled by or is under common control with Tenant; (b) any
corporation or other entity resulting from a merger, acquisition, consolidation or reorganization
of or with Tenant; (c) the purchaser of all or substantially all of the assets of Tenant provided
that (i) Tenant provides evidence to Landlord in writing that such assignment or sublease complies
with the criteria set forth in (a), (b) or (c) above, (ii) the Transferee expressly assumes
Tenants obligations and liabilities; and (iii) the credit of the Transferee and Tenant after the
transfer is equivalent to or better than that of Tenant at the time of the Transfer.
Control
for
purposes of this
Article
8 shall mean ownership of a majority voting interest in any such
entity. In the event Tenant desires to effect any Transfer pursuant to this
Section 8.2
,
then, unless otherwise prohibited or restricted by applicable law, Tenant must provide Landlord
with at least ten (10) Business Days prior written notice of such proposed Transfer, together with
such evidence as Landlord may reasonably request to establish that the proposed Transferee is a
Qualified Transferee as defined herein. Tenants rights under this
Section 8.2
are
personal to the Tenant named herein and any Qualified Transferee taking an assignment of all of
Tenants rights under this Lease.
8.3 Landlords Options.
If Tenant proposes a Transfer that is not permitted under
Section
8.2
, then: (a) if after giving effect to a proposed Transfer and all prior Transfers (other
than Transfers to Qualified Transferees) more than fifty percent (50%) of the Net Rentable Area of
the Premises would be the subject of Transfers, Landlord may elect to terminate this Lease as to
the space affected by the proposed Transfer as of the date specified by Tenant in its notice under
Section 8.1
, in which event Tenant shall be relieved of all further obligations hereunder
as to such space; (b) Landlord may elect to permit Tenant to complete the Transfer on the terms set
forth in such notice, subject, however, to such reasonable conditions as Landlord may require and
to the balance of this
Article 8;
or (c) Landlord may elect to deny the request to Transfer
so long as Landlords denial is reasonable. If Landlord elects to terminate this Lease under
Section 8.3(a)
above, Tenant may deliver written notice to Landlord within five (5)
Business Days following delivery of Landlords notice of termination, rescinding Tenants request
for consent to the Transfer, and if Tenant gives such notice Landlords exercise of the option to
terminate shall be null and void and this Lease shall continue in full force and effect. If
Landlord fails to deliver to Tenant notice of Landlords consent, or the withholding of consent, to
a proposed Transfer, Landlord shall be deemed to have waived the right to terminate under clause
(a) above and to have denied its consent to the proposed Transfer. In deciding whether to consent
to a proposed Transfer, Landlord may consider any factors that Landlord deems relevant, including
but not limited to the following: (i) whether the use of the Premises by the proposed Transferee
would be a Permitted Use; (ii) only with respect to any assignment of this Lease or any sublease
for all of the Premises for substantially all of the then-remaining Term, whether the proposed
Transferee is of sound financial condition and has sufficient financial resources and business
expertise, as determined by Landlord, to perform under this Lease (or the Sublease, as the case may
be); (iii) whether the proposed Transferees use involves the storage, use, treatment or disposal
of any Hazardous Materials; (iv) whether the proposed use or the proposed Transferee could cause
the violation of any covenant or agreement of Landlord to any third party or sublessee or permit
any other tenant to terminate its lease; and (v) whether the proposed Transferee is then
negotiating with Landlord or Landlords leasing agent regarding leasing any space in the Building.
Failure by Landlord to approve a proposed Transfer shall not cause a termination of this Lease, and
the sole remedy of Tenant shall be an action for injunctive or declaratory relief. If this Lease
shall be canceled by Landlord under clause (a) above with respect to less than the entire Premises,
Base Rent shall be prorated on the basis of the number of square feet of Net Rentable Area retained
by Tenant
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and upon request of either party, the parties shall execute written confirmation of the
retained square footage and Tenants new Proportionate Share.
8.4 Minimum Rental and Terms; Division of Excess Rent.
Any rent or other consideration
realized by Tenant in connection with or as a result of any sublease (other than to a Qualified
Transferee) in excess of the Base Rent payable hereunder, after first deducting all reasonable and
customary costs actually incurred by Tenant to effect such sublease (such as tenant improvements,
brokerage fees, legal fees, advertising costs, rent or parking concessions and the like) (
Excess
Rent
) shall be divided equally between Landlord and Tenant and Landlords share shall be paid
promptly to Landlord as Rent hereunder;
provided
,
however
, that Landlord shall be
entitled to receive the total Excess Rent if Tenant is in default of any obligation under this
Lease until such default is cured.
8.5 Tenant Not Released.
No Transfer by Tenant shall relieve Tenant of any obligation under
this Lease unless otherwise agreed in a writing executed by Landlord. Any Transfer that conflicts
with the provisions hereof shall be void. No consent by Landlord to any Transfer shall constitute
a consent to any other Transfer nor shall it constitute a waiver of any of the provisions of this
Article 8
as they apply to any such future Transfers. Following any assignment of this
Lease by Tenant, Tenant and each subsequent transferor shall remain liable for any obligations
arising in connection with any amendments to this Lease executed by Landlord and the assignee
tenant, whether or not such amendments are made with knowledge or consent of the transferor.
8.6 Written Agreement.
Any Transfer must be in writing and the Transferee shall assume in
writing, for the express benefit of Landlord, all of the obligations of Tenant under this Lease
with respect to the space transferred (except, in the case of a sublease, for the obligation to pay
Base Rent), provided that no such assumption shall be deemed a novation or other release of the
transferor unless otherwise agreed in a writing executed by Landlord. Tenant shall provide to
Landlord true and correct copies of the executed Transfer documents and any amendment thereto
during the Term.
8.7 No Transfer Period.
Notwithstanding anything to the contrary in this
Article 8
,
except with respect to Transfers to Qualified Transferees pursuant to
Section 8.2
above,
Tenant shall not enter into any Transfer of this Lease until the Term Commencement Date without
Landlords prior written approval which may be given or withheld in Landlords sole and absolute
discretion.
8.8 Conditions.
Landlord may condition its consent to any proposed Transfer other than to a
Qualified Transferee on such conditions as Landlord may reasonably require including, construction
of any improvements reasonably deemed necessary or appropriate by Landlord by reason of the
Transfer. Any improvements, additions, or alterations to the Building that are required by any
law, ordinance, rule or regulation, or are reasonably deemed necessary or appropriate by Landlord
as a result of any Transfer hereunder, shall be installed and provided by Tenant in accordance with
Section 6.7
, without cost or expense to Landlord.
8.9 Expenses.
Landlord may hire outside consultants to review the Transfer documents and
information. Except for Transfers that do not require Landlords consent and for Transfers to
Qualified Transferees, Tenant shall reimburse Landlord for the actual costs and expenses incurred
by Landlord in connection with any request for consent under this
Article 8
(even if
consent is denied or the request is withdrawn) and such reimbursement shall include all
out-of-pocket expenses paid to third parties, including reasonable attorneys fees, within thirty
(30) days following demand therefor.
8.10 Restriction on Landlord.
Provided that (a) no Event of Default has occurred hereunder
and is continuing, and (b) Tenant leases, occupies and pays Rent on at least Two Hundred Thousand
(200,000) square feet of Net Rentable Area under this Lease, during the period in which such
conditions are satisfied Landlord shall not enter into any lease of space within the Building with
a Competitor without Tenants prior written consent. As used herein and for purposes of this Lease
only, the term
Competitor
means American Express (only to the extent American Express occupies
space within the
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Building for purposes directly related to travel), all Cendant Travelpoint companies,
Travelocity, Certified Vacations, Priceline.com, BookIt.com, Carlson Wagonlit Travel, HRG North
America, BCD Travel, TQ3 Navigant, Orbitz Worldwide, Inc., AAA Travel, Liberty Travel, Omega World
Travel, Travel Zoo, Farecast, Kayak, Shermans Travel, Farechase, Sidestep, STA Travel and National
Leisure Group (and all of each of their direct, wholly owned subsidiaries that are in direct
competition with Tenants travel business). Notwithstanding the foregoing, the restriction set
forth herein shall not apply to a particular Competitor if, at the time Landlord is considering
entering into a lease with such Competitor, Tenant (which as used herein shall include any
Qualified Transferee) has either assigned its interest under this Lease (in whole or in part) to a
Competitor, or Tenant is subleasing a portion of the Premises to such Competitor. Without
liability to Tenant, Landlord shall have the right, except as provided above, to offer and to lease
space in the Building, or in any other property, to any party, including without limitation parties
with whom Tenant is negotiating, or with whom Tenant desires to negotiate, a Transfer.
8.11 No Leasehold Financing.
Tenant shall not encumber, pledge or mortgage the whole or any
part of the Premises or this Lease, nor shall this Lease or any interest thereunder be assignable
or transferable by operation of law or by any process or proceeding of any court or otherwise
without the prior written consent of Landlord, which consent may be given or withheld in Landlords
sole discretion.
ARTICLE 9
Condition and Operation of the Building
9.1 No Warranty.
Landlords entire obligation with respect to the condition of the Premises,
its suitability for Tenants uses and the improvements to be installed therein shall be as stated
herein or in
Exhibit C
. Landlord shall have no other obligation of any kind or character,
express or implied, with respect to the condition of the Premises, or the suitability thereof for
Tenants purposes, and Tenant acknowledges that except as set forth in this Lease, it has neither
received nor relied upon any representation or warranty made by or on behalf of Landlord with
respect to such matters. Landlord represents that: (a) to its actual knowledge, the Base Building
shall comply with all applicable Laws, including without limitation, the Americans with
Disabilities Act, in effect at the time of issuance of the building permits for the Base Building;
and (b) upon the Term Commencement Date, the Base Building shall be in good working order and
condition (except for punch list items). Landlord shall use diligent and commercially reasonable
efforts to cause its contractors to repair any latent defects (including enforcement of warranties
and guaranties as necessary) provided such latent defects are identified by Tenant or otherwise
known to Landlord during the period ending one (1) year after completion of such work. Landlords
construction contract for the Base Building includes a limited warranty from the contractor as to
the quality and workmanship of the work and Landlord agrees to use diligent and commercially
reasonable efforts to enforce the terms of the warranty if and to the extent necessary. If any
defect in initial construction of the Building (which means any failure of the construction to
comply with the Base Building Plans) materially impacts Tenants use and occupancy of the Premises
and Tenant provides Landlord with written notice of such defect within ninety (90) days after
commencing construction of its Tenant Improvements then Landlord shall enforce the terms of the
construction contract and shall cause its contractor to correct the defect provided that Landlord
is not warranting that it will be successful in its efforts to enforce the contract.
Notwithstanding the foregoing, Landlords obligations under this
Section 9.1
shall not
relieve Tenant of its obligation to verify existing conditions pursuant to
Exhibit C
.
9.2 Building Alterations.
Subject to the restrictions set forth in
Section 1.1(a)
above regarding material modifications to the Building which shall also apply to this
Section
9.2
, Landlord may, in its sole discretion, at any time and from time to time: (a) make
alterations, structural modifications, seismic modifications or additions to the Building; (b)
change, add to, eliminate or reduce the extent, size, shape or configuration of any aspect of or
improvement (including the Building) located on the Real Property or its operations; (c) change the
arrangement, character, use or location of corridors, stairs, toilets, mechanical, plumbing,
electrical or other operating systems or any other parts of the Building;
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(d) except as expressly provided herein, change the name, number or designation by which the
Building is commonly known; or (e) alter or relocate any portion of the Common Areas or any other
common facility. None of the foregoing acts shall be deemed an actual or constructive eviction of
Tenant, entitle Tenant to any reduction of Rent or result in any liability of Landlord to Tenant;
provided
,
however
, that Landlord shall provide Tenant with reasonable prior notice
of any of the actions set forth in this
Section 9.2
, to be taken by Landlord if such action
will substantially interfere with Tenants ability to (i) conduct business in the Premises, (ii)
gain access to and from the Premises, the Garage or adjacent streets, or (iii) use the Garage.
Subject to Tenants signage rights as set forth herein, Landlord shall have the exclusive rights to
the airspace above and around, and the subsurface below, the Premises and the Building, including,
without limitation, the exclusive right to use all exterior walls, roofs and other portions of the
Building for signs, notices and other promotional purposes. Subject to the terms of this Lease,
Landlord shall have the sole and exclusive right to possession and control of the Common Areas and
all other areas of the Building and Real Property outside the Premises.
ARTICLE 10
Lender Rights
10.1 Subordination.
This Lease is subject and subordinate to each ground or land lease which
may now, or provided Tenant receives an SNDA (defined below), hereafter cover all or any portion of
the Building or Real Property and to each mortgage, deed of trust or other financing or security
agreement which may now or, provided Tenant receives an SNDA, hereafter encumber all or any portion
of the Building or Real Property and to all renewals, modifications, consolidations, replacements
and extensions thereof (collectively, the
Senior Instruments
), subject to the execution of an
SNDA as provided for below. Landlord shall obtain a non-disturbance agreement from the holder of
any Senior Instrument (the
Senior Parties
) now encumbering the Premises for the benefit of Tenant
in substantially the form attached hereto as
Exhibit G
or such other commercially
reasonable form of subordination, attornment and nondisturbance agreement reasonably acceptable to
Tenant as such Senior Party may request (an
SNDA
) within forty-five (45) days after the date of
this Lease. Tenant, upon Landlords or any Senior Partys request, shall execute promptly any such
SNDA to confirm such subordination and shall deliver the same to the Senior Party within ten (10)
days following receipt thereof.
10.2 Attornment
. In the event of the enforcement by any Senior Party under any Senior
Instrument provided for by law or by such Senior Instrument, Tenant shall attorn to any person or
party succeeding to the interest of Landlord as a result of such enforcement including any
purchaser of all or any portion of the Building or the Real Property at a public or private
foreclosure sale or exercise of a power of sale under such mortgage or deed of trust (collectively,
Successor
) and shall recognize such Successor as the Landlord under this Lease without change in
the terms or other provisions of this Lease except as provided in the applicable SNDA.
Notwithstanding the foregoing, a Senior Party may elect at any time to cause its interest in the
Building or the Real Property to be subordinate and junior to Tenants interest under this Lease by
filing an instrument in the real property records of King County, Washington, effecting such
election and providing Tenant with notice of such election. In no event shall any Senior Party or
any Successor have any liability or obligation whatsoever to Tenant or Tenants successors or
assigns for the return of all or any part of the Security Deposit unless, and then only to the
extent that, such Senior Party or Successor actually receives all or any part of the Security
Deposit.
10.3 REAs
. Tenant agrees that this Lease and the rights of Tenant hereunder are subject and
subordinate to any reciprocal access or easement agreements whether now or, in the future,
affecting the Building or Real Property (the
REAs
); provided, however, any future REAs shall not
adversely affect any rights granted to Tenant hereunder.
10.4 Estoppel Certificate.
Within ten (10) Business Days following a written request from
Landlord Tenant shall execute and deliver an estoppel certificate addressed to Landlord and/or to
any
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Senior Party or prospective Senior Party or, any purchaser or prospective purchaser of all or
any portion of, or interest in, the Building or Real Property on a form supplied by Landlord or
such other addressee, certifying as to such facts (if true) as the addressee may reasonably require
including but not limited to the form attached hereto as
Exhibit F
modified to the extent,
if any, required to conform such certificate to the then state of facts. If Tenant fails or
refuses to deliver an estoppel certificate to Landlord in accordance with the preceding sentence,
or to provide written comments on any other form provided to Tenant within ten (10) Business Days
of a written request, then Tenant shall conclusively be deemed, without exception, to have
acknowledged the correctness of the statements set forth in the form of certificate provided and
shall be estopped from denying the correctness of each such statement, and the addressee thereof
may rely on the correctness of the statements in such form of certificate, as if made and certified
by such party.
ARTICLE 11
Insurance
11.1 Landlords Property Insurance.
Landlord shall maintain, or cause to be maintained, a
policy or policies of insurance with the premiums thereon fully paid in advance, issued by and
binding upon an insurance company or companies of good financial standing (which companies shall be
of generally comparable strength as the companies insuring Comparable Buildings), insuring the
Building against loss or damage by fire or other insurable hazards (including earthquake loss if
Landlord elects to maintain such coverage) and contingencies for the full replacement cost thereof,
exclusive of excavations and foundations below the lowest basement floor of the Building. Landlord
shall not be obligated to insure any of Tenants Personal Property, Tenant Extra Improvements or
Alterations. Landlords policy shall contain the following or comparable coverage: at least twelve
(12) months of rental income loss coverage payable in instances in which Tenant would be entitled
to Rent abatement hereunder if rent loss insurance proceeds are available, and shall include (i)
extended coverage, vandalism, water damage endorsement, and (ii) a building laws and/or law
and ordinance coverage endorsement that covers costs of demolition, increased costs of
construction due to changes in building codes and contingent liability with respect to undamaged
portions of the Building with each such endorsement to be of a kind required by Landlord to assist
Landlord in funding its obligations under this Lease to repair and restore the Building. If such
insurance is available on commercially reasonable terms and conditions (or if Tenant elects to pay
the entire premium for such coverage) Landlord shall carry a service interruption coverage for
loss of income as a result of damage to the physical property of a third party service provider.
The coverage and amounts of insurance carried by Landlord in connection with the Building at a
minimum shall be comparable to the coverage and amounts of insurance which are carried by
reasonably prudent landlords of Comparable Buildings. If the annual premiums paid by Landlord for
such property insurance exceed the standard premium rates because the nature of Tenants operations
result in extra-hazardous or higher than normal risk exposure, then Tenant shall, upon receipt of
appropriate premium invoices, reimburse Landlord for such increases in premium. All insurance
proceeds payable under Landlords insurance carried hereunder shall be payable solely to Landlord
and Tenant shall have no interest therein.
11.2 Liability Insurance.
Landlord shall maintain or cause to be maintained with respect to
the Building a policy or policies of commercial general liability insurance with the premiums
thereon fully paid in advance, issued by and binding upon an insurance company of good financial
standing, in amounts no less than as shall from time to time be carried by owners and operators of
Comparable Buildings, such insurance to afford minimum protection of not less than Five Million
Dollars ($5,000,000) per occurrence, combined single limit, for bodily injury, death and property
damage. The coverages required to be carried shall be extended to include, but not to be limited
to, blanket contractual liability, personal injury liability (libel, slander, false arrest and
wrongful eviction), and broad form property damage liability. Upon written request from Tenant no
more than one time per year, Landlord shall provide Tenant reasonable evidence that the insurance
required to be maintained hereunder by Landlord is in full force and effect.
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11.3 Tenants Insurance.
(a) Property Insurance.
Tenant shall provide all risk insurance coverage during the Term
insuring against loss or damage by fire and such other risks as are from time to time included in
an ISO Special Form (ISO CP 10 30 or equivalent) policy or any other comparable or better coverage
(including without limitation sprinkler leakage and water damage), insuring the full replacement
cost of any Tenant Extra Improvements and Alterations and Tenants Personal Property, as the same
may exist from time to time. Such policy shall contain replacement value, ordinance or law
coverage, and legal liability endorsements in a form reasonably satisfactory to Landlord and, in
making its reasonable determination, Landlord may consider the requirements of any mortgagee of
Landlord.
(b) Liability Coverage.
Tenant shall maintain or cause to be maintained a policy or policies
of commercial general liability and excess liability insurance with the premiums thereon fully paid
in advance, issued by and binding upon an insurance company of good financial standing, such
insurance to afford minimum protection of not less than Five Million Dollars ($5,000,000.00), per
occurrence, combined single limit, for personal injury, bodily injury (including death) and
property damage, or such higher amounts as Landlord may from time to time reasonably designate by
not less than thirty (30) days notice if such increased coverage is then being customarily required
by prudent landlords of Comparable Buildings; however, (i) Landlord will not have the right to
require any such increase during the initial twenty-four (24) months of the Term and (ii) Landlord
may not require any such increase more often than once in any twenty-four (24) month period. The
coverages required to be carried shall be extended to include, but not to be limited to, blanket
contractual liability, personal injury liability (libel, slander, false arrest and wrongful
eviction), and broad form property damage liability. Tenants contractual liability insurance
shall apply to Tenants indemnity obligations under this Lease and the certificate evidencing
Tenants insurance coverage shall state that the insurance includes the liability assumed by Tenant
under this Lease. Tenants policy shall be written on an occurrence basis and shall be primary
with any other insurance available to Landlord being excess.
(c) Workers Compensation Insurance.
Throughout the Lease Term, Tenant, at its own expense,
shall keep and maintain in full force and effect workers compensation insurance in an amount equal
to at least the minimum statutory amount then currently required in the State of Washington. In
addition, Tenant shall maintain Employers Liability Insurance with limits of at least One Million
Dollars ($1,000,000.00).
(d) Auto Liability Insurance.
If Tenant operates any automobile or other motor vehicle
servicing the Premises, Tenant shall maintain insurance covering liability arising out of the
operation of any automobile or other motor vehicle, including owned, hired and non-owned vehicles,
with a limit of not less than One Million Dollars ($1,000,000.00).
(e) Other.
Such other form or forms of insurance as are generally required by prudent owners
of or obtained by tenants of similar projects in the Bellevue, Washington vicinity, as Landlord or
any mortgagee of Landlord may reasonably require from time to time, against the same or other
insurable hazards which at the time are commonly insured against in the case of premises similarly
situated, due regard being given to the height and type of buildings thereon and their
construction, use and occupancy.
(f) Policy Form.
All policies required to be carried by Tenant, under this
Article 11
shall be written with financially responsible companies with a Best & Company rating of B+ IX or
better, and shall designate Landlord, Landlords partners or members, Landlords property manager,
any Senior Party using the ISO CG 20 26 or its equivalent or such other form reasonably required by
Landlord from time to time, and each insurer shall agree not to cancel or materially alter the
policy without at least thirty (30) days prior written notice to Landlord and all named and
additional insureds. Any self-insurance provisions under any insurance policies maintained by
Tenant shall be subject to Landlords prior written approval.
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(g) Certificates.
Prior to commencement of the Term, and thereafter during the Term, within
fifteen (15) days prior to the expiration date of any such coverage, Tenant shall deliver to
Landlord a certificate or certificates of the insurance required hereunder together with copies of
all endorsements required above. If Tenant fails to provide such proof of insurance and should
sure failure remain uncured for fifteen (15) Business Days following notice from Landlord to
Tenant, Landlord shall be authorized (but not required) to procure such coverage in the amounts
stated with all costs thereof to be charged to Tenant and paid within thirty (30) days following
written invoice therefor as an Extra Service.
11.4 Indemnity and Exoneration.
(a)
Except as expressly otherwise provided in this Lease, Landlord shall not be liable to
Tenant for any loss, damage or injury to person or property caused by (i) theft, fire, vandalism,
assault, battery, act of God, acts of the public enemy, acts of terrorists or criminals, riot,
strike, insurrection, war, court order, requisition or order of governmental body or authority,
whether or not the negligence of Landlord was a partial cause of such loss, damage or injury, or
(ii) the active negligence or willful misconduct of Tenant or Tenant Parties, or (iii) repair or
alteration of any part of the Building or failure to make any such repair.
(b)
Tenant shall indemnify, defend, protect and hold Landlord and Landlord Parties harmless
from and against any and all Claims arising out of or related to claims of injury to or death of
persons, damage to property occurring or resulting directly or indirectly from the use or occupancy
of the Premises or activities of Tenant or Tenant Parties in or about the Premises, the Building or
the Real Property;
provided
,
however,
that the foregoing indemnity shall not be applicable to
claims arising in whole or in part by reason of the active negligence or willful misconduct of
Landlord or any Landlord Party, unless such claims are or should be covered by insurance required
to be carried by Tenant under the terms of this Lease, in which case such claims shall be subject
to the terms of this indemnity.
(c)
Landlord shall indemnify, defend, protect and hold Tenant and Tenant Parties harmless from
and against any and all claims, judgments, damages, penalties, fines, costs, expenses, liabilities
or losses to the extent arising out of the active negligence (including Landlords failure to
timely and properly perform Landlords maintenance and repair responsibilities set forth herein) or
willful misconduct of Landlord or any Landlord Party, unless such claims are or should be covered
by insurance required to be carried by Tenant under the terms of this Lease, in which case such
claims shall not be subject to the terms of this indemnity;
provided,
however
, that the foregoing
indemnity shall not include claims to the extent arising by reason of the negligence or willful
misconduct of Tenant or Tenant Parties.
(d)
To the extent, but only to the extent, necessary to fully indemnify the parties from
claims made by the indemnifying party or its employees, the indemnities herein constitute a waiver
of the indemnifying partys immunity under the Washington Industrial Insurance Act, RCW Title 51,
as between Landlord and Tenant only.
(e) LANDLORD AND TENANT ACKNOWLEDGE BY THEIR INITIALS BELOW THAT EACH INDEMNIFICATION
PROVISION OF THIS LEASE (INCLUDING, BUT NOT LIMITED TO, THOSE RELATING TO WORKERS COMPENSATION
BENEFITS AND LAWS) AND EACH WAIVER OF CLAIMS HEREIN WAS SPECIFICALLY NEGOTIATED AND AGREED TO BY
LANDLORD AND TENANT.
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11.5 Indemnity for Liens.
Tenant shall indemnify, defend and protect Landlord and hold
and save Landlord harmless of and from any and all loss, claims, proceedings, cost, damage, injury,
causes of action, liabilities or expense arising out of or in any way related to work or labor
performed, materials or supplies furnished to or at the request of Tenant or in connection with
performance of any work done for the account of Tenant in the Premises or the Building.
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11.6 Waiver of Subrogation Rights.
Anything in this Lease to the contrary notwithstanding,
Landlord and Tenant each waive all rights of recovery, claim, action or cause of action, against
the other, Tenant Parties or Landlord Parties, as applicable, for third party liability and any
loss or damage that may occur to the Premises, or any improvements thereto, or the Building or Real
Property or any personal property of such party therein, by reason of fire, the elements, or any
other cause to the extent that such rights of recovery, claim, action or cause of action is or
would be covered by insurance required to be obtained pursuant to this Lease, regardless of cause
or origin, including negligence of the other party, Landlord Parties or Tenant Parties, as
applicable, and each party covenants that no insurer shall hold any right of subrogation against
such other party. Each party shall advise its insurers of the foregoing and such waiver shall be a
part of each policy maintained by such party that applies to the Premises, any part of the Building
or Real Property or such partys use and occupancy of any part thereof.
ARTICLE 12
Casualty and Eminent Domain
12.1 Damage and Destruction.
The following provision shall apply to any fire or other
casualty in the Premises or Building. In the event of any damage which affects the Premises or the
Building outside the boundaries of the Premises, Landlord within a reasonable period of time
following the date of the damage (which period shall generally be no more than sixty (60) days
following the date of the damage but may be longer if necessary due to the nature and extent of the
damage), shall deliver to Tenant an estimate of the time necessary to repair the damage in question
such that the Premises may be used by and accessible to Tenant and the Building and Common Areas
operable as a first-class office building; such notice will be based upon the review and opinions
of Landlords architect and contractor (
Repair Notice
).
(a)
If the damage is limited solely to the Premises and the Repair Notice indicates that
Premises can be repaired such that the same may be occupied by Tenant for Tenants business
purposes with all damage repaired within nine (9) months from the date of damage or destruction,
then Landlord shall diligently rebuild the same (including Tenants Alterations and Tenants Extra
Improvements which Landlord shall repair at Tenants cost);
provided
,
however
, that
Landlord shall not be obligated to expend for such repair an amount in excess of the insurance
proceeds recovered or recoverable (or which would be recovered if Landlord maintained the insurance
coverage required hereunder and diligently sought to recover the maximum possible proceeds) as a
result of such damage,
plus
any deductibles reimbursed in full as part of Operating Costs
plus
sums paid to Landlord by Tenant under the following sentence. In any instance in
which Landlord restores the Premises under this
Section 12.1
, Tenant upon demand from
Landlord shall pay all costs associated with repair and rebuilding of the Tenant Extra Improvements
and Alterations and if Tenant fails to do so, Landlords obligation to restore such items shall be
excused.
(b)
If portions of the Building outside the boundaries of the Premises are damaged or
destroyed (whether or not the Premises are also damaged or destroyed) and (i) the Repair Notice
indicates that the Premises and the Building can both be repaired such that the same may be
occupied by Tenant for Tenants business purposes with all damage repaired within nine (9) months
from the date of damage or destruction, and (ii) Landlord determines that such reconstruction is
economically feasible, then Landlord shall diligently rebuild the same;
provided
,
however
, that Landlord shall not be obligated to expend for such repair an amount in excess
of the insurance proceeds recovered (or which would be recovered if Landlord maintained the
insurance coverage required hereunder and diligently sought to recover the maximum possible
proceeds) as a result of such damage and any deductibles reimbursed in full as part of Operating
Costs
plus
sums advanced to Landlord by Tenant for repair of the Alterations and Tenant
Extra Improvements, and Landlord shall have no obligation to repair or restore Tenants Personal
Property.
(c)
If (i) the Premises should be damaged by any occurrence not covered by Landlords
insurance (or the insurance required to be maintained by Landlord hereunder), or (ii) the
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Repair Notice indicates that Premises or the Building are damaged to the extent that the
damage cannot, be restored within nine (9) months from the date of damage, or (iii) the Building
should be damaged to the extent of more than fifty percent (50%) of the cost of replacement
thereof, notwithstanding that the Premises may be undamaged, or (iv) if the damage occurs during
the last year of the Term, Landlord may elect either to repair or rebuild the Premises or the
Building or to terminate this Lease upon giving notice in writing of such election to Tenant within
ninety (90) days after the happening of the event causing the damage;
provided
,
however
, that if Tenant exercises any Extension Option then in effect, the exercise of such
termination option based upon clause (iv) above by Landlord shall be null and void. However, as a
condition to any such termination pursuant to clauses (i), (ii) or (iii), all other leases in the
Building covering premises which are similarly affected by such damage must be concurrently
terminated, it being the intent of the parties that Landlord not be able to use the provisions of
this
Article 12
to terminate below market leases. If this Lease is not terminated
pursuant to this
subsection 12.1(c)
, Landlord shall diligently rebuild the Building and
Premises, to the extent required herein.
(d)
During any period when the Premises or any material portion of the Premises is rendered
unusable or inaccessible because of any casualty, Rent shall abate proportionately until such time
as the Premises are made usable and accessible (excluding time to repair Alterations or Tenant
Extra Improvements) as reasonably determined by Landlord, and no portion of the Rent so abated
shall be subject to subsequent recapture
provided
,
however
, that there shall be no such abatement
except to the extent that the amount thereof is compensated for and recoverable from the proceeds
of rental income loss insurance maintained by Landlord. Tenants abatement period shall continue
until Landlords substantial completion of repairs to the Premises required to be completed by
Landlord hereunder other than: (i) any items that require extraordinary lead time for fabrication
or availability of materials; or (ii) other items that are not substantially completed but the
completion of which will not preclude Tenants occupancy and use of the Premises for any Permitted
Use (and with respect to such items, Landlord shall retain reasonable access to the Premises
following the abatement period in order to complete same).
(e)
The proceeds from any insurance paid by reason of damage to or destruction of the Building
or any part thereof, the Building Standard Improvements or any other element, component or property
insured by Landlord shall belong to and be paid to Landlord subject to the rights of any mortgagee
of Landlords interest in the Building or Real Property or the beneficiary of any deed of trust
that constitutes an encumbrance thereon. If this Lease is terminated by either party as a
consequence of a casualty in accordance with any of the provisions of this
Section
12.1,
all proceeds of insurance required to be maintained either by Landlord or Tenant (to the extent
Tenant is required or elects to insure the Tenant Extra Improvements) shall be paid to Landlord
subject to the rights of any mortgagee of Landlords interest in the Building or Real Property or
the beneficiary of any deed of trust that constitutes an encumbrance thereon;
provided,
however,
that Tenant shall be paid all proceeds of insurance payable in connection with Tenants Personal
Property.
(f)
If the Premises or at least forty percent (40%) of the Net Rentable Area of the Premises
are damaged by fire or other casualty (not caused by Tenant or any Tenant Party) and are rendered
not reasonably usable for Tenants business purposes thereby, or if the Building shall be so
damaged by fire or other casualty (not caused by Tenant or any Tenant Party) that Tenant shall be
deprived of reasonable access to at least forty percent (40%) of the Net Rentable Area of the
Premises, and if, pursuant to Landlords Repair Notice, the restoration cannot be substantially
completed on or before the date which is nine (9) months following the date of Landlords Repair
Notice, then Tenant shall have the right to terminate this Lease by giving written notice (the
Termination Notice
) to Landlord not later than thirty (30) days following receipt of Landlords
Repair Notice. If Landlord reasonably determines that adequate insurance proceeds will not be
available to restore the portions of the Premises that Landlord is responsible for repairing,
Landlord shall notify Tenant. Within thirty (30) days after receipt of such notice Tenant may
notify Landlord that it will terminate this Lease unless Landlord agrees to fund such excess costs
and complete the restoration. If Landlord does not elect to pay any
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excess costs to complete restoration of the portions of the Premises that Landlord is
responsible for repairing within thirty (30) days after receipt of Tenants notice then Tenant may
send a Termination Notice as set forth above. If Tenant gives a Termination Notice, this Lease
shall be deemed cancelled and terminated (as if such date were the Expiration Date) as of either
(i) the date of the damage (if the Premises is rendered wholly unusable) or as of the date on
which Tenant vacates the Premises but in no event later than thirty (30) days after the Termination
Notice (if the Premises is rendered partially unusable), and Rent shall be apportioned and shall be
paid or refunded, as the case may be up to and including the date of such termination.
Notwithstanding the foregoing, if Tenant was entitled to but elected not to exercise its right to
terminate this Lease and Landlord has not exercised its right to terminate this Lease, Landlord
shall diligently rebuild and restore the Building and Premises to the extent required herein and if
Landlord does not substantially complete the repair and restoration of the Premises within three
(3) months after the estimated period of time set forth in Landlords Repair Notice (which period
shall be extended to the extent of any delays caused by Tenant or Force Majeure), then Tenant may
elect to terminate this Lease by written notice to Landlord within thirty (30) days after the
expiration of such period, as the same may be so extended and this Lease shall terminate thirty
(30) days after the date of Tenants notice unless Landlord completes the repair and restoration of
the Premises within such period. In addition, if the Premises, or any material part thereof, or
any portion of the Building necessary for Tenants use of the Premises, are damaged or destroyed
during the last twelve (12) months of the Term, or any extension thereof, and such damage cannot be
repaired within ninety (90) days from the date of casualty (as reasonably determined by Landlord
within thirty (30) days following the date of the casualty), then Landlord or Tenant may terminate
this Lease by giving written notice thereof to the other party within forty-five (45) days after
the date of the casualty, in which case this Lease shall terminate as of the later of the date of
the casualty or the date of Tenants vacation of the Premises.
(g)
If Landlord rebuilds the Premises under any provision of this
Article 12
, and
receives insurance proceeds or Tenant pays Landlord for the cost thereof under
Section
12(a)
above, Landlord shall repair and restore all Tenant Extra Improvements other than any
items that Tenant elects not to restore, such election to be made by written notice to Landlord
delivered no later than five (5) Business Days following Landlords delivery to Tenant of the
Repair Notice. If Tenant fails to timely deliver such notice, Tenant shall be deemed to have
elected to have all Tenant Extra Improvements fully repaired and restored.
12.2 Condemnation.
(a)
If a portion of the Premises or any portion of the Building or Real Property shall be
taken or condemned for any public purpose and the remainder of the Premises is rendered either
inaccessible or unusable for Tenants business operations, this Lease shall, at the option of
either party, terminate as of the date of such taking. If this Lease is not terminated in its
entirety then it shall terminate only as to the portion of the Premises taken and Base Rent and
Tenants Proportionate Share shall be adjusted to reflect the new Net Rentable Area of the Premises
and/or the Building. If any portion of the Building or Real Property shall be taken or condemned
for any public purpose to such an extent as to render the Building not economically viable in
Landlords good faith discretion, then whether or not the Premises or any part thereof is taken or
conveyed, Landlord may by notice in writing to Tenant terminate this Lease, and the Base Rent and
other charges shall be paid or refunded as of the date of termination.
(b)
If during the Term of this Lease the entire Premises shall be taken by eminent domain or
destroyed by the action of any public or quasi-public authority or in the event of conveyance in
lieu thereof, this Lease shall terminate as of the day possession shall be taken by such authority,
and Tenant shall pay Rent up to that date with an appropriate refund by Landlord of such rent as
shall have been paid in advance for a period subsequent to the date of the taking of possession.
(c)
If a temporary taking of all or a portion of the Premises occurs, there shall be no
abatement of Rent and Tenant shall remain fully obligated for performance of all of the covenants
and
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obligations on its part to be performed pursuant to the terms of this Lease. All proceeds
awarded or paid with respect thereto shall belong to Tenant.
(d)
All compensation awarded for any such taking or conveyance whether for the whole or a part
of the Premises shall be the property of Landlord, whether such damages shall be awarded as
compensation for diminution in the value of the leasehold or of the fee of or underlying leasehold
interest in the Premises, and Tenant waives all claims against Landlord and the condemning
authority for damages for termination of its leasehold interest or interference with its business
and hereby assigns to Landlord all of Tenants right, title and interest in and to any and all such
compensation;
provided
,
however
, that Tenant shall be entitled to claim, prove and
receive in the condemnation proceedings such separate award as may under the laws of the State of
Washington be expressly allocated to Tenants Personal Property or relocation expenses, provided
that such award shall be made by the court in addition to and shall not result in a reduction of
the award made to Landlord.
ARTICLE 13
Default
13.1 Events of Default.
The occurrence of any of the following shall constitute an event of
default (
Event of Default
) on the part of Tenant:
(a) [Intentionally Omitted]
;
(b) Nonpayment of Rent
. Failure to pay any installment of Base Rent, Operating Costs or other
items of Rent, upon the date when payment is due, if such failure is not cured within five (5)
Business Days after written notice of such failure
provided
,
however
, that Landlord
shall not be required to give written notice of non-payment more than two (2) times in any twelve
(12) month period and the third (3rd) late payment in any twelve (12) month period shall be an
immediate Event of Default without notice;
(c) Other Obligations
. Failure to perform any obligation, agreement or covenant under this
Lease other than those matters specified in
Section
s 13.1(a)
,
13.1(b)
and
13.1(i)
, such failure continuing for fifteen (15) Business Days after written notice of
such failure (or with respect to non-monetary obligations only, such longer period as is reasonably
necessary to remedy such default, provided that Tenant shall continuously and diligently pursue
such remedy at all times until such default is cured);
(d) General Assignment
. A general assignment for the benefit of creditors by Tenant;
(e) Bankruptcy
. The filing of any voluntary petition in bankruptcy by Tenant, or the filing
of an involuntary petition by Tenants creditors, which involuntary petition remains undischarged
for a period of thirty (30) days. If under applicable law the trustee in bankruptcy or Tenant has
the right to affirm this Lease and continue to perform the obligations of Tenant hereunder, such
trustee or Tenant shall, in such time period as may be permitted by the bankruptcy court having
jurisdiction, cure all defaults of Tenant hereunder outstanding as of the date of the affirmance of
this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord
of the continued performance of Tenants obligations under this Lease;
(f) Receivership
. The employment of a receiver to take possession of substantially all of
Tenants assets or the Premises, if such receivership remains undissolved for a period of ten (10)
Business Days after creation thereof;
(g) Attachment
. The attachment, execution or other judicial seizure of all or substantially
all of Tenants assets or the Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of ten (10) Business Days after the levy thereof;
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(h) Insolvency
. The admission by Tenant in writing of its inability to pay its debts as they
become due, the filing by Tenant of a petition seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any present or future
statute, law or regulation, the filing by Tenant of an answer admitting or failing timely to
contest a material allegation of a petition filed against Tenant or Guarantor in any such
proceeding or, if within thirty (30) days after the commencement of any proceeding against Tenant
seeking any reorganization, or arrangement, composition, readjustment, liquidation, dissolution or
similar relief under any present or future statute, law or regulation, such proceeding shall not
have been dismissed; and
(i) Failure to Deliver
. Failure to deliver or comment on any subordination or attornment
agreement or estoppel certificate when and as required under
Article 10
if such failure
continues for five (5) Business Days after notice from Landlord of Tenants failure to timely
comply with the provisions of
Article 10
.
13.2 Remedies Upon Default.
(a) Termination
. If an Event of Default occurs, Landlord shall have the right, with or
without notice or demand, immediately (after expiration of the applicable grace periods specified
herein) to terminate this Lease, and at any time thereafter recover possession of the Premises or
any part thereof and expel and remove therefrom Tenant and any other person occupying the same, by
any lawful means, and again repossess and enjoy the Premises without prejudice to any of the
remedies that Landlord may have under this Lease, or at law or equity by reason of Tenants default
or of such termination.
(b) Continuation After Default
. Even though Tenant has breached this Lease and/or abandoned
the Premises, this Lease shall continue in effect for so long as Landlord does not terminate
Tenants right to possession under Section
13.2(a)
hereof, and Landlord may enforce all of
its rights and remedies under this Lease, including (but without limitation) the right to recover
Rent as it becomes due. Acts of maintenance, preservation or efforts to lease the Premises or the
appointment of receiver upon application of Landlord to protect Landlords interest under this
Lease shall not constitute an election to terminate Tenants right to possession. If Landlord does
not terminate this Lease, then, regardless of whether Tenant shall have abandoned the Premises, and
without demand or notice, Landlord may re-enter and take possession of the Premises or any part
thereof, expel from the Premises Tenant and anyone claiming through or under Tenant, and remove the
personal property of either. Landlord may relet the Premises, or any part of them, in Landlords
or Tenants name for the account of Tenant, for such period of time and at such other terms and
conditions as Landlord, in its sole discretion, may determine. Landlord may collect and receive
the rents from the Premises. Re-entry or taking possession of the Premises by Landlord under this
Section shall not be construed as an election on Landlords part to terminate this Lease, unless a
written notice of termination is given to Tenant. Landlord reserves the right following any
re-entry or reletting, or both, under this Section to exercise its right to terminate the Lease.
During the Event of Default, Tenant will pay Landlord the Rent and other sums that would be payable
under this Lease if repossession had not occurred, less the net proceeds, if any, after reletting
the Premises, after deducting Landlords Reletting Expenses. Notwithstanding the above, if
Landlord relets the Premises for a term (the
Relet Term
) that extends past the Expiration Date of
this Lease (without consideration of any earlier termination pursuant to this
Article 13
),
the Reletting Expenses which may be included in Landlords damages under this Lease shall be
limited to a prorated portion of the Reletting Expenses, based on the percentage that the length of
the Term remaining on the date Landlord terminates this Lease or Tenants right to possession bears
to the length of the Relet Term. For example, if there are two (2) years left on the Term at the
time that Landlord terminates possession and, prior to the expiration of the two (2) year period,
Landlord enters into a lease with a Relet Term of ten (10) years with a new tenant, then only
twenty percent (20%) of the Reletting Expenses shall be included when determining Landlords
damages.
Reletting Expenses
is defined to include all expenses actually incurred by Landlord in
connection with reletting the Premises, including without limitation, all repossession costs, labor
costs, brokerage commissions, attorneys fees, remodeling and repair costs, costs for removing and
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storing Tenants property and equipment and rent concessions granted by Landlord to any new
tenant, prorated over the life of the new lease.
(c) Acceleration.
Landlord shall also have the right to declare the entire balance of the
Rent for the remainder of the Term of this Lease to be due and payable immediately, and collect
such balance in any manner not inconsistent with applicable law, but subject to the provisions of
Section 13.3
below.
(d) Cure
. Landlord may cure such default or perform such obligation on Tenants behalf and at
Tenants expense as an Extra Service. Tenant shall reimburse Landlord pursuant to
Section
5.4
.
(e) Waiver of Redemption Rights
. Tenant, for itself, and on behalf of any and all persons
claiming through or under Tenant, including creditors of all kinds, hereby waives and surrenders
all rights and privileges that they may have under any present or future law, to redeem the
Premises or to have a continuance of this Lease for the Lease Term, as it may have been extended.
13.3 Damages Upon Termination.
Should Landlord terminate this Lease pursuant to the
provisions of
Section 13.2(a)
hereof, Landlord shall have all the rights and remedies of a
landlord under applicable law and Landlord shall be entitled to recover from Tenant: (a) the worth
at the time of award of the unpaid Rent and other amounts which had been earned at the time of
termination; (b) the worth at the time of award of the amount by which the unpaid Rent which would
have been earned after termination until the time of award exceeds the amount of such Rent loss
that Tenant proves could have been reasonably avoided; (c) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the
amount of such Rent loss that the Tenant proves could be reasonably avoided; (d) all costs incurred
by Landlord in reletting the Premises, including without limitation, brokerage commissions,
attorneys fees, marketing and advertising expenses and expenses of cleaning, restoring or
remodeling the Premises; and (e) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenants failure to perform its obligations under this Lease or
which, in the ordinary course of things, would be likely to result therefrom. The worth at the
time of award of the amounts referred to in (a) and (b) shall be computed with interest at fifteen
percent (15%) per annum or the highest lawful commercial interest rate, whichever is the lower.
The worth at the time of award of the amount referred to in (c) shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco in effect as of
time of award plus one percent (1%) and, where rental value is a material issue, shall be based
upon competent appraisal evidence.
13.4 Computation of Rent for Purposes of Default.
For purposes of computing unpaid Rent that
would have accrued and become payable under this Lease pursuant to the provisions of
Section
13.3
, unpaid Rent shall consist of the sum of:
(a)
the total Base Rent for the balance of the Term, plus
(b)
a computation of the Operating Costs for the balance of the Term, the assumed Operating
Costs for the calendar year of the default and each future calendar year in the Term to be equal to
the Operating Costs for the calendar year prior to the year in which default occurs compounded at a
per annum rate equal to the mean average rate of inflation for the preceding five (5) calendar
years as determined by reference to the Consumer Price Index All Items for
Seattle-Tacoma-Bremerton, All Urban Consumers, published by the Bureau of Labor Statistics of the
United States Department of Labor (Base Year 1982-84=100), or such successor index as may be
established to provide a measure of the current purchasing power of the dollar
(provided,
however,
that if no successor index is published by the United States Department of Labor, Landlord may
select in its reasonable discretion a substitute index or method of measuring inflation (the
CPI
Index
); plus
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(c)
the total payments for Parking Passes required to be purchased by Tenant pursuant to
Section
14.22
for the balance of the Term.
13.5 Late Charge.
Tenant acknowledges that late payment by Tenant of Rent will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of such costs being extremely
difficult and impracticable to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Landlord by the terms of any note
secured by a Senior Instrument covering the Premises. Therefore, in addition to Landlords other
remedies, if any payment of Rent is not received by the fifth (5th) day after the due date thereof,
Tenant shall pay a late fee in an amount equal to four percent (4%) of the delinquency, the parties
agreeing that such sum represents a reasonable estimate of Landlords costs; however, on the first
(1st) occasion in any twelve (12) month period on which Rent is not timely paid, Tenant will be
entitled to a five (5) Business Day grace period following notice of non-payment prior to the
imposition of such late fee. In addition, any sums not paid by Tenant when due shall bear interest
from the due date until paid in full at an annual interest rate of fifteen percent (15%) or the
highest commercial interest rate permitted by Law, if less (the
Interest Rate
). The provision
for a late charge and interest and collection of such late charge or interest by Landlord, shall
not be deemed a waiver of any breach or Event of Default by Tenant under this Lease. If any of
Tenants Rent checks is returned by the bank without payment then Tenant shall pay a bounced check
charge of Seventy-five Dollars ($75.00) and Landlord may require Tenant to pay future installments
of Rent by certified or cashiers check.
13.6 Remedies Cumulative.
All of the remedies permitted or available to Landlord under this
Lease, or at law or in equity, shall be cumulative and not alternative and invocation of any such
right or remedy shall not constitute a waiver or election of remedies with respect to any other
permitted or available right or remedy.
13.7 Tenants Remedies.
(a)
Landlord shall not be in default unless Landlord fails to cure a default by Landlord of
its obligations under this Lease within thirty (30) days after its receipt of notice thereof from
Tenant, or if such default is not capable of being cured within said thirty (30) day period,
Landlord has failed to commence such cure and diligently pursue such cure until completion. Tenant
shall not have any right to recover consequential damages from Landlord. Tenant shall not sue,
seek any remedy or enforce any right against Landlord (other than exercising Tenants rights under
Sections 5.3
,
6.5(b)
, or
13.7(b)
in accordance with the provisions thereof)
as a result of Landlords default until (i) Tenant gives written notice to all Senior Parties, and
(ii) if any Senior Party notifies Tenant within ten (10) Business Days following Tenants notice
(or such longer period as may be required under any SNDA) that such Senior Party intends to attempt
to cure Landlords default, a reasonable time for such Senior Party, to remedy the act or omission
has elapsed following the giving of notice by Tenant to Senior Party required hereunder, including,
without limitation, time to obtain possession from Landlord by power of sale or judicial
foreclosure, it being agreed that the Senior Party shall have no obligation to Tenant to cure or
remedy any act or omission of Landlord. Tenant shall look solely to Landlords interest in the
Building (which shall be deemed to include the proceeds of any sale or refinancing of all or any
portion of the Building or the Property by Landlord with respect to any obligation or liability
arising prior to such sale, as well as any insurance or condemnation proceeds), for recovery of any
judgment from Landlord whether from a breach hereof or from a right created by statute or at common
law. Landlord and Landlord Parties shall not be personally liable for any such judgment. Tenant
agrees that no other property or assets of Landlord or any partner or member of Landlord shall be
subject to levy, execution or other enforcement procedures for satisfaction of any such judgment or
decree; no partner or member of Landlord shall be sued or named as a party in any suit or action
(except as may be necessary to secure jurisdiction over Landlord); no service of process shall be
made against any partner or member of Landlord (except as may be necessary to secure jurisdiction
over Landlord); no judgment shall be taken against partner or member of Landlord; no writ of
execution shall ever be levied against the assets of any partner or member of Landlord; and
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these covenants, limitations and agreements are enforceable both by Landlord and by any
partner or member of Landlord. Any lien obtained to enforce any such judgment and any levy of
execution thereon shall be subject and subordinate to any Senior Instrument. Sums due Tenant from
Landlord under this Lease and not paid when due shall bear interest at the rate of fifteen percent
(15%) per annum from the due date until paid, except where another rate of interest is expressly
provided in this Lease.
(b)
If (A) a default by Landlord occurs with respect to the provision of Basic Services to the
Premises, (B) Tenant has provided simultaneous written notice thereof to Landlord and any Senior
Party (of which Tenant has notice), and (C) Landlord or such Senior Party has failed to commence to
cure such default within the thirty (30) day period specified above, Tenant may deliver a second
notice to Landlord and the Senior Party stating that Tenant will commence a cure of such default
and describing the steps Tenant proposes to take to cure such default if Landlord or such Senior
Party has not commenced a cure within five (5) Business Days after receipt of such notice. Such
notice may not be combined with any other notices and shall clearly state that it is a Notice of
Landlord Default and Tenants Intent to Exercise Self-Help Rights. If neither Landlord nor the
Senior Party commences the cure within such five (5) Business Day period then Tenant shall be
permitted to undertake the cure described in such notice. Tenants right to cure Landlord defaults
shall be limited providing janitorial services and matters that can be accomplished through repairs
to the electrical, mechanical or telecommunications systems located primarily within or serving
only the Premises and any such cure shall be undertaken only by experienced, qualified contractors.
Landlord shall reimburse Tenant for the reasonable costs of such cure within thirty (30) days
after completion thereof and delivery to Landlord of invoices therefor, together with such back-up
information as Landlord shall reasonably request. If Landlord fails to make such reimbursement
when required, Tenant shall have the right to offset its actual costs incurred against Base Rent,
provided
,
however
, that in no event may Tenant offset more than fifty percent (50%)
of Base Rent due in any month and
provided
,
further
, that if the Landlord disputes
Tenants right to offset, such dispute shall be resolved in accordance with the terms of the
following paragraph.
If the parties cannot agree on the amount (if any) that Tenant is permitted to offset against
Base Rent, Tenant shall pay any undisputed sums due to Landlord and shall deposit the disputed
amount in a commercial escrow account with instructions that such amount shall not be disbursed to
either party absent mutual written instructions or a binding judgment or arbitration award. If
Landlord disputes Tenants right to an offset, it shall deliver an arbitration demand to Tenant.
Within ten (10) Business Days following delivery of an arbitration demand, the parties shall
mutually select one (1) arbitrator who is a natural person not employed by either of the parties or
any parent or affiliated partnership, corporation or other enterprise thereof, who shall be a
licensed lawyer with at least ten (10) years of experience in commercial leasing in Class A office
buildings in the Seattle/Bellevue vicinity. If the parties do not agree on an arbitrator, then
either party, on behalf of both, may request appointment of such a qualified person by the American
Arbitration Association in a written notice with a copy given to the other party. The arbitrator
so selected shall decide the dispute, if it has not previously been resolved, by following the
procedure set forth herein. The arbitration shall be conducted in the City of Seattle or the City
of Bellevue, Washington or other mutually acceptable location. The arbitrator shall hold a hearing
on the matter in dispute within fifteen (15) days after his or her appointment. The arbitration
shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitrator shall render his or her decision within fifteen (15) days after the
scheduled arbitration hearing. The arbitrator shall render its decision and award in writing and
shall deliver copies to each party. The arbitrator shall have the right to consult experts and
competent authorities with factual information or evidence pertaining to a matter at issue, but any
such consultation shall be made in the presence of both parties with full right on their part to
cross-examine. If the arbitrator believes that expert advice would materially assist in the
resolution of the question presented, the arbitrator may retain one (1) or more qualified persons
to provide such expert advice. The fees and expenses of any such qualified person or persons shall
be equally borne by Landlord and Tenant. The arbitrator shall have no power to
J-46
modify the provisions of this Lease but otherwise the decision of the arbitrator shall be
final, binding and conclusive upon the parties, and a judgment may be rendered thereon in any court
having jurisdiction over the Premises and the parties hereto. Landlord and Tenant shall each pay
one half (1/2) of the cost and expense of the American Arbitration Association and its arbitrator
for such arbitration. Each party shall pay the fees and costs of its own counsel provided that the
arbitrator shall have authority in its discretion to award to the prevailing party in the
arbitration its reasonable attorneys fees and all costs of arbitration including the fees of the
arbitrator. If any arbitrator fails, refuses or is unable to act, his or her successor shall be
appointed in the manner provided above.
ARTICLE 14
Miscellaneous
14.1 No Waiver.
Failure of Landlord or Tenant to declare any default immediately upon
occurrence thereof, or delay in taking any action in connection therewith, shall not waive such
default, but Landlord or Tenant, as the case may be, shall have the right to declare any such
default at any time thereafter. No waiver by a party of an event of default, or any agreement,
term, covenant or condition contained in this Lease, shall be effective or binding on such party
unless made in writing and no such waiver shall be implied from any omission by a party to take
action with respect to such event of default or other such matter. No express written waiver by a
party of any event of default, or other such matter, shall affect or cover any other event of
default, matter or period of time, other than the event of default, matter and/or period of time
specified in such express waiver. One or more written waivers by a party of any event of default,
or other matter, shall not be deemed to be a waiver of any subsequent event of default, or other
matter, in the performance of the same provision of this Lease. Acceptance of Rent by Landlord
hereunder, or endorsement of any check, shall not, in and of itself, constitute a waiver of any
breach or event of default or of any agreement, term, covenant or condition of this Lease, except
as to the payment of Rent so accepted, regardless of Landlords knowledge of any concurrent event
of default or matter. Landlord may, at its election, apply any Rent received from Tenant to the
oldest obligation outstanding from Tenant to Landlord, any endorsement or other statement of Tenant
to the contrary notwithstanding. No course of conduct between Landlord and Tenant, and no
acceptance of the keys to or possession of the Premises before the termination of the Term by
Landlord or any employee of Landlord shall constitute a waiver of any such breach or of any term,
covenant or condition of this Lease or operate as a surrender of this Lease.
14.2 Holding Over.
If Tenant (or anyone claiming under Tenant) remains in possession after
expiration or termination of this Lease without the written consent of Landlord, Tenant shall
comply with all terms and conditions of this Lease except that Tenant shall pay Base Rent for each
month or partial month of occupancy thereafter at a rate equal to one hundred fifty percent (150%)
of the Base Rent for the last month of the Term, together with such other amounts as may become due
hereunder. No occupancy or payment of Rent by Tenant after expiration of the Term shall operate to
renew or extend the Term. If Tenant remains in possession after the expiration or termination of
this Lease without Landlords consent, in addition to the payment described in the first sentence
of this
Section
14.2
, Tenant shall indemnify, defend, protect and hold Landlord and
Landlord Parties harmless from and against any and all Claims for damages by any other tenant or
third person to whom Landlord may have leased or offered to lease all or any part of the Premises
effective on or after the termination of this Lease, together with all loss, cost, expense, damages
and liabilities in connection with any such reletting, including, without limitation, attorneys
fees and Landlords lost revenues. If Tenant holds over with the consent of Landlord in writing
Tenant shall thereafter occupy the Premises under this Lease on a month-to-month basis and Base
Rent shall be increased to the greater of (a) one hundred percent (100%) of the Rent for the last
month of the Term, or (b) the then current fair market rent for the Premises as determined by
Landlord in its reasonable discretion. For purposes of this
Section
14.2
, the term
remains in possession shall include circumstances where Tenant has failed to fully vacate the
Premises or failed to fully complete all removal and restoration work required under this Lease
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14.3 Attorneys Fees.
If either party places the enforcement of this Lease, or any part
thereof, or the collection of any Rent due, or to become due hereunder, or recovery of the
possession of the Premises in the hands of an attorney or collection agency, or files suit upon the
same, or seeks a judicial declaration of rights hereunder, the prevailing party shall recover its
reasonable attorneys fees, court costs and collection agency charges. As used herein, prevailing
party shall mean the party who substantially prevails in the matter at issue, including without
limitation, a party who dismisses an action for recovery hereunder in exchange for payment of the
sums allegedly due, performance of covenants allegedly breached or consideration substantially
equal to the relief sought in the action.
14.4 Amendments.
This Lease may not be altered, changed or amended, except by an instrument
in writing signed by both parties.
14.5 Transfers by Landlord.
Landlord shall have the right to transfer and assign, in whole or
in part, all of its rights and obligations hereunder and in the Building and Real Property. If
Landlord sells or otherwise transfers the Building, or if Landlord assigns its interest in this
Lease, other than an assignment solely for security purposes, and provided that such purchaser,
transferee or assignee thereof shall assume Landlords obligations hereunder in writing to the
extent arising from and after the date of transfer, Landlord shall thereupon be relieved of all
liabilities hereunder arising thereafter, but this Lease shall otherwise remain in full force and
effect. Landlord or any person or party succeeding to possession of the Building as a successor to
Landlord shall be subject to Landlords obligations hereunder only during the period of such
persons or partys ownership.
14.6 Severability.
If any term or provision of this Lease, or the application thereof to any
person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this
Lease, or the application of such provision to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each provision of this
Lease shall be valid and shall be enforceable to the extent permitted by law.
14.7 Notices.
All notices, demands, consents and approvals that may or are required to be
given by either party to the other hereunder shall be in writing, shall be sent via nationally
recognized overnight courier service or in the United States mail, certified or registered, postage
prepaid, and addressed to the party to be notified at the address for such party specified on the
Basic Lease Information Sheet, or to such other place as the party to be notified may from time to
time designate by at least fifteen (15) days notice to the notifying party. Additionally, as
specified herein, on certain events, Landlord may deliver notice to the Premises Notice Address as
long as copies of any such notice are also delivered to Tenants standard notice addresses. Notice
shall be deemed to have been given (i) if sent via overnight courier, on the Business Day next
succeeding the date upon which such notice is deposited with such overnight courier, (ii) if sent
via certified or registered mail, on the third (3rd) Business Day following mailing. Tenant shall
deliver a copy of any notice given to Landlord to (a) Landlords property manager, (b) any Senior
Party whose address is known to Tenant, and (c) 2800 Post Oak Boulevard, 50th floor, Houston, Texas
77056-6118, Attention: C. Hastings Johnson. Tenant appoints as its agent to receive service of
all default notices and notice of commencement of unlawful detainer proceedings the person in
charge of or apparently in charge of or occupying the Premises at the time, and, if there is no
such person, then such service may be made by attaching the same on the main entrance of the
Premises and Landlord shall also send a copy of such notice to the Tenants notice address by one
of the methods described above to the attention of the General Counsel and the Director of Real
Estate.
14.8 No Option.
Submission of this instrument for examination or signature by Tenant does not
constitute a reservation of or an option to lease, and it is not effective as a lease or otherwise
until execution and delivery by both Landlord and Tenant. Landlord shall not be deemed to have
made an offer to Tenant by furnishing Tenant with a copy of this Lease with particulars inserted.
No contractual or other rights shall exist or be created between Landlord and Tenant until all
parties hereto have executed this Lease
J-48
and until it has been approved in writing by any Senior Party and fully executed copies have
been delivered to Landlord and Tenant.
14.9 Integration and Interpretation.
The terms of this Lease are intended by the parties as a
final expression of their agreement with respect to such terms as are included in this Lease and
may not be contradicted by evidence of any prior or contemporaneous agreement, arrangement,
understanding or negotiation (whether oral or written). The parties further intend that this Lease
constitutes the complete and exclusive statement of its terms, and no extrinsic evidence whatsoever
may be introduced in any judicial proceeding involving this Lease. The language in all parts of
this Lease shall in all cases be construed as a whole and in accordance with its fair meaning and
not construed for or against any party, regardless of which party may have drafted the provision in
question, it being agreed that this is a negotiated agreement. The following exhibits and
schedules are attached hereto and incorporated by this reference as if fully set forth herein:
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Exhibit A
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Floor Plans for the Premises, Outdoor Amenity Area and Generator
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Exhibit B
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Legal Description of the Real Property
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Exhibit C
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Initial Improvements of the Premises
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Schedule C-1
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Base Building Improvements
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Schedule C-2
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Definition of Building Standard Improvements
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Schedule C-3
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Typical Floor Plan for Building Standard Improvements
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Exhibit D
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Rules and Regulations
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Exhibit E
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Lease Commencement Certificate
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Exhibit F
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Form of Estoppel Certificate
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Exhibit G
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Form of SNDA
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Exhibit H
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Environmental Reports
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Exhibit I
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Memorandum of Lease
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Exhibit J
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Existing Leases and Assumed Obligations
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14.10 Quitclaim.
Upon expiration or earlier termination of this Lease, Tenant shall,
immediately upon request of Landlord, execute, acknowledge and deliver to Landlord a recordable
deed quit-claiming to Landlord all interest of Tenant in the Premises, the Real Property, the
Building and this Lease.
14.11 No Easement for Light, Air and View.
This Lease conveys to Tenant no rights for any
light, air or view. No diminution of light, air or view, or any impairment of the visibility of
the Premises from inside or outside the Building, by any structure or other object that may
hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of Rent
under this Lease, constitute an actual or constructive eviction of Tenant, result in any liability
of Landlord to Tenant, or in any other way affect this Lease or Tenants obligations hereunder.
14.12 No Merger.
The voluntary or other surrender or termination of this Lease by Tenant, or
a mutual cancellation thereof shall not work a merger, but, at Landlords sole option, shall either
terminate all existing subleases or subtenancies or shall operate as an assignment to Landlord of
all such subleases or subtenancies.
14.13 Memorandum of Lease.
Upon request of either party, the parties shall execute and record
a memorandum hereof in the form of
Exhibit I
attached hereto; provided that simultaneously
with such execution, Tenant shall execute and deliver to Landlord a recordable termination of the
memorandum in a form reasonably acceptable to Landlord which Landlord may record at any time
following the Expiration Date or any earlier termination of this Lease.
14.14 Survival.
All of the parties covenants and obligations contained in this Lease
intended to survive termination or expiration of this Lease by their nature shall survive the
expiration or earlier termination of this Lease. No provision of this Lease providing for
termination in certain events shall be
J-49
construed as a limitation or restriction of a partys rights and remedies at law or in equity
available upon a breach by the other party of this Lease.
14.15 Financial Statements.
If Landlord intends to sell all or any portion of the Building or
the Real Property (or any interest therein), or obtain a loan secured by the Building or the Real
Property (or any interest therein), and at such time Tenant is no longer a publicly traded company,
then Tenant shall, within thirty (30) days of Landlords written request, furnish Landlord with
financial statements, dated no earlier than one (1) year before such request, certified as accurate
by Tenant, or, if available, audited financial statements prepared by an independent certified
public accountant with copies of the auditors statement, reflecting Tenants then current
financial condition, or the financial condition of the individuals comprising Tenant, in such form
and detail as Landlord may reasonably request. To the extent such information is not otherwise
publicly available, Landlord shall make reasonable efforts to maintain the confidentiality of such
information
provided
,
however
, that Landlord may provide such information on a
confidential basis to any of its consultants, accountants, advisors, lawyers and any actual or
prospective lender, investor or purchaser. In addition, Landlord may disclose such information to
the extent required by law or in any administrative or judicial proceeding in which it is required
to divulge such information.
14.16 No Joint Venture.
This Lease shall not be construed to create a partnership, joint
venture or similar relationship or arrangement between Landlord and Tenant hereunder.
14.17 Successors and Assigns.
Except as otherwise provided herein, this Lease shall be
binding upon and inure to the benefit of Landlord, its successors and assigns; and shall be binding
upon and inure to the benefit of Tenant, its successors, and to the extent assignment may be
approved by Landlord hereunder, Tenants assigns.
14.18 Applicable Law.
All rights and remedies of Landlord and Tenant under this Lease shall
be construed and enforced according to the laws of the State of Washington. Any actions or
proceedings brought under this Lease, or with respect to any matter arising under or out of this
Lease, shall be brought and tried only in courts located in the County of King, Washington
(excepting appellate courts).
14.19 Time of the Essence; Force Majeure.
Time is of the essence of each and every covenant
herein contained. If either party to this Lease, as the result of any (i) strikes, lockouts, or
labor disputes; (ii) failure of power or other utilities not due to the negligence, misconduct
and/or omission of such partys employees, agents, contractors or representatives; (iii) inability
to obtain labor or materials or reasonable substitutes therefor; (iv) war, governmental action,
court order, condemnation, civil unrest, riot, fire or other casualty; (v) extreme or unusual
weather conditions, acts of God or unforeseen soil conditions; or (vi) other conditions similar to
those enumerated in this Section beyond the reasonable control of the party obligated to perform
(except for financial inability) (collectively,
Force Majeure
) fails punctually to perform any
obligation on its part to be performed under this Lease, then such failure shall be excused and not
be a breach of this Lease by the party in question but only to the extent occasioned by such event.
Notwithstanding the foregoing to the contrary, Force Majeure will not serve to extend or delay the
rights of Tenant to terminate this Lease in the event of casualty as described in
Article
12
above, except as expressly set forth in
Article 12
above. If any right or option of
either party to take any action under or with respect to this Lease is conditioned upon the same
being exercised within any prescribed period of time or at or before a named date, then such
prescribed period of time and such named date shall be deemed to be extended or delayed, as the
case may be, for a period equal to the period of the delay occasioned by any event described above.
Notwithstanding anything herein contained, however, the provisions of this Section shall not be
applicable to Tenants obligation to pay Rent under this Lease or Tenants or Landlords
obligations to pay any other sums, monies, costs, charges or expenses required to be paid by such
party hereunder.
14.20 Confidentiality.
The parties shall treat the contents of this Lease as confidential
information and shall not disclose the terms and conditions hereof to other parties;
provided
,
however
,
J-50
each party may disclose portions of the Lease to its officers, directors, employees,
attorneys, architects, accountants, and other consultants and advisors to the extent such persons
need to know such information provided such parties are first informed of the confidential nature
of such information and each such party agrees to treat the information as confidential. In
addition, the contents of this Lease may be divulged by either party to the extent, but only to the
extent, required by law or in any administrative or judicial proceeding in which such party is
required to divulge such information, however each party shall notify the other prior to making
such disclosure. Notwithstanding anything in this Lease to the contrary, Tenant shall have the
right, in its absolute discretion, to file this Lease with the Securities and Exchange Commission,
if Tenant in good faith determines that such filing is necessary or advisable under the Securities
Exchange Act of 1934, as amended, and such filing shall not be a breach of this Lease. Tenant
shall be responsible for any disclosure of this Lease in violation of the terms of this Section
made by any person who received this Lease or learns of its terms and conditions, directly or
indirectly, from Tenant.
14.21 Interpretation.
Except as specifically provided otherwise in this Lease, Landlord may
act in its sole and absolute discretion when required to act hereunder or when deciding to grant
its consent or approval of any act or request by Tenant. The term, including shall mean
including, without limitation. All indemnities contained herein shall survive termination of
this Lease with respect to any act, condition or event that is the subject matter of such indemnity
and that occurs prior to the Expiration Date. Notwithstanding anything herein to the contrary, all
provisions of this Lease which require the payment of money or the delivery of property after the
Expiration Date shall survive termination of the Lease.
14.22 Parking
(a) Base Parking Ratio
. Tenant shall lease and Landlord shall provide three (3) parking
passes (each a
Parking Pass
) for every one thousand (1,000) square feet of Net Rentable Area in
the Premises. Rent for each Parking Pass (the
Parking Rent
) will be at the rate set forth in the
chart set forth below plus any applicable taxes or governmental surcharges. The annual increase in
Parking Rent shall take effect each calendar year on April 1st.
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Parking Rent per Parking Pass Per Month (exclusive of Time Period taxes and governmental surcharges)
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Lease Year 1
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One Hundred Fifty Dollars ($150.00)
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Lease Year 2
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One Hundred Fifty-five and 25/100 Dollars ($155.25)
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Lease Year 3
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One Hundred Sixty and 68/100 Dollars ($160.68)
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Lease Year 4
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One Hundred Sixty-six and 31/100 Dollars ($166.31)
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Lease Year 5
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One Hundred Seventy-two and 14/100 Dollars ($172.14)
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Lease Year 6
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One Hundred Seventy-eight and 16/100 Dollars ($178.16)
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Lease Year 7
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One Hundred Eighty-four and 40/100 Dollars ($184.40)
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Lease Year 8
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One Hundred Ninety and 85/100 Dollars ($190.85)
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Lease Year 9
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One Hundred Ninety-seven and 53/100 Dollars ($197.53)
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Lease Year 10
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Two Hundred Four and 44/100 Dollars ($204.44)
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Lease Year 11
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Two Hundred Eleven and 60/100 Dollars ($211.60)
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Extension Terms
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The rate then being charged by Landlord for monthly
parking in the Garage
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Landlord and Tenant acknowledge that the Building has been designed to include 957 parking
spaces (including spaces designated for carpools and handicapped users) which is less than the
number of
J-51
Parking Passes to be allocated to Tenant under this Lease and that parking will be
accommodated through normal overflow and in and out privileges of the users of the Parking Passes.
(b) Reserved Parking.
As part of the allocation of Parking Passes described above, Tenant may
elect to convert up to fifteen (15) of the unreserved Parking Passes into reserved Parking Passes
provided the Parking Rent for each reserved Parking Pass shall be equal to one hundred fifty
percent (150%) of the Parking Rent for the unreserved Parking Passes. All reserved spaces shall be
located on the P1 level of the Garage as designated by Landlord. All such reserved spaces shall be
labeled as Expedia Visitor Parking at Tenants expense.
(c) Supplemental Parking.
In addition to the Parking Passes described above, if Tenant gives
Landlord at least six (6) months prior written notice, commencing at any time prior to the end of
the eighth (8th) Lease Year Tenant shall lease up to one (1) additional Parking Pass for each one
thousand (1,000) square feet of Net Rentable Area in the Initial Premises (the
Supplemental
Parking
). If Tenant elects to lease Supplemental Parking it shall lease such spaces for the
remainder of the Term except that Tenant shall have a one-time right to cancel the Supplemental
Parking by providing Landlord with six (6) months prior written notice and at the end of such
notice period, Tenant shall have no further right or obligation to lease Supplemental Parking. If
Tenant does not exercise its right to lease Supplemental Parking within the time period set forth
above then this
Section 14.22(c)
shall immediately terminate and be of no further force and
effect. During any period in which Tenant leases Supplemental Parking, the Parking Rent rates
shall be revised as set forth below and Tenant shall pay Parking Rent only on the number of Parking
Passes calculated under
Section 14.22(a)
.
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Parking Rent per Parking Pass Per Month (exclusive of Time Period taxes and governmental surcharges)
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Lease Year 1
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One Hundred Eighty-seven and 50/100 Dollars ($187.50)
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Lease Year 2
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One Hundred Ninety-four and 06/100 Dollars ($194.06)
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Lease Year 3
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Two Hundred and 85/100 Dollars ($200.85)
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Lease Year 4
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Two Hundred Seven and 88/100 Dollars ($207.88)
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Lease Year 5
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Two Hundred Fifteen and 16/100 Dollars ($215.16)
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Lease Year 6
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Two Hundred Twenty-two and 69/100 Dollars ($222.69)
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Lease Year 7
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Two Hundred Thirty and 48/100 Dollars ($230.48)
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Lease Year 8
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Two Hundred Thirty-eight and 55/100 Dollars ($238.55)
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Lease Year 9
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Two Hundred Forty-six and 90/100 Dollars ($246.90)
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Lease Year 10
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Two Hundred Fifty-five and 54/100 Dollars ($255.54)
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Lease Year 11
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Two Hundred Sixty-four and 48/100 Dollars ($264.48)
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Extension Terms
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The rate then being charged by Landlord for Parking Passes
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If Tenant leases any Supplemental Parking, all holders of Tenants Parking Passes shall be
required to park in a designated parking area on the lowest level(s) of the Garage. The
Supplemental Parking area will include the number of spaces equal to the total number of spaces in
the Garage multiplied by a fraction the numerator of which is the Net Rentable Area of the Premises
and the denominator of which is the Net Rentable Area of the Building (minus the reserved spaces
provided for under
Section 14.22(b)
unless Tenant elects to locate the reserved spaces in
the Supplemental Parking area in which case
Section 14.22(b)
shall be of no further force
and effect so long as Supplemental Parking is in effect). If Tenant elects to locate its reserved
spaces in the Supplemental Parking area then Tenant shall pay the rate for such spaces set forth in
this
Section 14.22(c)
. The Supplemental Parking area shall be located approximately on
levels P3 to P8 and shall be for Tenants exclusive use. Tenant
J-52
acknowledges that in order to provide the Supplemental Parking, Landlord may need to install
and upon Tenants request shall install separate gates and access systems and institute parking
management programs such as tandem or valet parking. Upon demand, Tenant shall pay all
out-of-pocket costs associated with creating, operating, and/or maintaining the Supplemental
Parking, including the cost of the parking management programs and installation, maintenance,
repair, replacement and removal of any such separate gates or access systems. If Tenant exercises
its right to cancel the Supplemental Parking then upon expiration of the six (6) months notice
period Tenant shall no longer be obligated to pay Landlords costs associated with operating and/or
maintaining such Supplemental Parking.
For so long as Tenant leases Supplemental Parking, Tenant shall cooperate with Landlord to
ensure that the holders of its Parking Passes park only in the designated area of the Garage.
Tenant agrees that Landlord may terminate or suspend the parking privileges of any holder who does
not park in the designated area or may assess a fine for such violation. Tenant shall not be
responsible for paying fines levied on the holders of its Parking Passes, but Tenant shall not
object to the collection or enforcement of any parking rules against or collection of any fines
from such persons, nor shall Tenant request or assert any rights for offset or rent reductions
(including reduction in Parking Rent) if Landlord suspends the parking rights of any of the holders
of its Parking Passes who have not followed the rules of the Garage.
(d) General Parking Terms.
All Parking Rent shall be payable in advance on the first day of
the month together with the payment of Base Rent and shall be prorated for partial months. Except
as provided herein to the contrary, each Parking Pass shall entitle the vehicle on which the
Parking Pass is presented to park in the parking garage located beneath the Building (the
Garage
)
on a nonpreferential and nonexclusive basis. Landlord shall have exclusive control over the
day-to-day operations of the Garage. Except as provided above with respect to Supplemental
Parking, no specific spaces in the Garage shall be assigned to Tenant. Landlord may make and
modify reasonable nondiscriminatory rules and regulations relating to the parking of vehicles in
the Garage, and Tenant shall abide by such rules and regulations to the extent not inconsistent
with this Lease and shall direct its employees and invitees to abide by such rules and regulations.
Landlord shall make commercially reasonable efforts to enforce such rules and regulations against
all Building tenants. In lieu of providing parking stickers or cards, Landlord may use any
reasonable alternative means of identifying and controlling vehicles authorized to be parked in the
Garage. Landlord may designate areas within the Garage for short term or non-tenant parking only
and Landlord may change such designations from time to time. Landlord reserves the right to alter
the size of the Garage and the configuration of parking spaces and driveways therein, provided that
no such work will deprive Tenant of its allocation of parking spaces as set forth in or materially
impair Tenants access to the area of the Garage which such spaces are located. Landlord may
assign any unreserved and unassigned parking spaces and/or make all or a portion of such spaces
reserved or institute any other measures, including but not limited to valet, assisted or tandem
parking, that Landlord determines are necessary or desirable for tenant requirements or orderly and
efficient parking. No such changes may alter Tenants rights under this Lease. On a temporary
basis during any period when Landlord is engaged in performing Garage repairs or maintenance,
Landlord at any time may, with prior notice to Tenant and to the extent required for such work,
substitute for Tenants Parking Passes an equivalent number of parking spaces in a parking
structure or subterranean parking facility or within a surface parking area located a reasonable
distance from the Building.
Landlord may operate the Garage or, in its discretion, may arrange for the Garage to be
operated by a qualified third party and, for purposes of this
Section
14.22
, such operator
shall be entitled to exercise any rights granted to Landlord under this Section. Upon request,
Tenant will execute and deliver a parking agreement with the operator of the Garage on the
operators standard form of agreement, with such revisions as Tenant may in good faith request,
subject to Landlords reasonable approval. If Landlord hires a third party to operate the Garage
then the monthly parking charges shall be paid to such operator at such place as the operator may
direct but the parking charges shall be considered additional Rent hereunder.
J-53
(e)
Landlord shall make good faith efforts to notify Tenant or to cause its parking operator
to notify Tenant if month-to-month parking passes become available in the Garage so that Tenants
employees can purchase such passes on a month-to-month basis at the rate that Landlord is
then-charging for month-to-month parking in the Garage.
(f)
If no portion of the Garage (other than Tenants Supplemental Parking area) is used for
valet or assisted parking then Landlord will not commit to provide parking passes to all of the
other tenants in the Building (collectively) at a ratio of more than three (3) parking passes for
every one thousand (1,000) square feet of Net Rentable Area in the Building (less the Net Rentable
Area of the Initial Premises).
14.23 Rent Assumption.
Landlord shall and hereby agrees to assume Tenants monetary
obligations with respect to the payment of base rent, operating costs, mandatory parking charges
and taxes to the extent set forth on
Exhibit J
attached hereto under those certain leases
and subleases of office space described on
Exhibit J
(the
Existing Leases
) to the extent
such obligations arise from and after the later of (a) November 1, 2008, and (b) the date,
determined on a building by building basis, on which Tenant has vacated the premises under each
Existing Lease in the condition required under such Existing Lease excluding only completion of
repair and restoration obligations as provided below. Notwithstanding the foregoing, Landlord
shall pay the full amount of operating costs due under the Existing Leases during such period and
the parties acknowledge that
Exhibit J
is merely an estimate of the amount of operating
costs. Tenant within sixty (60) days after receipt of notice from Landlord shall complete, at
Tenants sole cost and expense any repair and restoration work required under the terms of the
Existing Leases unless Tenant obtains a written waiver of such requirements from the applicable
landlord and if such work is not completed within that period, Landlord shall be relieved from any
obligation under this
Section 14.23
with respect to the premises under the Existing Lease
that requires restoration until such work is completed. In determining whether Tenant has
completed its restoration obligation under each Existing Lease, Landlord shall act reasonably and
shall not require Tenant to obtain written confirmation from the applicable landlord that Tenant
has completed its obligations. In no event shall Landlord be obligated to assume or pay any other
obligations under an Existing Lease even if such obligations have been reduced to a sum certain.
If permitted by the applicable landlord, Landlord shall make all payments of base rent, operating
costs, mandatory parking charges and taxes directly to the landlord under the Existing Lease as and
when such payments are due. Landlord and Tenant shall work together in good faith to negotiate an
early termination of the Existing Leases provided that Landlord shall pay all costs or penalties
related thereto. Landlord and Tenant shall also work together in good faith to secure a sublease
for any of the Existing Leases provided that Landlord shall pay all costs related thereto and shall
be entitled to all income received under such sublease.
14.24 Brokers.
Tenant and Landlord each represent and warrant to the other that it has had no
dealing with any broker or agent other than the Broker(s) identified in the Basic Lease Information
Sheet as
Item 15
. Tenant and Landlord shall each indemnify, defend and hold the other
party harmless from and against any and all liabilities for commissions or other compensation or
charges claimed by any other broker or agent based on dealings with the indemnifying party with
respect to this Lease. The foregoing indemnity shall survive termination or earlier expiration of
this Lease. It shall be the responsibility of Tenant and Tenants Broker to compensate any other
representatives assisting Tenant or Tenants Broker in connection with this Lease and the
transactions contemplated hereunder. Landlord shall pay Tenants Broker a commission equal to Seven
and 50/100 Dollars ($7.50) per square foot of Net Rentable Area in the Initial Premises, payable:
(i) one-half (1/2) upon execution and delivery of this Lease by Landlord and Tenant, and (ii)
one-half upon the date on which Tenant occupies and commences payment of Rent on a least half of
the Initial Premises.
14.25 Roof Top Equipment.
Tenant shall have the nonexclusive right, at no additional rent to
Tenant, to use a portion of the roof of the Building (such portion to be no greater than Tenants
Proportionate Share) to install, maintain, repair, and replace: (a) satellite dishes or antenna
measuring less
J-54
than thirty-six (36) inches in diameter (the
Devices
) for Tenants and its general business
purposes (but not for use by any third party other than Transferees pursuant to this Lease unless
such third partys use is related to Tenants general business purposes) at Tenants sole cost and
expense; and (b) supplemental HVAC unit(s) serving the Premises, at Tenants sole cost and expense.
Tenant may not grant any other party other than Transferees pursuant to this Lease, any right to
use any Devices for any purpose whatsoever unless such third partys use is related to Tenants
general business purposes. The Devices may not be used for providing cellular phone service or
commercial broadcasts. Tenants Devices shall not interfere with the operation of any equipment
used by Landlord or its service providers, or any equipment used by other occupants of the Building
that is in place prior to the placement of Tenants Devices and if such interference occurs
Landlord may immediately revoke Tenants right to use the Devices that are determined to be causing
such interference. The design, appearance, size, location and method of installation of the any
Devices and any HVAC units to be placed on the roof, and the use thereof shall be subject to all
applicable Laws and Landlords prior approval which shall not be unreasonably withheld, conditioned
or delayed. Landlord makes no representation or warranty whatsoever as concerns (i) the use of the
roof by Tenant, or (ii) the safety thereof, or (iii) that the installation of the Devices will be
permitted under applicable Laws, or (iv) that such use or Devices will function as intended.
Tenant shall be solely responsible for designing any improvements to the roof and the Devices in a
manner that complies with all Laws, in a manner that is compatible with the design of the Building
and other equipment located on the roof of the Building and including appropriate screening as may
be required by Law or by Landlord to protect the integrity of the Building design. If at any time
Tenants use of the roof or the Devices ceases to be permitted under applicable Laws, Tenants
rights under this Section shall terminate and be of no further force or effect. Upon termination
of Tenants rights under this Section or upon Lease termination, Tenant at its sole cost and
expense shall promptly remove any improvement installed on the roof by Tenant including the Devices
and all related wiring, plumbing, and equipment from the Building and shall restore the Building to
its condition existing prior to such installation. Tenant shall be solely responsible for
installation and maintenance of any improvements, including any Devices and any HVAC units
installed by Tenant on the roof and shall ensure that such installation and maintenance do not void
or limit any warranty Landlord may have on the roof or roof membrane. Tenant shall provide
Landlord with full plans and specifications for any intended improvements to the roof related to
any Devices or any HVAC units, for Landlords approval prior to installation thereof and such plans
shall include details regarding Tenants proposed method of installation; Landlord will notify
Tenant of Landlords approval of same (or disapproval, specifying in reasonable detail the basis
for such disapproval) within twenty (20) Business Days following delivery of Tenants request, plus
such additional time as may be reasonably required in order for Landlords consultants to review
same. Tenant shall be permitted to install, maintain, remove and replace cables or lines within
the Building outside the Premises (at locations designated by Landlord) to connect any Devices or
any HVAC units to the Premises. Tenant acknowledges and agrees that Landlord has not represented or
warranted that Tenant will have unlimited access to riser space or other space outside the Premises
to accommodate Tenants needs. Prior to commencement of any work under this Section, Tenant shall
obtain and deliver to Landlord all necessary governmental permits for any improvement, including
the Devices, any HVAC units and related equipment. Tenant shall indemnify and hold harmless
Landlord from any Claims arising out of or in connection with any use by Tenant of the roof and in
connection with Tenants installation, maintenance, use or removal of any improvement, including
any Devices, any HVAC units and related equipment in the Building. Landlord shall not permit other
tenants or third parties to install roof-top equipment on the Building in a manner which
unreasonably interferes with Tenants reasonable use of its Devices.
14.26 USA Patriot Act Disclosures.
Pursuant to United States Presidential Executive Order
13224 signed on September 24, 2001, and entitled Blocking Property and Prohibiting Transactions
with Persons Who Commit, Threaten to Commit, or Support Terrorism (
Executive Order
), Landlord is
required to ensure that it does not transact business with persons or entities determined to have
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committed, or to pose a risk of committing or supporting, terrorist acts and those identified
on the list of Specially Designated Nationals and Blocked Persons (
List
), generated by the Office
of Foreign Assets Control of the U.S. Department of the Treasury. The names or aliases of these
persons or entities (
Blocked Persons
) are updated from time to time. In the event Landlord
learns that Tenants name or the name of any of the Covered Parties appears on the List, Landlord
reserves the right to delay the agreements contemplated by this Lease pending Landlords
investigation into the matter. If Landlord determines that Tenant or any Covered Person is a
Blocked Person and Tenant cannot remedy such situation within thirty (30) days following notice
from Landlord (or such longer period as may be reasonably necessary in order to remedy such
situation, provided that Tenant promptly commences and thereafter diligently prosecutes its efforts
to remedy the situation), Landlord reserves the right to declare such failure as default hereunder
and/or take all other actions necessary to comply with the requirements of the Executive Order.
The provisions of this paragraph will survive termination of this Lease.
Tenant represents to Landlord that to the best of its knowledge, (i) neither Tenant, its
managing member, nor any person or entity that directly owns ten percent (10%) or greater equity
interest in it nor any of its officers or directors or managing member (collectively the
Covered
Parties
) is a person or entity with whom U.S. persons or entities are restricted from doing
business under regulations of the Office of Foreign Asset Control (
OFAC
) of the Department of the
U.S. Treasury (including those named on the List) or under the Executive Order or other
governmental action, and (ii) that throughout the term of this Lease, Tenant and each of the
Covered Parties shall comply with the Executive Order. Any breach of this representation and
warranty shall be subject to Landlords rights described in the immediately preceding paragraph.
At any time and from time-to-time during the Term, Tenant shall deliver to Landlord, within ten
(10) Business Days after receipt of a written request therefor, a written certification or such
other evidence reasonably acceptable to Landlord evidencing and confirming Tenants compliance with
this provision.
Landlord represents to Tenant that to the best of its knowledge,(y) neither Landlord, its
managing member, nor any person or entity that directly owns ten percent (10%) or greater equity
interest in it nor any of its officers or directors or managing member (collectively,
Landlord
Covered Parties
) is a person or entity with whom U.S. persons or entities are restricted from
doing business under regulations of OFAC (including those named on the List) or under the Executive
Order or other governmental action, and (z) that throughout the term of this Lease, Landlord and
each of the Landlords Covered Parties shall comply with the Executive Order. At any time and from
time-to-time during the Term, Landlord shall deliver to Tenant, within ten (10) Business Days after
receipt of a written request therefor, a written certification or such other evidence reasonably
acceptable to Tenant evidencing and confirming Landlords compliance with this provision.
14.27 Generator.
(a)
Subject to the terms of this
Section 14.27
, Tenant shall have a non-exclusive
right to install one or more diesel fuel powered emergency power generators, a diesel fuel tank,
its enclosures, connectors to electrical service and conduit to the Premises (together, the
Generator
) and associated uninterrupted power supply switching facilities, its enclosures,
connectors to electrical service and conduit to the Premises (the
UPS
) on the P-1 level of the
Garage in the location designated by Landlord as shown on
Exhibit A
. Prior to
installation, Landlord must approve, which approval shall not be unreasonably withheld, conditioned
or delayed: (1) the actual Generator and the UPS, (2) drawings submitted by Tenant showing the
Generator and UPS to be installed, method of installation and such other information concerning the
installation, use and maintenance of the Generator and the UPS which Landlord may reasonably
request, and (3) the contractor selected by Tenant to install the Generator and the UPS, and the
non-financial terms of the contract between Tenant and its contractor that may affect the Building.
Tenant shall be solely responsible for obtaining (with Landlords approval) all permits and
approvals required by any governmental entities to install, operate, maintain, or decommission the
Generator and the UPS and shall provide all permits to Landlord in advance. Tenant shall repair
and
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maintain the Generator and the UPS at Tenants sole cost and expense using contractors
approved by Landlord, and Tenant shall comply with all the laws, rules, regulations, ordinances and
standards of all governmental authorities having jurisdiction over the Building to the extent such
laws, rules, regulations, ordinances and standards concern the Generator and/or the UPS. Tenant
shall be responsible for all additional costs of any kind whatsoever incurred by Landlord
attributable to the use, presence, operation, maintenance, or decommissioning of the Generator or
the UPS as an Extra Service. Tenant shall pay for all utilities used or consumed in connection
with the Generator or the UPS. Tenant shall pay all personal property taxes, if any, separately
assessed with respect to the Generator or the UPS; and if and to the extent the Generator or the
UPS are assessed for tax purposes as part of the Building or Landlords personal property, Tenant
shall reimburse Landlord for all taxes attributable to the Generator or UPS on the earlier of (i)
thirty (30) days after Landlords written demand for such taxes, or (ii) the date such taxes are
due. The Generator and the UPS shall be used only for periodic testing and, only in the event
Tenants primary electrical service is interrupted, to provide power to the Premises. All testing
shall take place at times reasonably selected by Landlord to minimize interference with other
tenants. The Generator and the UPS shall be used for backup power for Tenant, and may not be used
as a primary power source or by any other person or entity without Landlords consent which shall
be in Landlords complete and sole discretion.
(b)
Installation, maintenance and use of the Generator and the UPS shall be designed and
operated in such a way as to prevent or minimize in a manner acceptable to all affected parties any
interference with the Base Building systems of the Building or the quiet enjoyment by any other
tenant or occupant of the Building. The Generator and the UPS shall at all times during the term
of this Lease remain the property of Tenant. Tenant, upon notice from Landlord, shall repair any
damage to the Building or Garage caused by the installation, operation or removal of the Generator
and UPS. If Tenant fails to do so, Landlord may do so on Tenants behalf as an Extra Service and
Tenant shall reimburse Landlord for such within thirty (30) days after receipt of a written request
for payment accompanied by reasonably detailed back-up documentation. Landlord agrees to permit
Tenant reasonable access to such portions of the Building as is necessary to facilitate the use of
the Generator and the UPS and the removal of the Generator and UPS. The Generator and the UPS
shall be installed and used at Tenants sole risk, and in no event (other than in the case of
Landlords gross negligence or willful misconduct) shall Landlord be liable under any circumstances
for any damage to the Generator, the UPS or the loss of use related to the Generator or the UPS.
(c)
Tenant shall be solely responsible for complying with all laws, rules and regulations with
respect to the Generator and the UPS and, prior to commencement of installation, Tenant shall
obtain all necessary governmental permits therefor. Tenant shall obtain insurance (naming Landlord
as an additional insured) insuring against any loss or damage arising out of or relating to any
contamination or release of any fuel from the Generator and shall not be permitted to install the
fuel tank until Tenant has provided a certificate of such policy to Landlord. Tenant shall be
permitted to install, maintain, remove and replace conduit, cables or lines and ducts within the
Building outside the Premises to connect the Generator to the Premises and to exhaust fumes at
locations designated by Landlord. Tenant shall not be required to pay Landlord any rent for the
space occupied by the Generator and UPS but if the location thereof results in the loss of parking
spaces then the number of parking spaces lost may be deducted from the number of Parking Passes
available to Tenant hereunder. If the Generator or UPS fail to work properly or to provide power
to the Premises, Landlord shall have no obligation or liability whatsoever with respect to such
failure, except to the extent Tenant demonstrates that such failure is caused by Landlords gross
negligence or willful misconduct.
14.28 Changes to Base Building.
Subject to the terms of this Section, Landlord has agreed
conceptually to the changes to the Base Building described in this Section, provided that Tenant
must obtain the Landlords approval of the plans and specifications for such changes which
approval, notwithstanding anything contained in this Lease or
Exhibit C
to the contrary,
shall not be unreasonably
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withheld, conditioned or delayed. Any such modifications must be approved by all applicable
governmental agencies and by Landlords lender, insurers and its architects, engineers and safety
consultants. Tenant shall pay all hard and soft costs of designing, permitting, and implementing
the approved modifications (including but not limited to the costs of Landlords outside
consultants, the cost of purchasing any additional equipment, and increases in insurance premiums)
relating to and Landlord shall have no obligation to approve or implement any changes that are not
fully paid for by Tenant. Tenant shall also pay any additional costs of operating the modified
system in excess of the cost of operating the system as currently designed. All such modifications
shall be considered changes to the Base Building for purposes of
Exhibit C
hereto.
(a)
Tenant may modify the Buildings emergency generator to provide additional capacity or to
serve additional purposes than that for which it is designed provided that the generator and its
tanks must be located within the area designated by Landlord in the Base Building Plans for such
purpose. No parking areas shall be impacted by any changes to the Buildings emergency generator.
If Landlord approves any changes to the Buildings emergency generator, Landlord shall not be
deemed to have made any representation or warranty with respect to the emergency generator or its
ability to serve Tenants needs and if the emergency generator fails to work properly or to provide
power to the Premises, Landlord shall have no obligation or liability whatsoever with respect to
such failure, except to the extent Tenant demonstrates that such failure is caused by Landlords
gross negligence or willful misconduct with respect to the operation or maintenance thereof.
(b)
Tenant to modify the Buildings elevators and the core walls on floor 11 to provide a
transfer floor between the low-rise and high-rise elevator banks provided that Tenant shall use the
same elevator doors and elevator controls that are being used by Landlord in the balance of the
Building. If Tenant elects to build out one of its floors as a conferencing floor, it shall do so
on floor 11.
14.29 Dedicated Move In.
Landlord shall allow Tenant to reserve the freight elevator and
loading dock for the majority of time for a period from 5:00 p.m. on a Friday until 7:00 a.m. on
the next business day on two (2) weekends mutually acceptable to Landlord and Tenant for Tenant to
move into the Premises. During that period, Landlord shall pad the all of the passenger elevators
in the low rise elevator bank and one (1) of the elevators in the high rise elevator bank (or all
of the high rise elevators if no other tenant is then occupying the Building) to permit them to be
used for movement of smaller items of freight. Tenant shall reimburse Landlord for the cost of the
work to pad the elevators and shall be responsible for the cost to repair any damage to the
passenger elevators as a result of the use thereof to move freight.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
LANDLORD:
TOWER 333 LLC,
a Delaware limited liability company
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By:
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Tower 333 SPE LLC,
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a Delaware limited liability company,
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its Managing Member
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By:
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HC Green Development Fund Limited Partnership,
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a Delaware limited partnership,
its Sole Equity Member
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By:
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Hines HCG Associates Limited Partnership,
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a Texas limited partnership,
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its General Partner
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By:
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Hines Fund Management, L.L.C.,
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a Delaware limited liability company,
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its General Partner
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By:
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Hines Interests Limited Partnership,
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a Delaware limited partnership,
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its Sole Member
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By:
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Hines Holdings, Inc.,
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a Texas corporation,
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its General Partner
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By:
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/s/ James C. Buie, Jr.
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Name:
Title:
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James C. Buie, Jr.
EVP
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TENANT:
Expedia, Inc.
a Washington Corporation
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By:
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/s/ Dara Khosrowshahi
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Name:
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Dara Khosrowshahi
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Title:
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President and CEO
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